EU-Mercosur deal is more strategic than macroeconomic

The aggregate economic impact of the recently finalised EU-Mercosur trade pact will be modest if it gets final approval. However, politically, the deal signals a commitment to multilateralism and free trade that appears in decline, given rising geopolitical tensions, a shift to bilateral arrangements, and the incoming Trump administration.

What you will learn:

• Strategically, the deal would help the EU diversify away from China as a source of critical minerals, which are vital for the green transition and defence-related supply chains.
• Although European exporters would gain preferential access to highly protected markets, the size of the trade flows are too small for the deal to offset an increase in trade frictions with the US.
• The impact would be much stronger for some industries. Capital-intensive sectors and certain parts of the agricultural industry, such as dairy and wine, will benefit, while beef and poultry farmers will likely lose out due to pressure from import competition.
• The deal has divided member states. Germany sees the deal as an opportunity for its car industry, while France’s opposition stems in part from the desire to protect its beef industry. As things stand, the deal will be approved unless Italy, currently on the fence, opposes ratification. The most likely scenario is that Rome will extract enough concessions to waive the deal through.