Hello from Latin America, where one of the world’s larger but less well-known trade pacts is celebrating its 30th birthday. Mercosur, the Common Market of the South, was born in 1991 when Brazil, Argentina, Uruguay and Paraguay dropped customs duties on trade with each other and committed to closer integration (Venezuela joined later but was suspended for human rights failings).

The alliance made headlines when it signed an ambitious pact with the EU in 2019 but since then, things have veered off track. We examine the prospects for what would be the world’s biggest free trade agreement — if it happens. Policy watch looks into the tensions between Brussels and Austria over vaccine distribution, while our chart of the day gives some insight into the degree to which east Asia dominates chip manufacturing.

It took 20 years to negotiate but was it dead on arrival? Almost two years after the EU and the Mercosur bloc of South American countries trumpeted their agreement on a trade treaty covering 800m people and about a quarter of the world’s gross domestic product, the mood has turned sour and the prospects for ratification are fading.

Europe’s Greens and the continent’s farming lobby have made common cause in attacking the Mercosur agreement ever since it was announced. The Greens hate the idea that extra European demand for South American beef and soya could encourage deforestation in the Amazon and other sensitive natural habitats, while the bloc’s farmers shudder at the prospect of cheap competition from Brazil and Argentina’s vast, low-cost agribusiness sectors. “I will not hide from you that we do receive a lot of negative responses from the agricultural community,” said Dita Charanzova, a Czech vice-president of the European Parliament and a supporter of the pact. “There is a lot of emotion around this agreement.”

Efforts by Portugal, a country with close ties to Latin America, to use its presidency of the EU Council in the first half of this year to find a way forward have come to nothing. Austria this month became the latest EU state to block the deal on environmental grounds. France has already said it will not sign the pact in its current form. The Portuguese foreign minister has conceded privately to Mercosur diplomats that Lisbon is unlikely to make much progress in the remainder of its presidency.

For obvious reasons, neither the EU nor Mercosur wants to reopen the main text of the agreement to accommodate objections: a document which took 20 years to agree could unravel in a few weeks. Another idea of splitting the agreement into trade and political sections and ratifying them separately was opposed by some member states.

The European Commission has promised instead to table a separate declaration on environmental sustainability to make the pact look greener. Argentina, which at present holds the presidency of Mercosur, is ready to consider a proposal but says it has yet to see one. Like Brazil, it believes any additional green commitments should bind Europe as well as South America. Both countries point out that the trade deal already contains a chapter on sustainable development and that their energy matrix is considerably cleaner than that of Europe.

The Europeans may be overestimating the patience of their Latin American counterparts. The trade deal only got done at all in 2019 because of a rare and brief overlap of pro-market political leaders in Mercosur’s historically protectionist two main countries, Brazil and Argentina. Buenos Aires now has a Peronist government which views the deal as excessively favourable to the EU and is not prepared to make further concessions.

“The agreement is very unbalanced,” one Argentine source said. “Mercosur gets very little and has to totally open its protected market in return.”

Brazil sees things the same way. “The additional access for agricultural products is very little as the EU is very protectionist,” said Pedro Miguel da Costa e Silva, Brazil’s chief negotiator. “It changes almost nothing for agriculture.”

The Latin Americans complain that key exports such as meat and sugar remain subject to quotas under the deal. Beef is limited to 1.2 per cent of annual EU consumption, “equivalent to one hamburger per person per year in the EU”, jokes Argentina’s ambassador to the EU, Pablo Grinspun. Soya, one of Brazil and Argentina’s biggest agricultural exports, already has duty-free access to the European market without the trade deal.

So, far from unleashing a wave of deforestation to facilitate surging exports, the Latin Americans say, the trade deal with the EU in fact offers Mercosur’s farmers thin pickings.

Worse still, it would open up Brazil and Argentina’s heavily protected car and truck industry to strong EU competitors, just when the two South American countries are struggling to emerge from deep pandemic-induced recessions. So why agree to more concessions on politically sensitive topics such as the environment, just to see your domestic industry shredded by competition?

Then there is the Jair Bolsonaro problem. Not only is the mercurial hard-right Brazilian leader the scourge of environmentalists and NGOs and the darling of loggers and ranchers: he has also picked a personal fight with Emmanuel Macron over the Amazon, even endorsing an insult to the French president and his wife on social media in 2019. “My personal view is that while Bolsonaro is in power, Europe will not ratify this agreement,” said one Mercosur source.

The commission nonetheless remains keen to make the Mercosur deal fly and some EU member states, such as the Nordic and east European countries, are broadly supportive. But the Mercosur nations are exasperated that 20 years of talks with the EU have yielded an agreement that is now being picked over again by member states and national parliaments — or in the case of Belgium, regional parliaments. “Who are we negotiating with?”, said da Costa e Silva. “The EU? Individual countries? Parliaments? Mayors? Where does this end?”

Political cycles in Europe and Brazil may complicate matters further. Slovenia, which holds the EU’s rotating presidency in the second half of this year, has other priorities, and next January France, one of the pact’s firmest opponents, will take the chair. Next year will also see Bolsonaro running for re-election; past form suggests he will be more interested in firing up his logging and ranching voting base than in international trade diplomacy.

Faced with difficulties like these, the South Americans’ thoughts are turning elsewhere. China is already Brazil’s biggest trading partner by far and Argentina’s second biggest. Mercosur has opened trade talks with Pacific nations such as South Korea, Singapore and Canada. Britain is another option.

The world’s biggest ever trade agreement is not dead yet but its prospects seem distinctly unhealthy.

Few supply chain chinks have captured the world’s attention quite like the shortage of semiconductor chips. An acute lack of supply has led several automakers to shut plants and provoked further questions about the viability of just-in-time production.

It has also triggered talk in Germany and the US of reshoring production. But, as the chart below shows, if the US wants to rely less on east Asia and more on domestic manufacturers, there’s going to have to be an awful lot of catch-up in terms of investment.

Line chart of share of global semiconductor manufacturing capacity (%)* showing US chip capacity has declined as China

While discord between the EU and the UK over vaccine supply chains has grabbed the headlines, tensions have also emerged within the trade bloc. Notably between Vienna and Brussels.

Austria’s chancellor Sebastian Kurz was among those that earlier this month lashed out at the EU over perceived failings in its distribution drive, accusing the bloc of “huge disparities” between member states. Other signatories were Bulgaria, Croatia, the Czech Republic, Latvia and Slovenia. The EU is now saying that, as a result of Kurz’s remarks, Austria will “not be getting one extra jab” of an additional 10m shots.

Our own view is that such tit for tat is unwise. Kurz might well have made the broadsides against the EU to mask problems closer to home. Yet that does not change the fact that Austria is a country in the middle of the EU that borders six other member states and Switzerland; rising cases here will spread throughout the region. Depriving its population of extra vaccines on the grounds of spite will serve no one well.

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