Turkey’s free trade opportunity

Philip Stevens*

Under Deputy Prime Minister Mehmet Şimşek, Turkey’s new government is pushing hard to reenergize free trade relationships with the EU and the U.S. The prize is deeper economic integration that will support its transformation into a modern economy and its escape from the middle-income trap in which it currently languishes.

Turkey’s top priority is to expand its Customs Union with the EU. This tariff-free trade deal – signed in 1995 as a prelude to full EU membership – has been a boon to Turkey, driving trade between the two from $28 billion in 1995 to $158 billion in 2014.

Significantly, the union forced Turkey to upgrade its regulatory standards and make its products more internationally competitive. This drove its integration into the global economy and emergence as a serious economic power.

The Customs Union hasn’t altered since its 1995 inception and is in urgent need of an upgrade to reflect changes in technology and business. In February, EU Minister Volkan Bozkır said negotiations to include services, public procurement and agriculture in the union will begin later this year. If successful, EU trade could double to $300 billion, he said.

Turkey also wants to re-energize trading relationships with the U.S., soured by the deteriorating geopolitical climate. As a trade dependent nation, it is alarmed at the prospect of being sidelined from the world’s biggest ever trade agreement: The Transatlantic Trade and Investment Partnership (TTIP), currently being negotiated between the EU and the U.S.

Turkey’s integration into the TTIP is so vital that Mr. Bozkır has threatened to rip up the Customs Union if it is not accommodated. Meanwhile, Turkish officials are touring Brussels and Washington trying to find a workable opening.  

A renewed trade charm offensive with the EU and the U.S. is partly due to the implosion of Turkey’s other major markets, Russia and the Middle East. It’s also recognition that the only way to escape its middle-income trap is to increase exports to the EU and the U.S. while attracting far higher levels of foreign direct investment.

Such investment will move Turkey up the value-chain, from a reliance on property, construction and low-end manufacturing towards more lucrative areas such as R&D and services. These sectors underpin the economies of high-income countries and Turkey won’t achieve its economic ambitions without them.

Trade is a two-way street. Despite the efforts of Ankara’s trade diplomats, Turkey has not given many EU and U.S. exporting sectors a fair crack at the whip in their activity in the Turkish market. A strong protectionist mindset in Ankara prioritizes building local manufacturing capacity, when the vast majority of economic value is in R&D.

The life sciences sector is particularly targeted. For one, the government seems bent on growing domestic pharmaceutical and medical device industries by shielding them from international competition. Its five-year development plan (2014-2018) includes a range of protectionist measures; among them is prioritizing the procurement of locally-made drugs over foreign equivalents in the public health system.

Such protectionist measures are probably against World Trade Organization (WTO) rules and effectively shut out international companies and their technology and know-how. The domestic sector will be left cosseted and flabby, not the ideal template for Turkey’s development into an exporter of high value products.

Outside healthcare, the Turkish government has a number of protectionist “local production” rules. They include the requirement for all IT infrastructure that processes domestic payment transactions to be based in Turkey. International companies face the expense of replicating their payment processing facilities, with the costs ultimately passed on to Turkish consumers.

There are however signs that reformers are getting the upper hand in Ankara.

In February, Deputy Prime Minister Lütfi Elvan announced plans to revise Turkey’s public procurement law in line with European Union rules as part of the upgrade to the Customs Union. It’s a start in the levelling of the playing field between international and domestic companies for large contracts.

February also saw the release of a draft of the new intellectual property law, set to bring the country’s patent law closer to European Union and WTO standards. 

This reform could offer greater legal certainty to foreign high tech companies wishing to sell or invest in Turkey – from green tech to industrial chemicals.

Such reforms are likely to meet domestic opposition, but are crucial for Turkey’s continued economic development. The government’s ability to withstand pressure from domestic lobby groups and stick to its broader free trade agenda will be a test no less important over the long term than those it faces over immigration or security.

*Philip Stevens is director of Geneva Network, a U.K.-based research organization focusing on international trade issues