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Turkey, trade liberalisation and an FTA with the US

Turkey, trade liberalisation and an FTA with the US

By Philip Stevens

Editor’s Note:  This article first appeared in The Hill.

April 2015: This week, Turkey’s Deputy Prime Minister and Economic Chief Ali Babacan is visiting Washington, D.C. While he may be here to join the droves of tourists admiring the cherry blossoms in peak bloom, his more pressing business will be to seek solutions to Turkey’s noxious brew of problems — including rising unemployment, growing inflation and slowing growth — through a new Free Trade Agreement (FTA)with America.

For Ankara, there is a strong case for an FTA with the US and the greater economic integration it would bring. After all, Turkey has set an ambitious to become a top-10 global economy by the 100th anniversary of the establishment of the Republic of Turkey in 2023.

Ankara has failed to give many US exporting sectors a fair crack at the whip in their operations in the Turkish market.

To do this, it needs to move significantly up the economic value chain away from simple manufacturing of autos and textiles, towards more sophisticated areas such as services and R&D.

Partnership with the US is therefore critical: on the one hand, the US offers a fertile ground for exports of Turkey’s growing services sector such as tourism, healthcare and education, while on the other, Turkey’s domestic industries, in particular its world-class construction firms, could gain a significant lift from greater synergies with US private-sector expertise.

Turkey is also increasingly nervous about the trade agenda of the European Union, to which it is directly tied through its membership in the European Customs Union. Countries that have signed this bilateral agreement with the EU can export duty-free to Turkey, but Turkey must face whatever tariffs exist when it exports. This imbalance could be made worse if the proposed Transatlantic Trade and Investment Partnership (TTIP) trade deal excludes Turkey – which would result in up to a 2.5% (or $20bn) hit to Turkey’s real income, according to a study by the German government.

For all of these reasons, Turkey would stand to gain from deepening bilateral relations with the US, either through a new FTA or closer integration with the TTIP. America’s incentive is not so clear-cut.

The US government not pushing hard for an FTA, as its trade agenda is already dominated by negotiations for the TTIP and the Trans-Pacific Partnership trade deals. The deteriorating geopolitical relationship over the Middle East does not help the situation either.

But most importantly, Ankara has failed to give many US exporting sectors a fair crack at the whip in their operations in the Turkish market. Despite talking a good talk about the need for innovation and economic development, there is a strong anti-competition mindset in Ankara that prioritizes building up local manufacturing capacity, even though the vast majority of economic value is in R&D.

This protectionist mindset manifests itself in a number of non-tariff barriers that complicate business for US exporters.

The life sciences sector is particularly targeted, mainly through the Ministry of Health’s procurement policies for pharmaceuticals. For instance, the exchange rate used for the procurement of imported pharmaceuticals remains at its devalued 2011 level, even though Turkish law requires it should change in line with the market. Companies also complain of a generally arbitrary and cumbersome procurement regime which make it difficult to operate profitably in Turkey.

Outside the healthcare sector, the Turkish government has a number of anti-competitive ‘local production’ rules which undermine international competition: of particular note is the requirement for all IT infrastructure that processes domestic payment transactions to be based in Turkey — thereby forcing international companies to replicate their processing facilities, as well as limiting the potential to save costs through cloud computing.

All FTAs in the past have only succeeded with a mobilized and engaged US business community. Even though Canada, Mexico and Japan are significant US trading partners, their invitation to the TPP was not automatic: each country had to come to Washington, D.C. and make their case to the Obama Administration, Congress, and US stakeholders over many months, including high-level discussion of irritants in the existing trade relationships.

Given the prevailing protectionist attitude in Turkey, there is currently little appetite amongst US business stakeholders to deepen bilateral relationships.

To its credit, Turkey has sought to reenergise bilateral economic ties in recent years, with President Erdogan of Turkey and President Obama establishing in 2013 a High Level Committee to explore how to deepen relationships and liberalize trade.

However, this kind of government-to-government engagement will not be enough to garner the support required to either establish an FTA or integrate Turkey into the TTIP. It requires the business community to go to Capitol Hill and make the case for Turkey. And for that to happen, Turkey needs to ensure a level playing field for foreign exporters and it domestic companies.

In developing their trade agendas, governments generally take their signals from the private sector, which after all is the overall object of trade policy. If Turkey wishes to push ahead with an FTA, it needs to woo the US private sector a lot harder.

By Philip Stevens 

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