Turkey's deficit with China and global implications

During my conversations with Chinese officials last week, I was convinced that Beijing understood the trade deficit heavily favoring China in the bilateral trade with Turkey has been a sore point that needs to be attended to urgently in order to promote cooperation in the other fields China is seeking to promote with Turkey. They do not try to hide that this is a major problem and acknowledge that it is simply not a sustainable trend between the two countries, making clear that China is ready to work with the Turkish side to correct the anomaly.

Before going into the details of the deficit issue, I must stress that China is Turkey's largest trade partner in the Far East and its third biggest trade partner after Germany and Russia. Considering the size of the two emerging countries' economies, the current trade volume -- $24.5 billion in 2011, up from $19.3 billion a year earlier, according to the Turkish Statistics Institute (TurkStat) -- is still very low. There is huge room for trade to grow. That is why both countries are publicly announcing that the target is to reach $50 billion by the year 2015 and $100 billion by the year 2050.

As for the trade deficit, an urgent action plan must be developed to address the structural reasons for this imbalance in both markets. Though the latest available data from TurkStat provides us some hope in correcting this imbalance, it will take decades for Turkish exports to catch up with imports from China at this speed. Looking at the numbers from last year, Chinese exports to Turkey were $22 billion, while its imports from Turkey were only $2.5 billion. Undoubtedly there is a huge discrepancy here. Put differently, Turkey's share in China's imports roughly equals 0.1 percent, while China's exports to Turkey constitutes 1 percent of Chinese exports overall.

The latest available data for 2012, which covered the period of January and February, from TurkStat, indicated that there is a slight improvement in the balance. Turkey imported $3.3 billion worth of Chinese goods in the period of January and February this year, up from $3.1 billion in the same period in 2011, an increase of 6.5 percent. Turkish exports to China increased, however, to $356 million from $293 million during the same period last year, posting a 21.5 percent increase. TİM has the figures for March as well, which indicated a 26 percent jump in Turkish exports to China when compared to the same month of last year.

I have to say that publicly bashing China with inflammatory remarks in the Turkish Parliament, as we saw during the debate in January 2012 on the agreement on enhancing cooperation in trade and economy between the two countries, does not help solve the trade deficit with China. Some opposition deputies belonging to the Republican People's Party (CHP) and the Nationalist Movement Party (MHP) raised sensitive issues that would surely raise eyebrows in Beijing.

For example, Nevzat Korkmaz, a MHP deputy from Isparta province, supported demands from Taiwan on the Parliament floor, saying Turkey should give permission to Taiwan to open a trade and cultural office in İstanbul while starting direct Turkish Airlines (THY) flights to Taiwan. CHP deputy Ali Haydar Öner from the same province brought up the status of Uyghur Turks in Xinjiang province, saying that the Chinese government should not prevent Uyghurs from exercising their religious and democratic rights. On the contrary, Beijing developed more sensitivity towards Uyghurs after the July 2009 riots and seeks further Turkish engagement in the province.

Though raising these points as part of their parliamentary oversight capacity is the legitimate right of deputies, I suspect mixing political and social issues with economic and trade relations may be counterproductive to solving Turkey's trade deficit with China. No wonder Sino-Turkish ties have received a big boost during the tenure of the ruling Justice and Development Party (AK Party) government in Turkey in the last nine years. Only during the AK Party government period have Chinese officials found a receptive ear in the Turkish capital, which went as far as allowing the Chinese Air Force to join in a military exercise in the NATO-member country in 2010.

Going back to the deficit issue, Chinese officials were telling me that they have developed a set of measures to stimulate exports from Turkey, encouraging more purchases from Turkish companies. Some of these measures even go as far as subsidizing Chinese companies that import from Turkey, although they publicly deny there is such a practice in place lest they run afoul of World Trade Organization (WTO) regulations. During Erdoğan's visit, they will look to develop new initiatives to further encourage Turkish exports.

Chinese authorities lament the fact that there are many structural reasons feeding into this deficit, which is not easy to solve in the short run. Challenges remain in the Turkish market, from high labor costs to superior living standards, which raise the cost of Turkish products. In turn, it would be a hard sell to promote Turkish goods to the price-sensitive, average Chinese consumer. Lack of knowledge and mutual understanding, as well as language difficulties, are other negative factors that play into the disadvantage of Turkish companies in the Chinese market.

This explains the success of some Turkish companies in the Xinjiang region, where a Turkic-speaking Uyghur community constitutes the largest ethnic community, comprising 45 percent of the 22 million population, according to the latest survey. In Urumqi, capital of Xinjiang, you can find many Turkish textile products, as well as food items that were exported from Turkey. With a Turkey Culture Year to be celebrated in China in 2013, Chinese officials hope that Turkey will be better promoted with a series of activities. Beijing hopes that better promotion of Turkey will also bring a bigger slice of the Chinese tourism industry, which sent only 97,000 Chinese tourists to Turkey in 2011. Considering that some 70 million Chinese spend their vacation abroad, the slice Turkey has been getting seems to be almost negligible.

To compensate for the trade deficit with Turkey, China is also encouraging investment in Turkey, setting up joint-venture companies or competing for government tenders in infrastructure projects. Chinese companies are especially targeting the mining, construction, communication and energy industries. During the visit of Chinese Vice President Xi Jinping in February 2012, Turkey and China struck a deal for a three-year currency swap worth $1.6 billion to enable bilateral trade in local currencies, which may act as a catalyst for striking more joint deals.

I also need to emphasize that it was kind of a smart move by the Chinese side to work with the Turkish Confederation of Businessmen and Industrialists (TUSKON) in Turkey because the latter is the largest trade interest group in Turkey, representing private small, medium and large enterprises under a single roof across Turkey. With 40,000 members in Turkey and partnerships in 140 countries, TUSKON is the perfect vehicle for Chinese companies to deliver business results, not only in the Turkish market but also in third-party markets, especially in Africa, where TUSKON has proved to be very strong. China believes that Turkish and Chinese companies can cooperate in these markets, where China will provide low-cost financing and cheap labor, while Turkey will pitch in with expertise and technology.

Chinese officials also underline that they have no problem with Turkey's “action plan” to provide incentives to industries that manufacture similar goods to replace Chinese imports in order to rectify the trade imbalance. They say China will be more than happy to see the deficit issue go away and not be one of the top issues discussed during high-level exchanges anymore. “It is like the anti-dumping cases launched against Chinese companies in Turkey, which used to be home to the second-highest number of cases after India. We worked on this by bringing representatives of Chinese and Turkish industries together to sort out their own problems. Dumping complaints from Turkish companies were drastically reduced. Today there are few cases of anti-dumping investigations against Chinese products in Turkey,” one official told me.

It seems the “gradualist” approach traditionally taken by the Chinese in national and global issues seems to be paying off in its relations with Turkey. After all, both Turkey and China, representing assertive developing countries in the G-20 group of the largest economies, have further ambitions to set the agenda in world trade and financial issues that go well beyond bilateral trade. Therefore, the trade deficit must go away for closer cooperation between Turkey and China.