The Trade Numerologist: Opportunity and Crisis in Turkish Exports

This column is based on data from Global Trade Atlas.

The global trading infrastructure, from shipping lines to investment banks, turns its eyes to Turkey. The country of 80 million, a bedrock economy important to Middle East and Europe, has been locked in political disputes with the US, NATO and other traditional allies.

The escalating crisis has helped deflate the Turkish currency, the lira, over 40% against the dollar this year.

That's a big deal. It's rare that an economy as powerful as Turkey's - a manufacturing machine with a total gross domestic product of over $850 billion -- experiences such a precipitous decline in currency value.

Usually a fall in currency value stimulates exports. Turkish goods, including valuable consumer goods from textiles and nuts to steel and cars, are going to be cheaper for buyers in the US, Middle East, Asia and Europe. Already exports have been rising to record levels this year.

Turkish exports, first 6 months

• 2009: $57.9 billion
• 2010: $54.6 billion
• 2011: $65.6 billion
• 2012: $74.2 billion
• 2013: $75.1 billion
• 2014: $80.1 billion
• 2015: $73.4 billion
• 2016: $71.6 billion
• 2017: $77.4 billion
• 2018: $82.2 billion

The tensions, fueled by Turkey buying weapons from Russia, the detention of an American pastor, and new US tariffs on steel and aluminum, are not resolved. Turkey and the US are threatening new rounds of tariffs.

President Recep Tayyip Erdogan, an authoritarian who has cemented his grip on power, has made no secret of his aversion to raising interest rates. In fact, he wants to lower rates to increase bank loans, and stimulate construction and investment in manufacturing. All that makes it hard to imagine the lira recovering value any time soon.

How this trade spat plays out will illustrate the contours of the new trade war. Currency devaluation is one of the easiest ways of boosting exports, and could also trigger spiraling 1930s-style tariffs that could cause inflation and gridlock the global economy.

In the short term, a situation like Turkey's presents opportunities for shipping lines, logistics firms and traders. They can make money getting Turkish-made shirts and steel to new buyers. It's also a play for investors looking for ways of betting on manufacturing consumer goods.

The main threat of disruption is in Europe. Seven of Turkey's top-ten trading partners are there, and all seven imported a lot more goods from the country during the first six months of 2018 than the year before. The others are Iraq, the US and Israel, and first two imported much less from Turkey in 2018.

Top Turkish export markets, first 6 months 2018

• Germany $8.2 billion (+14%)
• UK $5.2 billion (+14%)
• Italy $5 billion (+18%)
• Spain $3.9 billion (+29%)
• Iraq $3.9 billion (-16%)
• US $3.8 billion (-13%)
• France $3.8 billion (+19%)
• Netherlands $2.4 billion (+38%)
• Belgium $2 billion (+31%)
• Israel $1.9 billion (+20%)

Despite declining shipments to the US, the Trump administration still feels threatened by Ankara's capacity to stimulate exports. This month, the US doubled tariffs on imports of steel and aluminum from Turkey. "I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar!" President Trump wrote in a Tweet. "Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!"

The US has criticized other countries, especially China, for devaluing currency in order to stimulate exports, and like China, Turkey has a rich manufacturing sector, heavily focused on exports.

Top Turkish exports, first 6 months, 2018

• Cars, trucks $13.7 billion
• Electric parts, semiconductors, etc. $7.8 billion
• Iron and steel $5.3 billion
• Clothing $4.5 billion
• Electric machinery $4.3 billion
• Textiles $3.2 billion
• Articles of iron and steel $3.1 billion
• Plastics $3 billion
• Pearls, precious stones $2.9 billion
• Edible fruits and nuts $1.9 billion

Ankara is hitting back. This month, it imposed duties on imports of cars, alcohol and tobacco from the US. The government has called for boycotting American consumer goods like iPhones. US exports to Turkey increased 11% to $6.2 billion during the first six months of 2018.

US exports to Turkey, first 6 months, 2018

• Electric machinery $890.8 million
• Iron and steel $695.3 million
• Oil and gas $620.8 million
• Cotton $442.4 million
• Optical, medical equipment $389.4 million
• Sound and TV equipment $327.9 million
• Pharmaceuticals $293.4 million
• Pearls, precious stones $262.2 million
• Organic chemicals $232.2 million
• Plastics $224.2 million

The risk for the US is losing markets without getting much in return. Turkey is a crucial geopolitical player. Already, Qatar has announced a $15 billion investment package, and Russia has promised to back non-dollar trade. "Before it is too late, Washington must give up the misguided notion that our relationship can be asymmetrical," Erdogan wrote in an op-ed published in the New York Times, "come to terms with the fact that Turkey has alternatives."

Posted 20 August 2018 by John Miller, Guest Blogger