The Mercosur - UE agreement and decarbonization

December 14, 2023

After years of extraordinary efforts by negotiation teams, Mercosur was finally hoping to sign the trade agreement with the European Union (EU) at the recent Rio de Janeiro Summit. However, the signing not only did not take place, but it now seems like a more distant goal. The collapse of the agreement was a source of frustration for Mercosur, but it would not be an exaggeration to think that the frustration may be just as great or even greater for the EU. So, if we were so close to concluding the agreement, as announced, why did we not achieve it?

The European narrative is that the agreement is detrimental to the environment. However, it appears that the story might be somewhat different. Recent words from President Macron provide clues to understanding what is happening: "We added clauses [to the agreement] at the beginning to please France, but it's not good for anyone because I cannot ask our farmers, our industrialists in France, and all over Europe to make efforts, to implement new measures for decarbonization, to abandon certain products, while all tariffs are being removed to import products that do not adhere to these rules." (...) "I don't know how to explain this agreement to a farmer, a steel producer, a French or European cement manufacturer."

Therefore, the resistance is no longer limited to agricultural interests; now, the industry is also resisting the agreement. The case of European agricultural protectionism is well-known, but how to explain the discomfort with Mercosur's manufacturing competition? The explanations, at least in part, lie in the EU's environmental standards and the comparative and competitive advantages of Mercosur countries.

Uruguay and Paraguay have almost 100% green electric grids, while Brazil's is 85% green, levels much higher than the EU's 39%. With this energy matrix, the region is highly attractive for powershoring, the business strategy of geographic production location associated with the availability of green, secure, cheap, and abundant energy. But the region's advantages don't stop there. Mercosur has the potential to produce green hydrogen at highly competitive prices by global standards, has significant reserves of many critical minerals for the new economy, such as lithium, nickel, graphite, silicon, rare earths, high-grade iron ore, and many others. It has abundant freshwater, diverse biomes and forests, enormous potential for the bioeconomy, ample available fertile land, abundant biomass, and unmatched potential to participate in and expand the carbon market.

However, the competitive advantages go even further. Mercosur is a global leader in technologies, business models, and biofuel production and is shielded from the major geopolitical issues that will increasingly determine the location of industrial investments. Furthermore, Mercosur is a natural candidate to participate in the geographical diversification of manufacturing production associated with the establishment of resilience networks for extreme climate events.

With this unique set of attributes, Mercosur can produce industrial goods with much lower emissions than Europe and with an unmatched time-to-market and cost structure. Agriculture, on the other hand, can significantly expand production while advancing sustainable and regenerative technologies, the use of degraded lands, and other environmentally friendly techniques. Powershoring is already attracting investments for energy-intensive manufacturing, including steel, cement, paper and pulp, fertilizers, SAF (sustainable aviation fuel), glass, ceramics, chemicals, and other sectors that need to decarbonize to protect business competitiveness and comply with European environmental regulations.

In this way, Mercosur presents itself to the world as a source of solutions for decarbonization, hunger, and many other sectors. For Europe, among other benefits, Mercosur can accelerate the decarbonization of its value chains – consider, for example, the impact of the region's green steel on the greening of the metal-mechanical industry and, even more importantly, reduce the timelines and costs of decarbonizing its electric grid with powershoring. However, all of this is unsettling to those who focus solely on immediacy, financial gains, and political influence, giving little consideration to issues of collective interest and consumer well-being.

For Mercosur to realize its full potential, it will be necessary for trade and international investment flows to operate freely. However, trade and investment are facing unprecedented obstacles due to protectionism, discrimination, massive subsidies, and highly biased technical standards and norms from developed countries, particularly in everything related to the sustainability industry. The WTO (World Trade Organization), in turn, is facing challenges that hinder its functioning, precisely in a context of complex climate change.

All of this is already creating tariff and non-tariff barriers and worrisome trade and investment diversion for Latin America and other developing regions. It appears that the collapse of the Mercosur-EU agreement would be part of this same trend. Ultimately, trade and investment can help address two of the region's biggest challenges, which are poverty and inequality. After all, both can, like no other artillery, generate jobs and income and have a fundamental impact on the Sustainable Development Goals (SDGs) and the green and fair transition. The Mercosur agreement should be seen, understood, and interpreted from a broad and ambitious perspective and should consider all the benefits and gains for Europe, the region, and the world.

Jorge Arbache
Jorge Arbache

Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-