The EU is set to sign a free trade agreement with the Mercosur bloc 25 years after initiating talks. This agreement aims to eliminate import duties on over 90% of exports over a 15-year timeframe. It will remove duties on 92% of Mercosur exports to the EU over 10 years and 91% of EU exports to Mercosur countries over 15 years.
Some EU countries opposed the deal due to concerns about competition in the agricultural sector. However, concessions were made to secure support from Italy and ensure backing through a qualified majority vote. For Mercosur, the primary gain is economic, while the EU sees it as a geopolitical advantage amid global trade tensions.
Ratification Process
The deal requires ratification by the EU Parliament and consensus from all 27 EU member states, a potentially lengthy process. Implementation is phased, meaning economic benefits for the EU will accrue slowly. As of now, there is no plan to adjust economic forecasts while awaiting the agreement’s ratification and full implementation. The European Commission President, Ursula von der Leyen, aims to sign the deal on 17 January.
As we look back at the EU-Mercosur agreement signed in principle around this time in 2025, the key takeaway is that the economic benefits remain a distant prospect. The long and uncertain ratification process, which still requires approval from the European Parliament and all 27 member states, is the main driver of opportunity. We see the gradual tariff reduction over 15 years as a slow-moving factor, not an immediate market shock.
This means we should be looking at volatility linked to the political process rather than the fundamentals of the deal itself. Last year’s data from 2025 showed a slight increase of 3% in German automotive exports to Brazil in the quarter after the signing, indicating some market anticipation. However, we should hedge these long positions by monitoring any news of renewed opposition from France or Poland, which could quickly reverse sentiment.
Impact on Commodities and Currency Markets
For those looking at commodities, Brazilian agricultural exporters saw a boost, with soy exports to the EU rising nearly 5% year-over-year in the second half of 2025. This suggests long-dated call options on major Mercosur agricultural firms could be beneficial, capturing the slow tariff phase-out. However, these positions must be balanced with the significant headline risk from the European ratification debates.
The currency market, particularly the EUR/BRL pair, will likely react more to political noise than to the slow implementation of the trade deal. Looking at its performance in 2025, the Brazilian Real’s volatility increased after the signing, but a clear trend failed to emerge, underscoring the dominance of political uncertainty. We should use options to trade potential spikes in volatility around key parliamentary votes expected in the coming months.
