Turkey: EU-US trade pact could hit exporters

Government officials are becoming increasingly concerned that Turkish exporters could face stiffer competition in their biggest markets due to a looming free trade agreement (FTA) between the EU and the US, a deal that could undermine Ankara’s Customs Union with Europe.

The EU and US are hoping to conclude their FTA next year, potentially bringing more than €200bn in benefits to the two sides. Eliminating tariffs would make US manufacturers more competitive against their Turkish counterparts, which enjoy cost advantages conferred by lower wages and proximity to Europe.

Not only does Turkey face the prospect of losing part of its critical EU market, but it could also see increased flows of US goods into its domestic economy. Under its Customs Union agreement with Brussels, which came into force in 1995, if the EU strikes an FTA with a third party, that state gains automatic access to Turkey, a right that is not reciprocated.

In response to the pending deal, the minister of economy, Zafer Caglayan, has suggested Ankara could scrap its 15-year-old Customs Union agreement with the EU if Turkey is not made a party to any FTA with the US. However, it is unlikely Turkey would follow through on this threat. Not only would Turkish exports to Europe become more expensive, the cost of imports – 35% of which are currently sourced from the EU – would also rise.

On May 27 it was foreign minister Ahmet Davutoglu’s turn to call for Turkey’s inclusion in any agreement, saying, “We think Turkey should be part of all free trade agreements being signed, otherwise it creates unfair competition against Turkey.”

During his visit to Washington in mid-May, Prime Minister Recep Erdogan and members of his delegation raised both the issue of Turkey’s exclusion from the EU-US FTA and the proposal for a similar agreement with its North American ally, though such a deal would come only after years of negotiations.

An agreement would open up US markets to Turkish exporters, but it would only partly compensate for the loss of trade earnings with the EU in the event that Brussels and Washington formalise their FTA. The US accounts for around 4% of Turkey’s total exports, compared to the EU’s almost 40%, while on an individual nation basis, the US is ranked seventh as a trade partner, behind Germany, Iraq, the UK, Italy, Russia and France, and only fractionally ahead of Iran.

Turkey already has some experience of being on the wrong end of FTAs brokered by the EU, seeing its trade with the bloc take a hit after Brussels struck trade deals with South Korea and Mexico, though the losses from these agreements would pall compared to those expected if the EU-US arrangement is concluded.

According to Sarp Kalkan, an analyst at the Economic Policy Research Foundation of Turkey (TEPAV) in Ankara, Turkish exporters would be the big losers in any new round of FTAs.

“The EU’s free trade deals are going to bring more risks for the Turkish economy in the future,” he told Agence France Press news agency on May 26.

These concerns may have been further fuelled by Turkey’s poor trade figures for April, which saw exports dip by 0.9% compared to the same month in 2012, falling to $12.5bn, while imports surged by 18.4% to $22.8bn. This weaker-than-expected result left Turkey with a trade deficit of $10.3bn for the month, well above the $6.6bn for April 2012.

Such was the concern over the rise in imports, Turkey’s central bank governor Erdem Basci said that the reserve could raise interest rates to cool domestic demand; however, this would be contrary to government calls for even further rate cuts to stimulate flagging growth.

The EU’s share of Turkey’s exports, which has been at more than 50% in the past, stood at 39.4% for the month of April. Germany is the largest market, with more than $1bn worth of sales during the month, though this too was down 4.2% year-on-year.

Potentially more bad news for Turkish exporters came on June 7, when Germany’s Bundesbank cut its growth forecast for 2013, lowering expectations from 0.4% to 0.3%. The central bank reduced its outlook for next year from 1.9% to 1.5%. This slower rate of expansion in Ankara’s leading trading partner does not bode well for Turkey, which could see a further easing of exports, while a cooling of the German economy – the strongest in Europe – could herald even weaker economic activity in the rest of the bloc.

Turkey is moving to build up a free trade network of its own, with plans to sign FTAs with Azerbaijan, along with a number of North African, Middle Eastern and even Latin American countries. If implemented, these lower barriers will offset some of the losses that would be incurred if the EU-US FTA goes through. By how much and how soon is hard to say, though most likely Turkey will see its share of the EU market diminish, while having to contend with an increase in imports from the US.