12/14 – International News Update

At a summit in Uruguay last week, European Commission President Ursula von der Leyen and South American leaders finalized an updated trade agreement between the European Union and the Latin-American Mercosur bloc, introducing several groundbreaking provisions. The key elements below were revealed in documents released by the European Commission on Tuesday Dec. 10.

Rebalancing Mechanism

A notable addition is the “rebalancing mechanism,” which permits compensation if a party’s policies undermine the trade deal’s benefits. This innovation, the first of its kind in EU trade agreements, reflects Latin America’s concerns over EU policies, such as anti-deforestation measures and carbon border taxes. These rules, aimed at addressing environmental concerns, could potentially restrict Mercosur exports but are now subject to challenge through this mechanism.

Commitment to Climate and Paris Accord

Both sides reiterated their dedication to the Paris Climate Agreement and pledged cooperation on climate-related trade matters. The deal includes a critical provision allowing suspension of the agreement, partially or fully, if either party breaches essential Paris accord obligations. Before suspension, the process mandates urgent consultations and a review period to seek resolutions.

Sustainable Development Integration

Sustainable development features prominently, with both parties emphasizing its importance amidst global crises. The agreement acknowledges each party’s autonomy in defining its sustainable development priorities while committing to joint initiatives that align trade practices with ecological goals.

Gradual Reduction of Auto Tariffs

The agreement sets a lengthy timeline for reducing Mercosur’s import tariffs on vehicles. Electric and hybrid vehicles will see the quickest tariff cuts, starting with a 29% reduction upon implementation and reaching zero after 18 years. Hydrogen-powered cars face a slower trajectory, with tariffs only beginning to reduce six years in and phasing out over 20 years. Regular petrol cars will maintain tariffs for nearly three decades, aligning with global electrification efforts.

To protect domestic industries, safeguards allow temporary suspension or reduction of tariff preferences on vehicle imports. These measures aim to prevent market disruptions, particularly following recent import tariffs by the EU, U.S., and Canada on Chinese electric vehicles, which raised concerns about redirected exports flooding South America.

Raw Material Trade

The agreement secures duty-free access for several South American raw materials, such as nickel, copper, aluminum, and steel, to EU markets. Brazil and Argentina, key exporters in the region, negotiated specific terms. Brazil, for instance, agreed not to impose export taxes but retained a 50% duty preference if any taxes are introduced, capped at 25%. Argentina, meanwhile, gained export duties for agricultural products while committing to refrain from taxing raw material exports.

Access to South America’s rich reserves, including Argentina’s lithium resources, was a pivotal goal for the EU, ensuring secure supplies of critical materials for industries such as renewable energy and technology.

The updated agreement marks a significant step in balancing trade and environmental concerns, reflecting the priorities of both regions. For Mercosur, the rebalancing mechanism and phased tariff reductions offer protection for domestic markets, while the EU achieves enhanced access to vital resources and embeds climate accountability into the deal.