Europe’s blockbuster trade deal with South America is deeply controversial. Here’s why

The European Union’s blockbuster trade deal with South America’s Mercosur bloc is widely regarded as highly controversial, with EU member states split over its terms and many wary of yet another farmer flashpoint.

After 25 years of talks, the EU and five South American countries — Brazil, Argentina, Uruguay, Paraguay and, newly, Bolivia — signed a landmark trade agreement on Dec. 6, setting the stage for one of the world’s biggest free trade zones.

The trans-Atlantic partnership is estimated to cover an area of more than 700 million people and represents about 20% of global gross domestic product.

The agreement, which is designed to facilitate trade between the two blocs by lowering tariffs on a range of products, now needs the approval of EU Parliament and a qualified majority of 15 member states.

Analysts expect a bumpy ratification process, with farmers and some EU member states warning it could create unfair competition for European agriculture.

France, the euro zone’s second-largest economy, is vehemently opposed, while countries including Poland, Italy, Austria and the Netherlands have all expressed reservations.

Germany, which is strongly in favor of a deal, is part of a bloc of 10 other member states calling for European Commission President Ursula von der Leyen to swiftly ratify the final terms.

“I think the first thing we need is to be cautious about the fact that we’ve been here before,” Mariano Machado, principal analyst for the Americas at Verisk Maplecroft, told CNBC via video call.

The EU and Mercosur bloc initially signed a draft trade deal in June 2019, only for progress to be held up until earlier this month amid a litany of political and environmental issues. Some of these headwinds included an expected uptick in the use of pesticides and the prospect of further biodiversity loss, worries over the rate of deforestation in the Amazon and human rights concerns regarding Indigenous groups.

Machado said that France’s tacit rejection of the agreement evolved over the last nearly six years into “proactive attempts to just throw the deal under the bus.”

In that regard, Machado said the EU’s von der Leyen had secured a monumental victory by “squeezing through the cracks” of French political turmoil and making it “increasingly difficult” for Paris to oppose the accord.

“It’s much more expensive to roll back a piece of paper than an idea,” Machado said, adding that it doesn’t appear likely that France will be able to successfully spearhead a blocking minority.

A spokesperson at France’s foreign ministry did not respond to a request for comment.

“The capitals opposing the deal are trying to build a coalition that could prevent the council from reaching the required qualified majority,” said Alberto Rizzi, a policy fellow at the European Council on Foreign Relations, a think tank.

“Blocking it would come with huge economic and political damage to the EU at a time when it can barely afford it,” he continued. “European governments cannot fail this test of unity and strength to appease opponents, such as European farmers and potential far-right voters.”

Food and agricultural products represent the biggest part of the EU’s imports from Brazil, Argentina and other Mercosur countries, with analysts at Dutch bank ING estimating these items came to a total import value of 23 billion euros ($24.13 billion) in 2023.

In a research note out earlier this month, ING analysts said the agreement is expected to facilitate trade growth between the two regions, citing a mix of larger import quotas and lower or removed tariffs on products like beef, poultry, sugar beet and soybeans.

That is sowing discontent among EU farmers, particularly because their Mercosur counterparts can operate at lower costs.

For instance, farmers in southwestern France on Dec. 12 built a wall of 578 hay bales in a demonstration on the road of Auch-Toulouse, with each bale said to represent French MPs in the country’s 577-seat Parliament, with an additional one for French President Emmanuel Macron, according to media reports.

The obstruction took place to protest the EU-Mercosur trade agreement, along with other domestic issues.

Environmental campaigners have also sounded the alarm over the potential for increased trade in agricultural products, citing the prospect of an influx of EU food imports in exchange for more EU exports of cars, plastics and pesticides.

“No greenwashed annexes can fix this inherently bad deal,” Laura Restrepo Alameda from Climate Action Network Latin America, said on Dec. 6.

“It is built to promote trade in products driving deforestation, land grabbing, massive pesticide use, carbon emissions and human rights violations,” she added.

In response to a CNBC request for comment, EU Commission Spokesperson Olof Gill said the bloc’s approach to the deal “exemplifies how trade agreements can effectively advance global climate efforts, linking economic collaboration with environmental responsibility.”

Gill cited the incorporation of the latest trade and sustainability standards and the inclusion of the landmark Paris Agreement as an “essential element” of the agreement.

“This will enable the EU to suspend the agreement if the Paris Agreement’s standards are not respected, reinforcing the role of trade agreements in supporting climate objectives,” Gill told CNBC by email.

Analysts told CNBC earlier this month that the strategic importance of lithium likely played a major role in the trade agreement, while a reduction in car tariffs has also been touted as a much-needed boost for Europe’s ailing car industry.

Lithium, sometimes referred to as “white gold” due to its light color and high market value, is regarded as a critical component in the global shift away from fossil fuels.

Mercosur countries such as Argentina, Bolivia and Brazil hold large lithium reserves, at a time when EU demand for this critical raw material is projected to increase substantially.

Elizabeth Johnson, head of Brazil research at economic consultancy TS Lombard, said that Brazil is likely to be one of the biggest winners of the agreement.

“The country already accounts for roughly 80% of all exports from Mercosur to the EU and the bloc is currently Brazil’s second-largest trading partner,” Johnson said in a research note published Dec. 11.

“Brazilian politicians are hoping that the deal will help expand Brazil’s export base to include new products and bolster European investment in Brazil, particularly in the energy transition segment,” she added.