EU and MERCOSUR agree on free trade agreement

​published on July 1, 2019 | reading time approx. 2 minutes

At a rather tough G-20 summit in Osaka last Friday, a long-awaited free trade agreement between MERCOSUR and the EU was made. At the subsequent press conference, words such as “historical moment” and “biggest deal in the history of the EU” were mentioned.

At an otherwise rather difficult summit meeting, the EU heads of government – after 20 years of negotiation with South American colleagues – wanted to deliberately set a positive signal for regulated free trade in the midst of international trade tensions. The deal was probably also made possible because the new Brazilian government – representing the largest player in South America – is currently systematically tackling a reform agenda which, in addition to de-bureaucratization, privatization and a fundamental tax reform, also provides for market opening.

• World's largest free trade area: creating the largest free trade area in the world with around 800 million market participants. The gross domestic product of the participating states amounts to approx. 18 trillion euros to around a quarter of global economic output.
• Participants: The deal covers all EU member states (about 512 million inhabitants) and the South American MERCOSUR community (about 260 million inhabitants) Brazil, Argentina, Uruguay and Paraguay.
• Market opening in Brazil: Brazil, in particular, was one of the world's most protectionist markets with high import tariffs and import rates and, with its signing, sends a clear signal of market opening.
• Import facilities: The MERCOSUR countries levy around up to 35 percent on cars, clothes and shoes, 14-20 percent on machinery and up to 18 percent on chemicals. These duties shall be systematically abolished.
• Gradual abolition of customs duties: Gradually, 91 percent of existing import tariffs on EU goods are to be eliminated (92 percent from EU to MERCOSUR imports). According to the EU, this results in a potential savings for European importers of approx. 4 trillion Euros.
• Public tenders: Participation in public tenders should be easier for companies from the EU in the future in the MERCOSUR space.
• Potential winners: Above all, European carmakers and mechanical engineers should benefit from the customs relief. German industry, in particular, expects growth potential by saving on import duties and is reacting rather euphorically. On the other hand, Brazil and Argentina are hoping for a tripling of exports of agricultural products (especially beef) in 15 years.
• Otherwise mixed reactions: Overall, the agreement is seen more as a win-win business and as a positive signal for free trade. By contrast, there are critical voices from the side of environmental parties and European farmers. A trade expert from Greenpeace spoke for clarification, simplifying “more cars against more cows”. According to the EU Agriculture Commissioner, the free trade agreement also offers “opportunities and benefits” for European farmers, but also “some challenges” due to increased competition from South America.
• Potential losers: As is often the case with free trade agreements, European farmers are losing out. However, both economic areas reserve the right, e.g. to prevent flooding of certain agricultural goods in the short term with “emergency tariffs”.
• Geographical protection: exclusive rights were negotiated for certain goods. Among the 357 “geographical indicators” are e.g. “Munich Beer”, “Champagne”, etc.
• Protection through standards: Both economic blocs are committed to protecting the environment and working conditions. For example, the participants must adhere to the Paris Agreement on Climate Change and make a commitment to stop deforestation.

The agreement negotiated by the EU Commission still has to be confirmed by the 28 member states and the European Parliament. The planned free trade zone offers no doubt new opportunities for the German export industry. We will observe this interesting development and keep you informed.