The EU-Mercosur agreement will have winners and losers but it wont make a major economic impact

On January 17, representatives of the EU and the Mercosur (Argentina, Brazil, Paraguay and Uruguay) will sign a free trade agreement in Paraguay. The accord, 25 years in the making, will create the world’s largest free trade area, with over 700 million consumers and a total trade volume of over €111 billion in 2024. The agreement has broad support from the continent’s business community, but it has met with resistance and protests from the farming lobby. They claim cheaper imports from South America will undercut their livelihoods and weaken food standards. While no economist would claim that economic isolation is preferable to free trade, opening up to trade always has consequences within each country. It is an accepted fact that there will always be winners and losers in international trade. EU consumers win, some producers may lose To understand the deal’s potential aggregate impact, we can look at which non-EU countries currently make up the largest share of the average EU shopping basket. The main providers are China (20% of total) and the US (13%). In contrast, Mercosur members represent a tiny share: Brazil has 1.8%, Argentina 0.3%, Uruguay 0.07% and Paraguay 0.02%. To put this in context, we can consider the largest supplier, Brazil. Apart from representing a small share of imports, its average import tariff in the EU is just 3.7%. This means Brazilian goods will become cheaper under the new rules, but not by much – a product that previously cost €10.37 will cost now €10. (Note that this analysis is working with averages and the assumption that goods produced in Mercosur will be freely sold in the EU. In practice, there will be exceptions and limits, but this is the case with any trading partner.) There is concern regarding a large flow of Brazilian goods into EU, especially meat. But if this influx were to materialise, EU consumers would benefit – if they purchase Brazilian meat, it would be because they prefer this option. The losers would be EU meat producers because they will face higher competition. However, the EU has said it will protect potential losers, stating that “the Commission stands ready to promptly and strongly assist farmers in the unlikely event of significant market disturbance linked to the agreement.” Assistance would likely take the form of tariffs if there is a sudden boom in imports. It has also announced quotas to limit how many goods are imported, and adjusted its 2028-34 budget to bring forward the delivery of €45 billion of EU agriculture subsidies. EU producers gain access to Mercosur markets The trade agreement also works the other way, granting EU producers access to a large market. While they could already sell to these countries, they can now do so at a lower price and with fewer obstacles. The combined size of Mercosur members (in GDP) is equivalent to France, with Brazil accounting for most of it. The main winners with regard to exports will therefore be Germany and, to a lesser extent, Italy, who account for the largest share of Brazil’s imports from the EU. However, this is still a tiny contribution to Germany and Italy’s exports (around 0.8%), meaning we can’t expect large aggregate effects. In addition, most goods tariffs are around 10%. The effects will also not be uniform across different industries. Given current trade patterns, producers of capital goods (like equipment and machinery) in those countries will be the main winners. Mercosur headquarters in Montevideo, Uruguay. Carlos Borroni/Flickr, CC BY-NC-ND Exceptions: cheese, champagne, cars Brazil and Argentina previously had a tariff of 35% on cars imported from the EU. The European auto industry was, unsurprisingly, strongly in favour of a trade agreement that would grant them easier access to South American markets. However, Brazil, like the EU, wants to protect certain industries, and believes that its auto industry deserves special treatment. In practice, this means that the prior tariffs will only slowly decline, with a planned phaseout period of 15 years. This will greatly diminish the potential of European carmakers to penetrate the Mercosur market. This is only one of the exceptions considered in the trade agreement. The EU has also put forward long lists of labelled goods from each member state that deserve protection. Among the many protected goods are Italy’s Parmigiano Reggiano cheese and French Champagne. Despite the Commission’s PR efforts, it is safe to say that this trade agreement will not have large aggregate effects. Depending on its implementation, however, it may still lead to substantial changes in demand for specific industries. Concerned citizens and campaigners should therefore carefully monitor how the subsidies, quotas and exceptions are applied in the wake of the deal’s signing, in order to ensure a win-win trade agreement for everyone. A weekly e-mail in English featuring expertise from scholars and researchers. It provides an introduction to the diversity of research coming out of the continent and considers some of the key issues facing European countries. Get the newsletter!