Hopes, fears, cars, cows: that will bring free trade between the EU and Mercosur

There are many indications that more than 20 years of EU negotiations could lead to a free trade agreement with South America's Mercosur.

Hopes, fears, cars, cows: that will bring free trade between the EU and Mercosur

There are many indications that more than 20 years of EU negotiations could lead to a free trade agreement with South America's Mercosur. This entails risks for both sides. But above all, chances that something positive will change.

The will is great, the political situation is favourable. The negotiations for a free trade zone between the EU and the South American economic area Mercosur are to be brought to a conclusion as a matter of urgency. This raises many fears and hopes about the future. But where previously the disadvantages were mostly discussed, now heads of state in South America also see the chance of a more important role in the world. This in turn should help to combat their national problems.

Mercosur combines the continent's largest economy, Brazil, with Argentina, the third largest, as well as Paraguay and Uruguay. The free trade agreement with the EU has been negotiated for more than 20 years, and the original text of the agreement was signed in 2019. He is to create the largest free trade zone in the world, with more than 500 million people in Europe and 270 million inhabitants in South America. The countries there currently mainly export agricultural products to the EU, which in turn mainly sells industrial goods to the south. The EU wants to forestall China, with which Brazil is also seeking a free trade agreement.

Chancellor Olaf Scholz is not on a trip to South America out of courtesy. It's about economic interests and geopolitics. The three countries Argentina, Brazil and Chile, which have their own association agreements, are high on Berlin's list of partners. The EU and Germany are looking for partners in the Global South for the conversion to renewable energies in order to slow down climate change and for more raw material and energy security. Scholz' initiative is intended to save the agreement with Mercosur with the help of additional agreements. In doing so, he must allay fears about disadvantages and risks for the local industry, especially in Argentina.

The EU and its industry see a huge sales market in South America that can be better used. More than 12,000 German companies are already exporting to Mercosur. In addition, a potential source of energy is to be secured. A free trade zone with the gradual dismantling of customs barriers should make this easier. Europe is already making the most direct investments in Mercosur, followed by China and the USA. Argentina also has large lithium deposits, many of which are still unused. The raw material is currently essential for the production of batteries and is intended to help the EU meet its climate targets.

From 2035, no more combustion cars will be registered in Europe. Germany wants to become climate-neutral by 2045, the EU by 2050. The principle of "change through trade" has fallen into disrepute because of the Russian war of aggression, but it is supposed to have an economic effect in South America, especially with regard to the climate. The EU has already imposed an import ban on goods from deforested areas. In addition, the supply chain law applies, which puts manufacturers under pressure to meet EU standards. The Brussels effect should also work in South America, for example in lithium mining. Berlin wants to get access to the huge lithium reserves for its auto industry in Argentina and Chile; of the raw material that is currently so coveted for electromobility in order to be less dependent on China.

The EU and the new Brazilian President Lula da Silva agree that the green lungs of the Amazon rainforest should no longer burn in all corners and ends year after year, but should be protected. Favorable conditions: Lula absolutely wants the free trade agreement and has promised to stop massive deforestation, which the majority of Brazilians reject anyway. And that despite the fact that the cleared areas are primarily used for meat production for the national market. There are already high-level exchanges between the EU, Germany and the Brazilian government in order to come to an agreement quickly.

The South American countries, for their part, want to link into the EU's value chains and thus fight their poverty problem. Argentina and Brazil are hoping for even more investments from the EU, more industry and jobs. Both heads of state, Alberto Fernández and Lula da Silva, have a social focus.

Argentina wants to export lithium and create the infrastructure to sell gas and green hydrogen to the EU. The second largest shale gas reserves in the world are located in the "Vaca Muerta". The deal could be a formative success for Fernández' Peronist alliance, which shows that it has a future, especially among young Argentines. Elections are held in October.

Argentina and Brazil recently announced the start of talks on a common trading currency, similar to the former ECU in the EU, currently called "Sur", meaning South. It will then be extended to other countries in the region. It would be a huge step that could also simplify trade within Mercosur, but also with the EU, and reduce dependence on the dollar. Argentina in particular is hoping that this will help it get a better grip on high inflation. Brazil is the main trading partner and dollar reserves are tight at the central bank.

France, Austria and Ireland wanted to block the agreement after it was signed in 2019. They feared the new competition for their farmers, for example in meat production. However, the import quotas should remain low, so according to independent analyses, the effect would not be great. Paris also did not want to be responsible for the fact that the environment there suffers from imports from South America. The same applies to the mining of raw materials. The Supply Chain Act may have reduced these fears.

In South America it is different. The right-wing Brazilian President Jair Bolsonaro, who has since been voted out, saw the desire for greater protection as an encroachment on Brazil's sovereignty, and even his environment minister wanted to "drive the herds of cattle through the Amazon." The reason was their proximity to the agricultural lobby. With Lula in office, the tide has completely turned and fears have vanished. Nevertheless, he also calls for additional agreements. Exactly which one is not known.

In Argentina, the Peronists fear that lower tariff barriers, i.e. new imports from overseas, will have a negative impact on the fragile domestic industry. Although the country's agricultural sector is highly profitable, it creates comparatively few jobs. Fears that the agreement could be reduced to "cows for cars" are also shaky because European carmakers, including Volkswagen, are already well represented in Brazil and Argentina. So, among other things, it could be about additional safeguard clauses in this sector.

However, the government is keeping a low profile on exactly what the demands from Buenos Aires on the EU are. However, Fernández made it clear during Scholz's visit that he believes a quick agreement is possible. Argentina's Foreign Minister Santiago Cafiero is therefore traveling to Brussels this week for talks with EU foreign representative Josep Borrell.

A few years ago the tide seemed to be turning against more free trade around the world. The US under President Donald Trump questioned the rules of the World Trade Organization, launched a trade war against China and introduced tariffs against the EU. The US-EU agreement TTIP and the EU-Canada counterpart CETA had previously disappeared there because of doubts about the benefits and massive resistance from civil society.

But then Trump lost his reelection to Joe Biden. The Russian head of state Vladimir Putin rolled his tanks into Ukraine, cut off the gas for the West and thus shook the world: war in Europe, looming energy shortages and the climate crisis that overshadowed everything. Now historically reliable partnerships are to be expanded and secured, and new sources of raw materials and energy are to be developed for the future. In South America, the EU and Germany might have found them.