Why Europe's trade deal with South America is so controversial

European Union blockbuster trade deal with the South American bloc Mercosur is widely considered highly controversial, with EU member states divided over its terms and many of them fearing yet another farmer's flashpoint.

After 25 years of talks, the EU and five South American countries – Brazil, Argentina, Uruguay, Paraguay and recently Bolivia – have signed an agreement landmark trade agreement on December 6, setting the stage for one of the world's largest free trade areas.

There is a transatlantic partnership estimated cover an area of ​​over 700 million people and constitutes approximately 20% of the world's gross domestic product.

The agreement, which is intended to facilitate trade between the two blocs by reducing tariffs on a range of products, now needs the consent of the European Parliament and a qualified majority of 15 member states.

Analysts expect the ratification process to be bumpy, with farmers and some EU member states warning it could create unfair competition for European agriculture.

France is the second largest economy in the euro zone he was vehemently opposedhowever, countries such as Poland, Italy, Austria and the Netherlands expressed reservations.

Germany, which strongly supports the agreement, is part of a bloc of 10 other member states calling on European Commission President Ursula von der Leyen to quickly ratify the final terms.

“I think the first thing we need is to be cautious, given that we've been here before,” Mariano Machado, chief analyst for the Americas at Verisk Maplecroft, told CNBC via video call.

Initially, the EU and the Mercosur bloc signed the draft trade agreement in June 2019, only for progress to be halted until early that month amid a litany of political and environmental issues. Some of these obstacles included the expected increase in pesticide use and the prospect of further biodiversity loss, concerns about the rate Amazon deforestation and human rights concerns regarding indigenous groups.

Machado said France's tacit rejection of the agreement has morphed over the past almost six years into “active attempts to simply throw the agreement under the bus.”

In this regard, Machado said that EU MP von der Leyen secured a monumental victory by “squeezing through the cracks” Political turmoil in France and making it “increasingly difficult” for Paris to oppose the deal.

“It is much more expensive to withdraw a piece of paper than an idea,” Machado said, adding that it seemed unlikely that France would successfully lead a blocking minority.

A spokesman for the French foreign ministry did not respond to a request for comment.

“Capitals opposing the agreement are trying to build a coalition that could prevent the Council from achieving the required qualified majority,” he added. he said Alberto Rizzi, policy specialist at the European Council on Foreign Relations, a think tank.

“Blocking this initiative would involve enormous economic and political damage to the EU at a time when it can barely afford it,” he continued. “European governments cannot fail the test of unity and strength to appease opponents such as European farmers and potential far-right voters.”

Food and agricultural products make up the largest share of EU imports from Brazil, Argentina and other Mercosur countries, say analysts at Dutch bank ING appreciating The total import value of these products in 2023 was EUR 23 billion ($24.13 billion).

In a research note published earlier this month, ING analysts said the deal is expected to facilitate increased trade between the two regions, citing a combination of larger import quotas and lower or eliminated tariffs on products such as beef, poultry, sugar beets and soybeans.

This is causing dissatisfaction among EU farmers, especially since their Mercosur counterparts can operate at lower costs.

For example, farmers in southwestern France on December 12 during a demonstration on the Auch-Toulouse road built a wall of 578 bales of hay, with each bale intended to represent French members of parliament in the 577-seat parliament and an additional bale for French President Emmanuel Macron, according to media reports. .

The obstruction took place as part of a protest against the EU-Mercosur trade agreement and other national issues.

Environmental activists have also raised alarm over the possibility of increased trade in agricultural products, citing the prospect of an influx of food imports from the EU in exchange for more EU exports of cars, plastics and pesticides.

“No green attachments can fix this inherently bad deal,” Laura Restrepo Alameda of Climate Action Network Latin America, he said December 6.

“It aims to promote trade in products that cause deforestation, land grabbing, massive use of pesticides, carbon emissions and human rights violations,” she added.

In response to CNBC's request for comment, European Commission spokesman Olof Gill said the bloc's approach to the agreement “is an example of how trade agreements can effectively support global climate efforts by combining economic cooperation with environmental responsibility.”

Gill mentioned the incorporation of the latest trading and sustainability standards and the inclusion of this landmark Paris Agreement as an “essential element” of the contract.

“This will enable the EU to suspend the agreement if Paris Agreement standards are not respected, strengthening the role of trade agreements in supporting climate goals,” Gill told CNBC via email.

Analysts told CNBC earlier this month that lithium is strategic probably played a major role in the trade agreement, while reducing car rates it was also touted as a much-needed boost for Europe sick car industry.

Lithium, sometimes called “white gold” due to its bright color and high market value, it is considered as a key element of the global transition away from fossil fuels.

Mercosur countries such as Argentina, Bolivia and Brazil have large reserves of lithium at a time when EU demand for this critical raw material is expected to increase significantly.

Elizabeth Johnson, head of Brazil research at economic consultancy TS Lombard, said Brazil was likely to be one of the biggest winners of the agreement.

“The country already accounts for around 80% of all Mercosur exports to the EU, and the bloc is now Brazil's second-largest trading partner,” Johnson said in a research note published on December 11.

“Brazilian politicians hope that the agreement will help expand Brazil's export base with new products and strengthen European investments in Brazil, especially in the energy transition segment,” she added.