EU Agriculture Newsletter #3: The Perfect Is the Enemy of the Good (EU-Mercosur Trade Deal Edition)

... I'm resisting the temptation to write about the climate-centered conference of parties (COP) happening in a petrol state led by petrol executives. I don't have much to say about that directly, plenty of people are writing about COP28. /deep eye roll/ ???

I have a lot to say about the EU-Mercosur Association Agreement extravaganza. We were (this close) to seeing this thing provisionally wrapped up last week in Rio at the Mercosur heads of state meeting.

The parties have been negotiating since 2003. Yes, 20 years. Unknown hundreds of meetings, thousands of flights, briefing books, late-night negotiations, and on and on. Think how much the global economy has changed in the last 20 years.

There were no iPhones. The billboard #1 song was, "In Da Club". There was no social media. Tesla was not a thing, few people had heard of Elon Musk. It was a simpler time. But the minerals at the heart of every electric vehicle are the force that will push the passage of the EU-Mercosur agreement over the finish line in 2024.

What is the current state of the EU- Mercosur Agreement?

The agreement is still alive and might be signed by the spring/summer of 2024. From 2003 to 2019 the agreement seemed unlikely. However, in the wake of the protectionism of the Trump administration and the overall diminishing importance of the WTO; the EU sought to make a stand for rules-based trade.

Early in 2019, it and Mercosur (Brazil) started negotiating again and revived the languishing negotiations, then voilà, after a few months, the economically liberal governments in Brazil and Argentina were on board. All the key parties reached an agreement in principle in June 2019 (Argentina, Brazil, Paraguay, and Uruguay). (Also FYI as of this month, Bolivia is now part of Mercosur)

Since June 2019, interest groups in the EU have been piling on additional requirements and dreaming up reasons not to sign the deal. (I see you French farmers and French steel producers). These pressures and forces are increasing in the wake of the upcoming EU Parliamentary elections this summer.

The pressure campaign seemed to work. On the sidelines of COP28 French President Emmanuel Macron met with Brazilian President Luiz Inácio Lula da Silva on Saturday, December 2.

After the meeting, Macron said (according to the FT. )

“It’s a deal that was negotiated 20 years ago and which we’ve tried to mend, and which has been badly mended."

“I can’t ask our farmers, our industrialists in France but also everywhere in Europe to make efforts to apply new rules to decarbonize and then say all of a sudden, ‘I’m removing all the tariffs to allow products to enter which do not apply these rules’.”

Okay, so France is taking a hard pass...

... But despite all that... it yet lives!?!?!... maybe..

On December 9, EU Trade Commissioner Valdis Dombrovskis told the Financial Times that the majority of EU countries support the EU-Mercosur deal and that Brussels is committed to try to “finalize this agreement.”

What would a deal mean for EU Agriculture?

Overall, it will be good for EU Agriculture value. But not all agricultural producers. Think about it this way, Mercosur is a group of countries with 265 million people. The populations are growing and their incomes are growing. With this deal, the current very high tariffs go to zero on European Agricultural goods such as wine, cheese, spirits, and other processed agricultural products.

On the flip side, the EU is opening its market to agricultural powerhouses in Brazil and Argentina. And apparently, they have some nice wines in Argentina. These products will also have the tariff rates cut to zero. In the end, it will mean more choices for consumers on both sides of the equation.

This deal (should) be approved because of Critical Raw Materials (CRMs) and Geopolitics

Though EU Agriculture is the subject of this newsletter and the #1 subject in my heart. It is small in relative value compared to the EU's need for the Critical Raw Materials (CRM) that abound in Mercosur countries, especially Brazil and Argentina.

EU policymakers and think tankers have been think-tanking a LOT about CRMs. They proposed an Act called... you guessed it... The Critical Raw Materials Act. This is part of both the EU Green Deal and an action-focused follow-up to the 2022 Versailles Declaration which outlined the strategic importance of critical raw materials to continue both the autonomy and the sovereignty of the EU. The recent conclusion of the Chile-EU FTA, was renegotiated to include clearer provisions for lithium and copper (among other things that come from the ground). Get ready for those Chilean malbecs to come to a 家乐福 near you.

Currently, the CRMs imported into the EU come from a variety of countries. However, the two largest suppliers are China and Russia. As geopolitical relations remain complex (China) and hostile (Russia), the opportunity to secure opportunities in Mercosur seems very inviting.

Also consider that even though some places in Europe might have deposits of rare earth minerals (currently 98% imported from China), there is no chance of a new rare earth mine being approved in Europe, ever. And even if it was approved the expense of the environmental lawsuits and red tape would take 200 years to resolve. Better to sign bilateral deals with countries and groups of countries where these mines already exist and are producing minerals.

So yes, the EU should view the possible deal with Mercosur as an opportunity to do what an economist might call, "transfer the negative environmental externalities" to Mercosur countries. Is this reason enough to sell out small-scale corn farmers in France? Yes, yes it is.

If not now, when?

The Greens swept into power across Europe in 2019. And like most waves, it is crashing against the cliffs of reality. This summer will very likely usher in 30-40% more conservative lawmakers into the EU Parliament. The current rhetoric from this collection of campaigners is more anti-trade than the current government. (I realize that campaigning and governing are quite different, so we don't exactly know what we will get.)

After 16 years of waiting plus four more years of procrastinating, the time to approve the EU-Mercosur Association Agreement is NOW.

Actually, the best time was two weeks ago so it could've been signed in Rio. The second best time is as soon as possible. The Mercosur countries are among the few potential sources for the C-R-I-T-I-C-A-L resources needed for the EU Green Deal. And despite how slim the chances look now, this is probably about as good a chance as we have for the next 6 years.

Think I'm wrong? Tell me why, let's discuss. Nothing worse than writing a newsletter, having two thousand readers and no discussion.