The new EU-Mercosur deal will have both positive and negative impacts on the economies of four South American countries and the EU. Argentina, Brazil, Paraguay and Uruguay, and specifically their exporting industries, should see a rise in revenue due to easier and cheaper access to the EU’s consumers. Certain types of companies and industries within the European Union will face a challenge ahead of them due to this deal, however.
The EU-Mercosur deal was signed on 28th of June 2019, and it will have an effect on almost 777 million citizens of EU and Mercosur. Its consequences will also contribute to challenges and successes of exporters and importers of other continents and trading unions.
South America’s only land connection to the rest of the world is the narrow Darien Gap, which in the north, ends with the Panama channel. Compared to Europe’s very close connection with the Middle East and Asia, and the close sea connection with the African continent, South America is a far more isolated area. A closer economic relationship with the Mercosur’s second largest export partner will help the four countries to counter the economic effects of the relative geographic isolation.
The EU’s consumers and Mercosur’s exporting industries are the clear winners of the deal. The European Union’s consumers, not depending on their income level, will reap many benefits from the EU-Mercosur deal.
Since the deal both reduces tariffs and export barriers, the consumers of EU will be able to access both basic and manufactured goods at cheaper prices. The lifting of trade barriers will likely cause increases in Argentina’s, Uruguay’s, Brazil’s and Paraguay’s exports into the states of EU.
Cheaper prices and the novelty factor could lead to more shelf space being won by Mercosur exporters. This will provide EU consumers the opportunity to buy and experience a more diverse selection of products.
Mercosur’s exporters will also experience many benefits from the deal. Increased revenues and profit margins, and lower administrative barriers are some of them. Increased demand for workers in the four South American countries, because of larger export opportunities, is also a possible positive consequence. From another perspective, increasing exports into the second largest trade partner’s market can lead to a lower degree of export diversification. During a economic downturn or changing import requirements, this could lead to difficulties in re-orienting exports or increasing exports into other markets.
The EU’s domestic meat industry and agriculture workers stand to lose significantly if the deal does not undergo significant corrections before it is ratified. Although the starting amount of meat and meat carcasses allowed to be exported with reduced tariffs into the EU is not large (one of them being 99,000 CWE of beef), there is a high probability that it will increase in the future.
However, even a small change can cause large consequences. Small meat farms and farmers in the EU, which already face significant challenges in the domestic market, will have to cope with even stiffer competition. Mercosur countries have a well-developed meat industry; cheap and high quality meat surging into the EU could mean an end to some of the smaller meat farmers.
The consequences of the agreement will present both opportunities and challenges to other trade partners of EU and Mercosur.
Chinese products have, for a long time, moved away from being cheapest. Competing with an influx of South American exports, like rice and chemical goods, will be a new challenge for China’s exporters.
Other countries will also be affected by the deal, however, to a lesser degree. Large importers of Mercosur’s goods are ASEAN and SAARC. A more accessible EU market, with consumers with larger incomes, could prompt Mercosur’s exporters to move away from less profitable markets.
The agreement with the four South American countries continues the EU’s line-up of deals with its most important trade partners. In contrast to the European Union’s trade agreement with Japan, the agreement with Mercosur countries is focused on food imports to EU, and offers different benefits to the citizens of EU.
The EU-Japan agreement opened the doors to EU’s food exporters to Japan, while Mercosur agreement does the exact opposite. In a way, the EU-Japan and EU-Mercosur agreements are both heavily based on the exports of cars and food products, just oriented towards different markets.
There’s still a long road ahead for this trans-continental deal. There’s at least two years, if not more, of EU member states discussing, correcting, editing, and improving the deal to suit their own terms.
Opposition to some terms of the deal has already formed in Ireland and France. Editing a trade agreement over two years is unlikely to become a large problem for the integrity of the structure of EU. Adding one more agreement that impacts some member states negatively isn’t a cause for concern. Brexit, migrant integration and other current, more visible problems will still dominate the headlines. Each additional disagreement, however, means that reasons for optimism within the union gets that much harder.
Although economic in nature, the EU-Mercosur deal, if it passes without major corrections, will have a significant impact on forestation in Brazil, and the rights of the Mercosur’s labour force to organise and bargain.
If the increasing exports to EU will increase the demand for workers in Mercosur, coupled with increased rights for the labour force, the EU-Mercosur deal would improve the conditions of the labour force in the four South American countries.
Closer political ties are an inevitable consequence of the agreement. Decreased barriers for trade and increased economic ties, time after time, have created closer political ties. Although the European Union’s interests are far more focused on its closer neighbours, as well as Asian and African countries, the political relationship between the two economic blocks has potential for development.
Migration of qualified specialists from Mercosur countries into some Southern and Western EU states (Spain, Portugal, Ireland) and deforestation of South America’s rainforests, are challenges that the signing of the new deal could lead to overcoming.