Trade profile: Turkey, caught in the middle

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.