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The European Union’s landmark agreement with Cuba entered into force this week, marking a new chapter that aims for increased trade and diplomacy between the EU and the Latin American region.

The Political Dialogue and Co-operation Agreement (PDCA) was agreed between Cuba and the EU last year and came into force on November 1, 2017. The agreement consists of three chapters including trade co-operation, political dialogue and sector policy dialogue.

Sectors that have been highlighted as being of interest are renewable energy and rural development. Activities will include Cuban public and private sectors, as well as international organisations and their agencies.

“The EU and Cuba are truly turning a page, and the new chapter of our partnership begins now – with the provisional application of our new agreement,” says the EU high representative for foreign affairs and security policy Federica Mogherini.

“This agreement also completes the network of ties with Latin America and the Caribbean and confirms our continued engagement with Latin America and the Caribbean.”

The EU is Cuba’s main export and second-largest trade partner as well as its biggest foreign investor in the sectors of tourism, construction, light and agricultural industries.

In 2016, EU exports to Cuba were worth €2.04bn while imports from Cuba amounted to €0.41bn. Cuba’s main export goods are agricultural products, beverages, tobacco and mineral fuels.

The PDCA aims to create a more predictable and transparent environment that will boost Cuba’s capacity to produce and trade. The agreement does not, however, establish a free trade area between the parties or cover investment protection.

The EU says the agreement will help diversify exports from Cuba beyond the traditional products, and that it plans to help Cuban exporters improve their access to EU markets.

EU and Mercosur

Meanwhile, the EU is racing to agree on a trade deal with South American trade bloc Mercosur by the end of the year. Hailed as being the EU’s biggest trade deal to date, the pact could save EU exporters €4bn a year in tariffs. It would also mean a big new market for European vehicles and industrial goods, access to public procurement contracts and better protection of intellectual property rights.

According to the EU trade commission, the EU exports €66bn of goods and services to Mercosur each year, and an impact assessment suggests a free trade agreement could double those figures.

The deal would also demonstrate, at a time of rising populism and protectionism, that Europe is committed to open trade as well as allow it to secure an agreement with a trading group that has been heavily undermined by US President Donald Trump.

“The EU-Mercosur deal would send the same signal as the EU-Japan political agreement announced over the summer — that while the US administration draws inwards and retreats from trade liberalisation, the rest of the world forges ahead,” senior trade associate at advisory Global Counsel, Guillaume Ferlet, tells GTR. 

“The US will consequently fall behind in the race to competitive liberalisation abroad, and this has US exporters worried already. Besides, it would be additional evidence that for all its internal divisions the EU is nonetheless capable of seizing the momentum and filling the void left by the new US administration in world trade. It is the prospects of restricted access to the US market under the Trump administration that has led Japan, Mexico, Mercosur and others to seek a deal with the EU more actively, but the question has always been whether the EU can actually make good on these opportunities.”

However, the pact has been challenged with objections from EU beef farmers and producers of ethanol from crops, who want the EU to set firm limits on how much it opens markets for certain products. The European Commission argues that  imports of beef and ethanol from Mercosur will displace imports from other countries, rather than gain new market share over the domestic sector.

“There is presumably no EU deal with Mercosur that could ever fully satisfy the EU’s defensive agricultural constituencies. So the question is rather how much the Commission thinks it can offer Mercosur  to convince them a deal is worth it, without triggering opposition from EU farmers that would sink the ratification process of the deal,” says Ferlet.

Further, Brussels is about to open negotiations with Australia and New Zealand, two agricultural powerhouses. If the the Commission doesn’t lock in a concession with Mercosur before those negotiations kick into high gear it will find itself under tremendous pressure from member states if it attempts to make deals on agriculture with all three at the same time, adds Ferlet.

EU negotiations, which started 18 years ago but have seen a ramp up in momentum over the last year, include four Mercosur countries: Argentina, Brazil, Paraguay and Uruguay. Venezuela is not part of the negotiations.

In 2015, the EU accounted for 21% of total trade for the four countries. EU exports to the region have increased from €21bn in 2005 to €46bn in 2015 while Mercosur’s exports have increased from €32bn to €42bn over the same period.

Mercosur’s biggest exports to the EU are agricultural products, beverages and tobacco, mineral products and wood and paper products. The EU’s exports to Mercosur include machinery, vehicles and parts, and chemicals and pharmaceuticals.

The EU is also a major exporter of commercial services to the bloc, a sector that was valued at €20bn in 2014. In terms of foreign investment, the EU’s investment in the region rose from €130bn in 2000 to €387bn in 2014. For their part, Mercosur countries invested €115bn in the EU in 2014.