House of Commons - UK-Turkey relations and Turkey's regional role

UK-Turkey relations and Turkey's regional role - Foreign Affairs Committee Contents

5 Economic and commercial relations

Turkish economy

144. The Government wishes to strengthen UK-Turkey relations in large part because it sees Turkey as an emerging economic power of significant potential.[326] 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).[327] In late 2009, The Economist named Turkey among the "CIVETS", the six states which it identified as the next international 'emerging economies to watch'.[328] Turkey has maintained a solid position as the world's 17^th- or 18^th-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.[329] 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.[330]

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.[331] 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.[332] 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.[333] 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

	2000	2002	2004	2006	2007	2008	2009	2010	2011	2012	2013	2016
Population, millions	63.6			68.1				72.8				77.0
Youth population (under 24), millions	32.5			32.7 (2005)				32.1				38.1 (2015)
Tertiary education enrolment, % relative to age group		25					46
Labour participation rate, % (female)	50 (27)	50 (28)	49 (26)	47 (24)	47 (24)	48 (25)	47 (24)
GDP/capita, current prices, $	4,026	3,396	5,559	7,775	9,422	10,475	8,710	10,309	10,576	10,988	11,808	14,839
Inflation: average consumer prices, % change	55.0	45.1	8.6	9.6	8.8	10.4	6.3	8.6	6.0	6.9	5.3	5.0
Unemployment, %	6.5	10.3	10.3	10.2	10.2	10.9	14.0	11.9	10.5	10.7	10.2	8.9
General government total expenditure, %/GDP	n/a	42.7	35.1	32.8	33.3	33.8	37.6	35.6	34.8	34.6	33.9	34.1
General government structural balance, %/potential GDP	n/a	-15.7	-6.1	-3.1	-3.5	-4.0	-4.1	-3.5	-2.1	-1.5	-1.1	-1.5
General government gross debt, %/GDP	51.3	73.7	59.2	46.1	39.4	39.5	46.1	42.2	40.3	38.1	36.3	33.2
Gross national savings, %/GDP	17.0	17.3	15.7	16.0	15.2	16.0	12.6	13.6	12.9	14.4	14.4	12.2
Current account deficit, %/GDP	-3.7	-0.3	-3.7	-6.1	-5.9	-5.7	-2.3	-6.6	-10.3	-7.4	-6.5	-7.5
Fixed broadband subscribers/100		0	1	4	7	8	9	10
Time to start a business, days		38 (2003)	6				6

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.[334] 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.[335]

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 financial environment.[336] 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".[337]

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.[338] She also outlined some of the obstacles to female participation in the labour force, which is low and has been declining (to around 25%).[339]

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 relations

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.[340]

151. In 2010, Turkey was the UK's 22^nd-largest export destination, and its 19^th-largest source of imports.[341] 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.[342] For Turkey, the UK was the 12^th-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.[343] 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".[344] However, as a destination for Turkish exports, the UK has consistently ranked second or third in recent years.[345] Tables 4 and 5 show recent UK-Turkey trade data.

Table 4: UK trade in goods with Turkey, £ bln, 2007-2011

	2007	2008	2009	2010	2011 Jan-Sep
UK exports	2.4	2.5	2.2	3.1	2.8
% change		4.2	-12.0	40.9
UK imports	4.7	4.7	4.3	5.0	4.0
% change		0	-8.5	16.3
Total trade	7.1	7.1	6.5	8.1	6.8
% change		0	-8.5	24.6
UK deficit	2.3	2.2	2.1	1.9	1.2

Sources: Ev 71 [FCO] and HMRC Overseas Trade Statistics

Table 5: UK trade in goods and services with Turkey, £ bln, 2007-2010

	2007	2008	2009	2010
UK exports	3.1	3.3	3.3	4.4
% change		6.5	0	33
UK imports	5.9	6.5	6.0	7.0
% change		10.2	-7.7	16.7
Total trade	9.0	9.8	9.3	11.3
% change		8.9	-5.4	21.5
UK deficit	2.8	3.2	2.7	2.6

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%.[346]

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.[347] We had two concerns about the target:

Arbitrariness. The Government has set the same target, of a doubling in bilateral trade, with respect to Brazil, Kuwait, India, Qatar and South Africa.[348] 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".[349] David Lidington effectively acknowledged that the target was an approximate one, intended primarily to galvanise cross-Government effort.[350]
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".[351]

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).[352]
signed with its Turkish counterpart a Knowledge Partnership which is intended to encourage co-operation between UK and Turkish universities, researchers and industry.[353] 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.[354]
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".[355]

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.[356] Dr Toksoz identified agriculture, health and pharmaceuticals as further sectors potentially offering opportunities for UK firms, while the CBI also mentioned the creative industries.[357] The CBI has itself designated Turkey as a priority market for increasing UK exports and attracting inward investment to the UK.[358] 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.[359]

155. In partnership with TheCityUK, UKTI has identified Turkey as one of six priority markets for the UK financial services sector.[360] TheCityUK has also made Turkey a priority market of its own, identifying "very strong growth prospects there".[361] 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.[362] The Turkish authorities also have ambitions to develop Istanbul as an international financial centre.[363] 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 firms—especially contractors—in parts of the Middle East, North Africa, the South Caucasus and Central Asia, a number of witnesses felt that this strategy offered considerable potential.[364] The CBI stated that one in four of the largest companies in the Middle East and North Africa was Turkish.[365] UK companies are already working alongside Turkish counterparts in Iraq, Saudi Arabia and Turkmenistan, for example.[366]

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.[367] 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.[368] 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.[369] The Scotch Whisky Association said that trade regulations could change quickly and with little consultation.[370]

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 community.[371] The UK-Turkey CEO Forum has a workstream on "brand Turkey", intended to improve perceptions among the UK business community about doing business in Turkey,[372] 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".[373]

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.

DEFENCE SECTOR

160. UKTI's Defence and Security Organisation (DSO) is promoting UK defence and security exports in Turkey.[374] The CBI agreed that aerospace and defence were among the sectors where there was scope for stronger UK-Turkey collaboration.[375] 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.[376]

161. As UKTI's Defence and Security Organisation seeks to expand the UK's share of the Turkish defence and security market, we will—as one of the Committees on Arms Export Controls—closely 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 Union:

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 acquis—for 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:

Scope. 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.[377] 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.[378]
Non-implementation. Turkey is not implementing the Customs Union fully: barriers to trade which should have been eliminated under its terms remain in place.[379] 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.[380] Members of the Scotch Whisky Association (SWA) face particular problems, with their exports subject to import permit requirements and a discriminatory excise tax regime.[381] 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.[382] A number of witnesses said that the decision-making mechanisms in the Customs Union that were intended to resolve problems were not working effectively.[383] 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 benchmarks—but 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).[384]

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.[385]

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

327 David Cameron, speech in Ankara, 27 July 2010, via Number 10 website (www.number10.gov.uk) Back

328 "BRICS and BICIS", The World in 2010 blogpost, www.economist.com/blogs/theworldin2010/2009/11/acronyms_4, 29 November 2009. The other "CIVETS" are Colombia, Indonesia, Vietnam, Egypt and South Africa. Back

329 GDP, current prices, $; IMF World Economic Outlook database Back

330 Q 159 Back

331 For example, Dr Toksoz at Q 159 Back

332 Ev 135 [TheCityUK] Back

333 Turkish Statistical Institute press release No. 252, 12 December 2011 (constant prices) Back

334 Q 136 [Dr Robins], Ev 85 [Dr Bechev] Back

335 For example, Ev 82 [Mr Park], 85 [Dr Bechev] Back

336 "Fundamentals in focus", Financial Times, 18 October 2011; World Bank, Global Economic Prospects, Vol. 4, January 2012 Back

337 Q 159 Back