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A good fit: Building stronger Mexico-Turkey trade links

Turkey and Mexico have each seen their share of world trade soar in the past two decades. The challenge now is to continue that dynamic growth in the years ahead - growth that banks can help facilitate.

Mexico and Turkey are both economies with great potential. In 2013, Turkey and Mexico (along with Nigeria and Indonesia) were identified as MINT  economies – the next emerging economic giants after the BRICs (Brazil, Russia, India and China) – due to their rapid economic growth and emerging middle class populations[1]. Both countries, blessed with strong geo-strategic positions (Turkey as the gateway to Europe and the Middle East, and Mexico as the bridge between North and Latin America) have seen a substantial rise in their share of world trade in recent years. The total value of Mexican goods exports has increased almost threefold since 1999, soaring to $374 billion in 2016[2], while Turkey’s goods exports increased fivefold over the same period to $142.6 billion[3].

Both countries have an excellent foundation on which to build with respect to trade. Turkey maintains a strong relationship with the European Union (EU) – its primary trading partner – with exports increasing by 7% year-on-year in 2016[4] to reach over $65 billion[5]. Similarly, approximately 84% of Mexico’s exports are with its NAFTA partners (Canada and the USA), totalling $313.4 billion in 2016[6].

Clearly, both have been highly successful at exporting to the developed behemoths next door – lying within trade blocs of one form or another. But diversification of trading partners would be a key way of stimulating growth, particularly as economic uncertainty in their core export markets continues, and China – a key partner for both – faces stagnation of its own.

While diversification efforts have certainly been made – Turkey has now established free trade agreements (FTAs) with 18 countries, while Mexico has developed FTAs with some 40 nations – the potential offered by exporting further afield remains, so far, relatively untapped. And Turkey and Mexico have only scratched the surface of the opportunities inherent in their bilateral trading relationship.

The benefits of growing Turkey-Mexico trade

Trade between Mexico and Turkey is gaining momentum, growing fifteenfold between 1999 and 2016[7]. Mexican multinationals such as building material conglomerate Cemex, food manufacturer Gruma, and Zinc Nacional have all recognised Turkey as an attractive investment opportunity; while Turkish multinationals such as Orphan Holding, Tekno Kauch and Toto Max now all operate in Mexico.

Yet relations between the two countries could be much stronger. Turkey’s trade with the whole of the Latin American and Caribbean region still only accounts for approximately 2% of its total commerce[8]. In areas such as machinery, construction and tourism, there remains huge potential for growth. 

The opportunities that stronger Turkey-Mexico ties offer are palpable, not only in direct exports, but also with respect to opening doors for each other elsewhere. For example, Turkey could leverage the relationship to improve its access to North and Latin America. Similarly, Mexico would be better positioned to grow its market presence in the EU, Middle East and Africa.

The value of such ties are increasingly being understood on both sides. In 2013, to strengthen its relationship with Latin American countries, Turkey became an observer member of the Pacific Alliance (a trade body comprising of Chile, Colombia, Mexico and Peru). Moreover, in recognition of the importance of Turkey’s membership (and its unrivalled position as the link between Europe and Asia), the Alliance subsequently established a joint trade promotion office in İstanbul[9].

Facilitating trade: the role of government

There is much to be gained from Turkey and Mexico boosting their relations, and both governments have demonstrated interest in strengthening ties. Negotiations for an FTA were initiated in 2013, and while progress stalled – with the last round of negotiations taking place in July 2015 – momentum is expected to build in 2017, with Mexican Foreign Minister Luis Videgaray recently stating that Turkey and Mexico have “agreed to an accelerated push to try and finalise the deal”[10]. Certainly, with concerns regarding increasing protectionist trends emerging from the US and the potential renegotiation of NAFTA, increasing trade ties with Turkey could be of particular benefit for Mexico, whose future with its largest trading partner remains somewhat unclear.

Facilitating trade: the role of banks

Banks have an important role to play in facilitating this important trade corridor. If the opportunities that each country has to offer are to be grasped, local businesses need to have confidence in the trade processing methods available to them. In the digital era, customers are increasingly expecting banks to provide effective, efficient trade processing irrespective of time, location or borders.

In well-established trading relationships (such as those between Mexican and US corporations, for example), there continues to be a growing preference for open account solutions over cumbersome, paper-based letters of credit (LCs). But open account trading offers little in the way of security and so is not the ideal solution for clients establishing new trading partnerships with counterparties in less familiar markets. If Turkey-Mexico trade is to flourish, banks must provide solutions that combine the security properties of the LC, and the ease, efficiency and cost-effectiveness of open account trade.

In trade finance circles this is a familiar dilemma, yet one being given a digital twist thanks to increasingly sophisticated technology innovation. Automated technology, such as electronic data-matching, can now receive and verify original LC documentation online, allowing the inefficiency and human error associated with manual processing to be eradicated, while also providing security, enhanced processing speed, and improved visibility.

Such technology is arguably just the start of a digital revolution in trade finance. With trade transactions proving both labour and document intensive, the sector is ripe for change and innovation through technology. For example, it is becoming clear that distributed ledger technology could hold a great deal of promise with regard to trade. Proof of concept (POC) projects exploring solutions that utilise this technology to enrich transactions are already gaining traction. Indeed, bodies such as the R3 consortium (comprising of over 70 financial institutions[11]), are now involved in efforts to bring distributed ledger technology to the trade finance industry.

Technology can play a key role in enhancing the trade space, and banks need to be committed to leveraging new capabilities and delivering solutions that will be of most benefit to clients. 

The value of partnership

The cost of investing into new digital capabilities can be a significant challenge for many smaller banks (particularly in light of the financial burden associated with an increasingly challenging regulatory environment). Yet, by partnering with specialist global trade service providers, local banks can provide such innovative technology platforms to their clients without suffering the financial burden of proprietary development. These non-compete partnerships combine the skills and expertise of both parties, with global trade service providers benefitting from invaluable local market expertise.   

Expanding trade between Turkey and Mexico offers an exciting opportunity for exporters in both countries. In practice, deepening ties will be a significant undertaking, not just for the Turkish and Mexican governments, but also for banks. If Mexico-Turkey trade is to flourish, banks must provide digital trade processing solutions that satisfy today’s requirements for efficiency and security, and leverage new technologies to provide the best service and trade experience for clients.

By forming non-compete partnerships and fusing the experience and capabilities of local and global banks, banks in both countries can provide businesses with the support necessary to approach new Turkey-Mexico opportunities with confidence and success.

The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.

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