We don’t want your EVs, Brazil tells EU as trade talks hit crunch time

BRUSSELS — The “cows for cars” free-trade deal between Europe and South America could be about to undergo some last-minute changes.

For Brazil, the deal can still happen as long as imports of electric cars are limited, according to diplomats who spoke to POLITICO. For the European Union, it can only happen as long as the cows aren’t raised on deforested land. 

Those are the two big issues standing in the way of (yet) another push to complete talks on creating a free-trade zone between the EU and the Mercosur bloc that would span nearly 800 million people and account for a fifth of global GDP.

The two sides have been in talks for a quarter century, and hopes are rising that they might — just might — finally clinch an agreement at the G20 summit that President Luiz Inácio Lula da Silva is hosting in Rio in November.

That would represent a major geopolitical win for European Commission President Ursula von der Leyen as she embarks on a second term. And it would create a chance to stem a decline in trade that has seen the EU — the region’s top trading partner just a decade ago — lose out to China.

A deal with Mercosur — which groups Argentina, Brazil, Paraguay, Uruguay and newcomer Bolivia — eluded von der Leyen in her first term. French President Emmanuel Macron intervened earlier this year to stall the talks, bowing to protests by farmers fearful of a flood of Brazilian and Argentinian beef. That has frustrated pro-deal countries led by Germany.

Contrasting trade flows create different pain points in the talks. Four-fifths of Mercosur’s exports to the EU are primary goods — including minerals, beef and soy. Going the other way, 90 percent of EU exports are manufactured goods, such as machinery, pharmaceuticals and cars.

EV safeguards

Brazil, which is leading the talks on behalf of Mercosur, is now seeking protection against future imports of European electric vehicles in the form of additional safeguard measures, according to a Mercosur diplomat, who was granted anonymity to discuss the closed-door talks.

For Brazil, the safeguards — which would restrict imports once a certain volume is reached — represent a direct response to the trade defense measures on Chinese EVs that the EU, the United States and Canada have adopted in recent months. Brussels is about to slap duties on imports of Chinese EVs following an anti-subsidy investigation, while Washington and Ottawa have imposed 100 percent duties.

Facing an economic downturn at home and more trade barriers in the West, Chinese EV-makers like BYD are rushing to alternative markets such as Brazil, Mexico or Morocco. In response, Brazil is gradually increasing EV tariffs — they should top out at 35 percent in 2026.

Localizing production is the play for Mercosur — just as it is for the EU in imposing its own tariffs on imports of Chinese-made EVs.

“Brazil and Argentina are traditionally highly protective of their auto industries. The EU-Mercosur agreement is the first large concession in this area,” said Geraldo Vidigal, a Brazilian professor in international trade law at the University of Amsterdam.

“Initially, the deal didn’t include EVs, but they have been catching up with that fast, especially since barriers elsewhere have made them a target market for Chinese EVs. There are now significant investments in building a domestic EV industry, and they wouldn’t want an oversight in negotiations with the EU to pierce a hole through that.”

Not just a provider

By digging a moat around its EV market, Brasília is seeking to leverage its huge reserves of critical minerals and create added value at home, moving beyond its role as a simple provider of minerals.

The move is reminiscent of the EU’s earlier trade negotiations with Chile — another South American country with a rich resource endowment that wanted to capture more value by developing its domestic industrial base.

Two Mercosur members, Argentina and Bolivia, form the “lithium triangle” with Chile; the three countries hold well over half the world’s known reserves of the metal used in electric vehicle batteries. Brazil holds 94 percent of the world’s reserves of niobium — a metal used to strengthen steel — as well as deposits of graphite, nickel and rare earths.

In a recent interview with POLITICO, Brazil’s ambassador to the EU, Pedro Miguel da Costa e Silva, signaled the country would be open to discussing a raw-materials partnership with the EU “not only as suppliers of raw materials, but as a partnership that will generate value added and transformation also in our country.”

Here’s the beef

The main outstanding grievance for the Mercosur countries is the EU’s new anti-deforestation rules — which are due to enter into force on Dec. 30 and seek to curb the clearing of tropical rainforests that continues as ranchers expand livestock grazing and crop cultivation.

They are a particularly sore point for Brazil, which wants to build its future prosperity on the back of agri-food exports and views the rules as a punitive barrier that would effectively undo the potential gains of the Mercosur deal.

In a letter obtained by POLITICO and sent last Wednesday to the Commission, Brazil’s foreign and agriculture ministers request that “the EU refrain from implementing the [anti-deforestation rules] at the end of 2024 and urgently reassess its approach to the matter,” in order to “avoid any negative impact on our trade relations.”

Just a day later, German Chancellor Olaf Scholz — the Mercosur deal’s top cheerleader — became the first European head of government to call for a delay in implementing the rules.

Germany and France have clashed repeatedly over Mercosur. And, with Macron yet to form a government following his recent electoral defeats, it remains to be seen whether Paris can rally enough support to thwart any deal that is reached. 

The European Commission declined to comment. Brazil’s Mission to the EU was approached by POLITICO for comment.

Jordyn Dahl and Koen Verhelst contributed reporting. This story has been updated.