Can protectionism propel Turkiye's textiles economy?

Türkiye has recently increased tariffs ranging between 30 per cent to 100 per cent on several textile imports, creating a potential threat to the country’s apparel manufacturers. These manufacturers are apprehensive about losing their competitive advantage to other Asian textile exporters. It is because Turkish garment producers heavily rely on imports of raw materials due to insufficient domestic supplies. The escalation of import duties carries the potential to significantly impact the Turkish economy, which employs 2.5 million people, potentially leading to substantial job losses.

Figure 1: Top Textile Imports of Turkiye

Source: ITC Trade Map

Complex manufacturing economy

Owing to the insufficient domestic supply, Türkiye remains the fourth largest cotton importer in the world according to the International Cotton Advisory Committee (ICAC). Along with this, the country also majorly imports man-made filaments and man-made staple fibres on a large scale. The existing duty structure is poised to notably impact the textile industry, consequently affecting apparel production. Presently, the import duties for key materials include 4.56 per cent for cotton, 5.3 per cent for man-made staple fibres, and 5.6 per cent for filaments. An escalation in tariffs, ranging from 30 per cent to 100 per cent, could result in an overall increase ranging approximately from 6 per cent to 11 per cent. This uptick in tariffs would increase production costs, influencing final product prices.  With the inflation in the country soaring at levels that are unbearable to the economy, the duties will also result in the supply drying up in the market or an average hike in the price of the raw materials; eventually increasing the price of the final product, thus affecting the competitiveness.

Turkiye is the third-largest exporter of apparel to the European Union, following China and Bangladesh. However, an increase in duties is expected to diminish the country’s competitiveness in the short term. This is already evident from Figure 2, depicting a decline in exports due to the government’s unorthodox economic measures, rising inflation, and escalating shipping costs. The imposition of import duties may exacerbate the situation, potentially spiralling it out of control. As a result, garment manufacturers in Turkiye anticipate a 40 per cent increase in the prices of garments exported to Europe. This would make garments from China, Bangladesh, and other Asian manufacturers more competitively priced.

Dragging down the competitiveness

The Turkish government is implementing measures to stimulate the domestic economy, which is under severe stress, but inadvertently, these measures are harming the country's textile industry. According to basic economic principles, the current approach is likely to contribute to higher inflation in the domestic market. While not all producers anticipate a substantial cost increase, the fear of job losses looms large. Despite a reduction in imports, as shown in Figure 1, there is a risk of creating a supply shortage in the market.

The increase in the import duty will in the long run affect the Revealed Comparative Advantage (RCA) for Turkiye – which is higher than the largest importer of apparel to the European Union – China. Duty structure plays an important role in determining the competitiveness of the country’s exports and the current move will affect the same in the long run, if not reversed in time. Turkiye has been hit by crises repeatedly, and this current policy action will only lead to further chaos as the textile sector is also one of the largest employers in the country.

Figure 2: Textile Exports of Türkiye (in $Mn)

Source: ITC Trade Map

Figure 3: Revealed Comparative Advantage of China and Türkiye for Exporting Apparel to EU

Source: ITC Trade Map, F2F analysis

A contretemps between domestic and international policies

The domestic sector is an instrumental component of Turkiye’s economic structure as it has the promise of employment, its own consumers, and also on occasion, a cushion to the harsher international crises. The current measures of protectionism, unfortunately, come at a time when the country is already in shambles in terms of inflation, and the economic condition. The country’s inflation is already at a higher level and a depreciating lira is not helping the exporters.

Also, there is a link between the exchange rate and inflation. Going by a simple logic, the depreciation of the currency aids exports leading to an increase in the foreign reserves of the country. However, if the inflation in the country is high, then the benefit that the exporters get is typically drained out in the costs with no profit in their hands. From the economic point of view, a reduction in profit also means that there will be reduced or no investment by the companies in the sector, which will affect production, innovation, and most importantly, employment, in the sector.

Figure 4: Inflation in Turkiye (in % change)

Source: Central Bank of Republic of Türkiye

Addressing economic woes

A demand for currency devaluation is logical, as exporters may seek increased profits. However, devaluing a currency also makes imports more expensive. Therefore, the question arises: given the current events, is it even appropriate to tamper with trade policy? While tightening policies to reduce inflation aligns with basic economic principles established over the years, it is crucial to consider whether attempting to address multiple issues simultaneously is advisable. Correcting one mistake at a time is more conducive to economic healing, as trying to address everything simultaneously puts a country at the risk of inflicting lasting scars on its economy for decades to come.

ALCHEMPro News Desk (MI WE)