EU-Mercosur Agreement: a Second Wind For European Luxury Goods?

On Wednesday, September 3, the long-awaited Mercosur, the international agreement between the European Union and Latin America, was approved by the Commission meeting in Brussels.

While some European economic sectors, such as agriculture, have been hostile and skeptical of the agreement, the prospects for other activities, such as those related to luxury goods, appear to be potentially lucrative.

South America represents a market of 270 million consumers, whose middle and upper classes are growing steadily. The South American countries involved (Argentina, Paraguay, Uruguay, and Brazil) represent a gross domestic product (GDP) of €2.5 trillion.

The trade balance between the two parties is fairly even. Last year, the European Union exported just over €55 billion worth of goods to Latin America and imported €56 billion.

Yesterday's adoption by the Commission is the first step in the process of bringing the agreement into force. The treaty will then be submitted to the various member states.

What opportunities could this treaty generate for the European luxury industry? The sectors most likely to benefit from exports to the American continent would be the automotive industry and spirits. This agreement would be a breath of fresh air for these industries, particularly spirits, whose revenues have been severely affected by the increase in customs duties in the United States (15%).

Germany, for example, is clearly in favor of Mercosur. With its industry in recession, this agreement would enable the automotive market to increase its exports by 10% once all the institutional steps have been completed and the agreement has come into force.

France, on the other hand, has proved to be the most skeptical partner: opposition to Mercosur comes mainly from the agricultural and food sectors, which are threatened by massive imports of South American products (meat, soybeans, sugar) that are not subject to European environmental regulations and could potentially flood the markets thanks to their lower prices.

For the luxury sector, however, the South American market could prove to be a godsend. The rapid growth of the middle classes in recent years has led to an increase in demand for luxury goods and exclusive services. In the large shopping centers of Brazilian, Uruguayan, and Argentine cities, French and Italian luxury brands already rub shoulders with expanding local high-end brands.

In a study conducted just before the global pandemic, Euromonitor found that South America was the fastest-growing luxury market (+9.1% between 2019 and 2020), despite the political instability and social inequalities that dominate these countries.

The advantage is that all the countries on this continent share similar cultures, consumer behaviors, and fashion trends, so once a brand develops in one country, it can easily establish itself in neighboring markets.

Brussels wants to quickly reach a common agreement among the 27 members of the Union, taking advantage of the favorable situation in Brazil created by Lula's presidency.
Yesterday, Paris succeeded in obtaining the activation of a “safeguard clause,” which allows France to examine in detail what will be proposed in order to protect the interests of the most sensitive sectors. Already threatened by the fall of the government and social unrest, the French administration fears adding to this the discontent of farmers.

According to the EU, Mercosur would allow European industries to save around €4 billion in customs duties each year in Latin America. Pro-Mercosur politicians see the agreement as a first step in the necessary strategy of trade diversification that must be adopted to counter the closure of trade with the United States.

Two years ago, some 20 European industrial confederations in the fashion and beauty sector, including Euratex (textile and clothing confederation), Cotance (leather industries confederation), and Cosmetics Europe (cosmetics professionals association), sent a joint appeal to European institutions calling for the adoption of the free trade agreement. In their press releases, the confederations indicated that Mercosur was essential to the competitiveness of European companies.
The President of the European Council, Antonio Costa, welcomed this first step, emphasizing that Mercosur “will represent an excellent opportunity to strengthen the competitiveness of the Union.”