5 Economic and commercial relations |
144. The Government wishes to strengthen UK-Turkey
relations in large part because it sees Turkey as an emerging
economic power of significant potential.
In Ankara in July 2010, the Prime Minister described Turkey as
"Europe's BRIC" (referring to the Brazil-Russia-India-China
group of major emerging economies).
In late 2009, The Economist named Turkey among the "CIVETS",
the six states which it identified as the next international 'emerging
economies to watch'.
Turkey has maintained a solid position as the world's 17th-
or 18th-largest economy since the mid-2000s; in its
September 2011 World Economic Outlook, the IMF expected Turkey
to retain roughly this ranking into the mid-2010s. This means
that, in comparison to the economies of EU Member States, Turkey
is larger than Belgium, Poland and Sweden, and is advancing most
immediately on the Netherlands.
Prime Minister Erdoðan wants Turkey to be in the global economic
top 10 by the centenary of the Republic in 2023 (something that
might involve overhauling Indonesia, South Korea or Mexico, or
possibly Italy or Spain). Dr Toksoz thought
that this was unlikely but that Turkey would certainly move up
a few places.
145. Our witnesses endorsed the Government's
identification of Turkey as a rising economy. Several stressed
the extent to which sustained economic growth and stability over
the last decade represented a change from Turkey's previous record
of recurrent inflation, debt and currency crises.
Especially as the banking sector is relatively well-regulated
and under-exposed internationally, in early 2012 it appeared that
Turkey had been able largely to weather the international financial
and economic crisis since 2008, with continued growth being driven
to a great extent by domestic demand.
Economic activity dipped in 2009, but GDP growth was 9.0% in 2010
and 9.6% in January-September 2011, although slowing through the
year. The data
in Table 3 provide a snapshot of Turkey's economic rise and potential.
Table 3: Turkey: Selected economic, demographic and
developmental indicators and forecasts, 2000-2016
|Youth population (under 24), millions
|Tertiary education enrolment,
% relative to age group
|Labour participation rate, % (female)
|GDP/capita, current prices, $
|Inflation: average consumer prices, % change
|General government total expenditure, %/GDP
|General government structural balance, %/potential GDP
|General government gross debt, %/GDP
|Gross national savings, %/GDP
|Current account deficit, %/GDP
|Fixed broadband subscribers/100
|Time to start a business, days
Sources: IMF World Economic Outlook Database,
September 2011; World Bank World Development Indicators; UN World
Population Prospects, 2010 Revision146. Several
witnesses stressed the extent to which the continuing popularity
of the AKP government, and Prime Minister Erdoðan in particular,
rested on the rises in living standards and public welfare and
infrastructure spending which the economic boom had enabled.
Witnesses also highlighted the intimate connection between Turkey's
economic performance and its international political position,
with its economic success acting as a key source of regional weight
and attractiveness, and economic considerations in turn helping
to drive foreign policy.
147. Dr Toksoz told us that the main short-term
risk to the Turkish economy was its large current account deficit,
which was running at around 10% of GDP at the turn of 2011/12.
The deficit is helping to generate a large external financing
requirement which has raised concerns in some quarters about Turkey's
vulnerability to a renewed crisis, especially given the international
Dr Toksoz predicted that there would be a slowdown in growth in
2012, and that there might be a "stop-go" pattern to
Turkish growth for some time. However, she advised the Government
not to be diverted by short-term setbacks and to remain focused
on the long-term fact that Turkey "is going to become a major
regional economic power".
148. We heard about a number of continuing drags
on Turkey's economic growth and development. Dr Toksoz said that
there would be a potential benefit from labour market and tax
reforms, to encourage employment and savings.
She also outlined some of the obstacles to female participation
in the labour force, which is low and has been declining (to around
149. We conclude that the Government
is correct to have identified Turkey as a rising regional economic
power. We recommend that the Government should not allow any short-term
setbacks to Turkey's economic performance to cause it to weaken
its efforts to intensify UK-Turkey economic ties over the longer
term, which must remain its focus.
UK-Turkey trade and commercial
150. A wish to expand bilateral trade and commercial
relations forms a major element in the Government's drive to upgrade
UK-Turkey ties. The Government's ambitions with respect to Turkey
form part of its wider strategy of pursuing intensified UK economic
relations with the world's emerging economies, in order to help
foster a sustainable economic recovery. The Government is pursuing
this objective partly by increasing the priority which the FCO
gives to commercial work.
151. In 2010, Turkey was the UK's 22nd-largest
export destination, and its 19th-largest source of
imports. Dr Toksoz
described the UK as being in the 'third tier' of exporters to
Turkey, behind the energy exporters Russia and Iran, and a second
tier of countries such as France.
For Turkey, the UK was the 12th-largest source of imports
in 2011, behind Italy and Spain as well as France and Germany
among EU Member States. We have been particularly struck by the
performance of Italy in building economic relations with, and
a presence in, Turkey: for example, Italy maintains a consistent
position as Turkey's fifth-largest source of imports.
Overall, the UK has tended to fall in the ranking of Turkey's
import sources since 2000, as Turkey's energy demand has boosted
the position of Russia and Iran, and emerging economies such as
India have made inroads. UKTI described competition in the Turkish
market as "fierce".
However, as a destination for Turkish exports, the UK has consistently
ranked second or third in recent years.
Tables 4 and 5 show recent UK-Turkey trade data.
Table 4: UK trade in goods with Turkey,
£ bln, 2007-2011
Sources: Ev 71 [FCO] and HMRC Overseas Trade Statistics
Table 5: UK trade in goods and services
with Turkey, £ bln, 2007-2010
Source: Ev 71 [FCO], based on Office for National Statistics,
UK Balance of Payments (The Pink Book) 2011
Turkey's recent annual import growth has ranged from
negative, in years with slower growth, to 15-20% in stronger years.
Annual export growth has typically ranged between 5% and 12%.
152. In Ankara in July 2010, the Prime Minister
set a target of doubling UK-Turkey trade by 2015. The baseline
is the 2009 figure for bilateral trade in goods£6.5
billion. We had
two concerns about the target:
The Government has set the same target, of a doubling in bilateral
trade, with respect to Brazil, Kuwait, India, Qatar and South
Africa. In our
Report on UK-Brazil Relations in 2011, we concluded that
the target was "clearly arbitrary" and "in effect,
simply an indication of intent to use the influence of government
to maximise trade opportunities for British companies".
David Lidington effectively acknowledged that the target was an
approximate one, intended primarily to galvanise cross-Government
- Potential counter-productiveness.
The target is in terms of overall trade volume, but the UK runs
a trade deficit with Turkey. This raises the risk that the target
could be achieved while increasing the deficit. Mr Lidington said
that the headline target was supported by more detailed plans
intended "to deliver it in a way that optimises jobs and
prosperity for the UK".
153. In pursuit of enhanced UK-Turkey commercial
ties, the Government has:
- given the post of UKTI Turkey
Director (based in Istanbul) a higher grade and a regional role
beyond Turkey; it has also added staff to the FCO's Turkey network
to work on economic and commercial matters (see paragraph 17).
- signed with its Turkish counterpart
a Knowledge Partnership which is intended to encourage co-operation
between UK and Turkish universities, researchers and industry.
For its part, the British Council said that it planned to increase
the number of research-based partnerships between the UK and Turkey
by 10% over the next two years, and that it would focus its work
on links between industry and higher education in the energy,
health, and information and communications technology sectors.
- established with its Turkish counterpart a CEO
Forum, which met for the first
time during Prime Minister Erdoðan's visit to London in March
2011, and for the second during President Gül's State Visit
in November 2011.
A UK-Turkey Joint Economic and Trade Committee (JETCO)
was already established in 2008 and meets annually at ministerial
level. TheCityUK, the financial and professional services lobby
group, said that the JETCO and CEO Forum "provide an atmosphere
and environment where bilateral business prospects and contacts
can be extended and built upon".
154. Under UKTI's five-year strategy for 2011-15,
Turkey is one of the agency's 20 priority markets. UKTI is prioritising
trade promotion in the high-value fields of information and communications
technology, energy (including renewables), infrastructure (including
public-private partnerships), and education and skills.
Dr Toksoz identified agriculture, health and pharmaceuticals as
further sectors potentially offering opportunities for UK firms,
while the CBI also mentioned the creative industries.
The CBI has itself designated Turkey as a priority market for
increasing UK exports and attracting inward investment to the
UK. Dr Toksoz
advised that Turkey was looking for foreign partners who would
invest in the country, rather than just export to it, as Ankara
sought to move its economy up the value chain and reduce its dependence
on importing purely for assembly and onward export.
155. In partnership with TheCityUK, UKTI has
identified Turkey as one of six priority markets for the UK financial
TheCityUK has also made Turkey a priority market of its own, identifying
"very strong growth prospects there".
The Turkish economy has reached a stage in development where markets
such as insurance are likely to expand rapidly, while major planned
public-private partnership projects in infrastructure and public
services offer significant opportunities to UK legal and financial
firms. The Turkish
authorities also have ambitions to develop Istanbul as an international
At present, our impression was that the presence of UK financial
and other services companies in Turkey remained relatively limited.
156. UKTI is also seeking to develop partnerships
between UK and Turkish companies for projects in third countries.
Given the active and well-established presence of Turkish firmsespecially
contractorsin parts of the Middle East, North Africa, the
South Caucasus and Central Asia, a number of witnesses felt that
this strategy offered considerable potential.
The CBI stated that one in four of the largest companies in the
Middle East and North Africa was Turkish.
UK companies are already working alongside Turkish counterparts
in Iraq, Saudi Arabia and Turkmenistan, for example.
157. Our witnesses were all positive about the
support that UKTI provided with respect to Turkey, and they welcomed
the Government's efforts to encourage expanded UK-Turkey commercial
ties. Dr Toksoz
warned that the Turkish economy was now "very private sector
driven", and that government-to-government relations might
therefore have less impact on commercial ties than in some more
state-dominated emerging economies.
Several witnesses and interlocutors said that building commercial
relations in Turkey took time and was sometimes difficult. Among
potential problems facing foreign firms in Turkey, the CBI said
that dispute resolution was slow, as were some bureaucratic procedures;
that corruption and the grey economy remained problems; and that
foreign firms sometimes faced discrimination.
The Scotch Whisky Association said that trade regulations could
change quickly and with little consultation.
158. A number of witnesses and interlocutors
said that the greatest obstacle to intensified UK-Turkey commercial
ties was probably Turkey's low visibility within the UK business
UK-Turkey CEO Forum has a workstream on "brand Turkey",
intended to improve perceptions among the UK business community
about doing business in Turkey,
while the FCO's 2011-15 Business Plan commits the department to
running, by July 2012, public diplomacy campaigns on "prosperity
in the key emerging powers".
159. We conclude that the Government
is correct to have identified significant potential to expand
UK commercial relations with Turkey, although the competitiveness
of the market should not be under-estimated. While we welcome
the galvanising effect of the Prime Minister's target of doubling
bilateral trade from 2009 to 2015, we recommend that the Government
and its partners should bear in mind the need to build much longer-term
relationships if the UK is to strengthen significantly its commercial
presence in Turkey. The FCO needs to be clear about the balance
between the trade and the investment potential of specific sectors
in Turkey, and about the lessons that the UK may learn from the
relative success in Turkey of other countries such as Italy. We
further recommend that in its response to this Report the FCO
should update us on the Government's activities aimed at increasing
Turkey's visibility to the UK business community.
160. UKTI's Defence and Security Organisation
(DSO) is promoting UK defence and security exports in Turkey.
The CBI agreed that aerospace and defence were among the sectors
where there was scope for stronger UK-Turkey collaboration.
During President Gül's State Visit in November 2011, Gerald
Howarth MP, Parliamentary Under-Secretary at the Ministry of Defence,
signed a Memorandum of Understanding (MoU) with the Turkish Ministry
of National Defence. According to the FCO, the MoU established
"a framework for the potential acquisition of common defence
equipment, for scientific and technical co-operation [...] and
the development of joint projects". The visit also saw the
signature of two company-to company agreements, for co-operation
on missile and rocket systems.
161. As UKTI's Defence and Security
Organisation seeks to expand the UK's share of the Turkish defence
and security market, we willas one of the Committees on
Arms Export Controlsclosely scrutinise UK exports of strategic
goods to Turkey, to ensure that they comply with the Consolidated
Criteria for licensed arms exports.
EU-Turkey Customs Union
162. The UK's trade with Turkey is governed by
the EU-Turkey Customs Union, which was established in 1995. The
EU has a Customs Union with only two other states, Andorra and
San Marino. Compared to other types of trade arrangements which
the EU has with non-Member States, under the EU-Turkey Customs
- Turkey is not part of the full
EU single market, allowing free movement of capital, services
and labour as well as goods, and obliging participants to apply
the full EU single market acquis. This aspect of the EU-Turkey
Customs Union distinguishes Turkey's position from that of non-EU
states belonging to the European Economic Area (i.e. Iceland,
Liechtenstein and Norway). The EU-Turkey Customs Union provides
only for free trade between the two parties in manufactured goods,
including processed agricultural products. It does not cover services
or public procurement. Trade in other agricultural products is
governed by a separate preferential agreement. Under the Customs
Union, Turkey is progressively to align its legislative and regulatory
regime with some (but not all) of the EU internal market acquisfor
example, as regards competition and intellectual property law.
- For products covered by the Customs Union, Turkey
applies the EU's external tariff policy, as it would do if it
were an EU Member. In other words, with respect to goods covered
by the Customs Union, if the EU amends its trade regime with a
third country, Turkey is obliged also to apply the amended rules.
This aspect of the EU-Turkey Customs Union distinguishes it from
a free trade agreement, which applies only to trade between the
parties, not their external trade relations.
163. From the UK perspective, we heard of two
sets of problems with the EU-Turkey Customs Union:
The Customs Union does not extend to services. We heard that this
contributed to the problems which are faced in Turkey in particular
by UK and other international legal professionals and law firms,
although it would not be certain that an EU-Turkey arrangement
which extended to services would necessarily liberalise the market
as much as the EU or UK legal services firms might wish. As matters
stand, the regime facing foreign legal professionals and firms
in Turkey is a matter of Turkish national regulation, and Turkey
applies a regime which TheCityUK said was discriminatory and disproportionate
as regards its negative impact on foreign legal professionals
and law firms. Foreign law firms in Turkey are unable to provide
an integrated full service by offering legal advice on English
and international as well as Turkish law.
TheCityUK recommended that professional services such as the law
should be included on the agenda of the UK-Turkey JETCO, to see
what progress could be made towards liberalising the sector on
a bilateral basis. The EU is officially committed to "extending
and deepening" the customs union, something which the CBI
supported, in particular with respect to the services sector.
Turkey is not implementing the Customs Union fully: barriers to
trade which should have been eliminated under its terms remain
in place. For
example, the CBI told us that Turkey applies a conformity assessment
requirement on goods that are in free circulation in the EU but
originated outside it, and that Turkey's regimes for intellectual
and other property rights, and data exclusivity and certification
in the pharmaceutical sector, also failed to meet the country's
Customs Union obligations.
Members of the Scotch Whisky Association (SWA) face particular
problems, with their exports subject to import permit requirements
and a discriminatory excise tax regime.
The SWA said that its members' experience in Turkey meant that
it was "unable to support the [Government's] effort to highlight
Turkey's potential" as an export market.
A number of witnesses said that the decision-making mechanisms
in the Customs Union that were intended to resolve problems were
not working effectively.
Turkey's EU accession process might offer an alternative mechanism
for resolving Customs Union disputes: the EU set 'benchmarks'
for Turkey for the opening of negotiations on the two relevant
chapters of the EU acquis that would resolve the SWA's
problems if Turkey were to meet the benchmarksbut it is
not doing so. Of the two chapters, the EU would not close the
taxation chapter in any case, because it is among those hostage
to the Cyprus dispute, and the free movement of goods chapter
cannot even be opened, for the same reason, so there would be
no gain to Turkey in meeting the benchmarks (see paragraphs 189-190
and Table 6).
164. From Turkey's perspective, we heard that
the main problem with the Customs Union was its asymmetry in the
EU's favour, as regards both its terms and the decision-making
which affects it. We heard that there were particular concerns
that Turkey would be obliged to lower its import tariffs in order
to implement the new round of international free-trade agreements
on which the EU is embarked, without gaining the improved market
access in return which will accrue to EU Members.
165. We conclude that the EU-Turkey
Customs Union is not working as effectively as it should to liberalise
trade, partly because the lack of movement in Turkey's EU accession
process appears to be contributing to Turkey's unwillingness to
implement fully its Customs Union obligations. We further conclude
that the Customs Union is anyway unsatisfactory because it excludes
the services sector, including legal services. Given the UK's
comparative advantage in the sector, we recommend that the Government
should explore any options open to it on a bilateral basis to
encourage Turkey to liberalise access to its market for UK services,
particularly lawyers and legal services firms.
326 Ev 52 [FCO] Back
David Cameron, speech in Ankara, 27 July 2010, via Number 10 website
"BRICS and BICIS", The World in 2010 blogpost,
November 2009. The other "CIVETS" are Colombia, Indonesia,
Vietnam, Egypt and South Africa. Back
GDP, current prices, $; IMF World Economic Outlook database Back
Q 159 Back
For example, Dr Toksoz at Q 159 Back
Ev 135 [TheCityUK] Back
Turkish Statistical Institute press release No. 252, 12 December
2011 (constant prices) Back
Q 136 [Dr Robins], Ev 85 [Dr Bechev] Back
For example, Ev 82 [Mr Park], 85 [Dr Bechev] Back
"Fundamentals in focus", Financial Times, 18
October 2011; World Bank, Global Economic Prospects, Vol.
4, January 2012 Back
Q 159 Back
Q 165 Back
Q 164; see Table 3. Back
Foreign Affairs Committee, Seventh Report of Session 2010-12,
The Role of the FCO in UK Government, HC 665, paras 49-60 Back
HMRC Overseas Trade Statistics Back
Q 166 Back
Turkish Statistical Institute (TurkStat), Foreign Trade Statistics
(via www.turkstat.gov.tr) Back
Ev 74; see also Ev 135 [TheCityUK]. Back
Turkish Statistical Institute, Foreign Trade Statistics Back
IMF World Economic Outlook Database, September 2011 Back
Q 194 [Mr Saward] Back
FCO Business Plan 2011-15, May 2011 update, via Cabinet Office
website (www.cabinetoffice.gov.uk) Back
Foreign Affairs Committee, Ninth Report of Session 2010-12, UK-Brazil
Relations, HC 949, para 89 Back
Qq 195, 197 Back
Q 199 Back
Ev 52 [FCO], Q 244 [David Lidington]. The change to the UKTI Turkey
Director post will take effect when it is next filled, which is
expected to be during 2012. Back
Ev 52, 74 [FCO]; "Huge opportunities for UK firms in Turkey",
Department for Business, Innovation and Skills press release,
28 September 2011 Back
Ev 134 Back
Ev 136 Back
UKTI, Britain Open for Business, May 2011, p 35 Back
Q 163 [Dr Toksoz], Ev 137 [CBI] Back
Ev 137 Back
Q 168 Back
UKTI, Britain Open for Business, May 2011, p 54 Back
Ev 135 Back
Ev 136 Back
Ev 136 [TheCityUK], 137 [CBI] Back
Ev 135 [TheCityUK], 138 [CBI] Back
Ev 138 Back
Ev 70 [FCO] Back
Ev 57-58 [Sir David Logan], 104 [Scotch Whisky Association], 136
Q 169 Back
Ev 138-139 Back
Ev 142 Back
Ev 136 [TheCityUK] Back
Q 191 [Mr Saward] Back
FCO Business Plan 2011-15, November 2010 and May 2011 update,
via Number 10 website (www.number10.gov.uk) Back
UKTI, Britain Open for Business, May 2011, p 50 Back
Ev 137 Back
Ev 73 [FCO] Back
Ev 137 [TheCityUK] Back
Conclusions of the European Council, Copenhagen, 12-13 December
2002; Ev 138 [CBI] Back
European Commission, Turkey 2011 Progress Report, SEC(2011) 1201
final, 12 October 2011, p 4; Ev 138 [CBI] Back
Ev 138 [CBI] Back
Ev 103-105, 141-142 Back
Ev 104 Back
Q 171 [Dr Toksoz], Ev 104 [Scotch Whisky Association], 130 [Economic
Development Foundation] Back
Ev 104-105, 141-142 Back
Ev 86 [Dr Bechev] Back