How Turkey can save its preferential trade agreement with Iran

NADER HABIBI

After more than eight years of intense negotiations, Iran and Turkey signed a Preferential Trade Agreement (PTA) in 2014 that went into effect in January 2015. According to this PTA, each country will reduce its tariffs on a list of import products from the other side. This list includes 142 Iranian products and 120 Turkish products. The trade officials of both countries have expressed optimism that this agreement will lead to a substantial increase in the volume of bilateral trade between the two countries. Turkish and Iranian officials have projected that value of bilateral trade will rise from approximately $12 billion in 2014 to $30 billion in 2015. While oil and gas dominate Iran’s exports to Turkey, this PTA focuses on the reduction of tariffs on agricultural and industrial products.

Soon after the treaty went into effect, however, several Iranian politicians and business groups expressed deep reservations about it. These critics focused on two main objections: 1) The Turkish exports included in this PTA are industrial products but Iran’s exports are mostly agricultural, 2) Several domestic industries, especially textiles and home appliances (refrigerators, stoves, etc.), will lose a large portion of the domestic market to Turkish exports. This sharp criticism has been directed at the Rouhani government’s trade and economic team. In response to the second objection, government officials pointed out current high import tariff rates are ineffective because a large amount of Turkish products are illegally smuggled into Iran every year anyways. 

The Iranian government officials, however, have so far been silent on the criticism that the Iranian export products which will benefit from this PTA are primarily low-value agricultural products. This is a very sensitive issue and a reminder of colonial trade arrangements to many Iranians. Like most developing countries, the public opinion in Iran strongly favors industrial production and industrial exports. Furthermore, these critics point to the fact that Iran faces a severe water shortage and does not have an advantage in agricultural exports.

In response to these vocal objections, Iran’s trade officials have promised to demand revisions in the next meeting of Iranian and Turkish officials in April. This is partly because of Iran’s upcoming parliamentary elections this summer. In response to domestic pressures, the Iranian government is likely to demand access to the Turkish market for a few industrial products. It will be very difficult for the Rouhani government to implement this treaty without such revisions and Turkey must decide how to respond. 

I like to argue that it will be in Turkey’s long-term interest to open its market to at least a minimum number of manufactured products from Iran. Such a measure will reduce the domestic pressure on the Iranian government to reject the entire agreement. Clearly Turkey is at a more advanced stage of industrial development and Iranian-manufactured products will pose as competition to only the medium and low-tech domestic products of Turkey. The experiences of successfully-industrializing countries such as South Korea and Taiwan show they adopted a process of industrial upgrading by continuously switching from production of low-tech industrial products to more advanced products. As they went through this transition, they allowed some low-tech industries to be overtaken by imports from less industrial trade partners.

It must be pointed out that Iran is not the only Middle Eastern country where interest groups have criticized their bilateral trade relations with Turkey. Similar objections were also voiced by a group of Egyptian businesspersons in 2013. To make bilateral trade with its Middle Eastern neighbors attractive and sustainable, Turkey cannot focus on a strategy of exporting industrial goods to these countries in exchange for natural resources and agricultural products. Middle Eastern countries will consider this arrangement humiliating and unfair. Instead, Turkey must allow its imports from these economies to include a minimum amount of manufactured and industrial products, in addition to natural resources and agricultural products.

Middle Eastern countries will welcome Turkish industrial exports only if Turkey opens its market to their less sophisticated industrial products. Bilateral trade in industrial goods also opens the door to investment and joint partnership arrangements, which will strengthen the economic ties between trade partners in the long run. 

*Nader Habibi is the Henry J. Leir Professor of Economics of the Middle East in Crown Center for Middle East Studies at Brandeis University. He served as the assistant professor of economics in Bilkent University in the 1997-98 academic year.