What's holding up Latin America-EU talks on creating a free-trade bloc?

In July, Brazil's President Luiz Inacio Lula da Silva announced that a trade deal between the European Union (EU) and Mercosur — a South American economic and trade bloc consisting of Argentina, Bolivia, Brazil, Paraguay, and Uruguay — would be ratified by the end of 2023.

The announcement – at a summit of the EU and the Community of Latin American and Caribbean States (CELAC) — potentially paves the way for one of the biggest free trade zones, estimated to cover 780 million people. It was valued at 40 billion euros worth of business in 2019.

The EU's free trade zone in comparison has a productive capacity four times greater than Mercosur's, while Germany has a GDP almost equivalent to all Mercosur's nations together.

In the works for two decades, the proposed deal aims to drive the flow of goods and services between the regional blocs, explains Javier I. Echaide, a researcher at Argentina's National Council of Scientific and Technical Investigation (CONICET).

It centres on three key pillars - trade, cooperation and political dialogue, says Santiago Villar, a researcher who has spent seven years studying regional integration processes, including EU-Mercosur relations.

"The most relevant is the trade pillar, which aims to reduce tariffs between both blocs," he tells TRT World.

But it also involves other aspects not strictly tied to traditional commerce - ranging from public purchases, intellectual property, postal services, telecommunications, electronic commerce, cyberdata, large data flows, capital movements, financial services, and environmental matters, Echaide says.

According to Villar, the sector that would benefit most from trade in the EU-Mercosur deal would be the primary driver of the economy - agriculture.

However, negotiations previously stalled due to differences over key issues such as agriculture, services, and government procurement, according to Julieta Zelicovich, a professor and researcher at the National University of Rosario.

The EU has been "interested" in Mercosur since its formal inception, and the Treaty of Asuncion was signed in 1991, says Villar. The first attempt to reach a deal in 2004 was a "step forward" despite it not succeeding.

Nevertheless, as EU-Brazil trade could surpass $100 billion this year, Lula underscored the importance of the EU as Brazil's second-largest partner. He said an EU-Mercosur deal could "open new horizons".

Spain, which holds the six-month rotating EU Presidency, also signalled its intent to conclude a deal by the end of 2023.

Victor Enciso, a professor at the Faculty of Agrarian Sciences at Paraguay's National University of Asuncion (UNA), sees a political dimension and a bid "to increase EU influence in Latin America".

From a South American perspective, Lula has said if a deal is not reached, it would not be down to Mercosur's lack of political will.

Brazil's leader insists that the bloc seeks a "certain balance," referencing the region's independence from colonialism and something Echaide says echoes among many Latin Americans.

Mercosur's exports to Europe have largely been commodities such as meat and crops tied to agribusiness, while the EU has largely exported manufactured products.

Echaide describes the practice as repeating the same pattern of colonial-era dependence, establishing local elites dependent on relations with European economic centres.

Today, Zelicovich says there is a "common understanding" that the EU has placed extra demands which have "somehow unbalanced the previous 2019 political agreement."

Four years ago, both parties appeared to reach a deal that reports indicated would benefit European manufacturers and Mercosur farmers.

Amid what Echaide calls "the convergence of both parties' political needs," Argentina's then-president, Mauricio Macri, held Mercosur's pro-tempore presidency and sought an important accolade to boost his foreign policy credentials for his reelection campaign, which he eventually lost.

The EU's Trade Commissioner, Cecilia Malmstrom, was ending her mandate and held ambitions to take "credit" for getting the deal inked.

Environmental backlash

However, between 2019 and 2023, during the presidency of Brazil's Jair Bolsonaro, his controversial policies on the Amazon forced the EU to pull back. It led to the postponement of the deal being ratified due to non-binding clauses.

Environmental defenders criticised the far-right leader's policies, insisting he rolled back protections that were causing ecological destruction. Land invaders – such as farmers, loggers and miners – decimated vast swathes of the Amazon for mining, crops and livestock.

The impact caused a backlash from Germany, Norway, Luxembourg, Slovakia and Austria.

In 2019, Ireland and France signalled that they would only back the EU-Mercosur deal with efforts to safeguard the Amazon.

According to Zelicovich, one of the key aspects of the EU-Mercosur deal recognises that all nations have common responsibilities in tackling the climate crisis but different capacities to address it.

"When Mercosur demanded some extra concessions on the agreements to make it more balanced and more updated to the evolving scenario in trade and international economy, politics, politics - the Europeans didn't concede that much," Zelicovich tells TRT World.

Some consider the Mercosur-EU deal to have high demands regarding environmental commitments, particularly for Global South nations who prefer to make environmental pledges in UN environments amid more of an understanding they are developing.

"The EU must make its environmental legislation more flexible," Echaide says.

He says it entails permitting some banned fertilisers and pesticides to Europe and allowing such Latin American products to be imported to their markets.

"If it does not do so, the opening will be unilateral, and the "free trade" that these agreements are said to achieve will not be as "free" as promised," Echaide says.

According to Villar, "the success (or not) of the negotiations, and ultimately, the signature of a comprehensive agreement depends on trade, mainly on the EU offer to market access for Mercosur agricultural products. Also, another hurdle is the remaining internal issues within the Mercosur structure, in order to avoid double taxation in(on) some industrial products arriving to Mercosur from the EU."

French opposition

Nevertheless, the deal has faced strong pushback from France.

President Emmanuel Macron called it "completely contradictory with what (Lula) is doing in Brazil and with what we are doing." He said he cannot ask European farmers and industrialists to make concessions about decarbonising while removing tariffs to allow such products to enter.

Villar explains that France and the Netherlands have a strong agricultural sector, with millions of families dependent on this sector. A deal with Mercosur would put the whole EU agricultural market at risk.

French opposition to EU trade involving agricultural "concessions" to other countries or blocs is not new.

The deal has previously been met with opposition from several countries in Europe. In 2019, Austria's Parliament rejected the agreement, as did the Dutch Parliament.

Ireland, Belgium, and Germany also expressed opposition.

The main aim is "the dismantling of internal subsidies within the EU to agricultural producers" coupled with "concern regarding environmental matters that is genuine, and that partly exposes the contradictions that this treaty has," says Echaide.

The potential FTA would increase trade and the transportation of goods, notably river transportation, which he says is "one of the main polluting factors" that directly impact climate crisis.

Enciso believes that over time, the interests of both sides have changed.

He says the EU appears more concerned with Eastern Europe while Mercosur has "too many internal issues unsolved" that include "the 'near-economic-collapse' of Argentina."

The country's new far-right President, Javier Milei, has cast doubt over Argentina's participation in Mercosur - even questioning whether the third-largest Latin American economy will remain in the bloc.

The EU trade commissioner Valdis Dombrovskis recently cancelled a visit to Brazil to finish the deal in December.

Analysts have also seen the end of Brazil's tenure in the rotating Mercosur presidency as a key step to getting a deal done. At the same time, regional leaders like Paraguay's President Santiago Pena have indicated the trade bloc could step away if the agreement is not concluded this month.

But the EU-Mercosur deal would likely benefit the export sectors of primary and agricultural goods, including ethanol, some wines, honey, beef, sheep, fish and chicken.

However, many of these products contain hormones prohibited in the EU, says Echaide.

South-South relations

If an EU-Mercosur deal materialises, Echaide says it will likely deepen the footprint of European companies in sectors providing footwear, leather goods, furniture and textiles - driving "local textile deindustrialisation" and "local unemployment" in Latin America.

Only 1.3 percent of EU exports go to Mercosur, while 21 percent of Mercosur exports go to the EU.

"Inequalities predate this FTA, but this agreement will deepen them," Echaide says, referencing the potential impact on local Latin American production.

However, other analysts contend there are different priorities among Mercosur leaders.

"I believe Lula is more interested in developing South-South relations, where Brazil has a chance of being a leader, and not much interested in South-North relations", explains Enciso.

He references the recent OPEC-Brazil deal and Mercosur-Singapore deal that took four years to come to fruition and aims to "deepen economic integration between Singapore and the four South American economies."

The Mercosur-Singapore deal also seeks to bolster trade flows through lowered tariff rates, establish transparent and predictable investment conditions, and drive cooperation in trade entrepreneurship, digitalisation, sustainable development, food security and SME development.

While the EU is Mercosur's number one trade and investment partner, China is Mercosur's largest trade partner regarding the exchange of goods. The EU then follows it.

"Nowadays, to access (the) EU market has a very high environmental price or cost for Mercosur's countries, higher than the time (when) conversations started. Asian countries are cheaper regarding this aspect," Enciso tells TRT World.