Turkey works to address trade deficit by pursuing further free trade agreements

Turkey’s trade record over the last few years has been relatively impressive. Exports have risen substantially, if erratically. In 2006, exports stood at $85.5bn. By 2014, the figure reached a record high of $157.6bn. However, imports have also grown rapidly, reaching $242.2bn in 2014. This trade deficit, which reached 10% of GDP in 2014, has been a perennial problem for the country. The country is looking to change this balance and has placed better export performance at the heart of its growth strategy up to 2023, the centenary of the Turkish Republic. The government is targeting exports of $500bn by that date as part of a plan to reach an annual GDP figure of $2trn (up from around $800bn in 2014) and a per capita income of $25,000 (up from $10,400 in 2014). The country is certainly well placed to bolster its trade volumes, both for import, export and re-export. Turkey’s geographic location gives it proximity to the markets of Eurasia, Africa and the Middle East. Some 56 countries lie within a four-hour flight of Turkey, a swathe of countries with around 1.5bn people and export potential of up to $10bn, according to EY. The republic has also developed the infrastructure to maximise this trade potential.

Freer Trade

The country scores relatively well on the Heritage Foundation’s Index of Economic Freedom 2015 for trade freedom and investment freedom. Turkey’s overall score of 63.2 ranks it 70th globally. However, it scores 84.6 on trade freedom and 75 on investment freedom (with a score above 70 denoting that a country is mostly free and a score above 80 signifying that it is free). Turkey also scores well in the World Economic Forum’s “Global Enabling Trade 2014” report, ranking 46th overall, 34th for domestic market access and 26th for its transport infrastructure. According to the report, Turkey also has a maximum score, along with 34 other countries, on Customs transparency. But this generally liberal trade regime will only get Turkey so far. The government has also been pushing hard to conclude comprehensive and limited free trade agreements (FTAs) with several partners to bolster trade.

The republic has 17 FTAs in force, is in negotiations for a further 13 and has begun preliminary discussions to commence negotiations on a further 10 with countries or country blocks including the US and Canada.

These FTAs have benefitted Turkey. In the years from 2000 to 2012, trade with FTA partners outperformed the country’s overall trade. According to a November 2013 article by Ceren Savaser at Herdem Attorneys on Mondaq.com, total exports in this period increased by 446%, while Turkish exports to FTA partners rose by 551%. By 2012 Turkey’s exports to FTA partners had reached $14.5bn, compared to overall exports of $152.5bn. In the same period, total imports to Turkey increased by 340%, whereas imports from FTA partners increased by 280%. By 2012 they had reached $10.7bn, or 4.5% of the total. As the statistics suggest, Turkey’s FTA trade, while relatively small, has outshone the country’s general trade performance. Moreover, it has benefitted disproportionately from its FTAs compared to its partners. These countries have a 4.5% share in Turkey’s imports, but a much more impressive 9.5% share in its exports. Out of Turkey’s 17 FTAs, seven partners ranked in the top-40 export destinations in 2012 (Egypt, Israel, Georgia, Lebanon, Morocco, Switzerland and Tunisia). While the government has struggled in general terms to boost exports without a concomitant increase in imports, the country has had no problems in remaining competitive with its FTA partners. Turkey’s general trade deficit stood at $84.1bn, or 10.7% of GDP, in 2012. However, with FTA partners, the country was running a $3.9bn trade surplus.

Negotiations

It is hardly surprising that the government is keen to conclude more FTAs. In April 2014 the country signed an agreement with Malaysia; negotiations with Singapore and Peru are progressing rapidly. The Turkey-Malaysia FTA is targeted to boost bilateral trade to $5bn by 2018 from around $1.1bn currently. The two countries will also abolish visa requirements for their citizens, and Malaysia has agreed to invest $1.5bn in the Turkish economy across several sectors from transport infrastructure to health care. The government also began a second round of FTA negotiations with Peru in January 2014. According to Peru’s minister of foreign trade and tourism, Magali Silva, while negotiations could take up to four years, the ministry is hopeful they will be concluded sooner. Turkey’s FTA negotiations with Singapore began in 2014. One of the sticking points in the negotiations has been Singapore’s services sector and the potential impact it could have on the local economy. Indeed, while Turkey has benefitted from such agreements in the past decade, the government is trying to remain vigilant about the potential damage that agreements with highly competitive nations could have on the local economy.

Across the Atlantic

One of the main concerns for Turkey’s trade policy currently is the potential Transatlantic Trade and Investment Partnership (TTIP), or FTA between the US and the EU. Under the terms of the Customs union between Turkey and the EU, established in 1996, Turkey is obliged to apply the same tariffs as the EU does to industrial products and processed agriculture products imported from third-party countries. As such, if TTIP were signed, US products would get preferential access to the Turkish market, while Turkish products would gain no reciprocal benefit when entering the US market. The agreement could therefore have a deleterious effect on bilateral trade with the US.

The trade balance between the two countries is already in the US’s favour. In 2014 US exports to Turkey were worth $12.7bn, while Turkish exports to the US reached $6.3bn. Nonetheless, exports to the US are growing rapidly. In 2012, they grew at 22%, almost twice the rate of exports to the rest of the world, and in 2014 they were up 12.4% year-on-year. Companies exporting automotive parts, machinery parts, and iron and steel have all gained a substantial foothold in the US market. In order for exports to the US to continue growing, Turkey is likely to look for a bilateral FTA with its North Atlantic counterpart. Discussions have been held regarding the commencement of FTA negotiations, but there are impediments to the talks that go beyond technicalities on the free movement of goods. In any negotiations, the US is likely to raise concerns about areas like freedom of press and the lack of transparency in public procurement.

Challenges

Among the steep challenges that still need to be met to boost trade and investment, one of the biggest is the issue of intellectual property and counterfeit goods, which hampers both foreign investment and progress on FTAs. Turkey remained on the watch list of the Office of the US Trade Representative (USTR) in 2014. In a report from that year, the USTR noted that several successful enforcement initiatives led to the prosecution of individuals selling counterfeit medicines online and the seizure of printing presses and materials used to counterfeit pharmaceutical packaging, as well as the seizure of pirated books, fake food products and counterfeit cancer treatments. Nonetheless, the report said, “US rights holders continue to raise serious concerns regarding the export from, and trans-shipment through, Turkey of counterfeit and pirated products. In particular, industry has expressed concern about the manufacture of counterfeited luxury goods, digital media and textiles.” Enhancement of Turkey’s copyright and intellectual property legislation could thus give a sizable boost to trade.

Another issue whose resolution could have large benefits for investment is the elimination of visa requirements for Turkish citizens visiting Europe’s Schengen area. This took a step forward in May 2015, when the EU trade commissioner and Turkish interior minister announced a decision to revise the framework and expand the scope of the EU Customs union, including eventual visa liberalisation. Turkey has gained much from the Customs union in terms of attracting foreign investors. Its proximity to both the EU and the Middle East, as well as its liberalised trade environment with many of the countries in its hinterland, make it a desirable location for production and export – a case illustrated by high FDI levels in its automotive industry. If Turkey is to get its external financing on a surer footing and meet its 2023 targets, FTA negotiations with a host of countries will be crucial in the coming years.

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The Report: Turkey 2015

Trade & Investment chapter from The Report: Turkey 2015

The Report: Turkey 2015

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