What does the Mercosur-European Union potentially hold for Latin America?

This week marked the signing of a historic agreement between Mercosur and the European Union. This pact aims to strengthen trade and political ties between the participating Latin American and European nations. After over 20 years of negotiations, the treaty presents a unique opportunity to promote economic growth, cultural exchange, and collaboration on global issues such as sustainability and innovation. Discover the potential changes in Latin America.

Brazil

The alliance creates one of the largest free trade zones in the world, affecting around 750 million people. Economically, it’s seen as the third biggest agreement globally, behind only the USMCA (United States-Mexico-Canada Agreement) and the RCEP (Regional Comprehensive Economic Partnership).

For Brazil, the largest Latin American country in the bloc, this partnership represents one of the most important economic connections between South America and Europe, linking two major players from their respective regions. Beyond trade, it’s also an opportunity to strengthen political cooperation and dialogue among all the countries involved, while encouraging joint efforts in sustainable development and technology.

According to the European Commission, the EU is Brazil’s second-largest trading partner, making up about 18% of Brazil’s total trade. On the flip side, Brazilian exports to the EU reached $46 billion in 2023.

What drives this relationship?

The two regions complement each other with their imports and exports, boosting their economies and markets through the exchange of goods and raw materials.

Brazil’s exports aren’t just about agriculture, as many might assume. However, agriculture remains a cornerstone of Brazil’s exports, thanks to its natural resources. It’s the largest supplier of soybeans, beef, and sugar to the European Union. Brazil is also a key source of iron ore for the EU. In 2023, agricultural and mineral products made up 17% and 21% of Brazil’s exports, respectively.

Aerospace is another standout sector, with Embraer playing a key role as one of the world’s leading aircraft manufacturers. Embraer not only contributes to Brazil’s exports but also works with European suppliers, creating a strong collaborative production chain.

Footwear is also a significant export, with European consumers embracing Brazilian shoes, whether made from leather or sustainable materials. Havaianas, in particular, are hugely popular for their durability, style, and comfort. These flip-flops, made from natural rubber, are now sold in over 100 European countries, according to Folha de São Paulo.

Brazil also supplies electronic goods to Europe, including technology for industrial automation.

And the trade goes both ways

The partnership is mutual. In 2024, EU exports to Brazil were worth around $21 billion, according to the Brazilian government. The main products included machinery (26%), chemicals and pharmaceuticals (23%), and transport equipment (13%). Brazil also imports agricultural machinery from Europe, highlighting how interconnected the two economies are.

Challenges to overcome

Despite the many benefits, there are still challenges that could complicate the relationship. One of the biggest issues is Brazil’s high import tariffs, which can reach up to 13.5%. These make international products more expensive and less competitive.

On top of that, Brazil’s tax system adds extra costs to imports, with various levies such as Import Duty (II), ICMS, IPI, and PIS/Cofins. These taxes can vary depending on the state, making the system even more complex.

Other challenges include strict food and drink safety regulations, currency fluctuations, expensive shipping costs, poor infrastructure at Brazilian ports, and slow customs processes.

Argentina

For Argentina, the agreement opens doors to new markets and bolsters its strategic position on the global stage. The European market, with over 450 million consumers, offers immense potential for Mercosur countries, especially with the significant tariff reductions on agricultural and livestock products—areas where both regions hold a competitive edge.

Argentina stands to benefit from increased exports of meat, wine, dairy products, and grains. These developments will enhance its competitiveness in global markets, diversify its trading partners, and attract investments to modernise key sectors such as agro-industry and technology. With abundant natural resources and a skilled workforce, Argentina is well-positioned to capitalise on these opportunities.

A plan to build nuclear power plants to develop artificial intelligence centers: a good opportunity for Argentina (and for the EU)

Argentina’s recent nuclear power plant construction plan and AI development centers can significantly benefit from the new agreement with the European Union (EU). The EU-Argentina Strategic Partnership Agreement offers several opportunities in key sectors like energy and technology.

1. Nuclear Energy Cooperation:

• Access to Advanced Technology: The EU’s expertise in nuclear technology can support Argentina’s atomic projects.
• Investments and Financing: The EU can provide financial resources and investment mechanisms for new nuclear plants.
• Research Collaboration: Joint research with EU institutions can enhance nuclear safety, efficiency, and waste management.

2. AI Development:

• Knowledge Transfer and Training: Argentina can gain access to EU’s leading AI research and training programs.
• Research Funding: EU funds (e.g., Horizon Europe) could support joint AI projects, boosting Argentina’s AI capabilities.
• Innovation Ecosystems: Collaboration with EU tech firms can foster AI hubs in Argentina, aligning with global standards.

3. Synergies Between Nuclear Energy and AI:

AI can optimize nuclear plant operations, improve energy management, and reduce costs, creating synergies between Argentina’s energy and tech sectors.

The EU agreement offers Argentina opportunities for technology transfer, funding, and research collaboration, accelerating progress in nuclear energy and AI development. And the EU can also benefit in several ways:

1. Energy Security: Increased nuclear energy development in Argentina can help diversify global energy supplies, contributing to EU energy security.

2. Technological Innovation: Collaborating on AI and nuclear projects enhances the EU’s global leadership in these fields, fostering innovation and new markets.

3. Investment Opportunities: The EU can gain access to investment opportunities in Argentina’s growing energy and tech sectors, benefiting from new markets and returns.

4. Strategic Partnership: Strengthening ties with Argentina enhances the EU’s influence in Latin America and provides a platform for further collaboration in various industries.

Uruguay

The Mercosur-European Union agreement also paves the way for greater foreign direct investment, particularly in infrastructure, technology, and renewable energy. Uruguay, renowned for its political and economic stability, could establish itself as a strategic hub for European companies seeking to expand their presence in Latin America.

Uruguay’s livestock industry, a key player in the European market, is set to benefit from tariff reductions or eliminations on high-quality meat exports. Additionally, the dairy industry is likely to see improved competitiveness in Europe, thanks to preferential trade terms and the removal of barriers.

How the Mercosur-EU agreement benefits Uruguay’s export capacity

The agreement could increase export capacity to the EU. Why? Once the agreement takes effect, approximately 70% of EU tariffs could be eliminated, providing a commercial boost to Uruguayan exports to the EU.

The EU was the third most important destination for Uruguayan exports, accounting for 17% of exports, in 2023. Uruguayan livestock benefits from the agreement, which grants a 99,000-ton quota for beef exports to the EU.

Chile

It is worth noting that Chile is not directly included in the Mercosur-European Union agreement. Instead, its political and economic relations with the EU are governed by the Association Agreement signed in 2002. In December 2023, Chile signed a new Advanced Framework Agreement with the EU, becoming the first country in the region to formalise a next-generation deal with the bloc.

Nonetheless, the recent Mercosur-EU agreement could indirectly benefit Chile by:

• Standardising trade rules across the region, enhancing the global competitiveness of Chilean products.
• Increasing trade opportunities through reduced tariffs on certain products, streamlining Chilean exports to and from the EU.
• Diversifying trade sectors, such as agriculture and fishing, by expanding the range of goods traded with the EU.
• Fostering strategic partnerships, with Chile acting as a gateway for investors seeking a foothold in Latin America.

Ultimately, closer interaction among Latin American countries under the agreement could strengthen regional trade ties and promote economic cooperation.

Colombia

The agreement between the European Union (EU) and Mercosur presents significant opportunities for Colombia in agribusiness, manufacturing, and technology. Integration with Mercosur and the Pacific Alliance could boost agricultural exports like coffee, fruits, and flowers, which reached US$2.5 billion in 2022, according to figures provided by DANE.

The automotive and auto parts industries stand to gain, considering Brazil and Argentina account for 60% of Latin American automotive production. European investment of 45 billion euros by 2027 in infrastructure, sustainability, and digital transition offers strategic opportunities. Colombia aims to engage in renewable energy and logistics projects, leveraging Brazilian expertise.

Additionally, the textile and metal-mechanic sectors are gaining strength due to tariff advantages, enhancing productivity and development. However, there are risks, including potential displacement of Colombian goods by Brazilian and Argentine products and European investments favoring Mercosur countries.

In 2022, Brazil accounted for 71% of Colombian imports from Mercosur, valued at US$7.276 billion. To remain competitive, Colombia must renegotiate its Free Trade Agreement with the EU to address industry and agriculture challenges, adapt to global trade dynamics, and solidify its role as a strategic regional partner.

Peru

For Peru, the agreement between Mercosur and the European Union represents a step forward that could help strengthen its position within the region. With the recent inauguration of the Port of Chancay—set to significantly reduce shipping times to Asia, particularly China—the Andean nation continues to rely on exports as one of its main sources of income, with a strong focus on the European market. According to data from the National Superintendence of Customs and Tax Administration (SUNAT), Peruvian exports to the European Union totalled $6.811 billion by the end of 2023.

Key goods exported to the European market include copper (11.4%), unroasted coffee (9%), fresh avocados (7%), zinc calcine (6.1%), and blueberries (5.5%). Furthermore, Peru has maintained a Trade Agreement with the European Union for over 11 years, during which it has imported products totalling $43.717 billion. Currently, the EU stands as Peru’s leading supplier of pharmaceutical products. Meanwhile, Peru has established itself as the EU’s top extra-EU supplier of avocados, blueberries, and asparagus, and is also its second-largest supplier of fresh grapes for the EU.

But this agreement can also mean a great expansion in the types of products with export potential. In this way, gold can rebound to get closer to the export of copper and zinc. In the same way, the so-called ‘Peruvian superfoods’ such as quinoa and organic coffee can exploit their current popularity in Europe to take advantage of the healthy trend.

Other products with the potential to increase their export level are those related to fishing (fishmeal, prawns and canned tuna), agro-industrial products such as cocoa, textiles such as Pima cotton and alpaca garments, among other primary or final products.

Finally, another aspect that is sought to increase are the destination countries of Peruvian exports on European soil. According to information from ADEX, between January and October 2024, the Netherlands has been the most significant country for Peruvian exports, reaching a total of US$ 1,958 million, followed by Spain (US$ 1,652 million), Germany (US$ 714 million), Italy (US$ 712 million) and Belgium (US$ 513 million).

Panama

Panama becomes the first country outside South America to attain the status of Associate State within Mercosur, marking a historic milestone in regional economic integration. This development connects Panama to a bloc representing the fifth-largest economy globally, with a market of 271 million inhabitants and a GDP of $4.5 trillion. For Panama, the opportunity to export products such as boneless beef, coffee, malt extract, cereal-based products, and others opens up new commercial horizons. Meanwhile, for Mercosur countries, Panama’s logistical platform and the fiscal incentives of the Colón Free Zone provide a strategic gateway to global trade.

This alliance not only strengthens Panama’s position as a logistical leader in the region but also embodies a shared commitment to sustainable economic growth. President José Raúl Mulino aptly summarized the significance by stating, “Today we made history.” This agreement reflects a unified vision of progress, positioning both Panama and Mercosur as pivotal players in a connected future that will benefit producers and consumers across both blocs.