EU free trade negotiations with Australia and Mercosur

The free trade talks between the EU and the South American bloc Mercosur, and between the EU and Australia, have been going on for many years – in the case of Mercosur, decades. Why is it so important for all parties to secure deals? Just why are they proving so problematic? And how much longer might it be until agreements are reached?

For the EU, the deals would ease many geo-economic challenges, recently exacerbated by Russia´s invasion in Ukraine and a more assertive China. It is also up against US economic policies of massive subsidies, partly protectionist, to stimulate the American economy.

For Australia, an agreement would open up a market of around 450 million consumers, and boost the country’s efforts to expand its export markets.

Mercosur, meanwhile, is also looking for new markets and greater diversification generally – it has yet to sign a major free trade deal of any kind.

So all parties have a lot to gain. Yet agreement has remained elusive.

President Lacalle Pou of Uruguay recently expressed his frustration with the lack of progress. Speaking at the summit between the EU and the Community of Latin American and Caribbean States (CELAC), he said: “Enough of words from 25 years of negotiation. It's difficult for me to explain to my teenage children that we have spent a quarter of a century trying to come to an agreement in a world that has changed so much.”

What, then are the sticking points?

As we’ll see, it’s because the various parties have further, very particular, financial, political and other objectives for the agreements they seek.

The EU’s broad-based aims

For the EU, it’s not an exaggeration to say that finalising these free trade deals will be key to its future plans.

In the first place, a deal with Mercosur would remove 91% of tariffs on EU exports there, its largest trade deal to date in terms of tariff reduction. According to the European Commission, that would represent a saving of EUR 4.5 billion worth of duties. It would also create the world’s largest free-trade zone, encompassing around 720 million people. This would greatly extend the EU’s influence in world trade and reduce competitive disadvantages with China and the US in South America and Oceania.

For the EU there is a need to diversify supply chains as well. To reduce dependence on China and meet its ambitious sustainability targets, it also wants priority access to raw materials and other commodities which the region offers.

This has been determined by the EU’s new Critical Raw Materials strategy. That aims to mitigate the risks to supply chains for materials related to sustainable energy that were highlighted by shortages during the pandemic and in the energy crisis following Russia's invasion of Ukraine. In particular, Mercosur has great potential for production and export of green hydrogen at competitive prices – and Europe is one of the biggest future markets.

Looking at Australia, it too has the potential to be a key partner to the EU. Australia has ample supplies of lithium, accounting for about half of production globally, along with cobalt. These are key elements for batteries used in electric vehicles, together with titanium, palladium, nickel, zinc and rare earth elements.

The EU is in urgent need of those commodities in order to achieve its ambitious targets regarding digitalisation and sustainability, laid down in the EU Green Deal. Their ultimate goal of is to reach climate neutrality by 2050.

Additionally, Australia has huge areas for wind and solar power, which it wants to use to produce green hydrogen – urgently needed by EU heavy industries for future decarbonisation.

The positions of Australia and Mercosur

Australia is also looking to diversify, particularly after their major trading partner China imposed blocks on numerous Australian farm products in 2020. A deal would boost their beef exports, but also other agricultural products such as sugar and lamb.  

Mercosur, meanwhile, has been facing even more fundamental challenges. The first is the suspension of Venezuela, leaving just Brazil, Argentina, Paraguay and Uruguay as full members. Internal trade has grown, but agreements with the rest of the world have proved elusive.

In recent years its member countries have additionally faced political and economic turmoil. Much of the region has also been slow to recover fiscally from the COVID pandemic, and the excessive influence of China in South America once again presents challenges. The region also seeks less dependence on the US. In addition, Mercosur consumers would benefit from cheaper access to EU manufactured goods. Agreement had been reached with the EU in 2019, but the treaty was never ratified.

The current state of play

In July, both sets of negotiations stalled again.

One main issue has been the vested interests of the agricultural sector in certain EU member states, particularly France, Ireland and the Netherlands, that could block a compromise. This is a continuation of a pattern seen in many FTA negotiations of the EU with other countries. Another issue has been the EU´s environmental stance.

For Mercosur, the EU’s latest environmental demands have proved to be a real sticking point, with Brazilian President Luiz Inácio Lula da Silva in particular citing them as problematic. Many like him argue that the EU conditions are excessive, and that they have already signed up to international agreements to protect the rainforest, and also made commitments to international labour standards.

As for Australia, the negotiations have been going on for much less time, relatively speaking, having started in 2018. They had hoped to conclude matters in July, but differences remained, particularly over the degree to which the EU would open its markets to Australian beef and other farm products. The EU also objects to Australian food producers using terms such as feta and prosecco for their produce.

Australia remains positive, helped by the fact, of course, that they only have the interests of a single country to consider. As Australian Trade Minister Don Farrell commented, "I'm optimistic that with some goodwill, some hard work, some perseverance, we're going to get there." Officials on both sides plan to meet again in August.

The position of the EU

There are currently four full members of Mercosur, plus Venezuela, currently suspended, and seven associate countries. If that makes agreement difficult, consider that the EU consists of 27 countries. To ratify any agreement requires the assent of each state and their parliaments, which means to reach a deal, further compromises, particularly regarding agricultural imports, will be necessary.

This is because the agreements being sought are more than mere trading arrangements. They serve to secure the EU´s strategic autonomy and economic resilience. The organisation has come under increasing pressure in recent years, with sluggish growth, high inflation and Brexit some of the main factors.

In this context, our belief is that jeopardising the agreements primarily for the protection of the agricultural sectors of some member countries seems to be short sighted. It is also in the overriding interest of countries such as France or Ireland to put aside their agricultural interests in favour of a speedy conclusion of the agreements. The EU and its member states have to accept that in the current environment, players like Australia and Mercosur have gained more political and economic leverage than they once had, increasing their bargaining powers. Agricultural protectionism and imposing new standards, such as the recently proposed addendum on deforestation and sustainability, are much harder today. The latter in particular can be perceived as patronising, which is why they tend to meet strong resistance.

What are the prospects for agreement?

On June 12th – before the recent failed negotiations – EU Commission President Ursula von der Leyen pledged the EU and the Mercosur bloc would conclude an agreement by the end of the year.

The comments of both the Uruguayan President and the Australian Agriculture Minister, quoted above, represent further evidence that, for all sides, the political will seems to remain intact.

What is certain is that despite the recent setbacks, all parties remain publicly committed to signing agreements. The aim is still to be able to do this before the start of 2024.

The clock is ticking, however. Will agreements be reached? In a few months we will know for sure.