The leaders of Mercosur¹ and the European Union (EU), on 6 December 2024, announced the conclusion of negotiations on an agreement between the two parties. The agreement follows more than two decades of negotiations and is expected to be transformative from both an economic and political perspective.

Background

Earlier announcements by the parties, in 2019, marked the conclusion of a political agreement on the main points of the agreement. In contrast, the recent announcement declares the effective conclusion of the negotiation — that is, there are no more points to be negotiated.

Further, during the timeframe of the prior negotiations, relations between the member states had deteriorated, culminating in the disruption of the final stages of the agreement. In the current scenario, the advances of the agreement are bolstered by a new context, impacted by post-pandemic effects, climate crisis, growing protectionism and geopolitical tensions.

The agreement

The agreement will integrate two of the largest economic blocs in the world, which together comprise approximately 718 million people and a GDP of approximately US$22t. The EU is currently Mercosur's second-largest trading partner, and with the agreement, it could become the main one.

The agreement boosts the diversification of Mercosur trade partnerships, in addition to fostering the modernization of the industrial sector of Mercosur countries, which can dynamize, and reduce the cost of, production in Mercosur. It is also expected that the agreement will boost the flows of direct and indirect investments.

Until now, Mercosur was the only trading bloc in Latin America that did not have a preferential trade agreement with the EU. Regarding trade in goods, Mercosur is currently the EU's tenth largest trading partner, but this new Free Trade Agreement is expected to unlock yet-untapped potential.

Innovations and commitments

The culmination of negotiations and the new agreement should help the two trading blocs integrate manufacturing chains and move toward decarbonization of the economy and the promotion of sustainable products. The newly negotiated agreement includes innovations, including:

• Sustainability: Reinforces environmental, social and economic commitments
• Automotive sector: Longer tariff reduction schedule for electrified vehicles and new technologies, with safeguards for investments
• Public policies on critical minerals: Flexibility to apply restrictions on the export of critical minerals, stimulating value addition in Mercosur countries
• Agreement rebalancing mechanism: Prevents unilateral measures from harming already-negotiated trade concessions
• Resources for cooperation: EU offering package to support implementation of the agreement in Mercosur countries

Trade of goods

With regard to the parties' negotiations, Mercosur's offer to the EU covers 91% of goods and 85% of the value of imports of EU preferential origin, with tariff reduction schedules between 4 and 15 years. The automotive sector is an exception, with tariff reduction periods of 18, 25, and 30 years. The EU's offer to Mercosur covers approximately 95% of goods and 92% of the value of European imports of Mercosur goods. Less than 5% of the imported value will be subject to quotas or restricted tariff treatments, mainly applied to agricultural items.

The gradual elimination of tariffs under the parties' agreement represents a significant opportunity for Mercosur companies. The reduction of tariffs will allow the import of advanced machinery and technologies from the EU, boosting capital investments (CapEx) and modernizing Mercosur members' industrial infrastructure, resulting in more efficient production and higher quality products, both for the domestic consumer market and potential exports.

Additionally, integration into European production chains should provide continuous opportunities for operations (Opex), improving the efficiency and competitiveness of Mercosur companies. At the same time, the agreement will give the EU access to raw materials that are critical for the EU's economy.

Trade facilitation

The agreement is innovative for Mercosur, with modern rules of origin and specific sector flexibilities, as well as the possibility of self-certification of origin, currently only available in ACE 18² in very early stages. Additionally, the agreement addresses issues related to the reduction of non-tariff barriers, with an emphasis on transparent and automated processes, best regulatory practices, mutual recognition of authorized economic operators (AEO), and additional facilitations for these.

Implications for businesses

Businesses should assess the agreement's potential impact for their specific situations and take appropriate steps to prepare themselves for the application of the agreement. For example, business may want to assess whether their products meet the thresholds to benefit from preferential treatment, whether any changes to the price setting are required, whether they have the necessary registrations and how they can best take their products to the opening markets.

Next steps and challenges

The conclusion of negotiations does not imply that the agreement will automatically enter into force. First, the agreement must undergo legal review, translation into all EU official languages, signing, ratification and internalization.

Within the EU it also has to be decided whether the agreement (or specific parts of it) are "EU only" or "mixed" agreements. The latter require approval from all Member States individually while "EU only" agreements only require signature and ratification at EU level.