The EU-Mercosur free trade agreement has been seen for years as a beacon of hope for closer economic cooperation. After some 30 years of intensive discussions, the agreement was signed in 2024, but has yet to be ratified. Some member states still have reservations and are blocking the final decision. Nevertheless, experts see enormous opportunities in its implementation: the integration of value chains, the protection of European designations of origin, and stable rules in a geopolitically uncertain world are among the key advantages.
In this compact, one-hour event, our representative in Brazil, Dietmar Sukop, and Carl Moses, consultant for economics, politics and business in Latin America, discussed the economic framework and market opportunities in Brazil and Argentina for German companies: Interesting insights into the economic framework and market opportunities of both countries were provided, as well as all relevant information on the agreement and its impact on German entrepreneurs.
Key Takeaways (the full interview follows):
- Brazil remains the largest economy in Latin America and ranks among the top 10 worldwide. Despite global uncertainties, GDP is growing, inflation is at 4.3%, and unemployment is low at 5.5%. Exciting opportunities are currently opening up for German companies in key sectors. Investments in agribusiness and food processing, considered key drivers of growth, are particularly attractive. Renewable energies and green hydrogen projects are also gaining importance. Another strategic area is the extraction and processing of rare earth elements and lithium, which are essential for high-tech applications and electromobility. Furthermore, industrial automation and mechanical engineering offer significant potential.
- Under President Javier Milei, Argentina is undergoing profound reforms. Inflation has fallen from several hundred percent to below 30 percent, a historic success that provides planning security. This also opens up diverse opportunities, particularly in the supply of raw materials, which offer a stable foundation for industrial value creation. Large-scale projects in the energy and infrastructure sectors are also especially attractive. The steady growth in demand for high-quality products generates interesting export opportunities for Thuringian companies. A major advantage of the Argentine market at present is the favorable exchange rate and the high purchasing power in US dollars. For German companies, a market is opening up that was long completely closed to many due to import restrictions; now, the doors are wide open.
The following is the complete interview, which was conducted as part of the online event “Café International: EU-Mercosur Free Trade Agreement” on December 3rd.
Carine Cornez-Fliege:
Through this discussion, we want to gain an understanding of the current situation in Argentina and Brazil and answer the question of what will happen with the Mercosur-EU free trade agreement and what will happen if it does not come to fruition.
To begin, it would be helpful if we could get an overview. Dietmar and Carl, please give us a brief update on the current economic situation in Brazil and Argentina.
Dietmar Sukop:
(…) we actually still expect a slight increase in gross domestic product this year. Unfortunately, this was revised downwards somewhat over the course of the year, partly due to the tariffs imposed by the USA. As you may know, the Trump administration imposed punitive tariffs of 50% on all, or almost all, exports from Brazil. Brazil is also currently in contact with the Trump administration; that is, President Lula is in contact with Trump, and there is an exemption list.
(…) The US has already made some concessions, including on many agricultural products and food items, such as coffee and orange juice. But there is at least the prospect that these 50% import duties on Brazilian products will be reduced somewhat. Regarding inflation, we are still slightly outside the range set by the government, currently at around 4.3%. Now, at the end of the year, we still have very high financing costs due to a very high key interest rate. Therefore, it is difficult for new investors to invest in Brazil.
On the unemployment front, we're currently at an average of about 5.5% across Brazil. Some states, however, are already experiencing near-full employment. For example, Santa Catarina, with 3%, is practically at full employment. So, the population is generally doing quite well. And as mentioned before, the gross domestic product is rising slightly, which is also benefiting consumers. The disposable income per capita is around US$10,600, which is also relatively good compared to the average of recent years.
Carl Moses:
Argentina has never been as exciting as it has been in the two years since Javier Milei won the election. Everything has been in flux ever since. As has been widely reported, Milei has implemented radical financial reforms. At the same time, he is a pragmatist who, for example, has so far maintained control of the exchange rate, contrary to his libertarian ideology. So, he and his team, which he has assembled from other political parties and institutions, are taking a very pragmatic approach.
(…) Inflation, by far Milei's biggest and most visible success so far, has fallen from several hundred percent to under 30 percent per year. Two percent per month is still a lot, but for Argentina it's a real improvement because people can actually plan. It's simply more stability. And Milei continues to do everything he can to keep inflation under control. But at the same time, we know that a sustained decline in inflation is a process that takes years. Look at countries like Peru, Uruguay – there used to be hyperinflation and high inflation everywhere in the region. It took many years, even in Brazil, to achieve this level of stability. And you can't just conjure that up in Argentina.
But something else has changed: As I said, in the last election this October, his party received an unexpectedly strong result.
And more importantly, in my opinion, what we have witnessed in recent months is the absolute support of the United States, that is, the administration of Donald Trump and his Treasury Secretary Scott Bessend. The Trump administration still has a few years in office, which is always necessary to support Javier Milei and his reform agenda.
Carine Cornez-Fliege:
More stability is surely also important for individual entrepreneurs, who can finally plan a little longer-term again?
Carl Moses:
Milei has liberalized many import barriers, especially non-tariff barriers, and access to foreign currency for imports to a very large extent. This means that companies again have access to foreign currency to import, and imports have increased massively this year and last. At the moment, the economy is flat, I would say. So, since February, there has essentially been stagnation. Nevertheless, the country will show average growth of around 4% for 2025. However, this is the carryover from the recovery in the second half of 2024. This means that next year we will probably have average growth that is below four percent. But you will still get the feeling that the economy is picking up because the situation is improving month by month. And imports are wide open. And the purchasing power of Argentinians in dollars is high because the government continues to keep the dollar exchange rate stable and as an important anchor for inflation. Argentina is too expensive, definitely. The government refuses to make any changes to its exchange rate policy and is focusing all its efforts on making the country more efficient and productive. But we all know that takes time. It doesn't happen in just a few months. It's such a dynamic and exciting development. So far, Milei has the support of the majority in Argentina, and, as I said, he has, above all, this tremendous support from the USA. Therefore, I believe he can maintain stability during the second half of his term. But what exactly happens next will remain extremely interesting in Argentina. However, after the last two or three months, I am significantly more optimistic about the medium and long term. This is fantastic news for German companies because a market is opening up that was completely closed to many for a long time due to import restrictions, and now the doors are wide open. And it will also be very interesting for foreign direct investment.
Carine Cornez-Fliege:
We had high hopes at the end of 2024 when the EU-Mercosur free trade agreement was finally signed. We were told it was coming, and we could rejoice. Now a year has passed, and it hasn't been ratified.
What's the situation? What do you think? We hear that Lula wants to give us a present for Christmas and that it's been signed. What's your take on it?
Dietmar Sukop:
Yes, as you just said, Lula wants to sign the agreement on December 20th. Whether it will actually happen, I can't tell you. I think after all these years, people have become a bit pessimistic about a real deal being finalized. It's also important to distinguish between two different kinds of agreements.
There's the trade agreement on its own, and then there's the complete EU-Mercosur agreement, which also needs to be ratified by the individual EU countries. The first trade agreement is naturally a bit simpler. It only requires the signature of the European Parliament. Even if we were to sign this trade agreement, it wouldn't mean that tariffs would be reduced to zero overnight. Rather, this is a long-term development we're facing, taking up to 15 years in some cases, during which tariffs would gradually be reduced.
Farmers also fear that cheap agricultural products might enter Europe. Personally, I don't see any problems with that. Every company that exports meat from Brazil, for example, has to be certified and sustainable. As far as I'm concerned, there's no risk of cheap, rotten meat somehow making its way to Europe. But on the other hand, farmers in Europe certainly have legitimate fears of facing very strong competition.
On the other hand, of course, Brazilian industry also had certain concerns: now technologically advanced equipment and machinery are coming from Germany. And we in our companies really need to make sure we can cope with this enormous competition. As in any process, any agreement, or any economic or political process, there will certainly be losers, and some companies will fall by the wayside. Certainly, some agricultural businesses in Europe will also go under. But I think the important thing is that, macroeconomically speaking, the economy will benefit, and so will the general population in both regions.
Carl Moses:
So, I've been reporting on the development of relations between the EU and Mercosur for 30 years, and with great passion. At times, I was practically an activist for the agreement. For several years now, I've been reluctant to watch its development because I'm simply frustrated that, firstly, we can't seem to get it done, and it's the EU's fault. It's been the EU's fault for quite some time now, not the South Americans', that it hasn't come into force. And, by the way, negotiations are currently underway with the US. And they'll probably decide by the end of this week to similarly open their market. In contrast, there's a stagnant supermarket landscape, at least in Argentina, where processed products are incredibly expensive. Where even German jam, costing three times as much as in Germany, is still competitive on Argentinian supermarket shelves. And Mercosur protects 300 designations of origin, such as Champagne, Black Forest ham, and certain cheeses. The EU has enormous potential in processed food products, and it's absurd that we only ever talk about glyphosate and a few tons more or less meat or ethanol, and not about these opportunities. Quite apart from that, I believe the reason we need this agreement is that, given the current geopolitical shift, international rules are collapsing before our very eyes. And with the EU-Mercosur agreement, we can at least maintain stable rules within this area, which would be the world's largest economic zone, just as we're used to, and we would even have better rules than before. It's simply incomprehensible to me that we still haven't implemented it. (...)
I fear we're already too late, regardless of whether the EU-Mercosur free trade agreement is actually signed on the 20th or not. China has long since overtaken us. The US is currently, as I just mentioned, making a massive push into Argentina. And that's just the gateway for the entire region. Lula and Trump also seem to get along well on a personal level. We're all slipping away from this. So we'll stagnate and fall relatively far behind if we Europeans don't take action.
Dietmar Sukop:
And I actually think that the opportunities are much, much greater for European companies than for South American companies. For example, the tariffs currently in place in the EU are significantly lower than those demanded here in Mercosur. And the tariff reductions that are planned are also much, much greater on the Mercosur side. So it will be much, much easier to export to Mercosur. On the other hand, the tariffs that might be eliminated in the EU are much, much lower. So the advantage clearly lies with the European side.
Carine Cornez-Fliege:
Let's assume the EU-Mercosur free trade agreement isn't signed. What other options do we have?
Carl Moses:
In Argentina, the agricultural industry has always been the backbone of the economy, generating all the foreign currency that the rest of the country needs to keep its economy running. Besides this still extremely dynamic sector, there's the question of currency: Where are there better supply opportunities for Germany than before, precisely because non-tariff trade barriers have been reduced and dismantled, and because the peso is strong? Sometimes it's much more important to look at how the currency is performing. If Argentina has a completely overvalued currency, then they can buy anything. Customs duties then become less of a factor.
Further opportunities lie in raw material supply, where Argentina is becoming a truly significant player in lithium, but also in copper, where German companies could and should secure their supply before it is lost to China or North America. (...) Argentina is now fully committed to developing its shale gas reserves. These are huge projects, for which there is also a development regime, enshrined in law under Milei, which provides significant advantages and long-term guarantees for large projects in the energy, infrastructure, and mining sectors.
This means that if a mining project like this is developed for several billion dollars, then the technology, worth hundreds of millions of dollars, largely comes from Germany. So, at this level, very significant business opportunities are now emerging.
I just mentioned the terrible shortage of a wide range of products in Argentinian retail stores – imports are open. The testing procedures have also been simplified. If a battery is approved in Europe, it no longer needs to be tested again in Argentina before being imported. So, the floodgates are wide open; I could list them all, because this applies to all sectors of the economy where Argentina is a grateful customer. They should take advantage of it while the exchange rate is so favorable! Right now, the window of opportunity is open.
Dietmar Sukop:
I remain optimistic that the agreement will be finalized at least by the time of the Hannover Messe, where Brazil is the partner country. However, if not, just as in Argentina, the economic engine is the agro-industry – not only agriculture itself, but also agribusiness in general: agricultural technology, food processing, and the like. That is the engine of the Brazilian economy.
Carl already touched on the topic of lithium, and rare earth elements in general, which the Trump administration is naturally interested in. They are also approaching Brazil to lower import costs and hope that Brazil will become one of the suppliers of rare earth elements to the US, rather than relying solely on China. China, by the way, is Brazil's most important trading partner, and if China enters this market, things will look bad for the European Union as well.
As Carl already said, there are so many suppliers. Green hydrogen is another area where things are a bit stalled. German companies and German politicians could also do something here to play a more prominent role.
Carl Moses:
With the EU-Mercosur free trade agreement, we would at least have a set of rules that would particularly benefit small and medium-sized enterprises (SMEs) that don't have their own local branches. Large corporations and companies handle this internally, but it would be unlikely to help SMEs. I always say, we don't necessarily need the EU-Mercosur free trade agreement, but it would help us, it would move us forward, and it would prevent us from falling behind in competition with China, and especially with other countries in Asia and other regions.
We have a superb position; Germany remains the country with the most direct investment in Mercosur. But we now need a boost, and I think what Donald Trump is doing shows us, on the one hand, that the gloves are off, but on the other hand, that Argentina is now receiving the substantial US support they announced a year ago. The Americans are guaranteeing the stability of this ally, and we also benefit from that because the conditions have become better and more stable.
Carine Cornez-Fliege:
Thank you for the interesting conversation!
Argentina and Brazil are undergoing rapid changes – and with or without an EU-Mercosur agreement, new opportunities are emerging that should be considered. We are available to assist you and would be happy to put you in Contact with relevant market experts such as Dietmar Sukop and Carl Moses.
