Wednesday, 23 December 2015

Turkey does not want to be left out of the Trans-Atlantic community

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By Ozan Serdaroğlu

December 23rd, 2015, The Turkey Analyst

The Turkish Justice and Development Party (AKP) government has always cherished strong economic bonds with the West, recognizing that both the EU and the U.S. are vital for Turkey’s foreign trade. Developments during the second half of 2015 show that further deepening of economic relations with Western countries has become a top priority. This new posture may also bring about considerable changes in domestic economic governance, ushering in a convergence of goals between the government and the economic elites in Turkey.

 eu-tr-tradeBACKGROUND: In contrast to its foreign policy, which has generated problematic political relations with the transatlantic community, the AKP’s economic agenda continues to reflect a no-frills approach when it comes to trade. The Turkish government now sets 2016 as a target year for further deepening economic relations, notably through updating the 1995 Customs Union Agreement with the EU; it is also pushing for Turkey’s inclusion in the “Transatlantic Trade and Investment Partnership” (TTIP) between the EU and the United States. Such targets are in fact well in line with government’s enduring economic policies, considering that Turkey has been building ever stronger economic ties with these two blocs since AKP’s access to power in 2002.

Most strikingly, the trade volume between the EU and Turkey had increased from 30 billion Euros in 2002 to 120 billion Euros by 2014. As of October 2015, Turkey was the EU’s fifth biggest trade partner with a volume of US$141 billion during the first ten months, ahead of countries like Japan, Brazil, South Korea and India. Five EU member states (Germany, United Kingdom, Italy, Spain and France) are among Turkey’s top ten markets. The U.S. ranks fifth on the list with imports worth US$5 billion, again for the first ten months of 2015. During the same period, the trade volume between the two countries reached US$15 billion, a considerable raise compared to the 6,5 billion dollars for the whole year of 2002, according to the Turkish Statistical Institute.

Nevertheless, the commercial dynamics are not harmlessly in favor of Turkey since it imports more than it exports. By October 2015, Turkey’s trade deficit amounted to US$12 billion with the EU and US$4.5 billion with the United States. In 2014, it was $20 billion and $6 billion respectively, denoting no significant change.

Despite the deficit, trade with the EU and the U.S. remain indispensable for the growth of the Turkish economy, not merely because they are crucial markets, but also due to a paradoxical development scheme. A large amount of what Turkey imports is used in production cycles without being sold on the consumer market. Turkey needs to import production factors like energy, raw materials, tools, pieces or spare parts to manufacture the products it exports. In this regard, Turkey’s trading partners are at the same time both its major markets and suppliers.

During 2014, Turkey mainly imported primary products (with a value of 14 billion Euros), base metals (9 billion Euros), mineral products (5.9 billion Euros), mineral fuels and lubricants (5.7 billion Euros) from the EU, according to the European Commission’s Directorate General for Trade.  Correspondingly, the main import products from the U.S. were oil (US$2 billion), iron and steel (US$1.9 billion), machinery (US$1 billion) and cotton yarn and fabric (US$802 million), according to the Office of the United States Trade Representative.

In light of above figures, the AKP’s upcoming economic priorities appear disciplined by the general imperatives of foreign trade. Additionally, two fundamental drives currently push the Turkish government to seek ways to deepen economic relations with the EU and the U.S.

First, Turkey is compelled to strengthen national immunity against “the long arc of instability stretching from the Maghreb to the Afghanistan-Pakistan border.” Turkish foreign policy in the Middle East has been economically costly: the loss of the Libyan and Syrian markets, the cancellation of the free trade agreement with Egypt and recently, the deep crisis with Russia, Turkey’s second biggest trade partner. Amid the turmoil, Ankara has recourse to new remedies. Already in May 2015, EU trade commissioner Cecilia Malmström and then Turkish Minister of Economy Nihat Zeybekçi agreed to modernize the customs union agreement and improve bilateral trade relations. These targets were also reiterated during the recent G20 summit in Turkey.  During the following EU-Turkey summit, the two sides also agreed to develop cooperation in energy, economy and monetary policies.

Second, the EU and the U.S. are set to sign the TTIP agreement which principally stipulates free trade mechanisms, harmonization in product regulation and protection of investor rights. If achieved, the TTIP will also technically include Turkey on unequal terms. With respect to articles 16 and 55 of the EU-Turkey customs union, Turkey is bound by all trade agreements signed between the EU and third countries, implying that American producers will require the right to enter the Turkish market with zero custom duties. The American market will however still remain protected unless the U.S. government signs a similar agreement with Turkey. According to the projections by the German Institute for Economic Research and Brookings Institute, being left out of the TTIP would cost Turkey 2.5 percent of its annual gross national income (US$20 billion) and 100,000 domestic jobs. The TTIP has a larger purview than the EU-Turkey customs union, which means that the prerequisite of Turkey’s participation would amount to expanding the customs union to all sectors subject to the partnership.

IMPLICATIONS: In pursuit of Turkey’s economic goals, the AKP government seems to be envisaging updating the customs union with the EU, which would open up the prospect of participation in the TTIP process. However, these engagements require deep transformations in Turkey’s economic governance, raising the question whether the government will be similarly engaged in a new reform process.

According to the May 2015 agreement between the EU and Turkey, the customs union will be expanded to the service sector (70 percent of economic activities in Turkey), primary agriculture (going beyond processed products) and public procurement sectors. As the customs union is currently limited to the industry, such an expansion would contribute to contracting the trade deficit with the EU, particularly by means of the primary agriculture sector where Turkey enjoys a competitive advantage.  Some liberalization in public procurement could also allow Turkey’s competitive construction and infrastructure companies to sign contracts in the EU. Yet, equally important would be the harmonization of legislation, which may deeply change the ways of doing business in the AKP’s “New Turkey”.

The AKP government will probably be pushed forward in this direction by Turkey’s economic elites, mainly represented by the Turkish Industry and Business Association (TÜSIAD), whose members account for 80 percent of Turkish foreign trade. The association published a report in October 2015 entitled, “A New Era for the Customs Union and the Business World”, where it emphasized the need of harmonization in most critical areas which largely determine the relationship between the AKP government and private actors.

Among these, the public procurement sector has been most controversial under AKP rule. Since 2002, the procurement law has been changed one hundred and sixty three times by the government, and most contracts have been reported to be awarded to pro-governmental business circles at low bidding prices. The EU-funded “Business anti-corruption portal” reports that several companies have been repeatedly preferred in procurements and it recommends European companies to use public procurement due diligence tools to reduce corruption risks. In this sense, a more competitive public procurement system is required.

The TÜSIAD report also emphasizes the need for reforming the state aid system. The expansion of the customs union would entail more transparence in the distribution scheme in order to avoid discrimination or other distortions to fair competition. In this sense, the EU institutions can be expected to make an important difference.

Similarly, another positive side effect of modernizing the customs union between the EU and Turkey would be enhanced juridical guarantees in case of legal disputes. Currently the main organ of administration and arbitration is the EU-Turkey Association Council which is a political entity composed of governmental representatives. This mechanism tolerates political discretion in handling matters of dispute. The involvement of independent arbitration institutions would coerce the Turkish government to respect its commitments stemming from the customs union.

However, Turkey’s integration in the EU economy will never be realized without participating in the trade dialogue with important third parties like the United States. This has come to be appreciated increasingly after the emergence of a TTIP perspective. At this point, the priority of the Turkish economic elite converges with the aim of the AKP government; the former expects that the Turkish point of view will come to be more reflected in similar trade initiatives. The recent TÜSIAD report clearly reflects this vision, considering the expansion of the customs union as the beginning of Turkey’s participation in the TTIP and consolidating its status as a member of the transatlantic community.

As stressed by the TÜSIAD President Canan Başaran-Symes, the Turkish business elite see the rapprochement with the EU not purely as a technical process but as a fundamental step of “Turkey’s integration with the transatlantic world’s liberal values”. The anticipation is that the expansion of the customs union would contribute to such integration by altering the role political actors in the economy and achieving a more stable and competitive economic system.

CONCLUSIONS: The AKP government has made solid commitments for the sake of economic obligations, at least discursively. However, these cannot simply be pulled off by straightforward technical measures; they require a considerable change in the government’s economic policies. In the developing context, this will certainly be closely supervised by Turkey’s economic elites.

On the other hand, it would be premature to assert an inevitable conflict. The Turkish government and business circles share a common goal of persuading EU and U.S. policymakers in admitting Turkey’s participation in their mutual initiatives. Turkish business elites may well engage in lobbying activities and benefit from the support of international business circles, as they did during the preparations of the customs union with the EU twenty years ago. However, this will not happen unless the AKP government carries out reforms that curb its arbitrary interventions in the economy. The question remains: will the AKP take such measures, aimed at transferring more power to market actors, in order to thereby secure Turkey’s eventual, full participation in the transatlantic economic community? The coming year will be decisive in this regard.

Ozan Serdaroğlu, Ph.D., is a Visiting Fellow at the Institute of Security and Development Policy’s Silk Road Studies Program in Stockholm, Sweden.

Image attribution: i.tmgrup.com.tr, accessed on Dec 21, 2015

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The Turkey Analyst is a publication of the Central Asia-Caucasus Institute & Silk Road Studies Joint Center, designed to bring authoritative analysis and news on the rapidly developing domestic and foreign policy issues in Turkey. It includes topical analysis, as well as a summary of the Turkish media debate.

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