Trade with Turkey Published by Global Britain

Trading Places: Britain and Turkey After Brexit

When asked about Britain turning its back on the EU, Nihat Zeybekci, Turkey's economy minister, offered an unexpectedly sunny take during a recent visit to London. "I think you would rather say the EU didn't retain the UK as a member," he replied. "From the EU point of view it is a loss, but are we concerned? No—on the contrary, we see it as an opportunity." Turkish officials have already begun drafting a "new generation" free-trade agreement to conclude upon Britain's EU departure.

The enthusiasm appears mutual. Both Boris Johnson, then foreign secretary, and Prime Minister Theresa May visited Turkey to discuss post-Brexit trade relations. In January 2017, Mrs May announced a £100m defence deal to develop fighter jets for the Turkish air force. President Recep Tayyip Erdoğan pledged to boost bilateral trade from $15bn to $20bn.

An emerging powerhouse

Turkey's economic credentials warrant attention. The economy has expanded by 6-7% annually for much of the past two decades. Even with projected growth slowing to 3% this year, few middle-income countries match such performance. PWC estimates Turkey could maintain 3% annual growth over the next three decades—nearly double the 1.6% average forecast for G7 countries. The government's 2023 vision targets a place among the world's ten largest economies.

Britain's trade with Turkey has quadrupled over the past fifteen years to $16.1bn, making Turkey the UK's 22nd-largest export market globally and its tenth-largest in Europe. Principal opportunities for British firms lie in airports, environmental services, water infrastructure, financial services, education, ICT, ports and life sciences. Whilst machinery, pharmaceuticals, vehicles, iron, steel and plastics dominate current exports, the healthcare sector presents particular promise, offering an estimated £2.5bn annual opportunity for UK companies.

Turkish policy aims to reduce import dependence and develop domestic manufacturing capabilities, with a long-term ambition to become a global exporter of high-tech goods. Economic reforms have progressively opened markets by reducing government controls on foreign trade and investment whilst privatising state-owned industries.

Incentives and investments

A decree published in January 2012 overhauled Turkey's investment regime, shifting towards sector-specific incentives targeting high-value, high-tech and export-oriented investment. Four schemes now operate—general, regional, large-scale and strategic—offering tax and customs duty exemptions, social security support, interest subsidies and free land. Priority sectors include tourism, mining, railways, pharmaceuticals, automotive, aerospace and defence.

Some 2,894 British companies operate in Turkey, including BP, Shell, Vodafone, Unilever, BAE Systems, HSBC, Aviva and Diageo. Between 2002 and 2015, the UK invested $8.6bn in Turkey, making it one of the largest foreign investors.

Turkey's attractions extend beyond manufacturing prowess. Its geostrategic position connects Europe, the Middle East, Central Asia and North Africa. At 79m people (projected to reach 83m by 2023, with half under 34), Turkey boasts Europe's youngest and fastest-growing population, providing access to 1.5bn consumers across markets worth $25trn GDP within four hours' flight time.

Clouds on the horizon

Yet Turkey faces formidable challenges. This year alone has brought multiple terrorist attacks, a change of prime minister, diplomatic spats with Germany and the EU, a failed coup attempt, and spillover from regional conflicts. The coup heightened perceptions of investment risk considerably.

Operational concerns include an economy seemingly trapped at middle-income status, weak productivity, high corporate foreign debt, a substantial current account deficit increasing vulnerability to capital flows, widespread tax evasion and over-reliance on indirect taxation. A weak lira—likely to weaken further as international interest rates rise—compounds these difficulties. Rigid labour markets and insufficient human capital present additional obstacles. Hosting over 3m refugees has severely strained public finances, prompting sovereign rating downgrades from Moody's and S&P.

Regulatory unpredictability poses further risks. Legislation changes capriciously, often without warning or consultation. Success requires visible commitment through local presence or strong partnerships. Turkey, whilst a WTO member, has failed to notify the organisation of import requirement changes and has applied non-tariff barriers such as reference pricing systems.

A partnership of convenience

Despite these tribulations, bilateral economic relations seem destined to grow in the post-Brexit era. Turkey was a founding member of both the OECD and G20 and maintains a customs union with the EU covering most goods except raw agricultural commodities. Future bilateral arrangements depend on Britain's withdrawal negotiations. Mrs May declined to confirm whether the UK would exit the customs union.

The customs union provides frictionless movement of goods within the EU whilst imposing a single external tariff barrier—precisely why British companies face fewer obstacles in Turkey than in other high-growth emerging markets. Yet scope exists for preferential arrangements in areas the customs union excludes: agricultural produce, services and public procurement.

Both governments have emphasised their intention to expand trade and investment ties. British and Turkish policymakers face curiously parallel challenges: both must reconstruct relationships with Europe under changed assumptions about their future status. Britain is departing the EU; Turkey, ostensibly seeking membership, appears destined for perpetual candidate status.

Thus two countries begin political journeys from opposite directions. With considerable irony, they may yet arrive at remarkably similar destinations.