Trade pro­file: Turkey, caught in the mid­dle

Financial Nigeria Magazine - - Contents - By Strat­for

Eco­nomic Back­ground

Sit­u­ated at the cross­roads of Europe, Asia and the Mid­dle East, Turkey has long ben­e­fited from the ro­bust trade net­works that pass through it. Ad­vances in tech­nol­ogy have di­min­ished the role Turkey's geo­graphic po­si­tion plays in its econ­omy to­day, if only slightly. Nev­er­the­less, the lo­ca­tion that his­tor­i­cally has made the coun­try a hub still gives it an ad­van­tage in in­dus­tries such as ship­ping and lo­gis­tics. Turkey's po­si­tion, more­over, al­lows it to choose its re­gional trade part­ners. Hav­ing fo­cused on ex­pand­ing its eco­nomic ties with Europe for most of its mod­ern his­tory, Turkey un­der­stands the lim­i­ta­tions of its re­la­tion­ship with the Euro­pean Union. But as it works to di­ver­sify its trade ties with part­ners in the east, it will have to tread lightly to avoid jeop­ar­diz­ing its most im­por­tant ex­port mar­ket and the one to which it is closely legally bound.

Mod­ern Turkey emerged from the ru­ins of the Ot­toman Em­pire about a cen­tury ago, in the wake of World War I. Dur­ing the tur­bu­lent tran­si­tion, the new coun­try fo­cused on con­sol­i­dat­ing and sta­bi­liz­ing its econ­omy while also en­cour­ag­ing growth. Mustafa Ke­mal Ataturk, the first Turk­ish pres­i­dent, es­tab­lished state-owned en­ter­prises in the 1920s and nur­tured Turkey's tobacco, cotton and sugar in­dus­tries, the most lu­cra­tive por­tions of what was then the coun­try's most im­por­tant eco­nomic sec­tor, agri­cul­ture. Turkey soon im­proved its trans­port in­fra­struc­ture with a rail­road sys­tem and more ro­bust road­ways, which, to­gether with a group of newly formed state banks, laid the ground­work for in­dus­tri­al­iza­tion af­ter World War II. The govern­ment in Ankara adopted im­port sub­sti­tu­tion poli­cies to shield the nascent in­dus­trial sec­tor from ex­ter­nal com­pe­ti­tion as it de­vel­oped.

And de­velop it did, though agri­cul­ture stayed at the fore­front of Turkey's eco­nomic growth dur­ing the 1950s and 1960s – hardly sur­pris­ing con­sid­er­ing the coun­try's abun­dant arable land. The govern­ment's im­port sub­sti­tu­tion poli­cies, in­clud­ing high tar­iffs and cap­i­tal con­trols, lim­ited trade un­til af­ter a mil­i­tary coup in 1980 (in­spired, in part, by the slug­gish econ­omy). The new ad­min­is­tra­tion be­gan in­tro­duc­ing re­forms, lift­ing price and cap­i­tal con­trols and re­duc­ing sub­si­dies in hopes of en­cour­ag­ing for­eign di­rect in­vest­ment. At the same time, it strove to in­crease in­dus­trial pro­duc­tion for ex­port. Turkey quickly ex­celled at man­u­fac­tur­ing tex­tiles, but durable goods and con­sumer ap­pli­ances proved to be among its best ex­ports.

Turkey's white goods sec­tor, in par­tic­u­lar, has thrived since it got its start in the mid-1950s. Turk­ish com­pa­nies such as Teba and Ves­tel man­u­fac­ture ma­chines for in­ter­na­tional brands like Singer and Elec­trolux. An­other firm, Arce­lik, which makes goods like re­frig­er­a­tors, wash­ing ma­chines and dish­wash­ers un­der its own name­plate, leads both do­mes­tic and ex­port cat­e­gories for those prod­ucts. By fo­cus­ing so heav­ily on ex­ports, Turkey's white goods sec­tor has man­aged to over­come the plateau in con­sump­tion and the lim­its in de­mand in­her­ent in the con­sumer goods mar­ket. The coun­try's lo­ca­tion of­fers its man­u­fac­tur­ers easy ac­cess to ex­port mar­kets in the Mid­dle East, where the mid­dle class has been grow­ing steadily, and in Europe, where Turk­ish goods of­ten have a com­pet­i­tive price edge on their more ex­pen­sive Euro­pean coun­ter­parts. Turkey's ex­port mar­ket also has helped the coun­try weather po­lit­i­cal shocks and en­su­ing pe­ri­ods of de­pressed do­mes­tic

Trade Pro­file: Turkey, Caught in the Mid­dle

con­sump­tion. Af­ter the failed coup in 2016, for ex­am­ple, Turkey leaned on its ex­ports to off­set tum­bling in­ter­nal con­sump­tion spurred by an un­steady lira, ris­ing in­fla­tion and slug­gish for­eign di­rect in­vest­ment.

Given the im­por­tance of ex­ports to its econ­omy, Turkey is al­ways on the look­out for op­por­tu­ni­ties to ex­pand its in­ter­na­tional trade ties. The Euro­pean Union is cur­rently Turkey's largest ex­port mar­ket. Ankara signed a for­ma­tive agree­ment with the Euro­pean Eco­nomic Com­mu­nity in 1963, and in 1995, it en­tered a cus­toms union with the bloc as part of ac­ces­sion talks. The deals form the back­bone of Turkey's in­ter­na­tional trade, but be­cause the coun­try still has yet to gain EU mem­ber­ship, the ar­range­ments don't al­ways work to its ad­van­tage. The cus­toms union, for in­stance, pro­vides Turkey ac­cess to the EU mar­ket but not nec­es­sar­ily to the mar­kets of en­ti­ties with which the Euro­pean Union has signed free trade deals. Those en­ti­ties, on the other hand, re­ceive ac­cess to Turkey's mar­ket by virtue of their agree­ments with the bloc. Fur­ther­more, the 1963 Ankara Agree­ment re­quires Turkey and the Euro­pean Union to keep a com­mon ex­ter­nal tar­iff on in­dus­trial goods for coun­tries with which the bloc has es­tab­lished trade deals. On the plus side, how­ever, the cus­toms union af­fords EU mar­ket ac­cess to coun­tries that have free trade agree­ments with Turkey, mak­ing it an at­trac­tive trade part­ner.

The coun­try's Econ­omy Min­istry is work­ing to turn the cus­toms union deal more to its favour by ne­go­ti­at­ing to in­clude ser­vices, which ac­count for nearly twothirds of Turkey's gross do­mes­tic prod­uct. Re­gard­less of whether it sways Brus­sels, though, stay­ing in the cus­toms union makes sense for Turkey – at least for now. A re­cent study by HSBC found that eight of Turkey's largest fu­ture ex­port mar­kets lie out­side the Euro­pean Union. With that in mind, Ankara is look­ing to build new trade part­ner­ships east of the Con­ti­nent.

Di­ver­si­fy­ing its trade re­la­tions while pre­serv­ing its vi­tal ties to the Euro­pean Union will be a tricky task for Turkey. The coun­try has had some suc­cess forging new part­ner­ships. Turkey re­cently signed free trade agree­ments with Viet­nam and Sin­ga­pore, for ex­am­ple. It also tripled its ex­ports to Qatar since the Gulf coun­try's lat­est dis­pute with Saudi Ara­bia be­gan. But Viet­nam and Sin­ga­pore al­ready had es­tab­lished trade re­la­tions with the Euro­pean Union, in­dica­tive of the usual pat­tern of the EU sign­ing a trade pact and Turkey scram­bling to set up some­thing sim­i­lar with the same trad­ing part­ner, per the re­stric­tions in the cus­toms union. Turkey will strug­gle to cob­ble to­gether pacts, beyond sim­ple free trade agree­ments, with part­ners out­side the Euro­pean Union's port­fo­lio, such as the Eurasian Eco­nomic Union (EEU). De­spite ex­press­ing in­ter­est in strik­ing a trade deal with that bloc, Ankara un­der­stands that any at­tempt to do so would meet with ob­jec­tions not only from within the Euro­pean Union but also from EEU mem­bers such as Ar­me­nia. Turkey raised the prospect only as a means of ne­go­ti­at­ing bet­ter trade terms with the Euro­pean Union, though it's doubt­ful the tac­tic will work con­sid­er­ing the en­dur­ing dif­fer­ences and height­ened ten­sion cur­rently between Ankara and Brus­sels. As much as Turkey de­pends on the Euro­pean Union for trade, it also de­pends on the Euro­pean Union for bro­ker­ing trade deals that Turkey can fol­low and forge on its own.

Trade Im­pli­ca­tions

Of­fen­sive In­ter­ests

Turkey is fight­ing to bring down trade bar­ri­ers for its white goods sec­tor, which faces stiff com­pe­ti­tion abroad. Be­cause of the lop­sided cus­toms union agree­ment, white goods pro­duc­ers in the Euro­pean Union have ac­cess to mar­kets that their

Turk­ish coun­ter­parts can't en­ter. Turkey will also have to con­tend with Asian white goods man­u­fac­tur­ers, par­tic­u­larly in China, as it tries to push its prod­ucts east. The com­pe­ti­tion with East Asia's man­u­fac­tur­ing jug­ger­nauts will limit how much far­ther beyond their ex­ist­ing mar­kets Turkey's ex­ports can reach.

Construction is a com­pet­i­tive sec­tor in Turkey's econ­omy and one that Ankara has turned to its ad­van­tage. The coun­try has cap­i­tal­ized on the de­mand for construction in nearby na­tions such as Iraq and the Gulf states, as well as the solid rep­u­ta­tion of Turk­ish firms, and it will con­tinue seek out op­por­tu­ni­ties to build the sec­tor. In ad­di­tion to boost­ing Turk­ish com­pa­nies' prof­its more than do­mes­tic de­mand ever could, construction projects in the Mid­dle East and in African coun­tries such as Kenya and So­ma­lia en­able Turkey to es­tab­lish a pres­ence in strate­gic the­aters. Although Turkey's do­mes­tic firms strug­gle to un­der­cut some of their com­peti­tors, par­tic­u­larly Chi­nese com­pa­nies, they are renowned for the qual­ity of their work. Ankara also uses Turkey's construction prow­ess as a form of aid by help­ing un­der­de­vel­oped Mus­lim coun­tries around the world build and fund schools. To­gether, the projects fa­cil­i­tate Turkey's strat­egy to raise its pro­file abroad.

Sim­i­larly, the qual­ity of Turkey's air­line ser­vices is an as­set for the coun­try. Turk­ish Air­lines has grown to be­come a ma­jor car­rier, not just re­gion­ally, but in­ter­na­tion­ally. As of this year, the air­line flies to more des­ti­na­tions than any other car­rier in the world, thanks in large part to its home coun­try's lo­ca­tion. Turkey's widerang­ing travel net­work has also helped it build healthy tourism and fi­nan­cial ser­vices sec­tors, two of the main con­sid­er­a­tions driv­ing Turkey to broaden its cus­toms union with the Euro­pean Union.

Man­u­fac­tured goods are an­other of Turkey's strong suits. The coun­try ex­ports the lion's share of its prod­ucts, such as cars and tex­tiles, to the Euro­pean Union. It is also work­ing to in­crease its share of global ex­ports in goods like mil­i­tary equip­ment and ships.

De­fen­sive In­ter­ests

Agri­cul­ture, once an eco­nomic main­stay, is still an im­por­tant sec­tor for Turkey, pro­vid­ing 7 per­cent of its GDP. And though Turk­ish farms pro­duce fruits, veg­eta­bles and nuts that travel to ex­port mar­kets the world over, Ankara guards its agri­cul­tural sec­tor. Turkey has levied sub­stan­tial tar­iffs on im­ported agri­cul­tural goods, in­clud­ing wheat, corn and toma­toes.The Turk­ish govern­ment pushed to ex­clude agri­cul­ture from its cus­toms union agree­ment with the Euro­pean Union in light of the sec­tor's po­lit­i­cal im­por­tance. By some es­ti­mates, agri­cul­ture em­ploys as much as 30 per­cent of Turkey's pop­u­la­tion. Keep­ing farm­ers happy is also a com­po­nent of the rul­ing Jus­tice and De­vel­op­ment Party's strat­egy to stay in power. To that end, the party has in­sti­tuted poli­cies to pro­tect farm­ers fi­nan­cially, for in­stance by of­fer­ing them in­come sup­port based on the num­ber of acres they cul­ti­vate. Main­tain­ing tight con­trol of the agri­cul­tural sec­tor also gives Ankara a tool it can use to sub­due mi­nor­ity pop­u­la­tions, such as the Kurds, should it see fit.

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