Japan and Turkey: the contours and current status of an economic partnership/free trade agreement.

• Author: Morrison, Scott
• Position: Essay

Introduction (1)

As the world's third largest economy, strategically proximate to China, and firm friend of the US, Japan is by any measure a crucial force--albeit an economic rather than a military one--in the Asia Pacific and East Asia. In keeping with the theme of this issue, therefore, the position and economic potential of the countries in the Asia Pacific may extend in importance even more visibly and consequentially outside of the region,--most likely in coalition with friends and allies, as it already does (as measured by economic engagement with countries that, collectively, span the globe). In keeping with this issue's examination of domestic and international developments relating to the Republic of Turkey, this article narrows its attention to recent and likely future events that have brought Japan to engage with Turkey.

With respect to both Japan and Turkey, the focus of this article encompasses both private parties (companies engaged in bilateral trade and investment) and especially the governments of these two countries. The Japanese and Turkish governments and their respective ministries and quasi-governmental actors simultaneously lead and follow the flow of capital, goods and services, seeking to facilitate their movement and formalize bilateral relations into an Economic Partnership Agreement (EPA). For the purposes of this article, EPA and Free Trade Agreement (FTA), the parlance used elsewhere, will be treated as synonymous and interchangeable. Over the last three years, the private sector has on balance been the initiator of enhanced trade relations, but both governments have instead responded to the business lobby and taken their own initiatives, particularly in the area of nuclear power.

In order to elucidate the contours and conditions of a possible EPA between Japan and Turkey, and the prospects and probability of such a document being agreed upon by the two governments, this article analyzes four elements. First, the character and quantity of trade and investment between Turkey and Japan over the last four years. Second, the legislative and diplomatic endeavors and accomplishments of the Japan-Turkey Joint Economic Committee from its inception in 1983 to the present. Third, some recent landmark deals between Japanese companies and the Turkish public and private sector. Fourth, respective demands and observations of a notional FTA between the two countries, as expressed by the "Joint Study Group for an Economic Partnership Agreement between Japan and the Republic of Turkey." This article concludes with some reflections on the cumulative effect of the economic and structural elements of bilateral relations, and those of the political and bureaucratic actors participating in the ongoing efforts to maximize tangible strategic and political gains from the relationship between Japan and Turkey.

The Character and Magnitude of Trade and Investment between Turkey and Japan

Turkish exports to Japan amounted to US$274 million in 2013 (as of October), US$331 million in 2012, US$296 million in 2011, US$272 million in 2010, and US$232 million in 2009. (2) The gradual upward trajectory of the value of Turkish exports in this period is evident from these figures. What is less apparent is what they indicate about the scale of Turkish exports in light of the size of the Japanese market, compared to that of other countries to which Turkey exports goods. Between 2009 and 2012, Turkey's exports to Japan were roughly comparable to its exports to Ireland. Ireland is the 42nd largest economy in the world; it is less than 4 percent of the Japanese economy in size. (3) These facts, combined with the areas of pressing Japanese demand which will be discussed in section four below, provide evidence supporting the proposition that Turkey has not yet realized the potential scale of goods it could export to Japan--as the promoters and advocates of augmented bilateral trade relations maintain. In 2012, all of the top ten Turkish products imported by Japan (comprising 64 percent of the total imports) were agricultural or marine products (foodstuffs, produce, tobacco, seafood), clothing and leather goods, except for the 8.5 percent of which were machinery and parts. (4) In the same year. Turkey's top export product types were textiles, clothing and accessories, vegetables and fruit, and fish products.5 On the other hand, Japan's exports to Turkey were worth US$3.6 billion in 2012, US$4.2 billion in 2011, US$3.2 billion in 2010, and US$2.7 billion in 2009. (6)

These figures bring into relief the stark trade imbalance between the two nations. In contrast to the relatively low value of Turkish exports, the composition of Turkey's imports from Japan emphasize the dominance of Japan in the trade relationship, at least with respect to monetary trade balance rather than demand and perceived importance of different types of goods or investment. The top ten exports from Japan to Turkey amounted to over 89 percent of the total exports, indicating the small number of product types sold. Of those top ten exports, nearly 35 percent were related to nuclear energy production-- nuclear reactors or machinery and parts. 13 percent were motor vehicles. The remainder included heavy industrial goods (iron and steel), precision instruments and machinery or parts, ships and other floating structures, and light industrial products (rubber and plastics). Japan's exports exceed Turkey's exports by a factor of at least 5 in value and typically by quite a lot more.

Turkey has no foreign direct investment (FDI) in Japan. (7) In 2010, Japan was the sixth highest contributor of FDI in Turkey--US$347 million, or 5.3 percent of total FDI. Japan is ahead of the US in the ranking of foreign investment in Turkey and four European Union countries. (8) Section four will furnish more detail on the increase in Japanese investment in Turkey more recently, including the opening of Japanese companies and offices in the country. The 2010 FDI figures underestimate the trend of growing direct investment of Japanese entities in Turkey, which has increased substantially from 2011 onwards. It is clear that there is an asymmetric economic relationship between the two countries, which the Turkish government is eager to redress, particularly with the decline of growth in the European Union and the consequent reduction in investment from the eurozone. Japan's interests from a macroeconomic standpoint may not be as obvious but, as the next section will detail, both sides have made efforts to attain an equal footing, or at least as advantageous a position as possible, as they attempt to prepare the groundwork for an EPA and increasingly promote high-level talks precedent to such an agreement.

The European Customs Union is central to the edifice of Turkey's existing FTAs. Turkey has entered into 29 FTAs, 10 of which were repealed due to their partners' accession to the European Union. The remaining European Free Trade Agreement is central to Turkey's strategy towards free trade arrangements. One of the remaining agreements is...