The European Union and the South American Mercosur bloc clinched a long-sought trade deal over the vehement objections of France, which has pledged to lead a charge to obstruct its ratification.

The sides agreed in principle on the terms of the trade pact December 6, after European Commission President Ursula von der Leyen traveled to Uruguay to attend this week’s Mercosur summit, even though an enraged French President Emmanuel Macron told her the terms were “unacceptable.” 

After more than two decades of negotiations, the deal is a chance for the EU and the South American customs union founded by Argentina, Brazil, Paraguay and Uruguay to harness new markets for their goods amid fierce competition from China and President-elect Donald Trump’s tariff threats. It would amount to the biggest trade agreement ever concluded by either bloc.

“This agreement is a win for Europe,” von der Leyen said in announcing the agreement, noting it includes safeguards aimed at protecting the bloc’s farmers. “This will create huge business opportunities.”

Ratification will be a difficult and uncertain fight in the EU, particularly given the depth of the objections from France, as well as Poland. If it goes through, the deal would create an integrated market of 780 million consumers, providing a boost to the EU’s embattled manufacturing sector and Mercosur’s vast agricultural industry. It would also strengthen the EU’s footprint in a region where China has emerged as a major industrial supplier and the main commodities purchaser, while helping insulate both blocs from a potential Trump trade war.

EU car exporters, in particular, stand to benefit from the gradual removal of current 35% tariffs. High duties on industrial products like car parts, machinery, chemicals, clothing and textiles would also be eliminated.

But several European countries, particularly France and Poland, remain adamantly opposed, mostly over concerns about how it will impact the agriculture sector. European farmers have feared that an inflow of goods from Latin America, produced at lower standards, puts them at an unfair disadvantage.Macron has faced outrage from farmers who oppose the deal, and is currently coping with the collapse of his government at home. French officials close to Macron have been critical of the EU’s von der Leyen, insisting that the deal might be rejected by member states even after she signs it.

Next Steps in the EU’s Ratification Process:

•    An agreement between the commission and Mercosur isn’t yet legally binding

•     Member states need to vote on the text of the agreement

• Passage requires support of at least 15 EU countries representing 65% of the population
• To block would require at least four countries with at least 35% of the bloc’s population

•    European Parliament also needs to consent to the text

•    Agreements that go beyond the scope of the EU institutions require ratification by each member state as well as some national and regional parliaments

Given the large consensus in France against the deal, the fight is one that Macron is likely to pursue as he faces a growing set of domestic political challenges. France maintains that a final agreement should protect European agricultural sectors from unfair competition and from being used as adjustment variables, according to an official from the French presidency, who added that those concerns are widely shared among EU member states.

It also wants the inclusion of a clause that would suspend the trade deal in the event of non-compliance with the Paris climate accords, as well as commitments to sustainable development, ending deforestation, and basic health standards, according to the official, who requested anonymity because they were not authorized to speak publicly.

What Bloomberg Economics Says...

“The agreement’s unpopularity means the next government in Paris will work hard to stop the deal in the Council of the EU (where member states meet). The governments of Poland and Italy suggested in recent weeks that they were against the deal, which could mean there was a possibility of forming a large enough coalition to block it.”—Antonio Barroso and Eleonora Mavroeidi. 

The deal is also likely to spark political tensions and farmers’ anger in Poland, which is holding a presidential election in spring 2025. Polish Prime Minister Donald Tusk said his government, which also includes a farmers-backed junior coalition party, will oppose the deal. Tusk raised domestic factors for his decision, saying that the deal would have repercussions for Polish agriculture.

“We don’t have yet the blocking minority yet,” Tusk told the Polish parliament after the announcement. “We will work anyway, not only with French, but also with others. There is a question mark over Italy. If we would have Italy on our side, we would probably have the blocking minority.”

Italy won’t sign the deal unless there are better guarantees for farmers and its agricultural sector, according to an official from Prime Minister Giorgia Meloni’s office. Germany, which represents around a fifth of the EU population, is a strong backer of the deal, as is Spain.Uruguay’s foreign minister, Omar Paganini, said on December 5 the signing and ratification process could take as long as 18 months.

The two sides similarly reached a preliminary agreement in 2019, but never signed it, due in large part to European protectionism and hostility toward the environmental policies of former Brazil President Jair Bolsonaro.

But Brazil’s current leader, Luiz Inacio Lula da Silva, has served as one of the agreement’s most vocal proponents since taking office in 2023.

 Uruguayan President Luis Lacalle Pou has also pushed hard for its completion.

For Mercosur’s biggest economy Brazil, the deal is set to boost the country’s giant agricultural commodities industry. Agriculture-related exports to the EU could grow by $7.1 billion between 2024 and 2040, according to the country’s Institute of Applied Economic Research, which forecasts gradual increases in shipments of pork, poultry, vegetable oils and fats, fish and food preparation products, along with other minor items.

Gradual increases in the amount of chicken meat Mercosur nations can export to the EU tariff-free should help Brazil, already the world’s top chicken exporter, boost sales of pricier processed cuts to the bloc, said Wagner Yanaguizawa, Rabobank’s animal protein sector analyst.

The deal will also give it an opportunity to increase shipments of soluble coffee, a product with higher aggregate values than green beans. The world’s largest coffee exporter counts the EU as its top client — responsible for almost half of total shipments — even as Brazil’s soluble coffee faces a 9% tariff, and the deal forecasts gradually reducing that to zero.

But the South American nation also has work to do to meet Europe’s increasing environmental requirements. New anti-deforestation rules have the potential to affect roughly two thirds of Brazil’s agriculture exports to Europe, said Sueme Mori Andrade, director of International Relations at Brazil’s Confederation of Agriculture and Livestock.