EU-Mercosur Agreement to boost global trade

Mercosur is the abbreviation for the Common Market of South America © AdobeStock

The EU started negotiations for a trade agreement with Mercosur two decades ago. The German industry would welcome a quick ratification of this forward-looking agreement. Europe could conclude one of the first free trade agreements (FTA) with the South American economic region – and thus seize new business opportunities and secure advantages over other competitors.

The FTA will allow the EU to play an active role in shaping globalisation in line with its own ideas. Especially in times of crisis, this would provide a valuable boost to the economies and jobs of the signatory countries. Moreover, the agreement would send an important signal for multilateral trade rules: It is worthwhile to focus on international cooperation and to consolidate geopolitically important partnerships. The agreement would permanently shape the rules for close trade relations, promote the multilateral principles of transparency, equal treatment and non-discrimination and strengthen international agreements to promote social and environmental standards. The FTA also creates the basis for an intensive political and social dialogue to implement the agreements. If we do not achieve closer, treaty-based cooperation, we will miss a unique opportunity to align values and standards in the Mercosur countries with the high level of the EU.

Why does the EU want a free trade agreement with Mercosur in the first place?

Europe and the world economy as a whole benefit enormously from international trade and cross-border investment, including the division of labour. EU trade policy aims to create the conditions for a smooth and rules-based exchange of goods, services and investment through agreements with groups of countries (for example in the World Trade Organisation, WTO) and individual states. EU bilateral trade agreements complement the general multilateral framework of the WTO. Bilateral agreements are about reciprocal market opening, but also about  disseminating internationally high EU standards and fundamental values such as openness, the rule of law and transparency. Although the European Union has long maintained substantial economic relations with the Mercosur countries, no comprehensive bilateral trade agreement exists so far. In fact, large parts of the Latin American market are still characterised by high tariff and non-tariff barriers. The EU-Mercosur Free Trade Agreement would significantly facilitate trade with the South American countries.

Why does the German economy need a free trade agreement with Mercosur?

Without open markets abroad, the German economy cannot survive. More than in almost any other country, prosperity in Germany depends on rule-based trade. The close integration into the global economy is reflected in the employment sector: almost 30 percent of German jobs depend directly or indirectly on exports, and in manufacturing the figure is as high as 56 percent. Already today around 240,000 jobs in Germany  are based on  exports to Mercosur. But only 2.4 percent of German exports  go to the Mercosur countries. Through free trade with Mercosur, Germany could significantly increase its exports to the region and at the same time reduce its risk vulnerability when exporting to other markets.

What advantages does the EU-Mercosur agreement offer German companies?

The free trade agreement with Mercosur offers German companies almost tariff-free, rule-based access to a market of around 265 million consumers. The Mercosur countries, which are currently still sealed off by high tariffs, have a great need for modernisation. High import costs can be a major obstacle - the average tariff rate applied to industrial goods imports in Argentina and Brazil is more than three times higher than in the EU (2018 according to the WTO: 14.2 / 13.9 / 4.2 percent). Moreover, South Americans are young, open-minded towards new technologies and have an affinity for Europe. All this means that there are great sales opportunities for German products and solutions. Companies and consumers will also benefit from the savings potential resulting from the abolition of customs duties and other trade barriers. This is a matter of several billion euros annually.

Is the Association Agreement also attractive to small and medium-sized industrial companies?

Definitely. Trade barriers place a much greater burden on small businesses than on large companies, as they often have neither the time nor the resources to tackle them. The increased transparency that the Agreement would create, as well as the simplification of customs procedures, would be particularly helpful for small businesses on both sides. In order to address the challenges faced by small and medium-sized enterprises (SMEs) in international trade and investment, the EU trade agreement with Mercosur countries includes a specific chapter to promote them. This will offer interesting new business opportunities for SMEs which are not yet active on the partner market as well as those 10,000 SMEs in Germany which already export to Mercosur today.

Does the agreement entail risks for the German economy?

The agreement is specifically designed to minimise risks in trade with Mercosur by clearly regulating the exchange of goods and services. Major risks would be more likely to arise if the agreement did not enter into force. Mercosur is currently negotiating numerous free trade agreements with other countries and regions. European products and services would no longer be competitive in the long run with goods from these countries if they were subject to import duties and trade barriers in Mercosur countries, but not those offered by competitors.

What opportunities does the agreement offer to Mercosur countries?

The agreement offers Mercosur countries a great opportunity to modernise their entire production chain - in agriculture, industry, trade, transport and services - in a sustainable way. The EU is one of the largest and most attractive markets in the world, and the agreement will make it easier to access it. This could bring major benefits for the local economy, with increased economic growth, jobs, social security and better products for the end consumer.

Does the agreement weaken European agriculture?

The interests of European agriculture are duly taken into account in the agreement. Sales of locally popular European products such as wines, spirits and cheeses will no longer be burdened by overly complicated procedures and tariffs of 20 to 35 percent. The EU could also be the first trading partner to conclude an agreement with the Mercosur countries. This would give the EU and Germany privileged market access in the coming years. Even if adjustment processes on the European side are to be expected, the German agricultural and food sector in general is likely to benefit from the agreement . The partnership agreement provides a good basis for fair competition.  

Will the high consumer protection standards in the European Union be maintained?

Yes, the high EU consumer protection standards are not negotiable. As with all free trade agreements, agricultural and food products imported from Mercosur must meet strict EU safety standards. These standards apply to all products sold and consumed in the EU, whether domestically produced or imported. The agreement will not change this situation.

What does the agreement mean for the environment and the Amazon rainforest?

The FTA offers a unique opportunity for the EU to have a positive impact on environmental and sustainability standards in the Mercosur region. Via a sustainability chapter, countries will be obliged to comply with rules on biodiversity, sustainable forest management and combating illegal logging. The European Union is able to count on a dialogue-based enforcement mechanism for this purpose: cooperation in bilateral, regional and international fora is to ensure that the agreements of the sustainability chapter are implemented. This mechanism also offers civil society organisations an active role in monitoring the implementation of the agreement, in particular regarding all environmental commitments.

Does the agreement have an impact on climate change?

The EU agreement with the Mercosur countries provides concrete mechanisms that can be expected to have a positive impact on climate change mitigation, although increased trade may lead to more transport and possibly emissions. The agreed commitments will ensure, among other things, greater efficiency in trade and production, faster diffusion of environmental technology, better compliance with international standards and, as prosperity increases, a tendency for more investment in environmental protection and greener products. In addition, the agreement increases the commitment of the parties to climate protection. For example, in the FTA, the EU and Mercosur have also committed themselves to implementing the Paris Climate Change Convention. This provides additional leverage to bind partner countries to it. For Brazil this also includes a commitment to combat deforestation. In addition, the 2030 Agenda for Sustainable Development, to which Mercosur countries have committed themselves, will develop mechanisms to tackle climate change.

Are labour rights protected by the agreement?

The chapter on sustainable development also protects respect for labour rights. The parties have agreed that the EU-Mercosur agreement must promote existing rights and not dilute them. They refer to the fundamental rights of workers as defined by the International Labour Organisation (ILO), such as non-discrimination in the workplace, the elimination of child and forced labour, freedom of association and the right to collective bargaining. A speedy entry into force of the agreement could counteract regressions in workers' rights at an earlier stage, as recently reported by trade unions in some Mercosur countries.

Will the agreement include provisions on investment protection?

Investment protection was not part of the negotiations between the EU and Mercosur countries. Germany has bilateral investment promotion and protection treaties (IPTs) with Argentina, Paraguay and Uruguay. An IPT with Brazil has been signed but is not in force yet.