Select Committee on Trade and Industry Appendices to the Report



Memorandum submitted by The Department of Trade and Industry


  1.  This Memorandum contains a summary of the economic, trade and investment situation in Turkey, followed by an account of the prospects for EU enlargement in those areas of particular interest to the DTI. The annexes cover: the activities in Turkey of British Trade International [Annex A]; and detailed trade statistics [Annex B].


  2.  Turkey occupies a key geopolitical position: straddling Europe and Asia, regularly returning Governments which are Western in outlook. It is a rare example of a secular democracy in an overwhelmingly Muslim country. Turkey has been a member of the NATO Alliance since 1952. It signed an Association Agreement (the "Ankara Agreement") with the EU in 1963, and applied for full membership in 1987. It has been in a Customs Union with the EU since 1996, and was confirmed as a candidate for EU membership at the Helsinki European Council in December 1999.

  3.  Turkey is a middle income country, with a population of 64 million and a GDP per capita of around $3,000. It has undergone a significant transformation over the last 40 years. In 1960, agriculture accounted for over 40 per cent of GDP. By 1998, services accounted for over half of GDP, manufacturing another fifth, while agriculture had fallen to around a sixth of GDP.

  4.  The Turkish economy has been characterised by strong growth, averaging around 4.5 per cent per annual since 1970. However, growth has at times fluctuated sharply and has been accompanied by high inflation (the consumer price index (CPI) ranged between 64 per cent and 105 per cent over the 1990s) and large budget deficits (the consolidated public sector deficit reached 13 per cent of GDP in 1998). There have been substantial trade deficits in recent years ($14 billion in 1998, about 7 per cent of GDP), largely offset by strong earnings from services, especially tourism, and remittances from Turks working overseas. Turkey's main exports of goods in 1998 were textiles (38 per cent), followed by agriculture/livestock (11 per cent) and iron/steel (8 per cent). Turkey imports a wide range of goods with the principal items in 1998 being machinery and equipment (19 per cent), chemicals (11 per cent) and vehicles (11 per cent). [See Annex B.]

  5.  In 1999 the three party coalition government, led by Prime Minister Bu­lent Ecevit, launched a programme designed to address fundamental structural weaknesses in the economy. The programme, which is supported by the IMF (through a 3 year Standby Agreement) and the World Bank, aims to introduce structural reforms in the financial, energy, social security and fiscal sectors. Targets for the end of 2000 include: bringing the CPI down to 25 per cent; a primary government sector budget surplus of £4.5 billion (£9.1 billion including privatisation receipts) equivalent to 2.2 per cent of GNP; and growth of 5 per cent. Since the launch of the programme there has been a managed depreciation of the Turkish lira, increased budget transparency and fiscal discipline, a start on privatisation and a reduced state guarantee on bank deposits combined with tighter regulatory controls.

  6.  The results of the programme have been broadly positive so far. GNP growth was 4.3 per cent in the first half of 2000. Inflation has slowed, despite the impact of high oil prices. Annual consumer price inflation fell from 64 per cent in September 1999 to 49 per cent in September 2000. The primary budget surplus between January and August 2000 was £5 billion. However, an import boom and rising oil prices has led to a substantial increase in the trade deficit, which doubled to reach $11.7 billion for the first half of 2000.

  7.  Turkey was affected by two major earthquakes in the second half of 1999 which caused considerable economic damage in the north west part of the country, as well as significant loss of life. Most of the reconstruction costs (estimated to be $4-6 billion) are being financed by special loans from international institutions including the IMF, World Bank and the EU. The UK is also contributing to the reconstruction effort through a study into infrastructure in Yalova province and offering to play a part in the reconstruction phase (British Earthquake Consortium for Turkey).


  8.  Turkey's privatisation programme was launched in 1985 with ambitious targets. But a number of factors delayed its implementation, including political instability, the reluctance of politicians to give up control of public enterprises, opaque privatisation techniques and repeated corruption scandals. As a result, privatisation receipts were only $4.6 billion between 1985 and the end of 1999, generated mainly from the sale of public shares in Isbank and the sale of minority holdings on some state-owned institutions.

  9.  Under the IMF Standby Agreement, privatisation is one of the key policy areas aimed at supporting fiscal policies. The government set a highly ambitious target of $7.6 billion in privatisation revenues for 2000 alone. It has made substantial progress towards this target. Privatisation receipts for the first 8 months of the year were $5.4 billion, accounting for 71 per cent of the target. This stemmed from the sale of government stakes in enterprises such as Petrol Ofisi (fuel retailing), TUPRAS (Turkish Oil Refinery Company), as well as the sale of the third mobile phone licence for $2.9 billion to the Isbank-Telecom Italia consortium. Part of Turkish Airlines (the tender for which is expected to be announced in November), the whole of Eregli Iron and Steel Company and Turk Telekom (the telecommunications company) are due to be privatised by the end of 2000. In respect of the last, the Turkish Government has been forced to increase to 34 per cent its proposed sale of a strategic stake, after international telecommunications companies showed no interest in an earlier offer of 20 per cent.


  10.  Turkey is one of the UK's top twelve priority under-exploited markets. The UK was Turkey's third largest export market destination and fifth largest import source in 1999. Total bilateral trade reached approximately $4 billion in 1999 and $3.65 billion in the first eight months of this year.

  11.  The UK's largest exports to Turkey in 1999 were telecommunications, sound recording and reproducing equipment. This was due to a real increase in Turkish political and popular awareness of the potential of telecommunications in economic development, combined with a need to update the existing network. The exceptional growth in the telecommunications sector is mainly in fibre optic cable systems, satellite and mobile communications. Motorola UK has signed a $500 million deal over three years with Turk Telekom to upgrade and expand their existing systems.

  12.  Turkey's increasing wealth has also led to a demand in the medical and pharmaceutical sector from the UK in the form of setting up private hospitals and medical equipment. This is now the UK's second largest area of exports to Turkey. There are also good opportunities for British exporters and investors in the areas of automotive parts, power generation and general industrial equipment, office machines and transport equipment, followed by chemicals and related products.

  13.  British Trade International (BTI) launched a three-year Turkey: Positioned for Business Campaign in June 1998 which is designed to give UK exports to Turkey a boost. [See Annex A.]

  14.  Turkey's main exports to the UK are apparel, clothing accessories and textiles. Many major UK clothing retailers purchase products from Turkish suppliers.


  15.  ECGD has provided a separate memorandum on its activities including the Ilisu Hydro-Electric Dam.


  16.  UK defence sales to Turkey average around £100 million per annum in niche markets, eg communications equipment and Land Rover vehicles. But sales topped £400 million in 1999-2000 as a result of successful bids by British firms to supply the MBD Rapier MK2 missile to the Turkish Air Force, M Command System and Sonar 2093 to the Turkish Navy, and satellite receiving equipment for all three services. Moreover, the British defence industry has prospects to supply in excess of £1 billion worth of equipment into Turkey over the next 5 years. These include opportunities to supply self-propelled air defence guns, corvettes, armoured personnel carriers, aircraft upgrades and sub-systems for Turkey's new attack helicopters.

  17.  Arms sales to Turkey are subject to the same scrutiny as all other destinations, in line with the consolidated EU and national arms export licensing criteria. These criteria state that an export licence should not be issued if there is a clearly identifiable risk that the equipment might be used for internal repression or external aggression. Each licence application for Turkey is assessed on a case by case basis in line with these criteria. The situation in south east (predominantly Kurdish) Turkey is carefully considered (in line with the internal repression criteria), along with Turkey's record on external aggression (eg incursions into northern Iraq). The majority of export licence applications for Turkey are approved each year. Full details are set out in the Government's Annual Report on Strategic Export Controls.


  18.  The Turkish Government is only now coming to grips with the need to improve on its record for encouraging FDI, which has averaged a little over $1 billion per year over the past decade. Total approved FDI since 1980, when the economy began to open up, has reached only $27.5 billion. High inflation and political and economic volatility have been the main reasons behind investor hesitation. However, the Turkish Government removed a constitutional obstacle to the provision of international arbitration on major public sector contracts in January 2000 in order to create a more attractive investment climate.

  19.  Total FDI approved was $1.6 billion in 1998 and $1.7 billion in 1999. This figure looks set to accelerate, given that a total of $1.9 billion was authorised in the first nine months of this year. According to cumulative figures to the end of September 2000, the UK was the fifth largest source of FDI in Turkey, with a total of $2 billion authorised (7.3 per cent of the cumulative total of FDI). The other leading foreign investors are France (19 per cent) especially in the automotive sector (Renault), Germany (13 per cent), The Netherlands (11.3 per cent) and USA (11 per cent).

  20.  Major British companies with a presence in Turkey include BP, Shell, Unilever, Lucas Industries, Rolls Royce, AstraZeneca, Glaxo Wellcome, HSBC as well as retailers Marks and Spencer, Laura Ashley and British Home Stores (BHS).


  21.  The UK is the second largest recipient of Turkish direct investment (the cumulative total of Turkish investment in the UK to the end of September 2000 was $588 million). Examples include Toprak, a Turkish-owned sanitary ware producer that is currently building a $72 million factory, covering 400,000 square feet at Deeside in North Wales. This factory will produce ceramic wall tiles and bathroom suites for British and West European markets, with a workforce of 430. Exsa (part of the Sabanci Group with assets of $10.5 billion) has been established in the UK for several years. It has captured a 6 per cent share of the EU market for polyester yarn from its manufacturing base in Leeds.


  22.  Relations between the EU and Turkey are conducted on the basis of the 1963 Association Agreement, one of the earliest bilateral treaties which the EU negotiated with a non-member country. The Association Agreement set out the aim of "ever closer bonds" between the peoples of Turkey and the EEC, to be achieved in part by facilitating the accession of Turkey "at a later date". In the course of Association, a Customs Union was to be established and the economic policies of the Community and Turkey more closely aligned. Under a Customs Union, not only are import restrictions removed between the contracting parties (as they are in a free trade area) but the partners also agree to implement a common trade regime towards third countries.

  23.  After a transitional period lasting 22 years, the Customs Union duly entered into force on 1 January 1996, and has become the backbone of the country's relationship with the EU. The Customs Union has eliminated duties and other import restrictions on trade in manufactured goods. Agricultural produce is not part of the Customs Union but is covered in a regime of tariff concessions. The Association Agreement set out the long-term aim of free trade in agriculture and the progressive achievement of free movement for workers. The lack of progress towards these goals has been a source of contention in EU/Turkey relations.

  24.  The Customs Union has led to a significant increase in the value of trade between the EU and Turkey from $27.9 billion in 1995 to $35.8 billion in 1999, enabling the EU to strengthen its position as Turkey's most important trade partner. The EU now accounts for more than 50 per cent of Turkish trade. A separate agreement between the European Coal and Steel Community (ECSC) and Turkey was reached in 1996 to establish a free trade area covering coal and steel products by 1999. This free trade area will be integrated into the Customs Union after 2002 when the ECSC Treaty expires.

  25.  The institutional framework set up under the Association Agreement and Customs Union has not met as frequently as envisaged in recent years, largely for political reasons. The Association Council held in April of this year was the first for three years. Similarly, the Customs Union Joint Committee has not met as regularly as planned.

  26.  The Customs Union also requires Turkey to adopt large parts of the acquis communautaire, particularly in the areas of the free movement of goods, competition, customs, commercial policy and the protection of intellectual, industrial and commercial property. In 1998, the Cardiff European Council endorsed a European Strategy designed to bring Turkey closer to the EU in every field. The Strategy covers the free movement of capital, services, public procurement, industrial and SME policy, telecommunications and information society, scientific and technical research, energy and consumer protection. Turkey does not however have any legal obligations under this programme.


  27.  The Helsinki European Council of December 1999 recognised Turkey as a candidate country for EU membership, but did not invite Turkey to open accession negotiations. As with other candidates, the EU's policy is that negotiations will not be opened until the EU is satisfied that Turkey meets the political criteria for membership set by the Copenhagen European Council of June 1993. These concern democracy, rule of law, human rights, and the protection of minorities. As such it is not possible at this stage to speculate on a timetable for Turkish membership.

  28.  Full implementation of the Customs Union should prepare Turkey to meet many of the obligations of membership, facilitating negotiations once the EU decides to open formal accession negotiations. Moreover, Turkey's actions under the European Strategy and the forthcoming Accession Partnership, which is due to be published on 8 November and is designed to put Turkey's pre-accession strategy on an equal footing with the 12 other candidate countries, should also make a major contribution to aligning Turkey better with the EU in many Single Market areas.


  29.  The European Commission plans for Turkey to receive

177 million (£102.9 million) per year for the next three years. This will be made up of

50 million (£29.1 million) per year from two new funding Regulations specifically for Turkey and

127 million (£73.8 million) per year from "MEDA II", the EU's external spending envelope for the Mediterranean and North Africa from 2000. These amounts are within the overall financial ceilings imposed on EU external spending from 2000-06 by EU Heads of Governments and, provided those ceilings continue to be respected, the Government has no objection to those amounts for Turkey. Although the Government's priority for EU external spending is to shift the balance more in favour of the poorest countries, the Government recognises the case for Turkey, post-earthquake and pre-accession to the Community, to qualify for assistance. In October 2000 the Commission presented a proposal to Member States for technical assistance to Turkey in the field of quality standards related to the functioning of the Customs Union. Assistance of this kind is necessary to enable Turkey to upgrade its administrative capacities and implement the acquis communautaire effectively.


  30.  The European Commission's last Report on Progress of Turkey towards Accession was published in October 1999. (It is available through the European Commission's website The Report concluded that Turkey continues to make most progress in alignment in the areas covered by the Customs Union and, to a lesser extent, in areas covered by the European Strategy. The next progress report is due to be published on 8 November. Particular areas of the acquis communautaire in which DTI has an interest are examined below.


  31.  The Customs Union has required Turkey to align with the acquis communautaire in the areas of free movement of goods and the adoption of a common commercial policy. Turkey has singed Free Trade Agreements with the EFTA countries, the candidate countries from Central and Eastern Europe, as well as the Former Yugoslav Republic of Macedonia. It is also a signatory to the 1995 Euro-Mediterranean or "Barcelona" Process which seeks to establish a free trade area between the EU and the countries of the Southern and Eastern Mediterranean by 2010.

  32.  The Customs Union does however entitle both Turkey and the EU to deploy anti-dumping measures and certain other trade defence instruments against each other or against third countries in cases where harmful trade may be taking place. As a consequence, there are on-going EU anti-dumping investigations on steel stranded ropes and cables, colour televisions and paracetamol from Turkey. The only current measures on Turkish products are anti-dumping duties of between 3.3 per cent and 15.2 per cent on certain polyester yarns. There are currently no EU anti-subsidy measures or anti-subsidy investigations on Turkish products.


  33.  The UK drinks industry remain concerned over the continuing privileged position of TEKEL, the state alcohol, salt and tobacco conglomerate. Draft legislation affecting TEKEL still does not allow the importation of spirit drinks, for example whisky, on the basis of free and fair competition. The Government wishes to see Turkish competition law brought fully into line with EU standards. It also regards it as important that the Turkish authorities should ensure that their competition authorities are adequately resourced in terms of financing, staff numbers and qualifications and have sufficient statutory independence to do their job properly.


  34.  There has been real progress in terms of protection of intellectual property rights in Turkey. Turkey has aligned its legislation on a substantial part of the acquis communautaire in the area of copyright and related rights, patents, trade marks, designs and models and geographical indications. It has acceded to a number of multilateral conventions (Paris Convention, Berne Convention, etc.) and set up new structures to deal with the implementation of the relevant legislation. Patent protection on pharmaceutical products and processes has also been ensured in Turkey since January 1999. But book piracy has been a major problem in Turkey for over 10 years. Each of the 4 major UK publishers has between 60 and 100 ongoing infringement cases in Turkey at any given time.


  35.  The first round of negotiations of an EU/Turkey Free Trade Agreement on Services and Government Procurement took place in Ankara on 17-18 October 2000 based on an EU draft negotiating text. This envisages a transitional period of 10 years during which Turkey, bearing in mind its status as an EU accession candidate, shall progressively align its legislation with the acquis communautaire. Over the same period, restrictions on trade in services (and public procurement) between the EU and Turkey are to be substantially eliminated.

  36.  On public procurement, a draft law is expected to be presented to the Turkish Parliament very shortly. The Turkish Government claims this will open public tendering to international competition and comply with the acquis communautaire.


  37.  Turkey is keenly aware of the economic importance of the telecommunications sector. As part of a policy of liberalisation, the Turkish Post Telegram and Telephony (PTT) was separated into "Turk Telekom" and "Turkish Postal Administration" in 1995. Under a new telecommunications law, the Government intend to privatise up to 49 per cent of Turk Telekom, which will retain its monopoly position until 1 January 2003.

  The new telecommunications law also provides for the establishment of an independent regulatory authority.


  38.  There is minimal bilateral contact with Turkey on Science and Technology issues, the main link being through the British Council's "partnerships programme" (formerly known as "academic links"). Since 1982, this programme has supported an average of 40-60 exchanges annually of researchers and academics to promote collaborative links between British and Turkish scientists. In 1999-2000 almost 100 exchanges were supported. In the current year, the programme has a budget of £66,000 with 22 links. There is no EU Science and Technology Association Agreement in place with Turkey and the Government is not aware of any plans for one to be negotiated.


  39.  Turkey's energy policy initiatives are broadly in line with the EU objectives of security of energy supplies, diversification, adoption of market principles, environmental norms and increased energy efficiency.

  40.  Important areas for alignment with the acquis communautaire include the internal energy market, in particular compliance with the Electricity and Gas Directives, state interventions in the solid fuels sector, improvements in energy efficiency (including losses in power transmission and distribution) and promotion of the use of renewable energies.

  41.  For budgetary reasons, Turkey postponed in July plans to build its first nuclear power plant at Akkuyu. It will however reconsider reinstating the project over the next ten to twenty years. Turkey's recent ratification of the Energy Charter Treaty is welcome, not least for its contribution to the creation of a favourable climate for FDI in the energy sector.


  42.  Turkey is setting up the legislative framework to adopt the acquis communautaire covering consumer protection. In respect of company law, major differences still exist in areas such as sole traders, merger provisions, accounting and auditing legislation. Turkey is however seeking to draft legislation to fill the gaps with the acquis communautaire. Amendments to the Turkish Trade Law are expected to be submitted to the Turkish Government for approval in 2001.


  43.  The prospects for expanding business between the UK and Turkey are healthy. Customs Union, Turkey's recognition at Helsinki as a candidate country eligible to join the EU and Turkey's continuing work in aligning its legislation with the acquis communautaire should all strengthen Turkey's economic integration with the EU and continue to give a boost to trade and investment between the UK and Turkey. So too should the successful implementation of the IMF Standby Agreement and further privatisation of state owned enterprises. To improve trading conditions and attract further foreign investment Turkey needs to do more, with technical assistance from the EU as necessary, to enhance conditions for competition; in particular, by amending legislation in line with EU standards and upgrading administration in regulatory matters.

November 2000

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