As expected, Turkey’s troubling disengagement from political and security cooperation with the United States due to President Recep Tayyip Erdoğan’s anti-Western, Islamist policies has started to take a toll on business and trade ties.
As of today, Turkey is the only member of the 28-nation NATO alliance that has failed to secure a temporary exemption from tariffs on steel and aluminum that went into effect on March 23, 2018. The countries that received waivers from US President Donald Trump’s move to impose 25 percent tariffs on imported steel and 10 percent on imported aluminum were Argentina, Australia, Brazil, Canada, Mexico, South Korea and the member countries of the European Union. Earlier this month the White House announced that the US had extended temporary waivers for Canada, Mexico and the EU for another 30 days during which further negotiations would take place. South Korea has already reached a final agreement with the US on steel imports, while Argentina, Australia and Brazil are still negotiating, although agreements in principle have already been made.
Turkey supplies 5.6 percent of US steel imports and ranks sixth among top steel exporters to the US, led by Canada (16.7 percent), Brazil (13.2 percent) and South Korea (9.7 percent). The tariffs would hit Turkey the hardest considering that the iron and steel industry employs 56,681 people and is regarded as a strategic sector for the Turkish economy. In 2017 Turkey exported 18.3 million tons of iron and steel valued at $13.8 billion, which accounted for 8.5 percent of all Turkish exports. In this category, Turkey remains a net exporter, meaning that it contributes to the improvement of Turkey’s long-running, chronic current account deficit.
Among 65 steel manufacturing countries in the world, Turkey places eighth with 37.5 million tons in 2017 and comes in at second place in Europe after Germany. The US tariffs would hit Turkey hard on steel and to a lesser degree on aluminum, with the US accounting for only 2.1 of Turkish aluminum exports globally. The overall trade volume between Turkey and the US was $20.6 billion in 2017, but the trade data for the January-March period of this year show there was a decline of 16 percent in the trade volume compared to the same period of 2017. If the Turkish government cannot work out a deal with the US on steel, the decline for the remainder of the year may be higher than that posted for the first quarter of 2018.
Turkish Economy Minister Nihat Zeybekçi said on several occasions that negotiations with the US to find a solution to this problem are ongoing. But judging from the list of countries that received waivers, Ankara has failed to find a receptive ear in Washington. The Turkish minister on April 5 sent a letter to US Commerce Secretary Wilbur Ross to request waivers, but that letter apparently fell on deaf ears. Zeybekçi also threatened retaliatory measures on US imports if a deal is not worked out to the satisfaction of Turkey. “Specifically, in the iron and steel industry we export materials worth $1.2 billion and import materials worth $1.3 billion. It is we who have a trade deficit,” he said.
Retaliation seems by and large an empty threat, however, given the structural problems plaguing the iron and steel industry in Turkey, which is heavily dependent on imported materials and technology. The iron ore grade (tenor) in deposits in Turkey is low, making extraction not feasible or profitable. The same problem also applies to coal reserves. Although the government in June 2017 eliminated a television tax collected for the Turkish Radio and Broadcasting Organization (TRT) that equaled TL 42.5 million ($12 million), other taxes and fees such as an electricity consumption tax and contributions to energy and environmental funds continue to burden the iron and steel industry. Turkey still relies on the import of graphite electrodes, which are used to refine steel, although the government has been working with domestic steel manufacturers on a plan to produce these electrodes themselves.
Even before the US tariffs went into effect, Turkey’s steel exports to the US had dropped by 60 percent in terms of volume in the January-February period of 2018 over the same period last year. The drop in dollar value was 45 percent and stood at $134.6 million. It appears exports to the EU compensated for the loss, with Belgium, the Netherlands and Germany becoming the three top importers of Turkish steel in the same period. Well, this is not really good news given the fact that Turkey has serious political troubles with these three EU member states, and one cannot rule out the spillover impact of unresolved political issues on trade and business ties even though Turkey and the EU adopted a 1996 agreement to freely trade steel and iron products.
Turkey’s insistence on finalizing the purchase of S-400 long range missiles from Russia and Erdoğan’s stated commitment to expanding defense industry cooperation to cover other military and defense products are complicating trade and business ties with the US. The jailing of US nationals and the arrest of local employees of US consulates, apparently on fabricated charges as part of a hostage taking policy pursued by the Erdoğan government, have antagonized many circles in Washington, including leading members of Congress, who declared their intention to sanction Turkey’s officials and halt military sales and technology transfer.
The suspension of the rule of law and the seizure of private assets worth at least $11 billion in a political vendetta that has resulted in the confiscation of over 1,000 firms since 2016 have already rattled the Turkish business environment and led to an exodus by some wealthy businesspeople who no longer trust the fate of their assets in Turkey. Under Erdoğan’s iron-grip one-man rule that even interferes in sound economic and fiscal policies to appease his own constituency, coupled with mass purges of well-qualified human resources, the country has lost its ability to generate sound economic and fiscal policies to counter risks. The Erdoğan government does not seem to really be interested in adopting the experience of others, especially the US, in market-oriented policies that promote job growth, reduce poverty, stimulate innovation and enhance technological knowhow.
Under these circumstances, the US does not seem comfortable working with the Erdoğan government in addressing economic troubles. Perhaps the exclusion of Turkey from the steel and aluminum waivers is not the only headache the Turkish government will face. It may only be a start and a harbinger of more punitive actions that may come Erdoğan’s way.