The assessment of the free trade agreement between the European Union and the South American member states of Mercosur has changed significantly in South America in recent months. The debate is no longer centered on its economic significance, but on its geopolitical dimension.
The agreement, which is being signed this Saturday (January 17) in Asuncion, the capital of Paraguay, is now primarily seen by South Americans as an opportunity for new positioning in a rapidly changing world.
Donald Trump is primarily responsible for this. The American president arbitrarily imposes tariffs, withdraws the United States from international organizations, lays claim to other countries' raw materials, and interferes in their internal politics, for example in Brazil.
In such a situation, the EU, like Brazil, Argentina, Uruguay and Paraguay, decide to take the opposite path: they rely on cooperation, rules and long-term reliability.
The agreement is "historic, above all because of its geopolitical significance," concluded Brazilian Finance Minister Fernando Haddad. The world must not be left to tensions between major powers, he says.
Fear of growing American interventionism
Brazilian political analyst Tomas Traumann believes that Trump's economic chauvinism ultimately accelerated the conclusion of the EU-Mercosur agreement. On both sides of the Atlantic, it was quickly realized how important it was to find new partners and put doubts aside.
For Brazil, Uruguay, Paraguay and Argentina, the agreement also has a clear security dimension. The US military intervention in Venezuela and Trump's military threats against Cuba, Colombia, Mexico and other countries have been seen as a signal that Washington wants to dominate the hemisphere at its own discretion.
For Brazil, which has traditionally insisted on the principles of sovereignty and non-interference, the agreement is a kind of insurance. At the same time, it gives the bloc of South American states greater international weight and strengthens it from within. Uruguayan Foreign Minister Mario Lubetkin calls it a “qualitative step forward” for the entire region.
German-Brazilian political scientist Oliver Steinkel praises the agreement as a far-sighted decision: "Europe and South America have expanded their strategic options." They are thus proving that it is still possible to conclude agreements based on rules. The EU and Mercosur reject coercion, arbitrariness and the right of the stronger.
Strategic raw materials
For Brazil, the agreement is truly historic, emphasizes Stinkel. It enables the integration of Brazilian industry into global value chains and for the first time puts Brazilian rare metals in the spotlight – a factor that has been underestimated until now.
Brazil has about 20 percent of the world's reserves of critical minerals needed to produce batteries, semiconductors, energy technologies and modern military equipment. In a phase of increasing dependence on China, which until now has a near-monopoly position when it comes to these minerals, Brazil is becoming a new key player.
The agreement makes South America more attractive and gives it more weight in future trade negotiations, believes Stinkel.
From a purely economic perspective, the agreement reveals how asymmetrical the interests of the EU and Mercosur are. While South America, thanks to its vast areas, good soil and modern agriculture, offers primarily agricultural products, Europe supplies industrial goods: machinery, cars, chemicals and pharmaceuticals.
In a study, the European branch of Brazil's Getulio Vargas Foundation (FGV) warns that the agreement should not be misunderstood as an engine of growth for South America.
“There is a risk that Mercosur countries will remain trapped in the role of suppliers of poorly processed raw materials,” says Marianne Fleischhauer, one of the study’s authors. “At the same time, local industries are coming under pressure from strong European competition.”
The governments of Mercosur countries could only respond to this with an active industrial policy.
Small economic effects
The agreement should not be overestimated from an economic perspective, adds Fleishhauer. The positive effects lie more in more stable prices and better margins than in increased export volumes. FGV is counting on long-term GDP growth of only 0,3 to 0,5 percent, with smaller countries like Uruguay and Paraguay benefiting above average.
Trade with the EU is admittedly less politically unpredictable than trade with the US and China – but its overall economic effects are modest for now.
It is therefore understandable that geopolitical aspects currently dominate the perception of the agreement in South America. Fears that the continent could find itself caught between two powers have been reinforced by the new US National Security Strategy, which defines Latin America as Washington's zone of influence, but also by China's White Paper on Latin America, in which Beijing for the first time formulates its ambitions for power in the region. The EU-Mercosur agreement now offers an alternative.
Too high expectations?
Is the agreement burdened with too high expectations, asks José Augusto Fontura Costa, head of the international law department at the University of São Paulo. “It is an attempt to limit the collapse of international norms and the institutional foundations of trade,” Fontura Costa said.
“But it is not capable of reversing the general erosion of institutions or restoring Europe's former role in relations with South America.” In the case of Brazil, the agreement will probably not be enough to break development structures based on raw material exports or reduce dependence on China and the US.
Another aspect is highlighted by Tatjana Prazeres, the State Secretary for Foreign Trade at the Brazilian Ministry of Trade, who points to Brazil's broader strategy to expand the Mercosur network of trade agreements worldwide.
In recent years, agreements have been concluded with Singapore and the EFTA countries – Norway, Switzerland, Iceland and Liechtenstein. “We are currently working on an agreement with the United Arab Emirates and expanding the agreement with India. We are also intensively talking with Vietnam, Indonesia and Canada.”
It is clear that the EU-Mercosur agreement represents much more for South America than a classic free trade agreement. As an “instrument for expanding strategic autonomy” in a world where great powers strive for hegemony, political scientist Steinkel describes it. Keeping options open – that is the best that South America can do at the moment.
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