House of Commons - Business and Enterprise

Select Committee on Business and Enterprise Written Evidence

Memorandum submitted by the Department for Business, Enterprise and Regulatory Reform (BERR)

THE ECONOMIC CONSEQUENCES OF TURKEY JOINING THE EU

EXECUTIVE SUMMARY

1. The UK remains strongly committed to Turkey's accession to the European Union, which we believe to be in the strategic interests of a prosperous and secure Europe.

2. Continuing to promote and support the progress and momentum of the accession process for Turkey will be a key part of the Government's strategy on Turkey, given the benefits gains for Turkey and EU Member States in fulfilling the legislative alignment criteria.

3. Based on current EU policies and knowledge, the direct net economic benefits of Turkey's accession to the EU would be positive but asymmetric: Turkey would gain proportionally more than the rest of the EU because of the relative sizes of the Turkish and EU economies. However, it is likely to take Turkey a decade or so to fulfil all the rules and obligations of EU membership and, with Turkey at an early stage in its preparations, its economy growing rapidly and the EU evolving at the same time, there are obvious difficulties in predicting the precise economic impact of Turkish accession.

4. Although it can be a difficult market in which to do business, Turkey also represents a sizeable and growing market for British goods and services. It is a country of strong economic potential with one of Europe's fastest growing economies with a predominantly young population of 72 million people that could help balance Europe's ageing population. The current Turkish Government sees reform and modernisation as a genuine priority (and not only for EU accession reasons).

5. From the economic point of view, Turkish accession will increase the size of the EU internal market and will enable further trade integration through the removal of trade restrictions in areas not currently covered in the Customs Union, eg agriculture and services, and the abolition of customs controls and some other technical barriers to trade. Turkey has a potentially large role in the EU's future energy security since it borders some of the richest hydrocarbon territories in the world and is already a key transit state for gas into the EU. Turkish accession would provide a stable market framework within which EU companies can transit gas to customers in the EU at competitive prices. Turkish accession could help improve access to these resources and their safe transportation into the rest of the EU by further securing the sections of the routes which transit Turkey.

6. Turkey's accession would also have an important impact on several transport modes. Its role as a corridor for road, rail, air and maritime pipeline connections between Europe and its southern neighbourhood would be strengthened.

7. Labour migration is another area where implications would arise from accession although it would be premature to attempt to assess the impact of Turkey joining the EU on the UK's labour market. The eventual impact would depend on the economic situation in the UK, Turkey, and the wider EU at the time of accession; the level of access granted to the UK labour market; decisions of other Member States on labour market access; and historical patterns of migration from Turkey to the UK and other EU member states.

8. A major part of the Government's strategy in Turkey is to deepen our trading relationship.[1] The proposed high level government to government forum will have a potentially important role to play in working towards this aim and addressing current market access disputes. Even with such a mechanism, we need to utilise all avenues to develop the necessary relationship with the Turkish Government. Lobbying by UK business and ourselves will remain an important element in this. The objective remains to support the Turkish Government in their aspiration to modernise their economy by:

— reinforcing key messages that simpler regulation and lighter government are good for trade;

— helping ease tension between protectionist elements and `free traders'; and

— raising a number of specific dispute cases.

9. Another part of the Government's strategy is to challenge potentially inaccurate perceptions in the UK that Turkey is not a sufficiently attractive market-place to warrant interest or perseverance. This perception is a significant factor in holding back stronger British interest in Turkey. Our major competitors show far less reluctance and have consequently enjoyed greater success than ours. Competition from developing economies such as China, Iran and Russia is also affecting the relative market share of all developed countries in Turkey including the UK's. It is notable that whilst there has been healthy growth in our trade overall, with bilateral trade having increased from £3.8 billion to £6.5 billion between 2002 and 2006, our relative market share has declined in the past five years from when we were in third place to now where we sit eighth in the table.

10. In addressing this perception, UKTI have already embarked on a programme to raise awareness of the opportunities in modern Turkey among the business community around the UK. While Turkey remains a difficult market because of the issues discussed in chapter 2 of this paper, the attractions of doing business there are considerable and will grow further as economic reform and preparations for EU accession progress. The economic figures make clear that business prospects have improved considerably. FDI interest in Turkey has grown rapidly as political and economic stability becomes more assured. It is no longer true to claim that it is not worth persevering. Yet the challenge remains for us to reach into UK boardrooms to understand and counter the caution that business appears to exhibit towards Turkey.

11. This memorandum incorporates material from BERR/UKTI, the FCO, Home Office, Defra and HMT.

INTRODUCTION

1. The road to integration with and accession to the EU has been a protracted and convoluted one for Turkey.

2. Turkey first applied for associate membership of what was then the European Economic Community (EEC) in 1959, and on 12 September 1963 signed the "Agreement Creating An Association Between The Republic of Turkey and the European Economic Community", also known as the Ankara Agreement. This agreement came into effect the following year on 12 December 1964. The Ankara Agreement sought to integrate Turkey into a customs union with the EEC whilst acknowledging the final goal of membership. In November 1970, a further "Additional Protocol" established a timetable for the abolition of tariffs and quotas on goods traded between Turkey and the EEC.

3. There was a temporary freeze in Turkish-EEC relations in 1980, following a military coup in Turkey. Relations were re-established in 1983 following multi-party elections and Turkey applied for full membership in 1987. The European Commission responded in 1990 by confirming Turkey's eventual membership but declining to begin accession negotiations immediately on the basis of concerns about Turkey's economic and political situation, including poor relations with Greece and conflict with Cyprus. This position was reaffirmed in 1997 when accession negotiations began with central and eastern European states but not with Turkey.

4. In 1995 a Customs Union between Turkey and the EU was established and took effect in 1996 which removed tariffs and quantitative restrictions on industrial goods. Since then there has been a significant increase in Turkey's share of the EU's foreign trade and Turkey is now the EU's 7th largest trading partner (2006).[2]

5. In 1999 Turkey was officially recognised as a candidate country and in 2004 the European Council concluded that Turkey sufficiently fulfilled the criteria agreed at the Copenhagen European Council in 1993 ("the Copenhagen criteria") to open accession negotiations. The negotiations were opened in October 2005 but in December 2006 the EU decided to suspend accession negotiations on eight chapters of the EU body of law (the acquis) because of Turkish refusal to meet its commitments under the Ankara Protocol to open its ports and airports to ships and aircraft from Cyprus. However, in practice this has not prevented steady, if slow, progress on the technical negotiations requesting opening positions and setting opening benchmarks in respect of the frozen chapters (those relevant to the Ankara Protocol) and opening others.

6. The UK has always been a strong supporter of enlargement as one of the EU's key tools for achieving stability and prosperity in our continent; securing agreement to start accession negotiations with Turkey was one of the notable successes of the UK's Presidency of the EU in 2005 and the Government is very keen that the current progress and momentum should continue.

7. The arguments for Turkish accession are strong and span a number of spheres, including the strategic political, security and economic, all of which are linked and will impact on each other. But Turkey's accession process promises to be more difficult than that of the Central and Eastern Europe countries and the necessary preparations are likely to last well into the next decade, with both Turkey and the EU evolving during this period and the climate for enlargement becoming unpredictable.

8. There are therefore uncertainties in assessing the impact of Turkish accession across the range of issues. This memorandum focuses specifically on the economic implications where, notwithstanding the uncertainties, there are clear benefits and opportunities, as well as challenges, in Turkish EU accession.

9. The Government commends the Portuguese Presidency's continuing progress on accession negotiations with Turkey and Croatia, a process that Member States committed to at last year's December European Council, and hopes this progress will continue under the Slovene Presidency. We hope the screening of applicant countries' compatibility with the acquis will continue at a steady pace in 2008. The UK will work to ensure that Turkey's accession process remains on track, with technically ready chapters being opened, building on the June accession conference during which Turkey opened two chapters.

10. In this context we note the Conclusions of the December 2006 European Council:

"Enlargement has been a success story for the European Union and Europe as a whole. It has helped to overcome the division of Europe and contributed to peace and stability throughout the continent. It has inspired reforms and has consolidated common principles of liberty, democracy, respect for human rights and fundamental freedoms and the rule of law as well as the market economy. The wider internal market and economic co-operation have increased prosperity and competitiveness, enabling the enlarged Union to respond better to the challenges of globalisation."

11. Turkish accession also offers great benefits both to current EU members and Turkey in areas such as Justice Home Affairs co-operation on migration, drugs and terrorism, as well as increasing engagement on military co-operation, energy security, regional economic development, and dialogue between Islam and the West. Within the Customs Union, Turkey is already an important economic partner for many European countries. Full accession will reinforce the application of EU standards across the Turkish economy.

12. The current state of play on the negotiations in relation to the individual chapters of the acquis is summarised in Annex B.

Overview of Turkish Economy

13. Turkey established an industrial base through state intervention and import protection in the post-war period. Policies shifted towards liberalisation in the 1980s. IMF-backed reforms since the 2001 financial crisis have improved macro-economic stability. The IMF stand-by agreement is due to expire in early 2008. A large current-account deficit and heavy reliance on short-term capital inflows could leave the economy vulnerable to sharp changes in investor sentiment. Increasing employment and income equality are key policy concerns, but the resources to tackle them are limited.

14. Turkey has experienced impressive growth over the last six years. Its dynamic economy is a complex mix of modern industry and commerce along with a traditional agriculture sector that still accounts for about 26% of employment. It has a strong and rapidly growing private sector, yet the state still plays a major role in basic industry, banking, transport, and communication. The largest industrial sector is textiles and clothing, which accounts for one-third of industrial employment (though facing stiff competition in international markets); other sectors, notably the automotive and electronics industries, are rising in importance within Turkey's export mix.

FIGURE 1: REAL GDP GROWTH RATE (%)

Country	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007 (est)	Average (98-07)
EU27	2.9	3.0	3.8	2.0	1.2	1.3	2.5	1.8	3.0	2.9	2.4
UK	3.4	3.0	3.8	2.4	2.1	2.8	3.3	1.8	2.8	2.8	2.8
Turkey	3.1	-4.7	7.4	-7.5	7.9	5.8	8.9	7.4	6.1	4.9	3.9

Source: Eurostat, ECFIN forecast Spring 2007

15. As a result of strong overall GDP growth, consumers in Turkey are becoming wealthier and better able to afford the higher value added goods and services that are produced in the UK and elsewhere in the EU27. GDP per capita in Turkey is, at €5,000, still considerably lower than in the EU27. Turkey's GDP per capita was in 2006 only 19% of the EU27 average. Furthermore, wealth in Turkey is not evenly spread, with huge regional variations between the more industrialised west and the generally more agricultural and poorer east, as well as variations between urban and rural areas.

16. Even if Turkey were to continue the impressive growth rates of the last six years—and they are likely to slow—it would have no prospect of catching up with the EU in terms of GDP per capita in the run up to accession.

17. Although the IMF programme is scheduled to end in May 2008, the Turkish Government's own economic strategy has highlighted their commitment to continue a programme of reform. Working with the IMF has led to a strong budget performance. According to the Commission autumn 2007 forecasts, there was a budget deficit of 0.3% of GDP in 2005, and a surplus of 0.4% of GDP in 2006 (compared with -33% in 2001). However, Turkey still has a sizeable but stable current account deficit and a significant government debt, although according to the Commission autumn forecasts, the debt ratio will be 54.1% in 2007, so is now within the Maastricht criteria of 60%. Bouts of financial instability occurred in May and September 2004, in March 2005 and during May-June 2006 which show that Turkey may still be vulnerable to volatility and sharp changes in global investor sentiment, but at the same time the combination of healthy growth, falling inflation and a tight fiscal policy has made the Turkish economy more robust and resilient to shocks.

18. State interference in the economy has been reduced in recent years. Political influence on state banks has declined and important markets, such as electricity, telecommunications, sugar, tobacco and petroleum have been liberalised. Turkey is still undergoing a transition from an agriculture based economy to a service oriented economy, although the share of employment in agriculture is still high.

19. Inflation has been drastically reduced, having come down from 65% in 1999 to 7.7% by October 2007. The reduction in inflation to single digit figures also made it possible to introduce the "New Lira" (the Turkish lira was converted to the New Turkish lira as 1,000,000 = 1), which has been the only legal tender since January 1, 2006.

TISC AREAS OF INQUIRY

1. Bilateral Trade and Investment Opportunities

(i) Trade

1. Turkey is a significant market for the UK and the UK is a major destination for Turkish exports, particularly for clothing and other textiles. There is a strong entrepreneurial culture in Turkey and despite regular economic downturns, business has a good track record of successfully riding out these setbacks.

2. There are 1,420 UK companies currently doing business with Turkey, with close to 500 having resident offices there. Some 220 Turkish companies are working in the UK. Significant British investors include Vodafone, Tesco, BP, Shell, HSBC, Aviva and Cadbury Schweppes.

BILATERAL TRADE FIGURES: (£ MILLION)

	2002	2003	2004	2005	2006
UK Exports	1,379	1,705	1,974	2,225	2,484
UK Imports	2,315	2,732	3,370	3,617	4,037
Balance	(936)	(1,027)	(1,396)	(1,392)	(1,553)

(Source: HMR&C/UKtradeinfo)

Average Percentage change over previous year:

Exports: +11.6%/ Imports: +11.6%

(ii) Exports to Turkey

3. The UK's market share has been falling in recent years. The UK is reasonably well placed in overall terms of market share and trade volumes although it has been declining along with other countries in the west in the face of imports from Russia (energy related exports) and China.

LEADING EXPORTERS % OF TOTAL

	2002	2003	2004	2005	2006
Russian Federation	7.5	7.9	9.3	11.1	12.7
Germany	13.7	13.6	12.8	11.7	10.6
China	2.7	3.8	4.6	5.9	6.9
Italy	8.1	7.9	7.0	6.5	6.2
France	5.9	6.0	6.4	5.0	5.2
USA	6.0	5.0	4.9	4.6	4.5
Iran	—	—	—	—	4.1
UK	4.7	5.0	4.4	4.0	3.7
Switzerland	4.2	4.3	3.5	3.5	2.9
Spain	2.7	2.9	3.3	3.0	2.8
South Korea	—	—	—	3.0	—
Japan	2.9	2.8	2.8	—	—

(Source: UN statistics)

MAJOR OVERALL EXPORTS TO TURKEY(2006) % OF TOTAL

Machinery, appliances & parts	20.1
Chemicals & chemical products	15.0
Mineral fuels & oil	12.2
Basic metals	11.7

(Source: UKTradeinfo)

TOP EXPORTS FROM THE UK TO TURKEY (VALUE £M)

	2002	2003	2004	2005	2006
Vehicles (other than rail and tramways)	147	241	405	438	503
Metalliferous ores and metal scrap	45	94	70	84	246
Power generating machinery, equipment, parts	70	102	142	151	209
Medicinal/Pharmaceutical products	157	164	169	186	164
Specialised industrial machinery	51	81	80	133	140
Organic chemicals	50	72	90	81	107
General industrial machinery and equipment	59	68	82	82	87
Electrical machinery and equipment	79	88	74	78	83
Miscellaneous manufactured articles	52	46	56	75	71
Plastics in primary forms	42	53	69	76	70
Office Machines and ADP equipment	60	54	47	74	63
Telecomms and sound recording equipment	48	51	45	55	58
Professional scientific and control instruments	42	43	45	48	53

(Source: uktradeinfo)

(iii) Turkish exports 2006

4. Turkey is a growing source of manufactured exports. In addition to traditional textile products, a developing manufacturing base in the telecommunications, electronics and automotive sectors dominate Turkey's exports. The UK is the second largest destination for Turkish exports.

LEADING TURKISH EXPORT MARKETS (2006)

	% of total
Germany	11.4
UK	8.0
Italy	7.9
US	5.9
(Source: UKtradeinfo)

MAJOR TURKISH EXPORTS (2006)

	% of total
Clothing & textiles	25.5
Road vehicles	13.9
Basic metals	9.4
Electrical machinery	7.6

(Source: UKtradeinfo)

TOP TURKISH EXPORTS TO THE UK

	Value £m
	2002	2003	2004	2005	2006
Articles of apparel and clothing accessories	1,028	1,164	1,222	1,314	1,317
Telecoms and sound recording and reproducing apparatus	177	189	379	408	483
Road vehicles	151	219	351	324	278
Electrical machinery, and parts thereof	129	157	171	206	340
Textile yarn, fabrics, made-up articles	231	223	237	229	243
Vegetables and Fruit	123	132	156	174	171
Iron and steel	68	82	117	89	145
Power generating machinery and equipment	30	53	71	98	126
Prefabricated buildings; plumbing, heating and lighting	40	65	96	92	111
Non-metallic mineral manufactures	52	69	102	99	109
Manufactures of metal	32	43	58	63	76
Miscellaneous manufactured articles	41	51	63	74	65
Other transport equipment	5	39	20	77	59

(Source: uktradeinfo)

(iv) Sectors of Specific Opportunity

5. Details of the Government response to opportunities in specific sectors are included in the edited version of UKTI Strategy document at Annex C. Not all sectors which offer opportunities will have specific programmes of the UKTI activity associated with them. It is the case that some sectors are not a good fit for UK exporters of goods or services and, in other cases, better opportunities exist elsewhere in other markets which are accorded a higher priority. However there are significant specific opportunities in the following sectors:

AGRICULTURE

6. Turkey's economy is still proportionally highly dependent on agriculture and is a producer of a wide range of agricultural products. Many of Turkey's exports are in the food and drink sector and Turkey enjoys a comparative advantage in a number of products. Turkey is among the largest producers of hazelnuts, figs, raisins and apricots and grows tea and tobacco. Opportunities exist in livestock, equine, crop development, fisheries, post harvest technology, research and development.

CHEMICALS

7. Turkey is a producer of many basic and intermediate chemicals and petrochemicals. The production value of the Turkish chemical sector is in excess of $11 billion, export revenues are worth $2.9 billion, and imports account for $17.4 billion, which is a striking 15% of total Turkish imports. Often these products are derived from available raw materials in Turkey. Others manufacture for industries already present there, such as auxiliaries for textiles and leather, paints and coatings for the construction and automotive sectors or additives for the plastics sector.

8. There are opportunities for export of specialist products and for the provision of services into the sector. For many companies in this sector, R&D and technical services are the best areas to investigate.

EDUCATION AND TRAINING

9. There are 10 million primary school children, three million high school students and over 100 universities covering all disciplines in Turkey. Education and Training receives over 10% share of the national budget, worth £7 billion in 2007. There is a new Government programme for the expansion of the vocational training system and IT and high tech education and training equipment and material is being widely used, starting from primary education.

ENGINEERING (ADVANCED)

Automotive

10. Turkey is Europe's largest bus and coach manufacturer and 3rd largest light commercial vehicle manufacturer with 17 companies manufacturing motor vehicles in Turkey. 2006 was a record year for the industry with vehicle production over 1m units and the sector's overall exports exceeding USD14 billion. There are over 700 companies manufacturing a wide variety of automotive components. The industry is becoming more and more competitive, characterised by increasing globalisation, industry consolidation and diminishing margins. One notable feature of the Turkish auto industry is the prevalence of imports within overall sales figures. By the end of 2005, the industry imported over US$7.5 billion worth of components for use by vehicle manufacturers and the aftermarket.

11. In the short and medium term, as the Turkish automotive manufacturing is largely assembly, there are business opportunities for UK suppliers of not only parts and components but also component production equipment. More components are inevitably going to be sourced locally and this will lead to opportunities for UK investment in the country to meet the purchasing requirements of their customers.

Other Engineering

12. Turkey is a major manufacturer, exporter and importer of miscellaneous mechanical, electrical and process engineering products. As for advanced engineering products, ie components, equipment or machinery that require high precision and high technology, Turkish companies source these from abroad. A wide variety of motor vehicles, engines, pumps, metal working machinery, foundry equipment, textile machinery, mechanical handling equipment, ship and marine equipment and electronic automotive components are imported into the country.

ENVIRONMENT/WATER

13. The Environment Heavy Cost Investment Planning organisation (EHCIP) of Turkey has led to the allocation of €68 billion for the infrastructure needs of the sector to be spent by 2023 (or EU accession). Half of this has been allocated to the water sector, mostly covering much needed wastewater treatment facilities and solid waste investments. The EU allocated €1.5 billion of IPA (Instrument for Pre-Accession Assistance) funds to Turkey covering 2007-09, 40% of which will be used by the environment sector. The World Bank is also supporting the municipalities by loans for their environmental investments through Turkey's Bank of Provinces.

14. Opportunities for UK companies exist as consultants and technology providers with the much needed investment in sanitary landfill sites, hazardous waste incinerators and sludge drying/incinerating facilities providing the biggest impetus.

FINANCIAL AND LEGAL SERVICES SECTOR

15. In the Financial and Legal Services Sector, Turkey is experiencing the launch of new products and services. Profitability in the sector has increased considerably. There is also particular foreign interest in the field of insurance, with FDI in that area reaching US$1 billion. Turkey offers numerous major project opportunities with supplier financing the key to winning such projects. Opportunities exist to provide Public Private Partnership (PPP) solutions, which are recognised as a British-designed tool and have become of interest to the Ministries of Health, Transport, Energy and Finance and the State Planning Organisation.

GIFTWARE

16. The fine jewellery manufacturing industry in Turkey has undergone enormous expansion within the past 15-20 years, focusing particularly on the production of gold jewellery. Turkey is now the world's third largest producer of gold jewellery, its third largest consumer, and also second largest exporter of gold jewellery (source: UKTI post report). Turkish exports of gold jewellery were worth US$ 1,031 million in 2006, and it is estimated that the Turkish jewellery manufacturing industry employs around 250,000 people. Against this background, opportunities may exist for UK companies in the following areas:

(1) For UK manufacturers/suppliers of machinery, tooling, chemicals, packaging, and other equipment to supply product to Turkish jewellery manufacturers.

(2) For UK jewellery designers to supply design services on a consultancy basis to Turkish manufacturers, or to enter into other co-operation agreements with Turkish manufacturers, including outsourcing of jewellery production for sale by the designer.

HEALTHCARE AND MEDICAL

17. Turkey has over 1,220 state, university, private and foundation hospitals and spending on healthcare receives a 4% share of the national budget worth £70 billion in 2007. Turkey increasingly acts as a regional health hub for the Caucasus, Central Asia and the Middle East with patients travelling to Turkey to receive treatment. New programmes funded by the EU and WHO have been introduced standardising healthcare across Turkey.

18. Turkey offers many trade opportunities to the healthcare industry, the UK's fourth largest area of exports to Turkey in 2006. As the country grows more affluent opportunities will remain strong for the sale of products into the healthcare sector. There will also be opportunities which are funded through IBRD and EU Accession funds for consultancy and management services. www.worldbank.org; www.deltur.cec.eu.int.

ICT

Telecommunications

19. The telecommunications sector in Turkey is amongst the most attractive and potentially lucrative anywhere in the world. Sector analysts all agree that the market is booming. Conservative estimates suggest the size of the sector is approximately US$ 22 billion and growing at about 20% pa. Mobile carrier services show the greatest rate of growth at 66% with software also showing growth rates of 25%.

20. Opportunities exist in the supply of goods into the sector and services and consultancy related to the increased amount of foreign direct investment there.

Software

21. The Turkish software industry is one of the fastest growing sectors of the economy claiming 25% growth in 2006 and double-digit growth rates in the past five years, estimated to be approximately US$700 million pa. (2006). Products of the local software industry range from packaged programmes (accounting, payroll and other business applications) to customised applications in, for example, financial services, telecommunications, manufacturing processes, retailing, healthcare, and education. Public sector companies in particular, almost always require custom-built software for their specific needs.

22. Opportunities exist for UK companies as local software companies, many of whom operate to internationally recognised methods and standards such as CMMI, SPICE: ISO 15504, ITIL and COBIT, are actively looking to form partnerships with companies overseas in order to gain international recognition and to expand their activities in new markets.

MARINE

23. Turkey is one of the largest producers of mega yachts in the world. Turkish production of other marine craft creates a number of good opportunities for UK companies seeking to supply marine equipment, communications and navigation equipment and design into the market.

OIL AND GAS

24. Turkey's geographical location makes it a natural land bridge connecting Europe to Asia. Therefore, it has an increasingly important role to play as an "energy corridor" between the major oil and natural gas producing countries in the Middle East and Caspian Sea and the Western energy markets. Expansion of the national gas grid, international gas pipeline projects like Nabucco and Turkey-Greece-Italy Interconnector and the Samsun-Ceyhan crude oil pipeline, along with Turkey's aspirations to be an energy corridor and an energy hub in Ceyhan also provide short-term opportunities in pipeline equipment and services along with equipment and services for the three planned refineries at Ceyhan.

25. The Turkish energy sector needs a total estimated investment figure of USD128.5 billion through to 2020, with the following breakdown as provided by the Under Secretariat of the Ministry of Energy and Natural Resources: USD 104.7 billion for power generation, USD16 billion for oil and gas exploration and production, USD 5.1 billion for coal exploration and development and USD 2.7 billion for the expansion of the Turkish natural gas grid. With the liberalisation of the market, privatisation of urban natural gas distribution is continuing at full speed, with the complete coverage of the 81 provinces to be completed by 2010. Section 6 covers energy transit issues.

POWER

26. Primary energy demand in Turkey has been growing at a rate of 6% per annum as a result of rapid urbanisation and industrialisation. This trend is expected to continue, with an additional 56,000 MW of new capacity required by 2020, with an investment of USD 7 billion per annum. Turkey aims at full utilisation of indigenous coal and lignite reserves along with hydro and renewable resources. Integration of nuclear energy into the Turkish energy mix will also be one of the main tools in responding to the growing electricity demand while avoiding dependence on importing fossil fuels. Privately owned nuclear plants corresponding to a total installed capacity of 5,000 MW will be commissioned by 2020. New laws and regulations are being enacted, including the recent Renewables and Energy Efficiency laws.

27. Although the regulated part of the Turkish electricity market is currently under the control of government companies, this will change drastically with the privatisation of the generation and distribution assets which will start early in 2008 and is wide open to foreign investment.

28. There are opportunities for British companies to provide services in areas of process management systems, advisory services including legal and regulatory frameworks, market structure and system development.

TEXTILES

29. The textile and clothing industry contributes significantly to the Turkish economy accounting for 10% of the GDP, 17.5% of total manufacturing and 20% of the manufacturing labour force. One of the major drivers of Turkish exports, the clothing sector produced £6.8 billion worth of goods in 2006, while the textile sector generated export revenues to the tune of £3.0 billion. Although a net exporter of textiles and clothing, imports have also been rising steadily. There is a growing demand for technical textiles, eg geo-fabrics, conveyor belts, non-woven tyre cord etc, in the Turkish market particularly in automotive, protective clothing and healthcare end-use industries.

TOURISM

30. Turkey is a major tourism destination and is among the world's top ten in terms of revenue generated. In 2006 Turkey was 11th in terms of numbers of visitors following a small dip after the record numbers set in 2005.[3] Turkey is host to both leisure based tourists in resorts along the Mediterranean and to cultural tourists exploring Turkey's rich ecological, religious and historical sites.

31. Many opportunities exist for investors and UK citizens are purchasing property on and around the Mediterranean coast. Trade opportunities for UK business tend to be on a small scale.

(II) INVESTMENT

32. Turkey attracted 5.5% of total FDI inflows to developing economies in 2006 ($20 billion) and 30% of total FDI inflows to emerging Europe in 2006. The estimated FDI inflow for 2007 is $30 billion.

33. Foreign interest in the Turkish market has increased rapidly since 17 December 2004 when Turkey was given a date to start negotiations with the EU, and inflows accelerated further with the start of accession negotiations on 3 October 2005 reaching $8.6 billion in 2005 and around $20 billion in 2006. Despite a perceived slowdown in EU negotiations, foreign interest remains strong, particularly in financial and retail sectors. Standard and Poor's investment Grade rating is BB- indicating that Turkey is more prone to changes in the economy.[4] Issues that may impact on FDI in connection with EU accession are covered in section 6.

UK investment in Turkey

34. The number of UK owned businesses in Turkey has increased strongly in recent years to represent approximately 10% of all foreign owned businesses in Turkey over the period 1954-2006, as shown in the following table.

35.

1954-2002 (cumulative) 2003 2004 2005 2006 1954-2006

UK 42 67 144 341 487 1,420

Total 5,560 1,105 2,095 2,845 3,350 14,955

(Source: Turkish Under Secretariat for Treasury)

36. The level of UK investment in Turkey is shown in the following table. UK investment in 2006 was 6th according to Turkish Treasury statistics above the US, Germany, France and Italy. The increase in investment from the Netherlands, UAE and Austria is particularly noteworthy, representing in the latter case sizeable mergers and acquisitions activity. Figures here for the UAE and Greece reflect annual payments for the acquisition of Turk Telecom and the acquisition in 2006 of Finansbank by the National Bank of Greece respectively.

US$ million 2002 2003 2004 2005 2006 2002-06

Netherlands 72 50 568 381 5,171 6,242

Belgium 5 54 25 1,088 3,456 4,628

Greece 0 24 38 11 2,787 2,860

UAE 1 0 0 1,625 1,548 3,174

Austria 0 0 1 9 1,108 1,118

UK 8 141 126 165 883 1,323

USA 2 52 36 88 693 871

France 22 120 34 2,107 444 2,727

Germany 86 142 73 391 366 1,058

Italy 241 1 15 692 209 1,158

TOTAL Incl. Other countries 622 745 1,291 8,534 17,817 29,009

(Source: Central Bank of the Republic of Turkey -www.tcmb.gov.tr)

Major UK investments in Turkey

— Aviva and Ak Insurance merged in June 2007. The merged company will become the biggest individual pension and the third largest life insurance company in Turkey.

— Cadbury Schweppes (CS) purchased the biggest chewing gum company in Turkey (Intergum Group) in June 2007. Intergum Group's market share in Turkey is estimated at 46%. Cadbury Schweppes had acquired 51% of Kent, the largest confectionery manufacturer in Turkey in 2002. CS now has a leading position in Turkey's confectionery market.

— Vodafone purchased Turkey's second biggest GSM player Telsim in 2006 for $4.5 billion. Vodafone has invested $1 billion to extend the Telsim network and increase the quality of communication. This is Vodafone's biggest investment project in Europe. The number of Vodafone subscribers in Turkey increased by 32% between May 2006 and June 2007.

— Since purchasing Izmir-based supermarket chain Kipa in 2003, Tesco has been expanding in the Turkish market, increasing the number of stores under the name of Tesco-Kipa from five in 2003 to 15 by the end of 2006 and 70 by the end of 2007. The medium-term goal is to become one of Turkey's top three retailers. Total investment in Turkey is likely to reach $1 billion by the end of 2007.

— Turkey's retail property sector is also attracting increasing British investment. A number of British companies (some with foreign partners) have invested in Turkey, including Saint Martin's (which bought Cevahir Mall in Istanbul, Europe's largest shopping mall), Parador Properties, Financial Dimensions, King Sturge, and Jones Lang Lasalle.

— HSBC purchased Demirbank in 2001, then Turkey's sixth largest bank. HSBC accounts for 10% of total consumer credit market and 7% of credit card market in Turkey. HSBC's business plan is to record a 100% growth in Turkey by 2010 and increase the number of branches from 159 to over 350 in the coming five years.

— BP is one of Turkey's largest foreign investors. The company is active in distributing and marketing fuel, oil and lubricants, LPG and the exploration of petroleum and gas. BP is also the operator of the $4 billion Baku-Tblisi-Ceyhan oil pipeline project, which is the biggest energy project in the world, so far carrying 10 million barrels of oil per year. BP is the biggest shareholder in the BTC holding 30% of the company shares. BTC launched "Community Investment Programme" and "Environmental Investment Programme", which involved a total of $12 million funding to mitigate the negative impacts of the construction and long term presence of the pipeline.

— Shell (Anglo Dutch) is among the major gas producers in Turkey. Shell holds around 2% of Turkey's biggest oil refinery, Tupras.

— Unilever (Anglo Dutch) has been active in Turkey for years. In terms of turnover, Unilever Turkey is among the top 10 Unilever companies in the world (out of 151). The company's 2007 turnover target is Euro 1 billion with a growth rate of 15%. Unilever Turkey has also become a training centre of global Unilever.

Turkish Investment in the UK

37. Turkish outward investment is rising; figures from UNCTAD show that levels of outward investment rose from $175 million in 2002 to $499 million in 2003 and $859 million in 2004, reaching $1,078 million in 2005 before falling back to $934 million in 2006. Turkish investment in the UK is currently more limited. In 2005 inward direct investment from Turkey amounted to only £140 million and currently only 221 Turkish companies are investors in the UK; traditional Turkish manufacturers do not consider the UK as a manufacturing base because of high manufacturing costs. However, UKTI believes there is considerable scope for more Turkish investment.

(III) CONCLUSION

38. Turkey offers a range of opportunities across many sectors. To reflect the potential of Turkey, UK Trade and Investment (UKTI) has included Turkey in the group of 17 High Growth Emerging Markets for which extra resource is being made available (see section 3 on HM Government support for business).

2. Difficulties faced by UK businesses wishing to trade, or forge investment links, with Turkey

1. Although Turkey aims to create a business friendly environment, there are still some significant concerns and impediments faced by UK businesses wishing to trade or forge investment links with Turkey, principally in the following areas.

TAXATION

2. The top income and corporate tax rates are relatively high, at up to 55% and effectively 45-55% respectively, and overall tax revenue collection is relatively low as a percentage of GDP compared with other OECD countries. There is a large informal economy.

CORRUPTION

3. There remain some challenges from corruption, although there has been some improvement. The Transparency International report of 2006 found that Turkey was one of a number of countries that showed a significant improvement in perceived levels of corruption. However Turkey remains 60th out of 163 in the corruption index and there is still no centralised strategy to tackle corruption within the country.

MARKET DISTORTIONS

4. Another main concern is government interference in the economy which creates distortions in the market. An example of this is direct subsidy by government of a variety of agricultural products. Total government expenditures equal more than a third of national GDP. Monetary controls remain a problem with state involvement in the availability of credit and the operation of some state banks.

THE LABOUR MARKET

5. Turkey's labour market flexibility is exceptionally low, being one of the 20 least flexible in the world. A recent World Bank study found that it is very costly and legally difficult to dismiss workers. Severance pay is typically 20 months salary; in the UK it is often much less and is based on years of service. There are also rules in place that give priority to recently dismissed workers when filling new vacancies, restrictions on night work and work at the weekends, and problems in the temporary work market—as term contracts can only be used in certain specified situations, again reducing opportunity.

LEGAL TRANSPARENCY

6. One of the biggest disincentives to trade remains a lack of transparency in the legal system and inefficient and lengthy dispute resolution procedures. There are some serious outstanding problems for UK businesses that result in significant loss of business, inhibit business prospects and hamper further investment in the market.

CUSTOMS UNION NON-COMPLIANCE

7. A number of barriers to trade are caused by Turkey's non-compliance with its obligations under the Customs Union. Such difficulties relate to divergent rules for external trade, standardisation, import licences, and technical trade barriers, as well as intellectual property rights (IPR), food safety and public procurement.

COMMERCIAL DISPUTES

8. Despite the undisputed improvement in the business environment in Turkey, there remain a number of commercial disputes that are damaging, result in significant revenue loss and could potentially deter future investment. Specific cases are listed below.

Spirits

9. Leading UK exporters of alcoholic spirits to Turkey, such as Diageo, Maxxium etc, have encountered a number of significant problems including a protracted and potentially crippling dispute over supposed dual pricing. They also face difficulties over certification and labelling, customs bureaucracy and discriminatory tax treatment. An EU trade barrier regulation complaint against Turkey is currently being raised. The decision over dual pricing currently sits with the Danistay (Turkey's Supreme Court).

Aviation

10. Although the UK has enjoyed significant success in introducing new carriers into Turkey, including BMI, EasyJet, GB Air, BA, Thomsons etc, there remains a reluctance on Turkey's part to adhere fully to the existing UK/Turkey Air Services Agreement and to increase competition in the market. EasyJet have applied to extend their routing from London-Gatwick to Istanbul Sabiha Gokcen in addition to their existing Luton/Istanbul business but still await formal authorisation from the Turkish CAA. BA do not enjoy fast track facilities for their VIP/business class passengers in Istanbul. In contrast, THY enjoys such services at London Heathrow. BMI continue to experience difficulties over the cost of introducing additional security at Esenboga from the monopoly provider and code sharing.

Telecommunications

11. There are significant British interests in Turkey's telecommunications sector with Vodafone being the largest single investor in the market with the purchase of Telsim for some US$4.5 billion in 2006. BT are technical advisers to Saudi Oger who purchased 51% of Türk Telekom. Vodafone remain concerned about plans to introduce a 3G system before the introduction of full "number mobility" between GSM operators. Number portability is a key requirement for a truly competitive GSM market place. Heavy taxation also remains a burden and is a major barrier to competition.

Pharmaceuticals

12. Pharmaceuticals is a growing sector for both the UK and Turkey. Major UK pharmaceutical companies continue to do significant business in Turkey, but although encouraging improvements have been made with Data Exclusivity (DE), there remains poor IPR enforcement, lack of adequate DE and difficulties over pricing and reimbursement. Further improvements are needed to ensure full compatibility with Turkey's EU and WTO commitments. Over-protection of Turkey's generic industry leads to significant revenue losses each year.

Power/Transport

13. There are several Balfour Beatty issues in Turkey. The outstanding balance (US$40 million) for the Ankara/Istanbul highway remains unpaid and is currently awaiting international arbitration. Balfour Beatty Networks are still owed some US$18 million by Turkiye Elektrik Ilisim AS (TEIAS) for the completion of the World Bank funded 380Kw Borcka Kalkandere energy transmission line. Non payment of these projects is discouraging further BB involvement and investment in Turkey.

Media

14. ECGD have negotiated terms with the Turkish Bankruptcy Administration (TMSF) for the settlement of a seven year old debt to a UK company arising from a Turkish Media Company (Sabah) that went bankrupt. The process now requires Halk Bank and the TMSF to agree to the monies being released.

Agri-Business

15. UK/Turkey signed a bilateral Memorandum of Understanding in March 2007. This centred on the development of collaboration in three main areas: animal husbandry, equine and organic farming. Although significant progress has been made in all these areas over the past two years, difficulties still remain over the requirement for health certificates for all agri-business products, perceived protectionism over certain produce (including black tea—Twinings) and over burdensome bureaucracy for the importation of general products.

Education and Training

16. Turkey has a wide manufacturing and educational base, much of which does not currently meet EU standards. There is a significant requirement for improvement in education, training, design, innovation and research and development in a number of key areas. The UK is looking to significantly improve collaboration in these key areas. There remain a number of concerns, however, including Ministry of Education directives preventing the use of foreign produced publications in Turkish schools, the encouragement of duplicated materials and the lack of intellectual property rights and enforcement in the publishing industry. These restrictions and failings create difficulties for a number of British publishers, including Longmans and Oxford Publishing. More broadly, legal restrictions make it very difficult for foreign education providers, including for vocational training, to operate in Turkey. Relaxation of these restrictions would enable a swift expansion of education provision in Turkey, which is strongly in its economic interests.

Retail Industry

17. A growing number of British interests are looking to establish retail outlets in Turkey. These include Harvey Nichols, Debenhams, and British Home Stores etc. There remains concern over Turkish restrictions on imports from China which inhibit Istanbul flagship stores from maximising their opportunities and establishing a presence as high quality international brands.

Conclusion

18. There has been progress on the Turkish side in addressing some of these problems, in particular in reducing domestic protection, tax reform and speedier resolution of commercial disputes. But there are still too many disputes creating significant barriers to trade that need to be resolved. Otherwise, we have been in regular contact with the industry and have regularly raised the issues with the Commission and at the highest levels with the Turkish Government, including PM Blair to Erdogan. We also pushed hard in the accession process to secure appropriate benchmarks for the relevant chapters requiring Turkey to remove the discriminatory measures before they can be opened.

19. As Turkey makes further progress on the accession process, fulfil the benchmarks being set and align with the Acquis on the individual chapters, more of these outstanding problems will be addressed. Our work with Turkey to support their accession preparations, together with our work to assist economic reform and the enhanced dialogue and co-operation represented by the Turkey/United Kingdom Strategic Partnership, will all support efforts to resolve the existing barriers to trade and the trade disputes.

3. THE ROLE OF THE UK GOVERNMENT IN ASSISTING BUSINESSES, THROUGH UK TRADE AND INVESTMENT (UKTI)

1. In July 2006 a new strategy was launched providing for a refocus of UKTI resources to emerging markets. One of its main objectives is to maximise the UK's ability to win market share in the new high growth economies by achieving a step-change in our performance in these markets. The strategy is supported by a comprehensive marketing strategy emphasising the UK as a place in which and with which to do business under the banner "hit the world running". Turkey was one of 17 countries categorised as a High Growth Emerging market. Other high growth emerging markets include China, India, Brazil, Mexico, South Africa, Saudi Arabia, Indonesia, Thailand, Singapore and Malaysia.

UKTI Strategy for Turkey

2. An edited version of the UKTI Strategy for Turkey is attached at Annex C. Its key objectives include:

(a) raising general awareness of the market characteristics and opportunities for doing business in Turkey;

(b) increasing the level of UKTI resources in Turkey;

(d) increasing the UK's effectiveness in the marketplace by working with companies with potential to enter the market;

(e) engaging with Turkish companies through the Turkish-British Business Council and

(f) working with UK stakeholders to influence the Government of Turkey to improve the competitive playing field for British companies.

3. In Turkey, an additional objective is to build a greater understanding and appreciation of the benefits of trade with the UK. A programme of awareness seminars is now in place with a number of events underway. These are listed in the strategy document at Annex C.

4. More than £5 million of UKTI resources are being transferred from mature markets to focus on emerging markets like Turkey. An Inward Investment Team has been established in Istanbul, a Marketing Officer appointed and enhanced capacity placed in Izmir and in Ankara. The overall strength of the team in Turkey has been raised from around 15 to 19. In London the Turkey team, which numbers five, also has responsibility for Russia, the Caucasus and Central Asia.

5. The enhanced team in Turkey will allow for more targeted identification of potential opportunities. They will also be responsible for delivering a range of UKTI services to help UK companies enter the market and develop their business further once there.

6. In addition to the awareness seminars, a High Growth Market Adviser has been appointed to increase the UK's effectiveness in the marketplace. The UKTI High Growth Markets Programme helps UK companies to capitalise on major commercial opportunities in some of the world's fastest-growing markets by targeting mid-corporate companies with the potential to enter or expand in the designated high-growth markets and aims to:

(a) develop and deliver support services tailored to the needs of individual companies;

(b) enable the sharing of experiences and lessons learned from exporters in these markets and

7. The Turkish-British Business Council (TBBC) is being refocused. Its aim is to strengthen the trade and investment relationship between Turkey and the UK by:

(a) identifying the most promising sectors and business opportunities for Small and Medium-Sized Enterprises from the two countries;

(b) encouraging investment in both directions;

(d) enhancing networking between the private sectors of both countries and

(e) creating specific opportunities through which companies and their organisation in both countries can develop a greater understanding of their respective strengths and potential areas of co-operation.

8. The TBBC is a joint council with a UK side consisting of predominantly UK companies, many of them major UK plcs, which has been chaired since 2007 by Sir Julian Horn-Smith. Members on the UK side include Balfour Beatty, HSBC, Denton Wilde Sapte, Imperial Tobacco, Allied Domecq, Vodafone and the Scotch Whisky Association. The Turkish side comprises a secretariat provided by DEIK, The Foreign Trade Board of Turkey and an Executive Board, made up of a number of senior Turkish industrialists. The Turkish co-Chairman is Metin Mansur, appointed in 2006.

9. UKTI aspires to begin a dialogue at ministerial level with the Government of Turkey, with the aim of raising outstanding market access issues at the highest levels while underlining the UK's commitment to developing further trade and investment links with Turkey.

10. The bulk of services for Turkey are delivered by UKTI's regional network in England and their equivalents in the devolved administrations. The Devolved Administrations for Scotland, Wales and Northern Ireland are directly responsible for the provision of international trade support. UKTI's regional network comprises International Trade Advisors (ITAs) based in International Trade Teams. ITAs work closely with Commercial Staff overseas and market and sector desks within UKTI headquarters.

11. UKTI's trade teams provide a range of export related services including: one-to-one help, advice and counselling, including help to determine whether exporting is in the client's best interest, and strategic advice to help the client plan and implement an export strategy.

12. The Devolved Administrations for Scotland, Wales and Northern Ireland have their own networks of advisors (both at home and overseas) and support programmes. They also draw on the resources of UKTI posts in the majority of overseas markets, including Turkey, and also can access most of UKTI's national services eg the Overseas Market Introduction Service and Tradeshow Access Programme. As partners they also have access to internal information on the UKTI website.

13. Delivery of the UKTI strategy on Turkey in the regions and devolved administrations is assisted by a network of regional "Champions", whose role is to provide communication links for posts in Turkey and with UKTI HQ in London. They have been instrumental in helping to organise the programme of regional information seminars.

Conclusion

14. By 2012 UKTI expects to have delivered improvements in the business performance of our international trade customers in Turkey, with an emphasis on innovative firms. We will do this by improving the networks that support business, enhancing the availability of information which allows business to make informed choices, and influencing the market conditions, where possible, to be more receptive to UK trade and investment.

4. TURKEY'S POTENTIAL AS A GATEWAY TO MARKETS IN THE MIDDLE EAST AND THE CAUCASUS AND THE CENTRAL ASIAN REPUBLICS

1. There is little specific empirical evidence that Turkey represents the best gateway to markets in the wider region. In some cases the markets involved represent areas with limited current opportunity for British business, while in others such as the Gulf States the UK is already a strong bilateral trade partner. Such evidence as there is for influence in nearby markets can be contradictory. For example a paper prepared by the Turkish Foreign Economic Relations Board (DEIK) points to significant contact and influence by Turkish business with the Turkish speaking republics of the Former Soviet Union and with other countries in the region.[5] Investment flows from the Arabian Peninsula are increasing according to DEiK. However, the 2nd International Turkish-Asian Congress organised by Turkish Asian Centre for Strategic Studies (TASAM) in Istanbul on 23-24 May 2007 asserted that Turkey's failure to establish very close links with the former Turkish republics, meant that bilateral economic relations remained well below their potential. The report further concluded that Turkey was neither benefiting from the great economic potential of the Gulf countries nor engaging more with these countries politically.

2. However, as a potential transit route for hydrocarbons to Europe, Turkey does offer a different option to established alternatives through Russia (see paragraphs 4 to 8 on energy below). There are also examples of business which Turkey has won in the Central Asian region in conjunction with British companies from the late 1990s. For example John Laing, together with Alarco from Turkey, constructed the international airport in Ashgabat, but there has been little more recent evidence of co-operation since then. Furthermore, Turkey has strong regional partnerships in the Middle East including Israel and enjoys good bilateral trade and investment relations with the Gulf States, Levant and North Africa.

3. Bilateral trade figures with some of the region are as follows with a brief explanation.

TURKEY'S TRADE RELATIONS WITH REGIONAL ECONOMIES (2004-06 in $m)

	2004 exports	2004 imports	2004 Trade balance	2005 exports	2005 imports	2005 Trade balance	2006 exports	2006 imports	2006 Trade balance
Russia	1,859	9,033	-7,174	2,377	12,906	-10,529	3,238	17,645	-14,300
Kazakhstan	356	441	-85	460	558	-98	697	971	-274
Azerbaijan	404	136	+268	528	272	+256	695	333	+692
Georgia	200	307	-107	272	303	-31	408	342	+72
Turkmenistan	215	176	+39	181	161	+20	281	189	+81
Uzbekistan	145	99	-33	151	261	-110	176	406	-230
Iran	813	1,962	-1149	913	3,470	-2,557	1,066	5,624	-4,558
Iraq	1,821	468	+1353	2,750	459	+2291	2,589	376	+2,213
Egypt	473	255	+218	687	267	+420	709	391	+318
Saudi Arabia	769	1,232	-463	962	1,889	-927	983	2,247	-1,264
UAE	1,139	183	+956	1,675	205	+1,470	1,986	351	+1634
Kuwait	266	26	+240	210	42	+169	219	56	+163
Israel	1,309	714	+495	1,467	803	+664	1,529	774	+755

Russia: Turkey's huge trade deficit with Russia is largely attributable to gas imports. There are also non-tariff barriers such as visa obstacles and long clearance procedures for Turkish trucks.

Caucasus: There are strong political and economic ties with Azerbaijan and Georgia. But these are not fully reflected in trade relations. Around 1,800 Turkish companies are active in Azerbaijan. Main Turkish investments in Georgia include two airport contracts (Tbilisi and Batumi) at $90 million and a number of tourism projects.

Central Asia: Kazakhstan is the most popular investment destination for Turkish business in the Central Asian region followed by Turkmenistan. Turkish companies have undertaken around $6 billion contracting business in Turkmenistan.

Iran: Economic relations between Turkey and Iran are limited; bilateral trade only accounted for 5% of Iran's trade volume. Iran is the second largest oil and gas exporter to Turkey and in 2006 became a top 10 supplier to Turkey overall.

Egypt: There are a few Turkish textile companies moving production to Egypt to benefit from cheap labour and energy. Egypt also has a qualified industrial zone agreement with the US which is a potential area of partnership.

Gulf Countries: Gulf countries are recording huge capital surpluses, and are seeking profitable investment destinations. The AKP government established close links with Saudi Arabia in particular. Turkish contractors have won $3.5 billion worth of business in Saudi Arabia. Gulf countries are particularly interested in Turkey's energy, property and financial markets.

Israel: There are significant links between Turkey and Israel including a free trade agreement. Israeli companies invest in Turkey and are strong trading partners with the Turks. In the first six months of 2007 figures released by the Israeli Embassy recorded bilateral trade worth $1.3 billion. Israeli exports to Turkey increased 24.7% to $512m, while Turkish exports to Israel increased 29.6% to $782m.[6]

ENERGY

4. As noted above, Turkey's proximity to some of the richest hydrocarbon territories in the world mean that it has a potentially large role to play in the future of EU energy security of supply. This has already been recognised by the EU Commission in their 2006 Energy Green Paper[7] and 2007 Strategic Energy Review An Energy Policy for Europe;[8] by EU Heads of State at the March Spring Council; by endorsing the Nabucco pipeline project; and by HMG in submissions to the Commission and Council on a European Energy Policy in January 2006.[9]

5. The EU is in a unique position whereby 75% of the world's known natural gas reserves are within pipeline distance and form an arc around the Union. The EU, including the UK, is a net importer of gas and, as such, is reliant on both producer and transit countries for the safe delivery of our piped gas. In order to mitigate the risk of supply interruption, for whatever reason, we need to strive for diversity of transit states and for the development of the world LNG market. Turkey, with its unique geographical position, has the potential to develop its infrastructure and as an even more significant transit country for gas into the EU than it already is. The EU already imports the majority of its piped gas from Russia—some of this already comes through Turkey, via the Blue Stream Pipeline.

6. But Turkey is also a bridging state for the EU to access to other sources of Caspian Gas, from Azerbaijan and Turkmenistan in the first instance. The EU Heads of State and Governments have supported the proposed Nabucco Pipeline project as the key vehicle for transporting gas from the Caspian to the EU. This would link Turkey and Austria through Romania, Bulgaria and Hungary. The Turkish transmission company BOTAS is a partner in project. The Nabucco project has been given the status of a project of special European interest and the European Commission has appointed Mr Jozias Johannes van Aartsen, the former Dutch Foreign Minister as a political co-ordinator for the project.[10]

7. The value to the EU of Turkey's possible role as an energy "hub"—importing sources of gas for transit on to the EU, depends largely on the model followed by Turkey—ie whether it becomes an aggregator or operates according to market rules—(ie allowing multiple commercial entities to procure, trade and supply gas). While Turkey could benefit from transit revenues under either approach, it is in its own and the EU's interests for them to adopt a market approach so that companies are exposed to competitive pressures, prices are transparently set, and investment in energy infrastructure can flow in.

8. Turkey has shown an inclination towards a market approach, for instance setting up a regulator along the lines of Ofgem, and has indicated willingness to join the Energy Community Treaty in the future (which extends the EU Acquis communitaire in gas and electricity plus parts of the competition and environment Acquis into the nations of the Western Balkans). However, Turkey has held back from joining the Treaty at this stage, preferring instead to try an open the energy chapters in the wider accession negotiations.

5. THE IMPACT OF EU TRADE POLICY, SUCH AS ANTI-DUMPING POLICIES, ON UK TRADE WITH TURKEY

1. Some of the difficulties and market access issues with Turkey have been mentioned in section 2 above but in general there are few bilateral trade policy issues between the UK and Turkey.

Trade defence

2. As far as trade defence is concerned, there are currently only two EU anti-dumping measures in place against Turkish exports (both related to certain steel products), both of which are currently subject to review.

3. In the other direction, as at the end of 2006, Turkey had six trade defence measures (all safeguards. Of these two (voltmeters/ammeters and activated earth and clays) are directly targeted against the UK (along with three other EUMS) with the balance (4) against the EU as a whole. Four of these measures were introduced in August 2006 and will remain in place (early accession aside) until at least August 2011.

4. Post-accession trade between UK and Turkey will of course be subject to internal market and competition disciplines not trade defence.

Steel

5. Steel is one sector where concerns are raised from time to time, both in the unfair trade field but also a current, long-term concern about implementation of a restructuring plan for the Turkish steel sector. This has wider industrial as well as trade policy concerns and echoes similar concerns in relation to steel industry restructuring in other recent accession countries.

6. EXPECTED CHANGES IN THE ECONOMIC, TRADE AND INVESTMENT RELATIONSHIP THAT MIGHT RESULT FROM THE ACCESSION OF TURKEY TO THE EUROPEAN UNION

1. Enlargement of the EU to include Turkey would increase the size of the Union significantly in terms of population, increasing the market for UK firms, and thus providing opportunities to exploit both economies of scale and gains from increased competition and innovation.

2. The economic benefits of Turkey's entry into the EU stem from factors which have a direct positive impact on the economic environment (trade, FDI, migration flows and better economic governance), and from political factors which have indirect economic benefits. Although other factors such as globalisation and internal reform may lead to increasing alignment with EU economies independently of the accession process, the EU accession negotiations provides important incentives for Turkey to continue in its current direction and pursue sound economic policies.

3. The accession process not only has a direct effect on Turkey's economic development but will assist in attracting foreign direct investment (FDI). Progressing towards accession would help Turkey push through their economic reforms contributing to increased potential growth rates. EU membership can be an aid to the Turkish Government because it establishes a framework for peer review amongst member states on micro-economic reform (Lisbon process) and also at the macro-economic level through the review of national Stability and Convergence programmes.

4. During the accession process, Turkey will need to tackle some significant challenges. Anticipating and managing the associated risks will influence the way that the trade and investment relationship develops. Among these issues will be labour and migration, trade barriers, the Common Agricultural Policy (CAP) and energy security.

5. In terms of the potential economic impact of accession, in assessing this account has to be taken of the extent to which the accession process encourages the momentum for reform. Were the prospect of accession for Turkey to be removed, there could potentially be a range of risks. For example, macroeconomic stability in Turkey could deteriorate. This is a particular risk as Turkey's current IMF programme comes to an end next year, potentially increasing the role of the EU as an external anchor. There is also a risk that relations with the EU could also worsen if Turkey turned eastwards for its partnerships, and economic barriers to for example trade with the EU could increase. Against this scenario, which would have negative economic consequences for both Turkey and the EU, the impact of EU membership could be large.

6. Another scenario however is that even without the accession process encouraging certain reforms, Turkey could slowly move closer to Europe even without accession as its aim. Political stability could be maintained, the economy could be well managed and economic reforms could continue. If this were the case, the effects of EU membership would be smaller.

7. It is, however, important to be aware of the potential economic costs of stalling or reversing the accession process, in particular:

— Calls within Turkey for an amendment of the current Customs Union Agreement, or its replacement by a Free Trade Agreement, could grow, which in turn could reduce trade levels; signing up to the CUA was seen by Turkey as step along the route to accession and if the prospect of accession were removed or reduced Turkish commitment to it could be weakened. This might particularly be the case because the CU is asymmetric; causing there to be some opposition to it in Turkey, in that under its terms Turkey cannot enter into any new preferential trade agreements with third countries without EU agreement. On the other hand the EU can enter into such agreements without Turkish agreement. The asymmetry also partly stems from Turkey being an automatic counterpart to any new preferential trade agreement signed by the EU. Another source of asymmetry is that if Turkey faces a trade dispute with the EU, the last legal resort is the European Court of Justice, causing the EU to be both a party and the arbitrator in trade disputes with Turkey.

— FDI could also decrease; FDI flows to Turkey increased following the start of the accession negotiations, and if the accession process stalled, there is risk that these flows could be reversed. In other words, if part of the increase in FDI visible in recent years is part of an already occurring "EU effect", there is a potential for these flows to be reversed.

Labour Migration

8. Before the EU opened negotiations with Turkey, the EU Commission[11] assessed the effects of Turkish membership on the EU including migration. They noted the existing population and that migration would be affected by the imposition of transition periods and permanent safeguard clauses.

9. There is already labour migration from Turkey to the EU, especially to Germany. It is likely that the accession of Turkey to the EU would lead to an increase in labour migration at the point of accession. However, enlargement and the prospect of enlargement—should over time reduce the incentives for economic migration as EU membership will boost growth, create job opportunities, and improve the quality of life in Turkey. Accession will also make return and temporary stay easier for Turkish nationals moving between current EU Member States and Turkey.

10. The impact of accession on labour migration, and the impact of any increase in labour migration on the UK labour market, will depend crucially on the circumstances at the time. Given the uncertainties over timing at this early stage in the negotiation process, it would therefore be premature to make any quantitative estimates of the possible impact. Any assessment would need to take into account the following key factors:

— the economic situation in the UK, Turkey, and the wider EU at the time of accession;

— the level of access granted to the UK labour market;

— decisions of other Member States on labour market access; and

— wider social factors, such as historical patterns of migration from Turkey to the UK and other EU member states.

11. The UK Government is taking a gradual and managed approach to workers from the new EU states, taking account not only of the impact on the labour market but also the wider social impacts. It is generally recognised that A8 migration has benefited the UK labour market and wider economy. The UK Government has also introduced new initiatives to assist in assessing and understanding the impacts of migration, including labour migration, to the UK more broadly—including;

— The Migration Impacts Forum (MIF): This forum will help build the evidence base for the effects which migration is having on communities and public services throughout the United Kingdom and advise on how these challenges can best be met.

— The Migration Advisory Committee (MAC): This is initially advising Ministers on where migration might sensibly fill gaps in the labour market with respect to skilled workers.

Trade and Foreign Direct Investment

12. Turkey is already a relatively open economy with trade in goods and services equivalent to 61% of its GDP. The EU is Turkey's biggest trading partner and is the destination of nearly 55% of Turkey's exports in goods and services and the source of 48% of its imports. This has increased vastly over the last 10 years due to Turkey becoming a member of a Customs Union with the EU in 1995. In 2006 the UK was the second largest export market for Turkey and over the same period the UK has seen imports from Turkey rise 462%. in nominal terms. In 2006 Turkey imported nearly £2.5 billion worth of goods and services from the UK. The UK's trade with Turkey is about 1.0% of our total.

13. The already existing CU limits the extent to which the trade could be expected to increase following Turkish accession to the single market. However, there is still some scope for trade to increase as certain non-tariff barriers still exist in manufacturing, and as both the agriculture and service sectors are excluded from the CU. De Mooij and Lejour (2004)[12] find that Turkey's trade with the EU15[13] would increase by 34% following Turkey's accession to the single market. This corresponds to an increase in exports over the longer term of 0.2% for the EU15, and for the A10, exports would increase by 0.3%.[14] Another study by Flam (2003)[15] has results of similar order of magnitude; he finds that trade with the EU could increase by almost 50% over the longer term. Such trade increases would be important for Turkey, but would only have small positive effects on the EU's GDP.

14. Whilst Turkey is not the UK's most important trade partner for a range of reasons including geography and history, an increased EU market would provide increased FDI and export opportunities for UK businesses. As Turkey's services market opens up, UK firms will benefit from increased levels of exports and more opportunities for FDI. The EU Services Directive would also ensure increased market opportunities are not just felt in goods but also services, the latter potentially having a higher impact.

15. As Turkey adopts the Acquis, improves its institutions and governance and combats corruption, Turkish companies' competitiveness will grow which should further enhance the prospects of increased trade. However, the effect on the UK and the EU is likely to be small.

16. As Turkish consumers become more affluent there will be more scope for exporting high-value added goods and services. If UK firms wish to exploit these opportunities they will need to invest time and energy establishing a profile in their markets of choice. This is especially true for services providers.

17. Foreign Direct Investment (FDI) to Turkey increased significantly in 2005 and 2006. Net FDI doubled to reach around 5% of GDP between 2005 and 2006.[16] This growth in FDI was driven by such factors as improved macroeconomic stability, recent legal changes and notably, the FDI law passed in 2003 which lowered barriers to FDI. A further driver of increased FDI has been privatisations, eg Turkish Telecom. The majority of the total 14,955 companies with foreign capital are in the wholesale and retail trade sectors, followed by manufacturing, real estate renting and other business activities. Textile goods production leads the manufacturing sector investments followed by chemicals and food and beverages. However, FDI stock still remains low for an economy the size of Turkey's. Enlargement could lead to more investment as Turkey would have to undertake reforms that would stimulate investment, including improving its infrastructure and reducing some of its bureaucratic barriers to trade.

18. Certain competition constraints still exist in Turkey that have to be overcome as Turkey adopts the Acquis; Turkey has to move forward with its privatisation programme and, for the public enterprises that are not privatised, state aid has to be reduced. Other reforms that will follow from the adoption of the Acquis relate to improvements in bureaucratic processes and the rule-of-law. These changes could increase FDI in Turkey.

CAP

19. The prospect of Turkish accession could well spur further reforms to the Common Agricultural Policy (CAP) and redirect the focus of the budget away from CAP towards innovation and entrepreneurship. Current discussions are focusing upon changes that will come into effect in the next spending period, from 2013 onwards, although many of these will be agreed in the forthcoming CAP Healthcheck and EU Budget Review. Turkey may therefore benefit from CAP reform upon accession, depending on what arrangements are agreed for New Member States. This should be welcomed, as the benefits stemming from such productivity enhancing activities would be far greater and more evenly distributed across the EU than those from CAP. The budgetary cost of Turkish accession from structural funds (and CAP if it is not reformed by then) is also likely to increase pressure on the UK to give up its rebate.

20. Providing an exact estimate of the post-accession budgetary costs is extremely difficult—Turkey's economic environment will have changed by accession, as will the rules governing the CAP and structural funds. Yet it is safe to assume that even by the time Turkey accedes, its GDP per capita will be low relative to the EU-27 average, and its dependence on agriculture and regional disparities in income still high. Richer existing Member States will incur a net annual budgetary cost and relatively poorer regions in existing Member States that are currently in receipt of Structural Funds may lose out from Turkey's accession.

EU as an Anchor Improving Turkish Institutions

21. As Turkey adopts the Acquis, it has to improve its institutions, improve governance and combat corruption. Chapter 24 on Judiciary and fundamental rights covers 10 principles for improving the fight against corruption. It stresses the importance of anti-corruption laws, integrity, accountability and transparency in public administration. Other chapters are also relevant for improving institutions; public procurement policies are covered by chapter 5, intellectual property rights are covered by chapter 7, competition policy and state aid are covered by chapter 8 and financial control is covered by chapter 32.

22. Recent economic literature supports a positive link between the quality of institutions and economic growth. Some economists even go as far as suggesting that institutions trump everything else in contributing to growth.[17] Furthermore, empirical work finds a positive relationship between institutional quality and trade flows, implying that Turkey's trade partners as well as Turkey would directly benefit from improved institutions in Turkey.[18] If the adoption of the Acquis leads to improved institutions, this could therefore lead to increased growth and trade.

23. The study by de Mooij and Lejour (2004)[19] estimates the effect of improving Turkey's institutions. They do this by assessing the impact of corruption on trade relations, and by looking at how much trade would increase if Turkey's ranking on the Corruption Perceptions Index improved. They find that an improvement from Turkey's current level to that of Portugal would lead to a 57% increase in Turkey's aggregate trade. They also find that the EU would benefit from this, with exports increasing by approximately 0.5%, and welfare increasing by $9.4 billion.[20] If Turkey's ranking improved less, to the level of Hungary rather than to the level of Portugal, they find that Turkey's trade would increase by 28% rather than by 57%. Looking at the experience of the New Member States, the improvements on the Corruption Perception Index have not been as large as the improvement required by Turkey to reach the level of either Hungary or Portugal. As such, the estimate by de Mooij and Lejour can be considered as an upper bound estimate.

Distributional Effects

24. In the longer term, we could see some distributive effects whereby some countries and sectors are affected more than others. The sectors with the largest trade barriers at present would be expected to see the largest trade increase. In terms of countries, a study by Adam and Moutos (2005)[21] on the effect of the CU on the EU15 finds that the "southern"[22] EU15 countries, whose export structure is the most similar to Turkey's, saw a relatively small increase in exports to Turkey being offset by decreasing exports to other European countries a as result of increased Turkish competition. The "northern"[23] European countries, on the other hand, experienced a larger increase in their exports to Turkey, and did not suffer from a decrease in exports to other European countries, causing them to be better off. The distributional impact of Turkish accession could be similar, with the southern European countries as well as the NMS experiencing a possible decrease in certain exports as competition from Turkey increases, whereas the northern European countries could see an increase in their exports.

25. The comparative advantage of the UK is quite different from that of Turkey. This implies that UK exporters on aggregate are not likely to receive significant additional competition from Turkey as barriers to trade are removed. Instead, exports from the UK are likely to increase, and consumers will gain from cheaper imports.

CONCLUSIONS

26. Apart from the political benefits of improved peace, stability and security, the Government believes that Turkish EU accession will bring potentially significant benefits and a range of economic impacts stemming from increased trade and FDI, improved institutions in Turkey, free movement of labour, dynamic gains and other political impacts such as energy security and the promotion of peace and stability in the region.

27. The channels with the largest economic effects are likely to be dynamic gains over time and benefits stemming from the political impacts of accession. Migration could also have an economic impact, though the magnitude of the flows and level of impact will depend on the level of economic development in Turkey at the time of accession and on whether transitional measures on labour mobility are put in place. Globalisation, Turkey's own modernisation and economic reform programme and gradual alignment with the acquis in the run up to accession will all combine to increase the bilateral trade and investment opportunities with Turkey.

Annex A

TURKEY/UNITED KINGDOM STRATEGIC PARTNERSHIP 2007-08

The British and Turkish Prime Ministers met in London on the 23 October 2007. On this occasion they agreed that the relationship between Turkey and the United Kingdom is of crucial and growing importance. The two countries share close ties and common perspectives on a wide range of international issues and global challenges. They commit to six monthly consultations to take forward work on the following key strategic priorities of mutual benefit in 2007-08:

— Support and maintain the momentum of Turkey's EU accession talks, through continuous dialogue and co-operation at all levels, advice on accession negotiations, help with promoting Turkey in Europe and more twinning and bilateral projects.

— Help end the isolation of the Turkish Cypriots—and encourage others in the international community to join us in our efforts.

— Deepen the UK-Turkey defence relationship, including within the framework of NATO and through support for Turkish participation in ESDP operations. Further promote the transatlantic partnership.

— Improve our co-operation on global security, in particular the fight against terrorism, counter-proliferation and aviation security, the illegal drugs trade, illegal immigration and other organised crime.

— Promote regional stability and peace, especially in the Middle East and Afghanistan, including partnerships to promote economic development.

— Tackle climate change and cooperate on developing secure energy supplies.

— Increase our bilateral trade and investment, promoting Turkey as a high growth, high priority market, raising awareness of mutually beneficial business opportunities, supporting economic reform and stimulating co-operation on R&D, ICT and other areas of business innovation.

— Increase our ties in education and culture, including through establishing a British University in Turkey.

TURKEY'S EU ACCESSION PROCESS

— Close dialogue and co-operation in support of Turkey's preparations for EU accession. We shall hold regular consultations between our Foreign Ministries on Turkey's accession process and wider developments within the EU, backed up by periodic review at Foreign Minister level.

— Advice on the negotiating process. Assistance and co-ordination in troubleshooting on individual chapters where further cooperation is needed. Help with continued compliance with the political criteria, including through resumption of our human rights dialogue.

— Joint work on promoting Turkey in Europe, improving the understanding in governments, the public and the media of the strategic importance of Turkey's accession bid, and demonstrating that Turkey is capable of and prepared to take the bold reforms necessary for accession. Further EU-Turkey networking and relationship-development projects such as the Bosphorus Conference. A public diplomacy campaign to give improved visibility to Turkey's contributions to the EU in eg the field of CFSP.

— More—and more strategic—EU twinning and bilateral projects to help Turkey fulfil the priorities in its Accession Partnership and reinforce its administrative capacity to assume the obligations of membership. Help to ensure the effective use of IPA funds. More work on political reform and human rights, through Whitehall visits and exchanges. English language training for officials working on Accession issues. Use of the Foreign Office Global Opportunities Fund—Reuniting Europe project budget, and greater involvement in the Commission's Civil Society Dialogue (eg through city twinning, university and NGO links).

Climate change and energy security

— Joint work to support Turkey's ambition to be a global energy hub, through an enhanced UK/Turkey Energy dialogue, with an emphasis on diversifying energy sources and transport routes. Shared best practice on issues surrounding energy market liberalisation, to ensure transparency and market pricing. UK involvement in regional energy conferences and regional groupings in the Middle East, Black Sea and Caspian.

— Joint work on Climate Change, especially on renewables, technology transfer and climate change agreements. Cooperation on the effects of climate change on human health. Further cooperation on the basis of Turkey's First National Communication on Climate Change to the UN.

— Greater technical co-operation on maritime safety and security, especially in the Turkish Straits. Co-operation on marine and coastal research and management including pollution reduction, remediation, prevention and control. Continued monitoring of environmental and security concerns of oil transit through the Turkish Straits, and promotion of pipelines that help to reduce the pressures on this route. Further coordination on issues with regard to activities carried out by IMO and EMSA, and support for Turkey's effective participation in activities originated by EMSA.

— Joint work on the energy and environment chapters of the EU accession process. UK involvement in future EU environment twinning projects.

— Work with UK companies, to ensure future investment on energy and climate change projects, building on the success of the BP-led consortium's BTC pipeline.

— Joint programmes in support of these objectives, including the Foreign Office Global Opportunities Fund.

Increasing our bilateral trade and investment

— Stronger trade and economic ties, through two-way ministerial visits, a meeting of the two sides of the Turkish-British Business Council in 2007. Greater investment in both countries.

— Raise awareness of business partnership opportunities in key sectors such as energy, education and training, the environment, financial and legal services. Seminars and sectoral trade missions, targeting top businesses to understand their needs and interest in investing in each country. Trade collaboration in the UK and in the wider region (eg Middle East, Central Asia and the Caucasus). Defence Export Services Organisation MOU with relevant Turkish authorities.

— Continued support for economic reform and an environment conducive to foreign investment, including through the early resolution of contractual and market access disputes. Promoting interest in the business opportunities offered by Turkey's privatisation programme. Public Diplomacy project on business and the economy. Advice on improving the functioning of Turkey's job market. Capacity building for commercial courts. Co-operation on Lisbon/Hampton Court agendas.

— Better technological co-operation by signposting help and advice about EU and other international research programmes and supporting UK-Turkey scientific links.

— Aim to establish a high level Government to Government forum to lay stronger foundations of economic partnership for mutual benefit.

Annex B

EU ACQUIS CHAPTER NEGOTIATIONS: CURRENT STATE OF PLAY

Accession negotiations between the EU and Turkey opened on 3 October 2005. Slow but steady progress continues.

As of 3 September 2007:

One chapter has been provisionally closed:

— Ch25 Science & Research (June 2006).

Three chapters are open:

— Ch18 Statistics (June 2007).

— Ch20 Enterprise & Industrial Policy (March 2007).

— Ch32 Financial Control (June 2007).

Under the Portuguese Presidency (until 31 December 2007) it is hoped that Ch21 Trans-European Networks and Ch28 Consumer & Health Protection could open, and good progress should continue on other chapters including Ch26 Education and Culture and Ch23 Judiciary and Fundamental Rights.

Under the December 2006 Council Conclusions, eight chapters were frozen until Turkey implements the Ankara Agreement Protocol (AAP), which deals with policy areas relevant to Customs Union and Turkey's restrictions on the Republic of Cyprus.

These are:

— Ch1 Free Movement of Goods.

— Ch3 Right of Establishment and Freedom to Provide Services.

— Ch9 Financial Services.

— Ch11 Agriculture & Rural Development.

— Ch13 Fisheries.

— Ch14 Transport Policy.

— Ch29 Customs Union.

— Ch30 External Relations.

As part of the revised screening process, Member States can agree opening benchmarks for individual chapters based on the recommendation of the Commission. These benchmarks set out steps that the candidate country must take before the chapter can be considered ready for negotiation. For Turkey, opening benchmarks have so far been set for thirteen chapters:

— Ch 1 Free Movement of Goods.

— Ch4 Free Movement of Capital.

— Ch5 Public Procurement.

— Ch6 Company Law.

— Ch7 Intellectual Property Rights.

— Ch8 Competition Policy.

— Ch9 Financial Services.*

— Ch11 Agriculture & Rural Development.*

— Ch12 Food Safety, Veterinary & Phytosanitary Policy.

— Ch16 Taxation.

— Ch19 Social Policy & Employment.

— Ch27 Environment.

— Ch29 Customs Union.*

Three of these chapters (asterisked) include implementation of the Ankara Protocol as an opening benchmark under the December 2006 Council Conclusions.

Annex C

UKTI STRATEGY FOR TURKEY 2007-08

TURKEY—HIGH GROWTH MARKET STRATEGY

Strategic Objective

By 2011 deliver measurable improvements in the business performance of UK Trade & Investment's international trade customers in Turkey, with an emphasis on innovative firms; and deliver a measurable improvement in Turkish investment in UK.

High-level objectives

— To achieve a step-change in the UK's profile in Turkey by raising general awareness of the market characteristics and opportunities for doing business there.

— To enhance the effectiveness of the UKTI effort in Turkey by identifying more proactively opportunities for business and engagement with Turkish companies.

— To foster an ever-improving environment for business in Turkey which enhances business prospects and opportunities and levels the competitive playing field.

— To build a greater understanding of and appreciation of the benefits of Trade with the UK, ostensibly through the Public Diplomacy Pilot on business and the economy.

Methodology

We will address these objectives in a variety of ways, working closely with key players in the UKTI network and other third party multipliers, as appropriate:

1. Demonstrably deepening and strengthening our trade and economic relationships and networks: (eg contact-building, door-opening and encouraging the Turkish government to see the benefits of policies that allow UK companies to compete and win business there)

— With Government—we aim to establish in 2007-08 a high level government to government forum to address weaknesses in the macro-economic environment, to tackle barriers to trade and to resolve trade disputes between UK companies and Turkish counterparts. Ensure appropriate cross-Whitehall contribution (particularly FCO) to the strategy by setting up a form of Liaison Group for periodic meetings / updates on progress.

— With NGOs—we will engage with leading Turkish NGO actors (eg TBBC, TUSIAD etc) to stimulate greater dialogue with government and the private sector with the aim of increasing their influence over commercial interests and the business environment.

— With EU representative offices—with the appointment of a new C4 2 Sec Commercial in Ankara we will engage the EU Offices here to help in identifying ways in which the Turkish business environment can be improved and in securing any commercial opportunities that arise from this work.

— With Turkish Business—we will aim to develop key relationships with the top 100 companies in Turkey to sell the "compelling proposition" and to emphasise the benefits of involving the UK as a strategic business partner in their corporate strategies. We should identify the strategies they intend to adopt for the period ahead. We should seek to insert UK partners, projects and solutions into their strategies. We should approach the business development and/or strategy managers on our target list and we should build, develop and sustain relationships with each of these key personalities.

— With UK Business—Working with our network in the English Regions and the Sectors Group and Posts to identify our target audience in the UK (ie in which sectors). Also identify who our primary customers should be [the expectation being that these will primarily be middle-to-larger size businesses who are existing exporters/investors].

— Others: eg Trade and Business organisations, academia, Chevening Scholars, the Media—through the Public Diplomacy Pilot we shall aim to widen understanding and awareness of the compelling proposition offered by the UK and to build consensus towards an improved business environment in Turkey.

2. Identifying the challenges and barriers to market access and putting in place strategies to tackle them: (eg work on economic, regulatory, energy, sustainable development and trade policy issues)

— Market/ institutional barriers—we will carry out an analysis of the key barriers inhibiting trade, engaging stakeholders to help identify these and the solutions for overcoming them.

— Weaknesses in supporting networks—we shall aim to strengthen institutional weaknesses in key networks (eg the TBBC) and to build a wide community of stakeholders to help press for reforms and change to improve the business environment.

— Information failures—we shall both improve the presentation of information about business in Turkey through our local and UKTI websites and seek to market more effectively (eg using the PD Pilot), and through a widened audience, the potential for greater business between the UK and Turkey.

3. Identifying opportunities and providing UK business with timely access to information and opportunities:

— Sectors—A re-focused and re-energised effort on fewer key sectors promoting in particular opportunities that reflect the new UKTI strategic targets (high value, high tech, R&D, Inward Investment or creative/innovative).

— R&D and S&T—We will devise a new initiative designed to strengthen awareness and co-operation on key R&D and S&T areas and to report regularly on Turkish projects and activities in these disciplines.

— Through the provision of UKTI services including the High-Growth Business Advisors, and UKTI's English Regional Network, the RDAs and the Devolved Administrations—we shall carry out a targeted programme of activities to increase awareness of Turkey and Turkish opportunities amongst our target audience in UK business, the ITA (eg an ITA Seminar) and RDA networks and other key stakeholders such as interested Trade Associations and Chambers.

— Within the UKTI regional trade teams and the responsible bodies in the Devolved Administrations (SDI, IBW, INI) a number of individual "Champions" will be identified to help:

— provide a focal point within each region for queries relating to Turkey;

— be a contact point for Posts;

— facilitate collaboration between regions on market specific;

— events/missions etc; and

— be well placed to lead missions to Turkey.

— These networks will help bring together the activity which the regions are already doing or considering. By working together in this way UKTI expects that the improved communication between Posts and regions will bring other benefits—for example, a better mutual understanding of Turkey and a more productive environment for generation of effective support for business through our services and use of our Customer Relationship Management system.

4. Measurably improving the perception of the UK by marketing the UK's Business Strengths:

— To market UK as the preferred choice for business partnerships.

— To market the success of the UK economy and the strengths of the UK business community.

— To market our high-tech and R&D success and potential.

— To market the unique skills and expertise of the City of London.

— To market the UK as the single best location for Turkish Investment.

— Embedding in all activities the `UK's compelling proposition': Business UK.

Promoting British Business

— Pay particular attention to the design and content of market web pages and websites to ensure they reflect the strategy.

PRIORITY SECTORS

UKTI sector groups decide which markets should be given priority. These decisions are always reached in close consultation with the UK business community, principally through the Sector Advisory Groups. Those markets we target are those where we can make the most impact by government supporting business, and while the list below is an indication of where we are targeting resource for Turkey this financial year, it does not mean that companies are not assisted on the Turkish market in other sectors. UKTI services can help companies access market opportunities across the range of sectors. An explanation follows of the major sectors where UKTI is active:

PRIORITY MARKETS: (ABOUT 75% OF AVAILABLE RESOURCE DEVOTED TO THEM)

Environment.

Water (incl waste water).

Agriculture (led by International Agriculture Technology Centre).

Marine (led by UKTI South East).

Security (led by UKTI South East).

Opportunity Markets (approximately one key event per year).

Mass Transport (Airports only).

Jewellery and Giftware (in partnership with Advantage West Midlands).

Financial and legal services.

Information and communications technology.

Advanced engineering.

Power.

OTHER SECTORS WITH NO DIRECT SG SUPPORT INCLUDE:

Education skills and leisure.

PRIORITY SECTORS

Environment/water

UKTI activity

1. Turkey has been a priority market for the environmental sector for the past three years. The UKTI Advisory Group (Environmental Sector Advisory group—ESAG) has identified Turkey as one of seven markets world-wide that offer huge business opportunities for UK companies supplying environmental technologies and solutions. As a result Environmental Industries Sector Unit (EISU) has been working with our colleagues at posts in Turkey (Istanbul and Ankara) to facilitate meetings between UK environmental sector and interlocutors in and from Turkey. For, example, in each of the past three years UKTI has sponsored seminar missions to Turkey. During these visits UK companies have had the opportunity to interact with potential business partners in Turkey. UKTI has also sponsored a number of business delegations to visit the UK from Turkey, which again offered the opportunity for business partnerships to be established.

2. The Turkish Government has estimated that it will take total investment of more than €68 billion to bring the state of their environmental infrastructure up to the standard required for EU membership. Hence, ESAG is keen for UK environmental companies to exploit this huge market.

AGRICULTURE

3. Turkey has been identified by UKTI as a new destination for British Agri-business. There are already well-established bilateral relations between the UK and Turkey Ministries of Agriculture which signed a Memorandum of Understanding in March 2007 to develop co-operation in Livestock, equine, crop development, fisheries, post harvest technology, research and development.

MARINE

4. Turkey was identified as a priority by the Marine Sector Advisory Group in 2005. In three areas Turkey is seen as having potential for exporters:

i. For more experienced exporters there is likely to be opportunity for leisure boats and marine equipment;

ii. In the longer term opportunities are going to exist for ship equipment;

iii. A special case is made for experienced exporters to tackle opportunities associated with the niche super- yacht sector.

FIRE, POLICE AND SECURITY

5. UKTI South East lead on this sector and have organised a seminar on opportunities in the security market in Turkey in October 2007. An outward mission to Turkey is planned to follow this up in 2008.

OPPORTUNITY SECTORS

Mass transport (airports only)

6. Some work in the airport sector has been undertaken under UKTI programmes but this is now tailing off.

JEWELLERY AND GIFTWARE

7. Turkey was identified by the giftware, jewellery & tableware sector as an "opportunity" sector in 2006-07. As a result, the sector has supported or undertaken the following actions:

— A visit to Turkey in March 2007 by representatives of the British Jewellery, Giftware & Finishing Federation (BJGF), the leading trade association, to research the jewellery market, including a visit to the Istanbul jewellery show.

— A programme of market research visits by Istanbul post representatives to leading Turkish jewellers in order to investigate the above opportunities in more detail.

8. At the same time, the London Jewellery Export project, a separate regional scheme (funded by London Development Agency) has also been investigating potential for London-based manufacturers and designers, specifically focusing on UK design

FINANCIAL AND LEGAL SERVICES SECTOR

9. Although potentially of interest to the UK financial sector, Turkey is a long way off from being seen as an open market, with the state still prominent in the financial sector and the retail sector not yet mature.

10. Turkey has positioned itself as an attractive and promising investment destination. Turkish reform efforts receive technical and financial support from the IMF, the World Bank and the EU. Turkey has restructured its banking sector and harmonised its legislation with European Union laws and international standards.

11. However, while post-crisis progress is recognised, a substantial reform agenda is still ahead. The 3 large state banks are yet to be sold to private investors. Supervisory frameworks are still building capacity while adapting to EU and Basel II. Credit markets need institutional support, auditing and accounting, credit information systems, collateral regime, enforcement of contracts and development of a mortgage market. Transaction taxes are still distorting financial mediation.

ICT

Telecoms:

12. Joining the EU will have positive implications on standards and regulation which will benefit UK companies. However, given the UK's competitive edge in Telecommunications technology, there are good opportunities for Communication companies irrespective of Turkey's EU status,

13. An inward mission from Turkey is due in January 2008 as part of a Central/Eastern European combined mission.

Software:

14. The focus of UKTI activity in software will be in retail and logistics with some activity to assess specific opportunities in the fields of Communications, Enterprise Systems, Financial Services and Healthcare.

ADVANCED ENGINEERING

15. A programme of activity has recently come to an end. A report on opportunities in the automotive sector in Izmir has been completed and is now available on the UKTI website.

POWER

16. The Power sector team has produced a report on the Turkish market which is on the UKTI portal or available direct from UKTI. A sectoral mission of six companies visited Turkey in November 2007.

OTHER SECTORS

Education and training

17. UKTI held a two day Education and Skills Forum in Istanbul in 2006. Although the forum was positively received, there has been little follow-up from the Turkish side in the areas that were highlighted to improve their development of this sector. This will be reviewed periodically and some work is anticipated in support of the ministerial visit by the Department of Innovation, Universities and Skills with a trade mission in December 2007.

UKTI SUPPORTED TURKEY EVENTS

2007

24 April

Meeting of the UK side of the Turkish-British Business Council.

31 July

Turkey Investors meeting at the Foreign and Commonwealth Office.

Opportunity for government to engage with stakeholders.

17 September

Meeting of the Caspian and Turkey Business Information Group.

Round-table of regional champions from the UK regions and devolved administrations.

8 October

Meeting of the Turkish-British Business Council (TBBC) in Istanbul.

12 October

Turkey breakfast briefing, Aston Business School, Birmingham.

UKTI West Midlands Seminar exploring opportunities in Turkey. Speakers with in-depth knowledge and experience of the Turkish market provided the key information necessary for any company entering Turkey.

16 October

Turkey—Positioned for Business (Multi-Sector).

Seminar with the London Chamber of Commerce exploring Turkey's recent government transformations and unprecedented levels of development.

17 October

UK—Globalisation Breakfast Seminar, Bristol and Poole.

The HSBC and UK Trade & Investment series of globalisation seminars in October and November in Bristol and Poole focused on high growth markets with particular emphasis on meeting the challenges, embracing the opportunities and managing the threats in rapidly growing markets such as China, Brazil, Turkey, South Africa etc.

18 October

Winning Business in Turkey seminar.

UKTI South-East hosted a seminar on doing business in Turkey in preparation for a trade mission addressing opportunities in the Security sector in Turkey in early 2008.

21 October

Turkey—Water Sector Fact Finding Visit.

UK Trade & Investment undertook a fact-finding visit to Ankara and selected Eastern Turkish towns in the week from 21 October to 26 October 2007.

11-16 November

Power sector mission.

Organised by UKTI Power Sector Team. Contracted to EA Technology. 6 companies to Turkey. 2 Centre—Ankara and Istanbul (Also participating in STEAM Conference.)

15 November

Banking on Turkey:

FT and DEIK organised conference on the banking and financial services sector in Turkey.

28 November

Turkey—TUSID (Food & Drink):

TUSID is the largest regional hospitality event in EURASIA. Attendance supported by UKTI via the Tradeshow Access Programme (TAP).

5 December

Turkey—Plast-Eurasia 2007 (Mechanical, Electrical & Process Engineering):

Plast-Eurasia 2007 is the 17th International Istanbul Plastic Industries Fair, with around 900 exhibitors and 30,000 visitors. Attendance supported by UKTI via the Tradeshow Access Programme(TAP).

6 December

Turkey seminar, BERR Conference Centre, London:

UKTI Seminar exploring opportunities in Turkey. High level seminar with presentations by Nick Baird, HMA Ankara, and the Ambassador of Turkey provided the key information necessary for any company entering Turkey.

2008

24 January

Turkey Seminar, Leeds:

UKTI Yorkshire and Humberside seminar on exploring opportunities in Turkey.

25 January

Turkey seminar, Swindon:

UKTI South West Seminar exploring opportunities in Turkey. Speakers with in-depth knowledge and experience of the Turkish market.

February 2008

Outward Trade Mission organised by UKTI South East focusing on security.

23 April

Turkey Seminar, East Midlands:

UKTI East Midlands together with East Midlands International Trade Association present a seminar on exploring opportunities in Turkey.