Tax & Accounting Blog

Opportunities for Global Trade in Turkey

Blog, Global Trade, ONESOURCE May 4, 2016

Turkey has what is needed to become a global trade powerhouse. But will it? The time has come to look hard at Turkey’s trade relationship with the European Union, and thus at its long-term potential as an important power broker for global trade, given its unique location in the world and its positive economic forecasts. Consider where it was roughly three decades ago, where it is today, and where it could be heading in the future.

In 1985, Turkey’s total trade was $19.3 billion and its ratio of trade in goods and services to GDP was 11 percent. Last year, trade was up to almost $400 billion and ratio of trade to GDP was 59 percent. Its population grew from 49 million to 79 million during that approximate time frame and GDP rose from $65 billion to $710 billion.

This rapid growth is in large part attributable to the Customs Union, adopted in 1995, which plugged Turkey directly into the European Union’s manufacturing trade. Although Turkey is, of course, not a European Union member—talks for it to join the Union began in 2005 and only recently began accelerating again—the Customs Union made it resemble one for most practical purposes. The union eliminated tariffs and quotas regarding trade between Turkey and EU member countries, and it mandated that Turkey adopt EU regulatory standards. Consequently, trading with a Turkish manufacturer became in practice no different than trading with a French or German or Italian manufacturer.

This grew into a mutually advantageous relationship, with Turkey becoming the EU’s fifth-largest trading partner by 2015, according to data from Eurostat. In 2014, the World Bank argued the trade relationship between the European Union and Turkey would progress beyond manufacturing and into the services sector, as well as agriculture.
Turkey has, however, been saddled with a slowdown in growth and fairly high inflation. The International Monetary Fund projects Turkey’s debt-to-GDP ratio, which has been trimmed from 46.5 percent in 2006 to about 32.6 percent today, to revert to 40 percent or more by 2020.

In Turkey, the Justice and Development Party, or AKP, regained power after losing it briefly last June, resting lingering uncertainty some observers had as to the stability of the country’s leadership. Deputy Prime Minister Mehmet Simsek reiterated plans to institute labor market reforms, raise the country’s domestic savings rate, and build a high value-added manufacturing base in the consumer electronics, electrical, automotive, and chemicals sectors, according to a report in The Wall Street Journal.

This agenda is vital for growth. Unless Turkey makes serious advances in human rights and democratic values, its ability to integrate with the European Union more tightly, and therefore realize its economic potential, will continue to be impeded.

Nevertheless, the underlying economic guidance Simsek has given has been universally bullish: a 2015 growth forecast of 4 percent, up from 3 percent; a 2016 GDP target of 4.5 percent, up from 4 percent; and a decline of inflation to 7.5 percent, down from 8.8 percent. Markets reacted to the forecasts with moderate optimism. Meeting these goals would assuage some doubt about the country’s domestic economic fundamentals, but the human rights questions would remain.

No one knows whether these projections will play out in reality, but Turkey has only one political party with sufficient power, and the fact that Simsek, who oversees economic policy, is doing much more than making vague gestures towards trade—he’s explicitly naming value-added manufacturing as a policy priority—does signal something positive for the country’s trade prospects moving forward.

There remains significant work to be done on the policy front in order to turn expectations into reality. The lifting of sanctions against Iran have encouraged some in the business sector, but Turkey set a preferential trade agreement with Iran in 2015 that failed to perform to expectations because of geopolitical issues.

Turkey has a real opportunity to be the European Union’s primary trade linkage to the Middle East, but at the same time it is hamstrung by the complex geopolitical issues there. The regressing trade between Iran and Turkey, despite a trade agreement that sought to mend fences, is an instructional microcosm of this, but the potential for Turkey to grow its economy by serving a bigger role in the Middle East is real nevertheless.

There are reasons to believe that Turkey can live up to its true potential as a regional or even global economic superpower. Patents in the electrical-electronics sector, a key area of growth, are up significantly. The country ranks first among 32 developed and developing countries in increasing its workforce size since 2008, according to the IMF, and half of its people are under the age of 30. Despite geopolitical tension, reports say Turkish brands, including Boyner, Vakko, Desa, Derimod, Mavi, Ipekyol, and Mudo, are readying a major push into Iran, perhaps opening up to 500 stores.

Foreign companies receive significant benefits—zero corporate tax, VAT, personal income tax, or stamp duty—for establishing management centers in Turkey, and it ranks as the second most competitive manufacturing hub in the EMEA region in the Deloitte Global Manufacturing Competitive Index.

The recipe for economic success in Turkey seems to depend in large part on trade, and continuing to increase trade seems to demand the following: Expand the trade agreement with the European Union beyond manufacturing; make substantial progress on human rights issues; and tightly execute policies that prioritize fiscal responsibility and support for private sector innovation.

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