Mercosur Agreement, Tariff Reductions for Fertilisers and CBAM: What Article 27a Could Mean for the Market

The agricultural sector in focus

This week marks an important step in European trade and climate policy. After more than twenty five years of negotiations, the Member States of the European Union have politically cleared the way for the signing of the Mercosur free trade agreement with Brazil, Argentina, Uruguay and Paraguay. At the same time, the European Commission has announced the temporary suspension of tariffs on key fertilisers and pointed to a potential new Article 27a in the CBAM Regulation, which is intended to cushion severe price shocks. These developments clearly show how closely trade agreements, cost structures in the European agricultural sector and CO2 pricing through CBAM are now intertwined. For many companies, competitive positioning, cost bases and risk profiles are set to change noticeably in the coming years.

The Mercosur agreement approaching the finish line

At a meeting of the Council of Ministers in Brussels, a sufficient number of Member States voted to allow the European Commission to sign the Mercosur agreement. France, Poland, Hungary, Ireland and Austria voted against it, Belgium abstained, but they were unable to block the required majority. This clears the way for one of the largest free trade areas in the world. The agreement is expected to eliminate tariffs on the vast majority of trade flows between the European Union and the Mercosur countries. European industrial sectors, in particular the automotive industry, mechanical engineering and the pharmaceutical sector, are expected to benefit from improved market access and reduced trade barriers. Germany is considered a key beneficiary due to its export structure, as demand in Mercosur markets aligns well with German supply.

Concerns in the agricultural sector

At the same time, the agricultural sector in Europe views the agreement with great scepticism. Farmers fear increased competition from lower cost products from South America and point to the risk of rising deforestation and weaker environmental standards in partner countries. They see a danger that the high level of protection for food safety and for animal and plant health in the European Union could be undermined. This tension between export opportunities for industry and protection interests in agriculture forms the political backdrop for the Commission’s recent accompanying measures. Tariff relief for fertilisers as support for the agricultural and food sector As a direct response to these concerns, the Commission has announced the temporary suspension of the remaining most favoured nation tariffs on key nitrogen fertilisers, in particular ammonia and urea, with the option to include additional fertilisers if needed. The aim is to reduce input costs for farmers and the wider agricultural and food sector, especially at a time when competitive pressure from imports is increasing. The Commission presents this step as a rapid and targeted measure. By lowering tariffs on fertilisers, the competitiveness of European agriculture is to be safeguarded without calling into question the overall trade policy direction. The message can be summarised very simply. If agricultural imports from South America become more competitive through the Mercosur agreement, European farmers should at least benefit from lower costs for critical inputs such as fertilisers. The measure also shows that traditional trade policy instruments continue to be used intensively alongside new approaches such as CBAM. For companies that trade in fertilisers or use them, it will be crucial to understand how the combination of lower tariffs and future CBAM costs will affect prices and margins.

Article 27a as an emergency mechanism within CBAM

In parallel with the relief on fertiliser tariffs, the Commission has pointed to a new Article 27a proposed for inclusion in the CBAM Regulation. This provision is intended to create an emergency mechanism within CBAM that can be activated if CBAM itself seriously impairs the functioning of the internal market under serious and unforeseen circumstances. Article 27a would oblige the Commission to monitor the impact of CBAM on prices and competition in the internal market. If the Commission concludes that the inclusion of a specific good in CBAM leads to severe disruptions of the internal market under exceptional conditions, it could propose by means of a delegated act to temporarily remove this good from Annex I of the CBAM Regulation. The removal would apply only for as long as the disruptive conditions persist. Once the situation normalises, the product would again fall within the scope of CBAM. The provision is not yet in force. It still needs to be adopted by the European Parliament and the Council. It is also by no means a general exit from CBAM. Article 27a is designed as a narrowly defined instrument for clearly specified situations with strict conditions. The Commission would have to demonstrate that CBAM is to a significant extent the cause of the severe market disruption and not merely that prices are high or that certain interest groups are dissatisfied. An important technical point is the possibility of retroactive application. Goods could be removed from the CBAM scope with effect from the point in time at which the conditions were first met in the view of the Commission. This is particularly relevant from a timing perspective. CBAM certificates can only be purchased from February 2027 onwards, so a retroactive removal affecting only imports from 2026 would not result in a burden from certificates already purchased. If such a decision were taken later, when certificates are already in use, a reimbursement mechanism would need to be provided.

How Mercosur, fertiliser tariffs and Article 27a are connected

Formally, Article 27a is designed to be sector neutral. In principle, the rule could be applied to any CBAM good. Politically, however, the current discussion is strongly shaped by the situation in fertilisers and the agricultural sector. Mercosur is likely to increase competitive pressure on European farmers. The temporary suspension of fertiliser tariffs directly addresses this concern by reducing the tariff component of costs. Article 27a adds a second layer, namely the possibility, in extreme cases, of intervening directly in the CBAM scope if price effects become so strong that they threaten the functioning of the internal market. While tariffs are being reduced, CBAM in turn leads to an increase in costs. If Article 27a becomes law, the European Commission could use it to resolve this contradiction and pursue a more coherent trade policy.

Implications for the fertiliser industry

For importers and traders of fertilisers, a new price constellation is emerging. Tariff relief reduces one cost component of imports. CBAM will introduce an additional component that depends on embedded emissions and the European CO2 price. The proposed option of temporarily removing certain goods under Article 27a increases regulatory uncertainty, but it is explicitly intended for rare exceptional situations. Trade and procurement strategies should consider both the most likely baseline scenario and the possibility of extraordinary interventions.

What companies should do now

Across all affected sectors, several practical conclusions can be drawn. Companies should not base their planning on possible exemptions or later suspensions. The prudent and robust assumption is that CBAM will apply as intended, both for existing and future product groups. Companies should align their business planning to account for the combined effects of trade agreements, tariff changes and CBAM costs. For fertilisers and agricultural products, this means in particular modelling the interaction between Mercosur market access, the suspension of tariffs and CBAM related CO2 costs. Second, high quality emissions data along the supply chain remains crucial. CBAM compliance, cost forecasts and the assessment of potential political changes all depend on reliable information on processes and suppliers.

Support in implementation

The parallel development of the Mercosur agreement, tariff relief for fertilisers and the proposed CBAM Article 27a clearly demonstrates how closely climate policy, trade rules and sectoral competitiveness are intertwined today. For many companies, this means additional complexity, but it also opens opportunities to reposition supply chains, products and markets. If you need support in analysing the combined effects of Mercosur, tariff changes and CBAM on your business, modelling CBAM cost scenarios for fertilisers or other goods, or adapting your processes, data structures and IT systems to the evolving CBAM framework, you are welcome to contact us directly at helge@kolum.earth.