The Turkish lands have been the lynchpin of trade between Europe and Asia, ever since the conquest of Constantinople in 1453 sealed the shift in the centre of European power from the Byzantine to the Ottoman Empire. Until the great European discoverers began to open up maritime trade routes towards the end of the 15th century, the Ottomans had a stranglehold on European trade to India and the East. And even afterwards they remained the masters of the land-based routes, famously known as the Silk Road.

Turkey is making big investments in the automotive sector and other machine-driven industries

Andrew Birch, IHS Global Insight

At the end of the 17th century, the empire of the Ottoman Turks reached as far as Algiers in the west, Basra in Iraq and parts of modern-day Yemen in the east, and almost to Vienna in the north. During the next 200 years, there was a rapid contraction of Ottoman territory to what, in 1923, came to be known as Turkey. But the country’s continued claim to land on both sides of the Bosphorus means that it has retained a strategic importance as a link between East and West.

Turkey’s external exports

Present-day Turkey has sought to leverage this natural advantage as much as possible and with some success. In 1923, Turkey’s external trade was worth about $50m. That has since grown to more than $100bn. The liberal economic policies of the government of Tayyip Erdogan, whose Justice and Development Party (AKP) came to power in 2002, have accelerated the process in recent years. Under Erdogan’s stewardship, exports have grown from $31.3bn in 2001 to $114.0bn in 2010, an increase of almost $83bn in just 10 years. By comparison, export growth in the previous 10 years was only $14.2bn. Between 1996 and 2000, it was just $5bn.

Turkey is becoming a significant player in the Middle East and there are important ties

John Sfakianakis, Banque Saudi Fransi

The majority of Turkey’s exports are manufactured goods. In the first four months of 2011, manufacturing exports totalled $40.4bn, or 97 per cent of the country’s total exports. The export of vehicles and basic manufactured metals alone accounted for more than a quarter of all exports.

“Just like the rest of emerging Europe, Turkey is making big investments in the automotive sector and other machine-driven industries,” says Andrew Birch, a specialist in Turkey at IHS Global Insight in Washington. “They are integrating themselves into the production cycle of Europe’s more developed countries, providing parts for markets such as Germany and Italy.”

While Turkey has a network of trading relationships across the globe, Europe is by far and away the country’s largest partner. Turkey’s exports to the EU in April alone amounted to $5.8bn, equivalent to 48.9 per cent of the country’s total exports, up from 45.9 per cent in April 2010, according to the latest government figures. Last year, Germany was the largest recipient of Turkish exports, followed by Italy, the UK, France and Iraq. It was also one of the largest sources of Turkey’s imports, along with Russia, China and the US.

Imports rise in Turkey

Unfortunately for Turkey, while exports have grown quickly, import growth has been even more rapid. Imports – chiefly of intermediate goods such as semi-processed industrial materials and unprocessed fuels and oils – amounted to $185.5bn in 2010, up more than 300 per cent from $41.4bn in 2001.

Syria doesn’t account for a critical proportion of Turkey’s trade, but trade has grown rapidly

Ed Parker, Fitch Ratings

The rapid growth in imports is having a worrying effect on the Turkey’s finances. Over the past 10 years, Turkey’s trade deficit has increased from $10bn to $71.6bn, and the gap is continuing to widen. According to the latest government data, exports reached $11.9bn in April, 26.5 per cent higher than for the same month in 2010. But imports for the same period amounted to $21bn, a 40.2 per cent increase over April 2010.

Turkey’s widening trade deficit has resulted in a rapidly increasing shortfall in the country’s external accounts. The current account deficit grew by almost 150 per cent in the year to March 2011, from $24.9bn to $60.5bn, according to US ratings agency Fitch Ratings. Fitch expects the current account deficit to reach $64bn by the end of 2011, equivalent to 8.3 per cent of gross domestic product (GDP). By the end of 2012, Turkey’s net external debt will have reached an estimated $250bn, compared with just $85bn in 2006.

Part of the problem is that although Turkey’s economy quickly returned to strong growth after the global downturn of 2008-09, the same has not been true in Europe. While domestic consumption in Turkey is extremely strong – fuelling demand for imports – the growth in appetite for Turkish goods and services in Europe has slowed.

Deficit widens

“Turkey’s economic growth means that imports are growing because of strong domestic demand, but exports are not growing at the same pace because the global economy is sluggish,” says Marwan Barakat, chief economist at Bank Audi in Beirut. “The result is a widening of the trade and current account deficits.”

Under Erdogan’s leadership, Turkey has sought to overcome its dependence on Europe by deepening relationships with the East. It has moved to develop political ties with countries unfashionable in the West, such as Iran, Syria and Libya, and it has strengthened existing links with other parts of the Arab world.

In June 2010, Ankara agreed the creation of a free trade and free movement zone with Syria, Lebanon and Jordan, building on bilateral deals signed with the three countries over the past five years.

“Turkey is becoming a significant player in the Middle East and there are very important ties between the two,” says John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh. “They trade goods such as textiles, clothes, fruit, vegetables and other foodstuffs. The Middle East, especially Saudi Arabia, benefits from cheap labour from Turkey, and Turkish companies are dominating the construction market in northern Iraq. Turkey is also a commercial hub and a tourist destination for Arabs, so the links are becoming stronger year by year.”

According to data from Fitch Ratings, Turkey’s exports to the Middle East rose from $9bn in 2005 to $23.1bn in 2010, an increase of more than 150 per cent, while the value of exports as a whole has grown by only 55 per cent over the same period.

“Turkey has been quite successful in directing trade away from slow-growing countries in Europe to faster-growing countries elsewhere,” says Ed Parker, head of EMEA sovereign ratings at Fitch Ratings. “There has been strong growth in Turkey’s trade with the Middle East and Africa as a whole, and with Asian countries.”

In 2010, the Middle East accounted for 19.5 per cent of Turkey’s exports, compared with 12.2 per cent in 2006. In the past five years, trade between Turkey and the 22 members of the Cairo-based Arab League has more than doubled to almost $30bn a year.

“There has been a lot of export growth with certain Middle East countries, especially since the fall of [former Iraqi leader] Saddam Hussein,” says Birch. “Investments in Libya were really soaring until this year, and the same in Syria and some of the Gulf states. It was more than a political push – there were concrete economic gains too.”

Syria trade links with Turkey

Turkey’s trading relationship with neighbouring Syria has grown particularly strongly, albeit from a small base. In the past five years, exports to Syria have more than tripled, from $552m in 2005 to $1.8bn in 2010, according to Fitch Ratings. Between 2006-10, Syria’s share in Turkey’s exports doubled from 0.7 per cent to 1.4 per cent.

“Syria has been one of the countries that Turkey has taken successful steps to improving relations with in recent years,” says Parker. “They seem to have developed a good dialogue with the Syrian authorities. Syria doesn’t account for a critical proportion of Turkey’s trade, but trade has grown rapidly.”

Unfortunately for Ankara, some of its fast-growing trading partners are now in political disarray. Not only will this have an impact on Turkey’s ability to trade in the short term, but it also gives Ankara some thorny diplomatic questions to address.

“Turkey’s greater engagement with the Middle East has got them intertwined in situations they may not have wanted to be intertwined in,” says Birch.

“They were heavy investors in Libya, and close to [Libyan leader Muammar] Qaddafi, which has put them in a bind. And they have an open border with Syria, which they knew to be a pariah state.”

Whatever the outcome of the political morass in Libya and Syria, Ankara will be keen to position itself so that it can continue to trade with the two states in the future. When the government regimes collapsed in Egypt and Tunisia, the managed to align its sympathies to the winning side. But how events will play out in Libya and Syria is much harder to predict.

“Until the situation settles it’s going to be difficult to say how trade might be affected in the longer term,” says Birch. “The situation is likely to be very unstable in 2011 and 2012. A lot of foreign investment in Libya has petered out. It seems that from now on, investors who have put investment into the country are biding their time to see what happens.”

As Europe and the US ramp up sanctions against Damascus, the same can be said of Syria. But Turkey is unlikely to fret about the economic consequences of political instability in the Middle East. Its economy relies neither on Syria nor Libya, and the government will be confident that any loss of trade will only be temporary.