Turkey is part of the European economy. Its production capacity has become more sophisticated only because of the European market.

The Customs Union agreement has been good for Turkey. It has played a major role in the global integration process of the last decade. It has helped Turkey’s exports diversify and become more sophisticated. It has upgraded Turkey from a low-tech exporter to a medium-tech exporter. The Customs Union agreement has insulated the Turkish industry against East Asian competition for a long time and contributed to the advancement of the electronic and automotive industries. So, has the agreement lost importance now? I do not think so. Let me tell you why. 

The agreement was validated after the reforms introduced by Kemal Derviş
Turkey signed the Customs Union Agreement with the European Union in 1996. It was unable to benefit from the agreement immediately, however. More precisely, the impact of the agreement was not translated into trade and foreign direct investment figures immediately. Why? Because, Turkey first needed to strengthen its absorption capacity as the European Union had done before.

In order to validate the agreement in practice, Turkey first had to wait for a relatively stable environment, which was enabled later by the reforms introduced by Kemal Derviş in 2001. Foreign trade started to boom only after macroeconomic stability was ensured. After the agreement, the country’s export volume increased remarkably, from $30 billion to $100 billion. This is important and the first point to underscore.

Second, the climate of political stability ensured after the 2002 election improved Turkey’s foreign direct investment attraction capacity. Foreign direct investment to Turkey increased from $1 billion to $15 billion. Almost 80 percent of the foreign direct investment in Turkey came from European Union countries. So, Turkey had to reorganize its economy and politics in order to benefit from the Customs Union agreement. The impacts of the agreement started to be felt as the domestic climate of stability started to strengthen. Turkey has gone through a transformation and this is a good thing. 

Turkey needs another leap
I am thinking that the same agreement can function today, as well. Turkey clearly needs a leap concerning the technologic capacity of its industry. It is crucial for Turkey to shift from medium to high-tech industrial production. When making this leap, we have to start considering which areas to concentrate on so as to ensure that Turkey outperforms its rivals, again via the Customs Union agreement. Strengthening relations with European firms that work in the identified areas would be useful for drawing foreign direct investments to Turkey. It would be useful to analyze the opportunities earned via the Customs Union agreement when focusing on subsidies designed to help control the current account deficit.

Similarly, Turkey has to introduce a series of domestic policy measures in order to continue benefiting from the agreement. The first step should be to put into effect the legislation regarding intellectual property rights. The second should be to make the court system functional, starting with efforts to solve the operational problems of the judiciary. Turkey needs to solve the long trial period problem. I think if the necessary infrastructure is set, the Customs Union agreement can become functional again.

Turkey is a part of the European economy. Turkey’s production capacity has become more sophisticated only because of the European market. Concerning the manufacturing industry, Turkey competes with Iran in the Iraqi market. It seems like a joke, but it is the truth.

Turkey’s east is still a blind alley.

This commentary was published in Radikal daily on 30.03.2012