January 2026 saw the EU conclude two major trade agreements – with the Mercosur countries and with India – culminating many years of negotiations. These agreements largely eliminate trade barriers and could, over the long run, help diversify the EU’s trade relations. Ratification of the two deals is still pending, however. Writing in the latest Monthly Report, Bundesbank experts illuminate the main features of the trade agreements and explore their potential economic impact.

Trade barriers dismantled

The planned agreements will create two of the world’s largest trading areas. The EU and Mercosur, a trade bloc made up of Argentina, Brazil, Paraguay and Uruguay (as well as Bolivia in the medium-term future), together form one of the world’s largest trading areas by population. The deal with India even covers an economic area of around two billion people and accounts for around one-quarter of global economic output.

One key aspect of both trade agreements is the removal of trade tariffs. The high import tariffs that the Mercosur countries currently impose on EU industrial goods – around 35 % on motor vehicles and 14 % on pharmaceuticals – are to be substantially reduced or abolished altogether. Similar arrangements are included in the trade deal with India: tariffs on machinery (previously up to 44 %), chemicals (22 %) and pharmaceuticals (11 %) will be mostly eliminated. In return, the EU will open its market to Indian exports such as textiles, leather goods and jewellery.

Sensitive sectors protected

While tariffs will be removed or reduced in many areas, sensitive sectors will continue to be protected. The EU-Mercosur trade agreement provides for duty-free import quotas into the EU for certain agricultural products. In the trade deal with India, the EU will leave its tariffs unchanged for beef, sugar and rice, while India will continue to impose high tariffs on dairy products, cereals and poultry.

Macroeconomic impact small initially, but potentially greater

Simulations by the experts indicate that the macroeconomic effects of both agreements are likely to be small, to begin with. The additional euro area imports and exports resulting from the simulations remain below 0.1 % when measured against the bloc’s total trade volume. GDP growth is estimated to be very limited as well. The benefits of the EU-Mercosur deal are expected to be somewhat greater for Spain and Portugal than for the euro area as a whole. The small macroeconomic effects are mainly explained by the previously low importance of bilateral trade relative to aggregate value added, the experts write. For the Mercosur countries and India, the effects, though more noticeable, are modest as well.

The agreements could deliver greater benefits over the long term. Besides trade in goods, the deal with India includes closer cooperation in the services sector and regarding the mobility of skilled workers. At the same time, India is a very fast-growing economy, which could translate into significantly greater economic potential for European enterprises over the longer term, the authors write. The agreement with the Mercosur countries could help diversify supply risks in the commodities sector and bolster supply chain resilience.

Deals send a signal for global cooperation

The experts argue that the agreements could be important not only in economic terms but also because of the political signals they send. In their view, the deals demonstrated that multilateral cooperation and trade liberalisation were still possible in times of unilateral, interest-driven policies and protectionist tendencies. Working together to reconcile interests ... can provide an attractive alternative to unilateral ... policies, the experts stress. The agreements could also help make the EU less reliant on certain trading partners. What mattered now, though, was how promptly and fully the trade agreements could be implemented.