In her State of the European Union address this year, EU-Commission President Ursula von der Leyen stressed the need to rethink the European Union’s foreign policy agenda and to intensify cooperation with democratic nations (“the core group of our like-minded partners: our friends in every single democratic nation on this globe”) (Von der Leyen, 2022). Latin America plays an important role here. Thus, in the near future, the agreements with Chile, Mexico, in addition to the one with New Zealand, are to be ratified and the negotiations with Australia and India are to be advanced (ibid.). In concrete terms, this means modernising the trade part of the EU-Chile Association Agreement, ratifying the EU-Mexico Association Agreement and the free trade agreement with New Zealand. Furthermore, a comprehensive engagement strategy is to be pursued in Latin America, in cooperation with the G7, especially the USA (ibid.). Latin America thus fulfils two geopolitically important criteria for the European Commission: almost all states are democratically governed, and it is rich in raw materials, also illustrated by the action plan on the EU’s resilience to critical raw materials.
This article focuses on the economic importance of EU trade with Latin America. In total, the EU exported goods worth almost 2.2 trillion Euro to third countries in 2021. Of these, goods worth 114.9 billion Euro were exported to Latin America. This contrasted with imports from Latin America worth 98 billion Euro, resulting in a trade surplus with Latin America of 16.9 billion Euro from the EU’s perspective. As Figure 1 shows, the EU trade balance with Latin America has always been positive in the years since the global financial crisis (from 2012).
In relation to EU exports, Latin America thus plays a comparatively minor role with a share of 5.3% of total in 2021 (Figure 2). By far the most important destination region for EU exports were European third countries, which accounted for 34.5%, followed by Canada and the USA with 20%, China with 10.3% and Africa with 6.7% of the total. Other important export partners by volume are Japan with 2.9%, Korea with 2.4% and India with 1.9% of the total export volume to third countries.
Compared to 2011, the share of EU exports to Latin America in total EU exports actually fell slightly from 5.7% to 5.3%. While the volume of trade with Latin America has grown by around 23.9% since 2011, total EU exports increased by 34.3% (Figure 3). By comparison, exports to China and Canada and the US grew particularly strongly, each increasing by around 77% over the same period.
Within Latin America, the European Commission’s prioritisation reflects the relevance of Chile and Mexico for European export markets. Mexico is the European Union’s most important trading partner in Latin America, followed by Brazil (included here in Mercosur) and Chile (Figure 4).
The negotiations on the EU-Mercosur Association Agreement have been concluded, but the agreement itself is currently “on ice”. From the EU’s point of view, the main obstacle to the ratification of the Association Agreement have been reservations about environmental protection. In Brazil, which dominates the Mercosur group, environmental protection has been weakened on many levels under the Bolsonaro government, and deforestation and the further development of the Amazon region have been promoted. In concrete figures, this means that in 2021 alone, more than 13,000 km² of rainforest (which is more than the area of Tyrol) was cleared, and in 2022 even more. The agreement would take such environmental reservations into account, but as Grübler at al. (2020) conclude, that a trade agreement cannot be a better instrument for enforcing environmental commitments than an environmental treaty. Whereby such clauses are not new in themselves. Environmental clauses in free trade agreements in general have increased significantly since the 1990s (Meinhart, 2022).
With Brazilian President-elect Luiz Inácio da Silva, a new window of opportunity to ratify the agreement could open up. During his election campaign, he announced his goal of concluding the agreement within six months of his re-election, but also him wanting to renegotiate parts of the agreement. At the COP27 summit, as well as previously, he emphasised that combating deforestation in the Amazons will have the highest priority. His credibility in this respect is demonstrated by the significant reduction in deforestation under his presidency from 2003 to 2010. With a view to the European Parliament elections in 2024, where a deal seems unlikely during the election campaign, a window of opportunity opens up for both sides in 2023. The EU’s foreign trade policy is certainly facing a conflict of goals between geopolitical and trade policy interests and the goals it has set itself for the Green Deal. Latin America is a good example of this, with the great economic importance of agricultural and raw material exports on the one hand and the EU’s need for raw materials on the other. Almost 41% of Latin American exports are currently accounted for by raw materials such as rare earths and agricultural goods, and a further 17.8% (as part of the production of material goods) by the production of food and animal feed (Figure 5). In contrast, more than 95% of European exports to Latin America are material goods. The most important sectors from the EU’s point of view are machinery and vehicles as well as chemical and pharmaceutical products.
Latin America is thus relevant for the supply of critical raw materials to the European Union. For example, the European Commission expects EU demand for rare earths, currently dominated by China, to increase fivefold by 2030, and even eighteenfold for lithium. According to the EU Action Plan for Critical Raw Materials Resilience published in 2020, the European Union sources rare earths almost exclusively (98%) from China (European Commission, 2020). In contrast, for lithium, which is particularly important for battery production, Chile is the world’s largest producer and the most important supplier for the European Union (ibid.) Mexico, for example, is the largest non-Asian processor of bismuth and Brazil, likewise among the main producers of several critical raw materials. In the race with China, Latin America accordingly already plays an important role, whose relevance for the EU – especially also in the context of the current geopolitical changes – will increase.
References:
European Commission. (2020). Communication of the European Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Critical Raw Materials Resilience: Charting a Path towards greater Security and Sustainability COM(2020) 474 final, Brussel.
Grübler, J., Reiter, O. und Sinabell, F. (2020). EU und Mercosur – Auswirkungen eines Abbaus von Handelsschranken und Aspekte der Nachhaltigkeit. WIFO Monatsberichte 11/2020.
Meinhart, B. (2022). Greening Trade? Environmental Provisions in Trade Agreements. FIW- Policy Brief, (55).
Von der Leyen, U. (2022). Lage der Union. Rede. https://ec.europa.eu/commission/presscorner/api/files/document/print/de/speech_22_5493/SPEECH_22_5493_DE.pdf
Author: Mag. Bernhard Moshammer, M.A. (wiiw)
Bernhard Moshammer is Economist at wiiw. His research focuses on European economic and political-economic issues. He has previously worked for the Austrian Federal Chancellery on EU affairs and on housing policies at the Austrian Chamber of Labour. He holds a degree in Economics from the Vienna University of Economics and Business and an M.A. in European Interdisciplinary Studies from the College of Europe, Natolin Campus in Warsaw, Poland.