MERCOSUR Agreement: Implications for Turkish and Hungarian Companies in EU Trade

Introduction

MERCOSUR (Southern Common Market) is a regional trade bloc in South America comprising Argentina, Brazil, Paraguay, and Uruguay, with Bolivia in the process of becoming a full member. Established in 1991 with the Treaty of Asunción, MERCOSUR aims to promote economic integration, free trade, and the movement of goods, services, and people among its member states. The bloc represents a combined GDP of over $2.9 trillion and a population of around 295 million people (World Bank, 2023).

Over the years, MERCOSUR has negotiated trade agreements with major global economies, including the European Union (EU). A proposed EU-MERCOSUR Free Trade Agreement, which has been under negotiation since 1999, is expected to have significant implications for trade relations worldwide, including for businesses in Türkiye and Hungary that engage in trade with the EU.

EU-MERCOSUR Free Trade Agreement is expected to have significant implications for businesses in Türkiye and Hungary

Key Provisions of the MERCOSUR-EU Trade Agreement

The EU and MERCOSUR reached a political agreement in 2019, aiming to remove trade barriers and boost bilateral trade. The key aspects of the agreement include:

• Tariff Reduction: The deal aims to eliminate tariffs on 91% of goods traded between the two regions over time (European Commission, 2023).

• Market Access: EU businesses will gain better access to MERCOSUR’s large consumer market, while MERCOSUR exporters will find it easier to sell in Europe.

• Intellectual Property Protection: Strengthening IP rights and geographical indications for EU products in MERCOSUR countries.

• Environmental and Labor Standards: Commitments to uphold environmental regulations and labor rights.

While the agreement has not yet been ratified due to political and environmental concerns, it is expected to reshape trade dynamics in the EU and beyond.

Potential Impact on Turkish and Hungarian Businesses

Both Türkiye and Hungary have strong trade ties with the EU, making the MERCOSUR agreement a factor that could influence their market position, export competitiveness, and trade strategies.

1. Increased Competition for Turkish and Hungarian Exporters

• Hungary’s trade with the EU accounts for over 75% of its total exports (Eurostat, 2023), making it highly dependent on European trade policies.

• Türkiye has a Customs Union with the EU, meaning Turkish exports benefit from tariff-free access to EU markets for industrial goods.

With the EU-MERCOSUR agreement potentially lowering tariffs on South American exports, Turkish and Hungarian companies could face increased competition in sectors such as automotive, machinery, and food products.

For instance:

• Brazil and Argentina are major agricultural exporters. Lower tariffs could give them an edge over Hungarian and Turkish agricultural exports to the EU, particularly in meat, grain, and soy products.

• Brazil's automotive sector is growing rapidly, and reduced tariffs on Brazilian vehicles could pose a challenge to Hungarian auto part manufacturers, which are heavily linked to German carmakers.

2. Supply Chain and Raw Material Benefits

The MERCOSUR agreement could also benefit Turkish and Hungarian manufacturers by making South American raw materials cheaper:

• Türkiye’s steel and textile industries rely on raw material imports, and tariff reductions could lower costs on imports of MERCOSUR-origin iron, soy, and chemicals.

• Hungary’s pharmaceutical and food processing industries may benefit from cheaper agricultural imports from South America.

3. Competitive Advantage for EU-Based Businesses in Türkiye and Hungary

EU companies operating in Türkiye and Hungary could gain a cost advantage by accessing cheaper inputs from MERCOSUR while still benefiting from free trade within the EU.

• European automotive manufacturers with production sites in Hungary (such as Audi and Mercedes-Benz) might access cheaper car parts from Brazil.

• European food producers in Hungary could face lower costs if they import Brazilian or Argentine meat and dairy products at reduced tariffs.

Challenges and Considerations

• Regulatory Barriers: Turkish businesses outside the EU’s trade agreements with MERCOSUR may not enjoy the same tariff reductions.

• Environmental and Compliance Issues: Some European policymakers are pushing for stricter environmental conditions, which could delay or modify the deal.

• Potential for Trade Diversion: If MERCOSUR exports gain preferential EU access, EU businesses might shift supply chains away from Turkish and Hungarian partners.

Conclusion

The MERCOSUR agreement has the potential to reshape global trade by strengthening economic ties between South America and the EU. While the deal could bring cost benefits in supply chains, Turkish and Hungarian exporters may face increased competition in key industries like agriculture, automotive, and manufacturing. At the same time, Non-EU businesses could take advantage of exposure to MERCOSUR markets, enhancing their competitiveness, by preparing to invest in building business functions in Hungary or Türkiye.

As negotiations continue, businesses in Türkiye and Hungary should monitor developments closely and explore strategies to diversify exports, strengthen regional partnerships, and optimize supply chains to remain competitive in the evolving trade landscape.

References

• World Bank (2023). "MERCOSUR Economic Data." Retrieved from: https://www.worldbank.org

• European Commission (2023). "EU-MERCOSUR Trade Agreement Overview." Retrieved from: https://trade.ec.europa.eu

• Eurostat (2023). "Hungary’s Trade with the EU." Retrieved from: https://ec.europa.eu/eurostat

• OECD (2023). "Türkiye-EU Trade Relations and Customs Union." Retrieved from: https://www.oecd.org