The rating agency notes that political conditions in Europe will be crucial in determining the final outcome, as they are likely to play a major role when this stage begins.
Although on December 6, the European Union (EU) and Mercosur made substantial progress on a trade agreement that had been under negotiation for more than two decades, for Moody's Ratings this comes at a time of greater risk of protectionist trade policies, taking into account that it seeks to create a free trade zone that covers more than 20% of global GDP and an integrated market of more than 700 million people.
The deal, Moody's says, now has to go through a ratification process that will require approval from 15 of the 27 EU member states representing 65% of the EU population, along with a simple majority in the European Parliament. Alternatively, four states representing at least 35% of the EU population can block it.
"With there already being evidence of opposition to the deal from France and the EU agricultural sector, the conditions are set for what is likely to be a lengthy and complex ratification process. An attempt to ratify a similar deal failed in 2019 as EU countries backed down in the face of strong local opposition, including environmental concerns. Political conditions in Europe will therefore be crucial in determining the final outcome, as they are likely to play a major role when the ratification process begins. Uruguay's foreign minister mentioned that the ratification process could take up to 18 months," Moody's said.
According to the rating agency, from the perspective of Mercosur, it is particularly relevant that the agreement includes significant tariff reductions for agricultural products. "Mercosur countries will obtain a quota of 99,000 tons of beef per year with a reduced tariff rate of 7.5% and an additional 180,000 tons of poultry meat with reduced tariffs. Sugar producers will benefit from a quota of 180,000 tons per year duty-free, and the agreement includes a quota of 450,000 tons of ethanol for industrial use duty-free, which favors the biofuel industry in Mercosur countries," it says in a report.
Moody's also notes that the agreement will reduce tariffs on soybean exports, which could benefit Brazil and Argentina, the EU's two main sources of soybean imports. "These agricultural products will also be subject to high environmental standards, as the agreement stipulates that the products cannot be involved in deforestation," the rating firm said.
For the EU, the agreement would gradually eliminate tariffs on more than 90% of exports to Mercosur countries, resulting in annual savings of more than US$4 billion. This aspect of the agreement includes the elimination of tariffs on manufactured goods exported from the EU to Mercosur, such as auto parts (35%), machinery (20%), chemicals (18%) and pharmaceuticals (14%), making European products more competitive in these markets. The agreement also aligns with the EU's strategic goals of ensuring access to critical raw materials and supporting its green transition.
"By opening markets and reducing trade barriers, the agreement represents a significant step towards deeper economic integration between the two regions. Greater trade openness should have a positive effect on growth and productivity, as it improves the medium-term economic prospects of Mercosur countries. The timing of the agreement demonstrates the interest of the EU and Mercosur in strengthening economic ties and diversifying trade partnerships in the face of growing global uncertainty stemming from an increased risk of US protectionism ," Moody's said.
