Trump’s Trade War and Its Effects: Where Does Turkey Stand?

Where does Turkey, not a direct target or source of any such conflict perpetrated by the Trump Administration, stand?[1] Turkey is a relatively low-level agenda item in the U.S. Other than the massive turbulence in Syria,^[2] Turkey rarely appears as a top topic since Trump’s ascension to power.^[3] To address this challenge, I offer a comparative analysis of Turkey and Mexico in their highly-dependent relationships with their trading partners: USA and the EU. The focus on trade is justified, because it is where we have seen one of the tangible outcomes of Trump’s foreign policy. Unlike the trade war with China (which is an ongoing battle without any clear finale on the horizon) the renegotiation of NAFTA has given us concrete evidence of how such relationships may unfold in the current historical situation. Therefore, instead of focusing on Trump’s rhetoric or project(ion)s for the future, I will focus on NAFTA renegotiations and compare Mexico’s position vis-à-vis USA to Turkey’s position vis-à-vis the EU. By focusing on the auto industry, which is the key industry for both Mexican and Turkish economies, I will analyse the effects of Trump-like trade policies on Turkey in today’s global economy.

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NAFTA came into force on January 1, 1994. Even though it was signed by the Clinton Administration, negotiations for creating a North American economic bloc had started earlier under the Reagan and Bush Administrations. It was technically the expanded version of an already existing Canada-United States Free Trade Agreement of 1988 with the addition of Mexico. By creating a free-trade zone in North America, the deal aimed at sustaining the economic competitiveness of North America vis-à-vis other dominant economic blocs of the time—for example, the European Union and East Asia. Tariff free access to lucrative American market was mostly given to goods manufactured in the region, which was simultaneously setting a barrier for goods manufactured outside the zone. Achieved mainly through the creation of a complex system of local content,^[4] North America remained a competitive manufacturing zone as well as a lucrative market.

The positive effect of this deal on Mexico’s account deficit has been enormous. The value of total trade between Mexico and the U.S. was about $89 billion in 1994 and Mexico ran a deficit of $1.3 billion. However, in 2017 aggregated value of trade went up to an astounding$557 billion with $71 billion surplus on Mexico’s balance.^[5] Achieving such levels of trade surplus was due to complete transformation of the Mexican economy. Especially in the area of manufacturing, Mexico became the epicentre of FDI oriented for manufacture exports. The share of manufactured goods in exports rose from 32.1 per cent in the 1970s to 78.7 per cent between 2000 and 2014. As Mexico’s integration with global value chains intensified, the economy in aggregated numbers grew spectacularly while its value-added growth rate declined (2.11 per cent per year between 1997 and 2014 compared to 7.12 per cent per year during 1950 and 1981), and labour productivity stagnated (de Souza & Gómez-Ramírez, 2018).

Mexico’s automobile production prior to NAFTA was moderately developed with around a 1.1 million unit production capacity. Originally designed during the import substitution era and reshaped after the crises of the 1970s, automotive output was split between the domestic market and exports. It was completely dominated by foreign automakers as Mexico’s attempts to develop its home-grown brand failed (Traub-merz, 2017). Following NAFTA, Mexico became a fast-growing export market and raised its production volume to around 3.5 million units a year. Eighty percent of its output is exported and about eighty percent of that is headed to the US. More than 60 per cent of Mexico’s automotive manufacturing, in other words, is to feed the US. market. Such substantive transformation in the past twenty years became possible with not only the FDI by U.S. based manufacturers such as GM, Ford and Chrysler (now part of Fiat-Chrysler Alliance, FCA) but also German and Japanese automakers who sought tariff free access to the US market.

This model of development, therefore, designated Mexico as a favourable manufacturing site for exports. Thanks to soaring investments, it was able to sustain above-mentioned trade surpluses vis-à-vis its trade partners (especially the US), however it failed to transform its economy to an autonomous and diversified one sustaining its own growth dynamics. This dependence on the US became crucial when Trump imposed the renegotiation of NAFTA. When the Trump Administration pushed for raising the bar for above-mentioned local content ratio to 75 per cent and negotiated for a new labour content value rule that mandates 40 per cent of a passenger vehicle and 45 per cent of a pickup or cargo vehicle to be made by hourly workers who earn a minimum of $16 per hour (Center for Automotive Research, 2018, p. 2), Mexico had to concede. These two rules effectively left the 30 per cent of the cars exported from Mexico to the U.S. ineligible for tariff-free trade and will force further restructuring on the Mexican auto industry.

But, we still need to answer what were the motivating factors behind Trump’s push for renegotiation of NAFTA? After all, it was barely on the agenda of his predecessor or rival in the 2016 elections. Why was Mexico at the heart of Trump’s anti-trade rhetoric? This can be explained by two simultaneous dynamics. NAFTA was no longer sustainable for economic and political/ideological reasons. Economically, NAFTA was a product of the late 1980s and early 1990s, an era in which China was a minor actor if not completely absent. NAFTA enabled North America to position itself vis-à-vis Europe under German and East Asia under Japanese leadership. However, China’s emergence as a force to reckon with, especially following its admittance to the WTO, altered the dynamics hence the priorities of the US.

Also, at home NAFTA further destabilised the post-war economic order, which was already under a lot of stress since the crisis-ridden 1970s. The introduction of a low-wage production hub in the south was used as a relocation threat to further deteriorate the conditions of labour in North American manufacturing (Dinçer, 2016). This led to a significant loss of hegemony for pro-NAFTA and pro-trade Democratic Party politics and gave room for Trump’s rising popularity in the Rust Belt region. Even though Trump’s win was a razor-thin one nation-wide, it would have been unimaginable with the shifts in this region (Meko, Lu, & Gamio, 2016). These two elements of sustainability caused the stand-off between the US and Mexico. The Trump Administration used its upper hand against Mexico and was able to impose the unfavourable conditions, which will most certainly lead to further restructuring of the Mexican manufacturing sector.

How can we use this historical moment to understand Turkey’s position in the global economic and political environment? Do Trump’s trade policies represent the new norm, and if so, what would the repercussions be for Turkey? I argue that the comparison has merits. Despite major differences, Turkey’s economy, akin to Mexico’s, is heavily dependent on exports to foreign markets, particularly the EU. Just like Mexico, Turkey benefited from a similar trade boost after becoming part of the customs union on December 31, 1995. Unlike Mexico, which was the prime recipient of American and Canadian FDI [Foreign Direct Investment], Turkey continued to sustain trade deficits with the EU, since it was not the only destination of FDI originating from the EU. However, Turkey’s aggregate trading volume went up exponentially and the EU became its number one export and import partner. As of 2017, total value of trade between Turkey and the EU reached €154 billion (Turkey running a €14 billion deficit) compared to $30 billion in 1995.^[6] Besides the value of trade, which would have otherwise been significantly less, the customs union with the EU also had a structural impact on the Turkish economy through policies such as “customs modernisation, eliminating technical barriers to trade, competition policies, intellectual property rights and trade policy instruments (Aytuğ, Kütük, Oduncu, & Togan, 2017, p. 420).”

Just like Mexico’s auto industry, Turkish auto industry’s characteristics changed dramatically following the accession to the customs union. Turkey’s automobile industry was bourgeoning in the 1960s thanks to large-scale public support after it became a sector of priority in the second five-year development plan of 1968. However, up until the mid-1990s, Turkey had two passenger car final assembly plants (operated by Renault and Fiat with local partners) and various truck and bus facilities operating at small scales. It was the appearance of the customs union on the horizon which rendered Turkey an ideal low-cost production site for exports to the EU. International automakers such as Toyota, Hyundai, Honda, and finally Ford came to Turkey in the second half of the 1990s to benefit from this boon. Due to the nature of the auto industry, which operates in clusters, these new manufacturing facilities and the increase in the capacities of the existing ones also generated a massive auto parts industry.

Both countries saw exponential increase in their capacities in terms of total units in this period. As a result, Mexico and Turkey became the 7^th and 14^th largest auto manufacturers in the world respectively. Due to UK’s woes related to Brexit, Turkey has a chance to climb up this the ladder even further. However, both countries show a similar continuing dependence on FDI, technology transfer and access to markets. Turkey has suffered even more deeply from the economic turmoil started in 2018, which shrank the already quite small domestic market, and increased the dependency on exports.

Both Mexico and Turkey’s lack of control over decision making processes cause further issues. Mexico’s already significantly adversarial labour relations (Marinaro, 2018) and local states’ willingness to compete with generous public subsidies to attract new investments render policy making in the long-term challenging. This myopia further intensifies the dependence on export markets, hence the new conditions imposed by the U.S. through the renegotiation of NAFTA. Labour relations in Turkey may not be as dismal as it is in Mexico, however, a series of wildcat strikes in 2015 were met with force with the government siding with the auto industry to suppress dissent. A year later, the Council of State deemed the termination of contracts legal despite the opposing decision made by local courts.[7]

Adding another dimension to this instability is that Europe’s already stagnant automotive market, which is Turkey’s main export market, has entered another down cycle. Ford, for instance, recently announced a massive overhaul of its money-losing European operations (Gibbs, 2018). Whether this will have direct consequences for Ford’s large Turkish operations, which employs around ten thousand workers, is unclear, but it certainly is a major element of concern as Ford is the largest exporter in Turkey as of 2017.^[8] Turkey’s efforts to create a domestic brand has yet to deliver any tangible outcomes and seems to be suspended, if not completely halted, due to the current economic turmoil.

Despite Turkey’s dependence on Europe as a major export market^[9] and a source of FDI,^[10] its dependence also bears important differences to that of Mexico’s from the US. First of all, Brussels as an actor/policy maker does not appear as cohesive as Washington. The divides within the EU also seem damning as Germany was able to reassert itself as the regional centre of manufacturing (including the auto industry) at the expense of others such as France and Italy. German automakers’ expansion into Eastern Europe, another Turkey-like regional manufacturing hub with lower costs, complicates matters even further since Turkey competes with a myriad of regional rivals.

However, in the event of such push for further concessions in the form of renegotiation of the terms and conditions of the customs union^[11] or imposing restructuring of the domestic economy for access to much-needed capital, Turkey may find itself in a position similar to Mexico. With little home-grown technology, limited capital accumulation and much-needed access to markets for its goods, Turkey faces similar challenges even without any large-scale NAFTA-renegotiation-like external factors. This is particularly the case as the Turkish economy has been tested with over 25 per cent currency devaluation and extreme inflation rates in an era of low-inflation worldwide. Depreciation of the Turkish lira increases the chances of export, however, the Turkish auto industry’s reliance on imported intermediary goods reduces possible benefits of rising export capacity. The simultaneous shrinkage of domestic market due to declining purchasing power also increases the dependence on foreign markets. Reducing Turkey’s competitive stance even further is the fact Turkey would have no say over bilateral free trade agreements the EU may be involved in. In case of a FTA between the EU and South Korea, for instance, the Turkish market may be opened to South Korean goods through the customs union while the opposite does not apply to Turkey and her ability to access to the South Korean market.

The embedded unevenness with several interrelated dimensions that I’ve described above puts countries like Turkey in a particularly fragile position. Similar to Mexico, Turkey is characterized by limited capital accumulation, dependence on foreign technology and export markets, and lack of control over decision making processes and may be faced with an intensified need to rely more on a combination of adversarial labour relations, reduced environmental standards, and providing more public support for private enterprises.