TRADE PROSPECTS BETWEEN UNITED STATES AND TüRK?YE: DIVERSIFICATION OR SPECIALIZATION?

It is critical to increase the export capacity of high-value products to move Türkiye to the higher income group

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When I was recently asked to take the lead as Washington, DC, Representative of the World Turkish Business Council (DT?K), I started strategizing the best pathway to increase trade volume in productive sectors. It is not an easy task to expand USA-Türkiye trade volume from US$35 billion to an envisioned US$100 billion given high transport costs, but it is not an impossible vision if there will be a renewed approach to diversify trade into high-value products particularly through innovation and technological transformation.

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It is encouraging to see that trade volume has increased significantly in the past 10 years compared to previous decades, however the product composition remains about the same. USA is Türkiye's second largest export destination. Chart 1 shows that America’s imports from Türkiye increased significantly from US$4.4 billion in 2010 to US$20.4 billion in 2022. America’s exports to Türkiye also surged from US$10.3 billion in 2010 to US$14.4 billion in 2022. Investments are increasing between the two countries and new US companies are coming to the Turkish market. This expansion seems sustainable as American companies usually make investment decisions with 7-10 year perspective. In recent years, US companies started entering the startup ecosystem through acquisitions in some sectors such as gaming and retail. In some sectors, Türkiye is seen as an alternative market to China. American companies are now positioning Türkiye as a regional hub.

Currently, Türkiye ranks 25th in the USA's imports with a share of 0.6 percent. There are significant untapped potentials to increase the share of Turkish exports to the US. Table 1 and Table 2 show that Turkish export companies have been specializing in traditional products. In 2022, building materials and carpets ranked highest which have been consistently Türkiye’s top export products to the US. In recent years, gold, jewelry, machinery and automotive sectors experienced the highest increase in demand in the US. Specialization has positive impact in expansion of trade volume as observed during the past decade. However, there is still room to add on this success through diversification into higher value Turkish export products which will accelerate economic growth. To reach high-income country level, economic growth needs to be accompanied with higher total factor productivity growth, and faster transformation toward industry.

Among the products imported from the USA, aircraft, iron and steel, mineral fuel and oils, boilers, machinery and mechanical devices, and optical, medical and surgical devices rank first. Cooperation in defense industry is expected to deepen in Türkiye-US commercial relations. It is advisable to prioritize productive sectors rather than defense industry so we could create economic opportunities for future generations. Currently, there are more than 2000 companies with American capital in Türkiye. These companies have the potential to create win-win solutions for all through prioritized investments in climate-friendly sectors.

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While diversifying trade, Türkiye should focus on boosting total factor productivity to escape from middle-income status. In order to join the ranks of the high-income countries, sustained growth in the long-term is necessary.?In Türkiye, total factor productivity usually stalls despite growing investment in both physical and human capital. To address this issue, technological advancements are needed in production of goods. If this is achieved, efficient production will lead to lower cost of production and higher competitiveness.

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There are also high potentials to increase trade and productivity in services sectors. This could improve the quality of finance, telecommunications, logistics, and professional services. Such improvements in turn could boost the productivity and profitability of manufacturing sectors. Foreign direct investment is important to access best practices and new services. A cooperation agenda could aim at facilitating services trade and the adoption of competition-enhancing regulatory reforms. This will also help create new jobs especially for the youth. Historically, services trade has been dominated by travel and transport, but exports of health services, communication, financial and insurance services witnessed more rapid change over the last decade. There are still untapped potentials in digital economy and mobile game coding.

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Trade agreements could help deepen economic collaboration and increase trade volume. A strategic partnership in trade could focus on providing incentives that would offset transportation and logistics costs. Türkiye could provide access to large markets. Despite slow progress in implementation, trade agreements generate positive impacts for all countries, if designed carefully. The key is to develop deep and comprehensive agreements to avoid design flaws that shallow agreements bring. In addition to lowering trade costs, a good strategic partnership should focus on eliminating non-tariff measures and behind-the-border barriers.

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The main question is where do we want to see Turkish exports in the next decade to reach a high-income level goal. The strategy towards this goal will help answer the questions pertaining to where to diversify and where to specialize. Revealed comparative advantages, export sophistication and product space analysis could be complemented with price projections in strategic sectors and external demand estimates in the medium to long-term. Investment decisions should be based on competitiveness projections of targeted high-value export sectors. Production of intermediate goods could be a good start to move Turkish companies towards higher value-added industries. Economic partnership will strengthen political stabilization. Literature clearly shows that economic collaboration stimulates growth much faster with visible results of increased household income for all countries involved.