Author: Arpi Talalian

Asia Times
[Turkey is weathering the storm of a catastrophic currency crisis
through tighter trade integration with China] Note: the article has
many charts, not shown here.
By David P Goldman
February 4, 2022
NEW YORK – Despite a catastrophic currency devaluation and 50% annual
inflation as of December, Turkish manufacturing is booming and exports
have risen by more than half from pre-pandemic levels.
A real economic boom in the midst of financial disaster is puzzling,
but there’s a simple explanation: Turkish manufacturing doesn’t have
much to do with Turkey. It buys Chinese capital equipment and
semi-finished goods and sells the finished products to Europe.
Turkey has found a niche in the fast-growing trade relationship
between Europe and China as a producer of steel products, chemicals,
household appliances and other goods, concentrating on more
labor-intensive and environmentally problematic industries.
Its economic dependence on China has increased significantly. This
helps explain why Turkey eschewed American efforts for a diplomatic
boycott of the Beijing Winter Olympics to protest against China’s
treatment of its Uighur minority, even though the Uighurs speak a
Turkish dialect and have strong cultural and religious ties to Turkey.
Mao Zedong might have said that political power grows out of the
barrel of a gun, but for Xi Jinping, it is more likely to grow out of
the door of a shipping container.
China’s imports from the rest of Asia have nearly tripled during the
past five years, prompting 15 Asian countries including Australia to
join the Regional Comprehensive Economic Partnership with China – but
not the United States.
That was an important Chinese diplomatic victory. Now, a quantum jump
in Sino-Turkish trade is likely to enhance China’s political influence
in Western Asia.
Turkey’s surprising resilience is yet another expression of the
Sino-forming of the world economy. China’s robust supply chains
support not only China’s remarkable trade performance, but move the
trade of its Asian neighbors into a tightly-integrated commercial
nexus.
The Turkish lira has fallen by more than 50% against the US dollar
since 2018, and the cost of production against default on its
foreign-currency debt is more than 5 percentage points, compared to 2
percentage points for Brazil.
Nonetheless, Turkey has managed to more than double its imports from
China in the past two years. Turkey runs a trade deficit, so it has to
borrow in order to buy more foreign goods.
Turkey’s official data show little increase in foreign debt, but the
triangular trade among China, Turkey and Europe allows ways to keep
trade credits off the official balance sheet.
Turkey imports in order to export. Consumption and other goods imports
fell during 2021, while imports of intermediate and capital goods
rose, supporting a 32% overall rise in exports.
The Turkish Statistical Institute’s breakdown of trade by country
shows that the lion’s share of the increase in imports came from
Russia – mainly due to higher energy prices – and China.
The export picture is markedly different. Europe accounted for more
than half the 2021 increase in Turkish exports.
Turkish industrial companies who benefit from this trade boom earn
foreign currency by exporting and paying for their imports with
foreign currency.
The value of the Turkish currency is of secondary importance to them.
That explains why the stock prices of Turkish industrial companies
rose as the Turkish lira fell, that is, remained stable in terms of US
dollars.
Turkish stock prices are a secondary concern for the Recep Tayyip
Erdogan government. The market capitalization of the Istanbul 100
Index is less than US$40 billion.
The dollar value of Turkey’s housing stock, the main repository of
middle-class wealth, exceeds $700 billion, I calculated in a 2020
study.
Erdogan’s low interest-rate policy sunk the Turkish lira, but Turkish
home prices have more than kept pace with inflation. That is key to
President Erdogan’s political staying power.
Unlike the Latin American and African devaluations of the past
generation, the collapse of the lira did not take down with it the
wealth of the middle class and industrial investors.
Tensions between China and Turkey flare up periodically over the
Uighur problem. Religious conservatives in Erdogan’s Justice and
Freedom Party complain about China’s forced assimilation of Muslims
into secular Chinese culture, and the nationalist Gray Wolves movement
occasionally breaks the window of a Chinese restaurant in Istanbul.
But President Erdogan wants to stay in power, and China controls the
means by which Erdogan can do so, namely Turkish economic growth, jobs
and asset prices.
American strategists who hope that Turkey will provide a counterweight
to growing Chinese and Russian influence in Western Asia may be
spinning their wheels. Without China, Turkey’s economy would be a
Venezuelan-style shambles, and that gives China enormous pull in
Ankara.