Executive Summary
Brazil and Argentina are strategically important to Europe, both as trade partners and as weighty representatives of the Global South.
Despite domestic challenges, Brazil, like Argentina, is trying to exert its influence on global challenges such as climate change, food, and energy security.
Brazil can take a leading global role in renewable energy sources while Argentina’s lithium reserves could cover 20 percent of global demand in 2030.
Implications for
International Businesses
Brazil strongly engages in the production of green hydrogen and domestic demand is expected to take up about 60 percent of the total supply. This leaves room for energy exports up to $20 billion.
Thyssenkrupp AG’s Nucera subsidiary together with Brazilian chemical company Unigel SA will open the country’s first industrial-scale green hydrogen plant by the end of 2023, with capacity set to grow from 60 MW to 240 MW in a second phase.
The ratification of the EU-Mercosur trade deal would give European companies access to a so far highly protected market of over 260 million people.
State of Play Global balancing act running into local challenges
Brazil and Argentina face different domestic challenges. Both are similarly trying to stay out of the West’s fallout with Russia over the invasion of Ukraine, or the emerging global rivalry between a US-led alliance and a China-dominated bloc. Together with a majority of other Latin American countries, they currently have left-leaning governments, brought to power by popular frustration with their predecessors’ pandemic policies and overall economic stagnation. Their relative instability makes them open to outside investments, including from Europe, in areas where their companies can in turn increase global exports to generate hard currency.
Increased energy and food prices worldwide, as well as Russia’s war against Ukraine disrupted Brazil’s recovery following the COVID-19 crisis. As the government had to temporarily extend federal tax breaks on fuels, it also began to promote investments around untapped deposits of fertilizers like potash to maintain the country’s status as the world’s third largest agricultural exporter. President Luiz Inácio Lula da Silva, inaugurated in January amid a deeply polarized socio-political landscape, now seeks to boost economic growth by promoting partnerships that assure joining value chains that help re-industrializing the country. For Argentina, the war further deepened an economic crisis marked by high annual inflation (already at 53.8 percent in 2019, i.e., before the pandemic) and a fiscal adjustment program administered by the International Monetary Fund (IMF). Energy import values increased by 120 percent, and the 80 percent price increase on imported fertilizer coupled with a record drought have affected agriculture and cattle exports. Ahead of an election in the fall, Argentina seeks financial and infrastructure assistance to exploit its available energy and mining sources to stabilize its economy.
Key Issues What makes region a geopolitical partner for the EU
In its quest to transition towards climate neutrality, the EU needs new partnerships for non-fossil energies. At the same time, it is diversifying geopolitical risks away from its dependence on Russia (until the war) and now increasingly on the Middle East. This makes Argentina and Brazil, two powerhouses for the green transition, important partners. Moreover, Latin America is a region with the lowest risk of interstate wars, along with the rest of the Americas. In the past, Europe’s impulse was to combine trade and investment with ambitious environmental, labor, and social standards, such as with the signing of the EU-Mercosur agreement in 2019. Now, ‘winning’ key green tech exporters not just for business purposes but also as strategic partners in a geopolitically contested world is crucial for the EU.
The United States follows a similar logic of investing in green tech and looking for allies, thus presents itself as a competitor for the EU in terms of trade while being a partner at the geostrategic level. For example, it formed the Minerals Security Partnership with like-minded countries from Europe and Asia to ensure access to critical minerals, thus countering China’s dominance in global supply chains. Source countries, in turn, would receive loan guarantees or debt financing for mining projects. So far, however, Argentina and Brazil have refused to join the initiative, just as they have rejected Washington’s offer to replace ageing military equipment with modern American weaponry if donated to Ukraine. On his recent visit to China, President Lula went even further, asking both the US and Europe not to “encourage” the war through arms shipments. He later added a call for a “peace group” to be established without the warring partners and their supporters to mediate an end to the hostilities, basically meaning Brazil, China and other (unnamed) countries from the Global South.
China, in turn, became Argentina’s and Brazil’s first trading partner in 2017 and 2009, respectively (even though the United States remains their biggest foreign investor). Both countries have been elevated to comprehensive strategic partners, the highest level that Beijing awards to a third country. Since 2005, China has financed infrastructure and energy projects there valued up to $48 billion, and Argentina became a member of the Belt and Road Initiative in 2022. However, two factors have led to a reappreciation of Beijing’s role: First, the dramatic decline of Chinese lending to Latin America and the Caribbean over the past decade, i.e., from $34.5 billion in 2010 to $807 million in 2022, though rebounding as of late. Second, rising concerns – especially in Brazil – that China’s buying up of natural resource-based products came to the detriment of its industries. This opens the door for Europe and a revived EU-Mercosur trade agreement focusing on cooperation around the green transition.
Ultimately, being on good terms with large powers such as China or Russia helps Brazil and Argentina balance the United States, which is why the two countries prefer not to join a Western-led alliance to isolate Russia. In comparison, from a political point of view, Europe is seen as less overbearing and thus, less invasive. Given the EU’s more limited geopolitical clout, signing a free trade deal with the EU is far less political costly for both countries than any hypothetical trade deal with Washington.
Green transition, trade, and money – the geo-economic side of the relationship
Europe’s renewed interest in the region, particularly in Argentina and Brazil, is not merely driven by geopolitical considerations, but also by the requirements of the green transition. Both countries hold an abundance of minerals that are critical especially for the electrification of transports, such as lithium (Argentina is the fourth-largest producer), nickel (Brazil has the world’s second largest reserve), and rare earth elements. Other energy opportunities include the production of liquefied natural gas and hydrogen in Argentina, which boasts the second-largest shale gas reserve in the world. In Brazil, renewables like wind and solar as well as the production of green hydrogen are frontrunners, propelling the country to the world’s top ten producers of solar energy. This generates investment opportunities for European companies in steel and automobile industries, software, mechanical engineering, solar technology, waste management, and startups. Investment risks, in turn, include a weak rule of law, competition with Chinese mining companies (42,29 percent of Argentina’s lithium exports go to China), as well as local state-owned enterprises like Brazilian energy giant Petrobras that may engage in unfair competition and a high risk of sovereign debt default.
The envisaged trade agreement with the EU with the Mercosur economic and political club uniting Argentina, Brazil, Uruguay, and Paraguay would be the largest such deal in latter’s history. It would give the group a boost, especially given that its actual economic integration has lagged expectations (despite a combined GDP of roughly US$2.2 trillion in 2021) while its effect on interstate peace has been considerable. In fact, the EU and Brazil are making progress on an addendum tackling sustainable development that would lift European countries’ resistance and move towards the agreement implementation. Given Argentina’s upcoming election, its stance is more delicate, so ratification – and therefore the deal’s implementation at the bilateral level – may be delayed. However, it has to be noted, that the most promising political candidates for Argentina’s election are less protectionist than the incumbent. The same is true for both countries’ bid to join the OECD club of mostly rich countries over the coming years, whose framework provides protection to European companies’ investments and fosters pro-market reforms.
Most recently, Argentina and Brazil have floated the idea of monetary cooperation by establishing a local currency system between the two countries. This is a payment agreement that seeks to foster intra-regional trade through a clearing system run by the two central banks. If implemented, this update will help businesses already established in both countries to avoid capital and import restrictions currently in place in Argentina. Especially the automotive sector, valued at $6.7 billion and contributing 22 percent of exports from Argentina to Brazil and 35 percent the other way in 2020, stands to benefit from this, and with-it European carmakers such as Volkswagen, Mercedes Benz, and Renault.