Americas: South America Leans into the EU to Offset "Donroe"

What happened: The European Union Council greenlit a comprehensive trade and investment agreement with the Mercosur trade bloc: Argentina, Bolivia, Brazil, Paraguay and Uruguay.

Why it matters: The inter-continental trade pact, slated for signing in Asuncion on 17 January, creates the world’s largest free trade area as South America grapples with US President Donald Trump’s reciprocal tariff regime and recent military intervention in Venezuela.

What happens next: The historic trade deal requires ratification by the two blocs’ members, but we expect the measurable tariff reductions to be enacted later this year.

On 9 January, the European Union Council approved a long-awaited trade agreement with Mercosur, the South American trade bloc formed by Argentina, Bolivia, Brazil, Paraguay and Uruguay. After over 25 years of negotiations, the inter-continental trade pact sends a message of support for multilateralism and free trade as US President Donald Trump is actively disrupting global trade relations and threatening to dismantle NATO and revive gunboat diplomacy throughout the Americas.

Proponents of the deal claim it will deepen economic integration between the two blocs, creating an economic zone of 700mn consumers. In broad terms, the big winners are European manufacturing exporters, especially capital goods industries, and South American agricultural, energy and mineral exporters.

A Message to Trump

Aside from economic integration, European and South American leaders want to highlight the expansive trade agreement as a geopolitical victory, sending a message to Washington: the road to peace and prosperity runs through multilateralism and trade liberalization, not unilateral trade measures and coercive diplomacy.

Excluding Argentina’s Javier Milei — a friend of Trump — most Latin American governments have been the target of the White House’s unilateralism and so-called “reciprocal” tariffs, and a revised version of the Monroe Doctrine that asserts the US supremacy over the Western Hemisphere. In the face of Trump’s “Donroe” doctrine, Mercosur nations have pressed for the trade deal with the EU.

Brazilian President Lula, aided by Trade Secretary Tatiana Prazeres (see our Featured Personality), threatened to exit negotiations if the EU member-states did not sign on. Since July, the two have increased their pressure and offered a few more concessions — including safeguards on South American agricultural imports — as the Trump administration slapped punitive 50% tariffs on Brazilian imports and sanctioned members of the Supreme Court. Lula has successfully negotiated with Trump to lower these tariffs in recent months, a sign the White House recognizes the geopolitical weight of the Mercosur-EU trade pact.

Neither Milei nor Lula blocked the intercontinental trade deal despite their personal animosity. For different reasons, both presidents support economic integration with Europe. The libertarian Milei, who has enthusiastically advocated for trade liberalization, supports the free trade agreement on ideological grounds.

According to our contacts, Milei also received word from the US embassy in Buenos Aires that the White House would not criticize the agreement, allowing the Argentine president to take some credit if he chooses. Nevertheless, we do not expect Milei to celebrate the historic accord with Lula, whom he regularly ridicules on social media.

On the other hand, Lula, who had been a staunch opponent of “reckless” liberalization for decades, has recently changed his mind, seeing the trade deal with the Europeans as the best way to diversify exports, attract FDI and negotiate technology transfer on better terms.

West Vs. China

Although the Mercosur-EU trade agreement indirectly counters Trump’s tariff shock, the White House will avoid disparaging the deal. Many in Washington see it as a positive development for Western investors, including those in the US, and a sign that South Americans are willing to set limits to Chinese penetration. If ratified, the deal will provide advantages to European firms, leading to greater investment in energy, mining, and infrastructure and logistics, possibly at the disadvantage of Chinese firms.

Moreover, many European firms have a long history in South America, and some have worked with US firms through joint ventures and financing channels. Accordingly, as one contact associated with a US embassy in a Mercosur member-state suggested that “if the trade deal is done with friendly capitalist countries, it serves our agenda.”

What to Expect

Prazeres and her Mercosur member-state counterparts will continue to work with the European Commission and Parliament to smooth the ratification process. Meanwhile, we expect the current Mercosur member-state governments to quickly ratify the deal in the coming months.

Although some European groups, including French farmers, will try to litigate ratification, we expect the tariff provisions to be implemented later this year. This will gradually lower duties across the board and encourage manufacturing value chain integration in such sectors as autos, aviation and capital goods.

The deal could also smooth the way toward cooperation on critical minerals and the electrification value chain, as well as energy exports to Europe, especially Argentina’s LNG later this decade.