In its annual forecast, Stratfor noted that the European Union would seek to complete its trade negotiations with Mercosur this year, and that agriculture would be one of the main obstacles to overcome. The new draft agreement between the two trade blocs aligns with this analysis.
After 20 years of negotiations, the European Union and the Common Market of the South (Mercosur) reached a draft deal for a free trade agreement on June 28. While most European and South American governments praised the deal, it will be years before it can actually be implemented, as many of the agreement's details have yet to be determined.
But most importantly, the deal still needs to be ratified by each of the 28 governments of the European Union and the four governments of Mercosur (Argentina, Brazil, Paraguay and Uruguay), along with the European Parliament. This will leave it vulnerable to domestic pushback on both continents. Furthermore, upcoming political transitions in South America and Europe risk killing the deal before it's ever enforced.
Details of the Agreement
The need to address concerns raised by countries on both sides of the Atlantic stretched the negotiation process for the deal across two decades. South American negotiators questioned opening their member states' industrial sectors, which are protected by high tariffs, to competition from European exporters (Mercosur's common external tariff for vehicle imports, for example, is 35 percent). Meanwhile, certain members of the European Union — including France, Poland and Ireland — feared to open their agricultural sectors to competitive South American food exports (the average EU tariff for agricultural products is 11 percent).
The June 28 deal reflects these concerns. Brussels agreed to gradually lift 92 percent of the tariffs on Mercosur imports, while Mercosur will progressively eliminate tariffs on 91 percent of EU imports. The agreement also includes a quota for Mercosur's beef exports to Europe, as well as protection for the regional appellations of certain EU food exports, such as champagne and Parma ham — a key demand from EU farmers.
The European Union and Mercosur had pushed to reach the deal ahead of two quickly approaching deadlines. First was the end of the European Commission's current mandate in September, since it's not a given that the configuration of the next commission (which negotiates free trade agreements on behalf of the bloc) would be as open to such deals. And second was Argentina's presidential election in October, which the country's conservative and market-friendly government risks losing to the more leftist and protectionist opposition.
Domestic pushback and potential political transitions in Mercosur and EU member states in the coming months risk killing the transcontinental trade deal before it's ever enforced.
In addition to these specific time crunches, the signing the deal also offered timely symbolic opportunities for both trade blocs. For Brussels, it was a demonstration of Europe's support for international trade agreements amid the recent surge of disputes brought on by the ongoing trade war between the United States and China. And for Mercosur, getting a deal on the books would help illustrate its the continuing relevance at a time when questions about its future abound.
Obstacles to Ratification
But despite the negotiators' attempt to quell their member states' respective concerns, the draft agreement has its skeptics. The Irish government has announced plans to conduct an economic assessment, saying it would reject the deal if it was found to be damaging for the country's farmers. The French government, meanwhile, has praised the agreement, though it warned it would not ratify it should Brazilian President Jair Bolsonaro made good on his recent threat to withdraw his country from the Paris Agreement on climate change.
On the Mercosur side, the Association of Entrepreneurs of Argentina has also warned that the deal as-is would harm the country's small- and medium-sized businesses. Alberto Fernandez, the most prominent of the candidates running against Argentine President Mauricio Macri in the upcoming election, echoed this sentiment — saying that the agreement would harm domestic industries and eliminate jobs. In Uruguay, where a presidential election is schedule for October, members of the main opposition party have also criticized the draft agreement.
A Fernandez presidential victory would increase the likelihood that Buenos Aires would walk away from the deal. On the other side of the world, French farmers could also still press Paris to seek further protections for their sector. And other EU countries with large agricultural sectors, such as Poland and Italy, could face similar domestic pressure to do the same — or block the deal altogether. Thus, while European Union and Mercosur may finally have a paper draft in their hands, actually getting all their member states on board to ratify it will be a long and arduous process and full of potential pitfalls.