TURKEY’S FOREIGN TRADE

1990-2006

Main Developments in Turkey’s Foreign Trade

Beginning in 1980, Turkey changed its economic development policy from “import substitution for industrialization” to an “export-oriented growth” strategy. Its economy opened up to world trade, export-promotion incentives were initiated (including tax exemptions, rebates and favorable credit terms), direct import controls were eliminated, and quantity restrictions were dismantled. State intervention in the economy was reduced to a minimum. As a result of these efforts, Turkey has increased its share of the world export pie from 0.15% in 1980 to 0.70% in 2005. Between 1980 and last year, Turkey’s exports rose from $2.9 billion to $85.3 billion. Not only was there a quantitative shift in exports, but the composition of exported goods also changed substantially. Whereas the previously dominant products in exports were mainly agricultural products and raw materials, high-value added industrial products are now gaining share. Transformation still continues with rising exports of machinery and transport equipment.

        The integration of the Turkish economy to global markets has been gradually escalating. The graph below shows the share of foreign trade in Turkey’ gross national product (GNP).

         The share of foreign trade in the whole economy has risen significantly since the 1980s. The volume of foreign trade consisted of 8.9% of GNP in 1970 while this share rose to 15.6, 23.2 and 41.1% in 1980, 1990 and 2000, respectively. Last year the volume of foreign trade in GNP rose by 4.4 points to 57.1%.

                           *Annual GNP is estimated for 2006.

In 2000, foreign trade volume rose to $82.3 billion while the export/import ratio was 51% and the share of foreign trade volume in GNP was 41.1%. In 2006, foreign trade made up 57.1% of GNP, while the export/import ratio was 62.1%. Hence, the ratio of foreign trade to GNP and the export/import ratio of Turkey in 2006 are better off compared to 2000.

Exports of $13 billion in 1990 rose to $21.6 billion in 1995 and $27.8 billion in 2000. The average annual growth rate of exports was 10.8% during 1990-1995 and 5.1% in 1995-2000. The primary reason for the high growth rate of exports during 1990-1995 was a considerable increase in the import demand of the European Union. Moreover, the devaluation of TL in 1994 gave a substantial competitive edge to Turkish exporters. However, in 1997 and 1998, as a result of the economic crises in Newly Industrialized Asian Countries (NICs) and the Russian Federation, the rate of increase in world trade and world demand shrank. Consequently, Turkish exports fell by 1.4% in 1999 but Turkey’s export growth rate started to accelerate at an important pace after 2000. Turkey’s exports grew by 12.8, 15.1, 31.0, 33.7, 16.3 and 16.1% respectively over the last six years. Hence, the average annual growth rate of exports of 2000-2006 was 20.6%, or more than 2.5 times the rate in 1990-2000.

Imports of Turkey, which were $22.3 billion in 1990, grew by 9.9% annually between 1990 and 1995 to reached $35.7 billion in the latter year. The average annual growth rate between 1995 and 2000 was 8.8%. Turkey’s joining the World Trade Organization in 1995, its entrance to the final stage of Customs Union with the European Union in 1996 and economic growth all worked to accelerate imports. However, imports shrank by 24% in 2001 due to the economic crisis and the devaluation of the domestic currency. In the following period, the increasing input needs of the growing domestic manufacturing sector led to a rising imports of intermediate and capital goods, while postponed purchases started to be realized and imports of consumer goods rose as well. As a result, in 2004 total imports shot up 40.7%. As demand for automobiles and other consumer goods settled down, the rate of increase of imports of consumer goods fell from 54.9% in 2004 to 15.5 and 14.4% in 2005 and 2006, respectively. As a result, the rate of increase for total imports was 19.7 and 17.6% in these two years. The share of intermediate and capital goods in total imports last year was 87.9%.

After the 9.5% contraction of the economy in 2001, continuously high growth rates were experienced. Real GNP rose by approximately 7.9, 5.9, 9.9 and 7.6% in the next four years. The first three quarters of 2005 indicates a 5.7% increase in real GNP. The spectacular GNP growth pushed the import demand for intermediate and capital goods up. The escalation in oil prices acted as another factor driving imports, especially in 2005, when Turkey’s oil imports by 42% and its share in total imports rose from 6.2% to 7.4%. The escalation in energy prices continued in 2006 but was not as strong as in the previous year. As a result, imports of oil rose by 15.1% and approached $10 billion.

The export/import ratio records the highest levels following important devaluations and declines in the aftermath. The ratio jumped from 51% in 2000 to 75.7% in 2001 and started to decline afterwards until it reached 62.1% last year. Although declining, the ratio is adequately high compared to its level in 2000.

The average annual increase in the volume of trade fell from 10.2% in 1990-1995 to 7.5% in 1995-2000 and rose to 18% in 2000-2006. The share of trade volume in GNP, which has continued to increase since 1990, is estimated to have reached a value of 57.1% last year.

Turkey's foreign trade balance has been negative since 1947. Foreign trade deficit (CIF imports – FOB exports) shrank by $16.7 billion to $10.1 billion in 2001 due to the effects of the devaluation of the Turkish lira. The deficit started to increase in 2002 and reached $52 billion in 2006 with an average annual rising rate of 35.4% in 2002-2006. Despite the continuing increase, the rate of increase has recently slowed down.

MAIN DEVELOPMENTS IN EXPORTS

When exports are examined sector by sector, we see that last year agricultural products comprised 10.1%, mining products made up 7.6% and manufactures accounted for 81.0% of total exports.

The main change in the period from 1990 to 2006 is the shift from agricultural products to manufactured goods. Over these 16 years, the average annual rate of increase for exports of agricultural products was 6.2% while that for manufactured goods was 13.8%. As a result, the share of manufactured goods rose by 13.3 points and the share of agricultural products fell by 15.4 points.

Despite the low growth in agricultural exports in the long term, agricultural products showed a high increase at 27.8% in 2005. However, the growth of the agricultural exports slowed down to 3.5% last year. In recent years, the trend of agricultural exports has been mostly dependent on the exports of hazelnuts, which fell by 24.6% last year after rising by 77.4 and 63.7% in 2004 and 2005, respectively. Accordingly, the share of hazelnuts in agricultural exports reached 14.5% in 2005 and fell to 10.6% last year. Last year's export performance of hazelnuts was not at a desirable level because the increase in the quantity exported did not compensate for a large drop in prices.

Olive oil, whose production and exports move up and down in two-year cycles, is another dominant product in Turkish agricultural exports. The share of olive oil in agricultural exports reached 3.6% in 2005, during the upper part of the cycle. Last year's export performance was also satisfactory due to the rise in prices.

Turkish agricultural exports depend largely on food rather than agricultural raw materials. The main agricultural raw material that Turkey exports is textile fibers, whose exports barely equal 30% of its imports.

The share of mining products fell from 6.8% in the 1990s to 4.2% in 2000. However, exports of mining products have been in a surge in the new millennium and their share in exports reached 7.6% last year. Exports of petroleum products to Italy, South Africa, Singapore and the US played a large part in the surge in 2000-2006.

Manufactured goods exports, which totaled nearly $70 billion last year, saw average annual increases of 10.0% in the 1990s and 20.4% over the last six years. The composition of the exports of manufactured goods has undergone important changes as well. Exports of textiles and clothing, which had a share of 36.8% in 1990 and 40.0% in 1995, have not kept pace, especially with exports of machinery and transportation equipment, so their share fell to 23% last year. On the other hand, the share of machinery and transportation equipment rose from 6.6 to 30.7% between 1990 and 2006. The change in the composition has moved Turkey closer to international norms.

The machinery and transportation equipment sector, among others, is worth noting here for its contributions to the rise in exports of manufactured goods. A total of 55% of the exports in this product group stems from transportation equipment, 45% due to automotive products alone.

Between 2000 and 2006, exports of automotive products, electrical and non-electrical machinery and office machines and telecommunications equipment rose annually on average by 40.3, 26.2 and 20.8, respectively. Exports of office machines and telecommunications equipment fell by 1.6% last year due to the difficulties in adapting to the shift from old-style vacuum tube TVs to LCD and plasma models.

Textiles and clothing, despite the decline in their share in total exports, continues to be an important component of Turkish exports. Global competition in the sector has intensified after the removal of quotas. While Turkish textiles and clothing exports to the EU market rose by 8.4 and 6.4%, exports to the US fell by 14.3 and 18.0% in 2005 and 2006, respectively. This is because price competition has been tougher in the US and particularly in clothing.

Exports of iron and steel rose by 81% in 2004 parallel to the price movements in global markets. The jump in the exports of iron and steel was followed by a slump in 2005, succeeded by another rise of 24.1% last year. Exports of iron and steel to the EU and the US, which experienced drops of 14.5 and 34.5 respectively in 2005, staged a quick recovery last year to rise by 46.4 and 33.8%, respectively. Chinese demand and supply has become one of the major factors determining global prices in the sector. China is supplying one-third of global demand in iron and steel and has become a net exporter despite its growing need for the product.

The graph on the left shows the makeup of Turkey’s exports in comparison to the world  in 2005. According to the graph, 11.3% of Turkish exports are agricultural goods, 6.2% are mining products and 81.8% are manufactured goods.

The share of agricultural and mining products in Turkish exports fell and the breakdown of exports into main sectors resembled those of world over the last 20 years. The share of manufactured goods in Turkish exports is now higher than the world average, indicating a high level of industrialization. On the other hand, the share of agricultural products was 2.9 points above the world average in 2005, which is a natural result of the geographical advantages of Turkey in this respect. It must be noted that the share of mining products in exports is about one-third of the world average, resulting from the fact that Turkey is an energy importer country.

At least as important as the share of manufactured goods in total exports is the composition of manufactured goods, which indicates that the share of the traditional industrial sectors (clothing, textiles, iron and steel, semi-manufactured goods) in the exports of manufactured goods is still higher than that of the world. Turkey stands to have a greater share compared to the world average in automotive products as well. Also, the share of other machinery including office and telecommunications equipment has risen, getting closer to the world average. Although the composition of its manufactured goods exports implies challenges for Turkey, it is also understood that Turkey will keep its export potential in traditional sectors while it expands into more technology-intensive sectors.

Exports By Country Groups

The European Union (EU-27) has been the destination for more than half of total exports. Among these countries, Germany has been the largest market for Turkish exporters. However, Turkish exports are not as dependent as they were in 1990s on this specific market. While the share of Germany in total exports was nearly 25% in 1990, last year it was just 11.4%. On the other hand, some other European countries such as Britain, Spain and Romania gained share.

In addition, exports to non-EU European countries moved in a faster pace than aggregate exports, with their share of total exports rising from 6.7 to 9.2% in 2000-2006. Approximately 50% of exports to the region are destined for the Russian Federation. Although exports to the Russian Federation fell during the 1998 economic crisis, the share of Russian Federation in Turkish exports have risen since 2000 and approached the level of 1990, before the fall of the Soviet Union.

Exports to Africa are mainly directed towards northern countries. Free trade agreements recently signed with Morocco, Tunisia and Egypt would further push Turkish exports to North Africa up. On the other hand, the share of other African countries in total exports advanced as a result of the high rates of increase. The rise in the share of other African countries can be attributed to the regional strategy that was put into effect in 2003 to promote trade and economic relations.

Exports to North American countries and especially the US had a larger rate of increase than aggregate exports during the period 1995-2000. However, the pace of exports to the region lost pace during the 2000s, which is mainly attributable to the 6.2, 4.9 and 21.4% declines in iron and steel, textiles and clothing exports, respectively, over the last two years.

The Near and Middle East has been an important export destination for Turkey due to a number of reasons, such as geographical proximity, cultural links and complementarity in needs. Exports to the region performed particularly high during the period from 2000 to 2005. However, the lack of political stability is preventing trade from fulfilling its potential, and exports to the region last year had a rate of increase 5.1 points lower than total exports.

 Exports to other Asian (Far Eastern) countries rose fast after 2000, particularly in 2005 and 2006. The region constituted 4.6% of total exports last year, with Kazakhstan and China making up a large part of this share.

Free zones, which provide vital financial, warehousing and distributional facilities to firms, performed highly regarding the rate of increase in 2000s. However, exports to free zones fell by 0.2% last year. On the other hand, imports from free zones rose by 23.3 last year following a decline in 2005. The total trade volume of free zones rose by 5.7 and 2.0% in 2005 and 2006, respectively. The slowdown in the performance of free zones is attributable to the changes in legal and fiscal arrangements relating to the zones.

BASIC DEVELOPMENTS IN IMPORTS

Conventionally, imports of intermediate goods, which fluctuate in parallel to Turkey’s economic growth, constitute approximately 70% of total imports. The share of intermediate goods declines in periods when consumption of final products accelerates.

Although the economy has been growing in recent years, growth in final consumption has not been so strong to bring the share of consumption goods up to the level of 2000. Growth is getting even more dependent on production rather than consumption, which has recently decreased the share of consumption goods in imports. The breakdown of imports progress in a desired path for a country that is implementing a program is to keep the price level down and increase production.

  Imports By Country Groups

European countries have a crucial share approaching 70% in Turkish imports, largely due to their geographical proximity to Turkey, their level of economic development and the Customs Union with the EU.

The share of EU in imports is 42.4%, which is quite high compared to other country groups but lower than the share of the EU in exports. The pace of imports from the EU was faster than the pace of total imports in the 1990s but slower since 2000.

Germany is the largest source of Turkish imports in the EU, but last year among all countries the Russian Federation became the largest supplier of Turkey. The rise in energy prices caused imports from the Russian Federation and Iran to jump, so that imports from the Russian Federation rose by 42.9 and 35.6 and imports from Iran rose by 76.8 and 62.1% in 2005 and 2006, respectively.

North America had a share of 11% in Turkish imports in 1990 but its share fell to 4.8% last year. The decline was particularly in the imports of food, office machines and telecommunications equipment, railway and tramway locomotives, and ships and other floating structures. However, imports of various products, such as textile fibers, metalliferous ores and metal scrap, pharmaceutical products and professional, scientific and controlling instruments rose over the last decade.

The share of Near and Middle Eastern countries in total imports fell until recently. As energy imports from Iran soared, imports from the region rose by 42.7 and 31.8% in the last two years.

Imports from North African countries are mainly mining products and mostly depend on the share of these countries in Turkish energy imports. Although energy imports have risen in the recent years, North African countries had a minor role in this increase compared to the Russian Federation and Iran.

Among other African countries, South Africa has a rising share in Turkish imports as a supplier of gold to the domestic jewelry sector.

In brief, Turkey’s foreign trade has developed enormously in terms of quantity and quality since the 1980s. Export performance has been spectacular especially for the last four years. Turkey has been implementing new strategies to ensure the sustainability of these developments and to diversify its exports and imports further on the regional and sectoral basis. The aim of Turkey is to exceed $500 billion in exports by the 100th anniversary of the republic.