As Trump threatens tariffs, Europe and South America strengthen ties

BRUSSELS – The European Union (EU) reached a major trade agreement on Dec 6 with four South American countries, concluding a long-delayed negotiation that took on new urgency as

President-elect Donald Trump threatened to impose tariffs

on some of the world’s largest economies.

The deal, between the EU and members of Mercosur – a bloc that includes Argentina, Brazil, Paraguay and Uruguay – would establish one of the largest trade zones in the world, and would be the EU’s biggest trade agreement ever.

With European leaders preparing for the possibility that Trump’s return to office will lead to a more fragmented global economy, the deal is a significant victory for proponents of free trade, linking markets with more than 700 million people.

But it could fuel frustration within the European bloc, with France, the biggest critic of the deal, opposed to the agreement over concerns about the possible dumping of cheap agricultural imports in Europe, which could hurt its farmers.

If ratified by EU member states and the European Parliament, the agreement would lift tariffs on products including meat, cars, wine and chocolate.

Despite France’s strong opposition to the agreement, Paris does not appear to have persuaded enough other European countries to vote against it, although it signaled it would still lobby to block it. A date for the ratification vote has not yet been set.

What’s in the trade deal?

With Trump’s election, Europe is facing the threat of high tariffs on exports to the US, its biggest trading partner, and increased competition from China. Trump has suggested that he would impose tariffs of 10 to 20 per cent on products around the world and tariffs of 60 per cent or more on Chinese goods.

So European leaders have emphasised the need to diversify trade.

European Commission president Ursula von der Leyen, the bloc’s executive arm, said on Dec 6 that the political agreement was a milestone for Europe and South America.

“We both believe that openness and cooperation are the true engines of progress and prosperity,” she said, speaking in Uruguay. “I know that strong winds are blowing in the opposite direction, towards isolation and fragmentation, but this agreement is our clear response.”

Negotiations over the trade deal began 25 years ago

and came close to a breakthrough in 2019. Ms Von der Leyen said the agreement would save European companies 4 billion euros (S$5.7 billion) in export duties per year.

The prospect of Trump’s tariffs has also made the deal more compelling for the members of Mercosur, who are interested in selling more beef and industrial products to Europe. And China’s intention to increase agricultural production means that a major buyer of Argentine and Brazilian meat and soybeans could reduce purchases.

Bolivia, a member of Mercosur, could join the agreement if it aligns its rules in line with other members of the bloc.

Dr Jacob Funk Kirkegaard, a senior fellow in Brussels at the Peterson Institute for International Economics, said the deal came at a critical moment. “The signal is that, well, the US may be pulling out of the global trading system, but the rest of the world is intent on pursuing a different route,” he said.

Boon for European carmakers and others

Economists say the agreement is critical for Europe, which is facing a disappointing economic outlook, and particularly for Germany, the biggest exporter to the Mercosur region. Tariffs imposed by Trump would exacerbate challenges for major European industries, including the automobile, pharmaceutical and machinery sectors.

European carmakers, including BMW, Fiat, Peugeot and Volkswagen, would benefit from lower tariffs on imports and exports between the two blocs. Novartis, Sanofi and other European pharmaceutical giants would gain easier access to a large market for health care products.

A range of other European industries, such as the luxury sector, tech, construction and banking, would also be able to reach hundreds of millions of consumers.

Chancellor Olaf Scholz of Germany said on Dec 6 that an “important hurdle” for the agreement had been overcome.

Prime Minister Pedro Sanchez of Spain, which manufactures large quantities of chemicals and pharmaceuticals, said on Dec 6 that the agreement would make Europe “more prosperous and resilient.” The Spanish government said the agreement would increase exports by up to 40 per cent and create an estimated 22,000 jobs.

Even if Europe is spared from US tariffs, escalating tension between the US and China could pose problems for European companies. Business leaders are concerned that if Chinese products are shut out of US markets, a surge of cheap Chinese imports would instead enter Europe or other markets where Europe competes.

Europe needs to prioritise not only the ratification of the South America trade agreement, but also trade agreements with other countries and regions, like Britain and Switzerland and nations in the Indo-Pacific region, said Mr Ignacio García Bercero, a former European Commission trade official.

The European bloc already has trade deals with most other countries in South America.

South America is also a reservoir of raw materials like lithium, nickel and manganese that are needed for Europe’s transition to green energy.

France opposes the deal out of concern for farmers

France has bitterly opposed the pact, saying it would open Europe’s agricultural markets to cheap food imports, including beef and wheat, that use hormones and pesticides that are forbidden in Europe.

French farmers, a politically powerful lobby, have joined others across the bloc to denounce what they fear will amount to food dumping that risks their economic survival.

Poland and Italy have also expressed concerns about the deal.

The timing is precarious for Mr Emmanuel Macron, the embattled president of France, whose

government is mired in crisis

.

He has called the agreement “unacceptable,” and on Dec 6, France sought to bat down suggestions that the country was isolated in its opposition.

“Today is clearly not the end of the story,” French trade minister Sophie Primas said, referring to the government’s hope to prevent the deal from being approved by the 27 national parliaments in the EU.

Environmental groups also oppose the deal, saying it would accelerate the destruction of forests in the Amazon to make way for increased agricultural production.

Ms Von der Leyen’s decision to push through the deal without Macron’s approval could fuel suspicion in France about giving Brussels too much power and could spur support for Ms Marine Le Pen, a nationalist, anti-immigrant leader who also opposes the deal.

“It’s a bit of a tinder box,” Dr Kirkegaard said. “The deal will remind many French voters that they don’t have much influence in the EU anymore.” NYTIMES