The European Free Trade Association-Mercosur Agreement and its political and economic significance

The European Free Trade Association-Mercosur Agreement and its political and economic significance

 Carlos Madrid[1] , OBELA[2]

On 16 September 2025, in Rio de Janeiro, Brazil, the countries of the Southern Common Market (MERCOSUR), comprising Argentina, Brazil, Paraguay, and Uruguay, and the European Free Trade Association (EFTA), comprising Switzerland, Norway, Liechtenstein, and Iceland, signed a free trade agreement. This collaborative agreement, which involves all parties, addresses issues such as trade in goods and services, intellectual property rights and competition, and proposes the gradual elimination of tariffs. This article will discuss the reasons behind the agreement and analyse the economic scope of EFTA-Mercosur trade relations, with a view to creating alternative markets in the context of the trade war.

Since 7 August 2025, following Washington's announcement of reciprocal tariffs on 2 April of the same year, EFTA countries (which are not part of the European Union) have been taxed by the US at a rate higher than the base rate of 10%: Liechtenstein 15%, Switzerland 39%, Norway 17% and Iceland 15%. The US is the third-largest destination for exports from Switzerland and Iceland, accounting for 11.3% and 10.1% of their total exports, respectively. For Norway, it accounts for 3.31% according to OEC data in 2023, and for Liechtenstein, approximately 0.6%.[3]

Amidst this uncertainty, countries have been actively seeking new trade agreements. On 1 October 2025, the EFTA trade agreement with India, the Trade and Economic Partnership Agreement (TEPA), came into force. This agreement, aiming to eliminate tariffs on 92.2% of EFTA tariff lines and 82.7% of India's, is a significant step in diversifying trade relations. Mercosur also made strides by meeting with Canada on 25 August 2025, to negotiate a free trade agreement. Additionally, the long-awaited European Union-Mercosur Agreement was approved by their Governments on 4 September of the same year, although it is yet to be ratified.

The EFTA, like Mercosur, is a heterogeneous group. For example, while the members' GDPs of Switzerland and Norway in 2024 are USD 936 billion and USD 483 billion, respectively, those of Iceland and Liechtenstein are USD 32 billion and USD 8 billion, respectively, the latter as of 2023. In terms of population, they are also asymmetrical[4], respectively, totalling 15 million people as of 2025. These differences raise the question of what the smaller countries in the group contribute to the overall effort. Iceland has seafood products (Switzerland and Liechtenstein are landlocked) and aluminium. Liechtenstein, on the other hand, with a high per capita income, has a financial sector that, between 2015 and 2018, generated 61% of the country's jobs (followed by manufacturing), of which 54% of workers are foreigners, mainly from Switzerland and Austria.

Switzerland and Liechtenstein form a customs union, share a common currency, and have harmonised policies in various areas. Liechtenstein also connects Swiss trade with Europe, participates in the European Economic Area (EEA) and prevents goods that do not comply with Swiss import regulations from entering its market.

The nominal GDP of the EFTA in 2023 was USD 1.3 billion (1.2% of global GDP), accounting for 7% of the European Union's GDP. The agreement envisages the creation of a trade area with almost 300 million people. Trade between the two groups in 2024 amounted to EUR 8.3 billion. In addition, trade volumes have increased (see Figure 1). The average annual growth rate of imports from 2019 to 2024 was 10% and that of exports was 14.3%. The EFTA countries are export-oriented. Between 2003 and 2024, they reported trade surpluses. Switzerland has the most significant trade weight (see Figure 2). 

In 2024, according to OEC data, Iceland primarily exported fish and crustaceans (USD 2.9 million) to Mercosur, followed by cotton, felt, and non-woven fabrics (USD 0.7 million), as well as iron and steel products. Norway: machinery, mechanical appliances (USD 364 million), optical, medical and surgical instruments (USD 119 million) and fish and crustaceans (USD 95 million); Switzerland exported pharmaceutical products (USD 2.477 billion), organic chemicals (USD 739 million), and machinery and mechanical appliances (USD 273 million). Liechtenstein mainly exports metal products (657 million Swiss francs (CHF)), electrical equipment (328 million CHF) and machinery (403 million CHF).

The trade agreement between the EFTA countries and Mercosur will eliminate all customs duties on imports of products from the latter group within a period of up to 15 years. Some of these products include chocolate, cheese, coffee, and mate; beef and veal, poultry and pork; red wine, prepared food products (such as preserves and bakery products), and fuels such as ethanol and bioethanol. 

The elimination of tariffs on these products is a game-changer for Mercosur, as its exports to the EFTA primarily consist of primary goods. The South American group's main exports include inorganic chemicals, coffee, mate tea, spices, and food industry waste, as well as animal feed. Uruguay's main export is beef, followed by seeds for oil production. Argentina's main exports are beef, primarily to Iceland, followed by shellfish and wine. Brazil, the region's largest economy, sells aluminium oxide to Norway and Iceland, followed by coffee to Switzerland and animal feed to Norway. Argentina and Brazil export minerals, mainly gold, to Switzerland. In addition, the agreement will also reduce tariffs on European products, such as pharmaceuticals, machinery, chemicals, fish, textiles, and car parts. 

 In conclusion, the main winners of the agreement are the EFTA countries, as they will obtain agri-food products at lower prices (the agricultural sector in Switzerland and Liechtenstein is small and costly). In addition, they will sell the same goods to Mercosur that they export to the US, allowing them to replace the US market. It will enable Mercosur to diversify its trading partners; however, due to its size, the agreement will not completely replace the US market, which China is replacing for Argentina and Brazil in terms of grains and meat.