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EU-Mercosur Agreement: The EU must overcome its trade impasse

Point of View, 26.09.2023 Research Areas

It could become the world’s largest free trade area. As a condition for the EU’s unilateral requirements, the Mercosur countries are now demanding cooperation and trade benefits – rightly so, and it will set an example for other agreements, say Bettina Rudloff and Tobias Stoll.

Cooperation, financial aid, trade compensation, but no sanctions: According to media reports, these are the demands of the Mercosur countries Brazil, Argentina, Uruguay, and Paraguay. They are responding to the EU’s request this spring to amend the forest and climate protection provisions of the EU-Mercosur Association Agreement within a supplementary declaration. Simultaneously, rules on deforestation-free sales into the EU have already been established in parallel.

Hard struggle for conclusion

After more than 20 years, the two major regional markets actually agreed on a joint trade agreement in June 2019. But then the Brazilian government under Jair Bolsonaro abandoned the prior climate protection pledges and allowed large-scale slash-and-burn agricultural practices. Under these changed circumstances, the EU was not willing to conclude the agreement. After his election in 2022, President Luiz Inácio “Lula” da Silva announced that he would return to his previous climate-conscious policies. However, this did not satisfy the EU, which had become aware of the critical importance of deforestation, leading to a much tougher stance: The EU Regulation on deforestation-free supply chains, which came into force in May, requires European importers of certain products such as soy, beef, and cocoa to ensure a deforestation-free supply chain and, in practice, to buy only appropriately certified goods. This will impact production methods and their documentation, and thus will also affect costs for supplier countries such as Brazil. In addition, the EU sought to make the negotiated agreement more sustainable: A supplementary declaration was intended to address corresponding weaknesses in the text, and also allow EU member states that had previously objected, such as France and Austria, to approve of the agreement.

The Mercosur countries have become increasingly critical of the unilateral EU initiatives developed in parallel, which they perceive as being intrusive and contradicting the idea of bilateral – and thus joint – negotiations on the agreement. The EU Regulation on deforestation-free supply chains, as a unilateral instrument, does indeed provide for cooperation, for example in developing tools for implementation. In this context, it also offers room for a more favourable risk classification for exporting countries, which reduces administrative burdens and costs. It is unknown whether these possibilities were taken into account in the agreements’ negotiations. The supplementary EU declaration proposed in February – prior to the regulation entering into force – does not yet address this issue.

More cooperation required for the trade agreement

The Mercosur countries’ response to the EU’s supplementary declaration now addresses this cooperation consistently: They demand EU support in implementing the necessary standards, including financial resources, the exclusion of trade sanctions regarding commitments and, above all, the introduction of a compensation mechanism, which is intended to be triggered if the unilateral EU legislation nullifies the trade benefits of the agreement. The latter did not appear out of the blue, given the large number of new unilateral sustainability commitments: In addition to the EU Regulation on deforestation-free supply chains, the European Supply Chain Directive, which is similar but covers all products, is well advanced in the Brussels legislative process, and a ban on imports of products from forced labour is being prepared. All of these new unilateral approaches impose partially different requirements on sales within the EU regarding deforestation, climate protection, labour standards, and human rights.

The recent demands of the Mercosur countries touch upon the fundamental question of how sustainability and fair trade are achieved. European legislation can prevent the EU and its consumers from unintentionally contributing to deforestation, environmental degradation, inhumane working conditions, and human rights abuses. However, in the case of global sustainability goals such as climate protection by preventing deforestation, strict rules can lead to trade being diverted to other, less strictly regulated markets. The sustainability goal will thus be undermined, albeit not by European consumers. Sustainability goals can therefore only be fully achieved with the acceptance and support of trading partners. Trade agreements can assist with this, if they are judiciously coordinated with the aforementioned unilateral instruments. In return, however, partners will expect clarity from the EU on what commitments they have to make and what the EU and its member states can contribute towards their implementation. Moreover, partners will demand more trade and competitive advantages in return for greater sustainability commitments.

The Mercosur proposal now offers opportunities to link unilateral actions with trade agreements. This is exactly what the EU itself envisaged in its review of the sustainability chapters in trade agreements in summer 2022. The Mercosur proposal should therefore be used constructively as a template, even if the design of individual elements still requires further discussion: For example, the EU should – for reasons of synergy and even more as a sign of appreciation – make greater efforts to utilise and at the same time support existing sustainability approaches on the Mercosur side, such as own certification. The proposed compensation mechanism could also increase the much-needed acceptance of sustainability goals. It fits into a well-known logic of trade agreements and Mercosur could conceivably impose protective tariffs, or the EU could offer increased market access, provided that unilateral sustainability targets are met.

The EU can now play a key role in linking sustainability and trade as well as promoting fair trade, also from the perspective of its partners. A failure of the agreement would benefit China in particular, which has already offered a trade agreement to individual Mercosur countries. Last but not least, the EU should seize the opportunity to design a forward-looking model for linking sustainability and trade to overcome the impasse on geo-strategically important agreements with other partners.