BRI Will Increase Chinese Competition For Turkey’s Textile Industry

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For Turkey's textile and clothing sector, China's Belt And Road Initiative could be a mixed bag. Turkish textile industry has slowed down over the years, as consumer spend in its main market – the European Union – has slackened, and European retailers face difficult market conditions.

Logistically, Turkey is well integrated with this market, and with other nearby markets of Central and West Asia and North Africa. So, the various infrastructure projects under the BRI will make Turkey an ideal logistics hub. And will help China, more than others to better service the European markets, with its vast array of competitively priced goods.

With the US-China trade war showing little sign of breakthrough, China will aggressively look at other markets for its goods, including textiles and apparel. And Europe is the largest consumer. In the textile and apparel sector, Turkey till now has a logistics advantage. This will soon be eroded, Turkish textile manufacturers will face stiffer competition from China in their largest market, in terms of price and delivery schedules.

Turkey could also face tough competition in its home market, as China will be able to supply lower cost textiles and apparel to the Turkish consumer. And this could be a one-way street, more or less.

The current economic situation in the country, child labour issues in its garment sector, are serious issues the industry is faced with. In this scenario, the industry needs to act fast. It will have to identify a niche segment for itself, and use its logistics advantage to the fullest. Being close to affluent markets, Turkish textile and apparel manufacturers will need to move way up the value chain, and develop its industry as a hub for high end fashion clothing and textiles, high end functional and performance wear, technical textiles and nonwovens. The way forward would be to partner with European technical research agencies, to help the industry move in this direction.

Turkish T&C trade

Turkey's textile and apparel exports have shown a marginal improvement since 2017, after witnessing a negative trend since 2015. Textile and apparel are an important commodity in Turkey's export basket, accounting for 17% of total exports from the country. The share of this sector in total exports of Turkey has been dwindling since 2014, when it accounted for 18.63%. Within the segment apparel and carpets and floor coverings are the top export items, accounting for over 60% of the country's textile and apparel exports. However, Turkey's apparel exports, after a significant fall in 2015, have remained stagnant with marginal declines every year.

The European Union is the main market for Turkey's textile and apparel, with 72% of the exports headed to this grouping. Turkey's Clothing Industrialists Association (TGSD) President Hadi Karasu has said the sector aimed at reaching US$ 18 billion or more in exports this year, adding that the target was to increase this amount to US$ 25 billion in the next five years. During January-July 2018, Turkey's textile and apparel exports have reached US$ 16.4 billion.

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Turkey's textile and apparel imports increased 8.28% in 2017, after declining continuously since 2015. The main items of import are textile raw materials – cotton, manmade filament yarns and textiles, manmade fibres and textiles, and woven apparel. Cotton imports in 2017 grew by over 30%. And imports of manmade filament textiles increased 7.18% and of manmade fibres and textiles by almost 10%. However, woven apparel imports went down by as much as 20.75%. Imports of woven apparel have been falling since 2015, with the steepest fall in 2017. And imports of textile inputs have been stagnant in 2015 and 2016.

The Turkish government has put in place plans and policies to strengthen the value-added textile and apparel sector in the country. The import figures clearly reflect the same, as input imports have risen, and imports of finished textiles and apparel are on a downswing. Almost a quarter of the imports come from China, mostly cotton fabrics and intermediary goods.  The government wants to monitor and control, to some extent, these imports. However, plans have been deferred till January 2019.

Turkish textile, apparel exports could slow down

The US Department of Labor's recent report on the use of child and forced labour in various countries, has added Turkey to the list for the first time. Various surveys and inspections found incidence of child labour in its garment factories. With apparel accounting for over 50% of the country's textile and apparel exports, this report could serve a blow to the sector.

Turkish textile manufacturers have been in efforts to improve their deteriorating image in Europe, mainly due to the country's labour practices. Industry associations and government agencies are now working closely with NGOs in the EU countries, mainly in Germany, Spain, the United Kingdom and the Netherlands, to improve the workplace conditions and environmental footprint of the industry. The sector has identified the need to improve the quality and productivity of workforce to become competitive in global markets. The sector's five-year roadmap is based on three main pillars: making close contact with the sector's markets, raising value addition, and improving sustainability.

Turkey's currency crisis adds to the industry's problems

The last few weeks have been particularly hectic for the Turkish economy, already in the midst of a currency crisis. The government recently announced the New Economic Plan 2019-2022, to help the economy weather the crisis.

The plan saw Turkey reduce its growth projections to 3.8% from 5.5% for 2018. It also called for 76 billion Turkish lira worth of cuts to public spending. The planned debt restructuring would likely involve only firms with a debt level of 100 million Turkish lira and higher. Commentators argue this would mean small and medium-sized firms would be left bankrupt. According to reports, some 100 companies applied for bankruptcy, among them two major export companies: 95-year-old Burak Aluminum and 58-year-old Teknik Aluminum.

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The government's key economic targets in the New Economic Plan include a 20.8% inflation forecast for 2018, up from 13.4%. The unemployment rate is estimated to reach 11.3% by the end of 2018 and 12.1% in 2019. It was 10.4% in August. The government promises to have a budget deficit of only 1.9% by the end of 2018 and to keep it below 2% for the next three years. In order to achieve these budget targets, it has instituted public spending cuts of 76 billion lira and revenue increases of 16 billion lira in 2019 to keep the deficit below 2%.

Nearly 40 billion lira out of 76 billion lira in spending cuts will be from public investments, and another 13 billion will come from social security expenditure. The public investment cut amounts to a 36% decrease. Growth in gross fixed investment had already halved to 3.9% in the second quarter, especially in machinery, and the private sector has been quite busy with debt repayments, so the budget cut in public investment will guarantee a shrinking of the economy in 2019.

The government is also promising to reduce the current account deficit to as low as 3.3% in 2019 and below 3% as early as 2020. The government is counting on a depreciated Turkish lira for this optimistic current account balance, which will hopefully fuel exports and tourism revenues. However, real foreign exchange rates used to estimate GDP forecasts seem to stay below inflation estimates, suggesting the Turkish lira is expected to appreciate in real terms for the next three years. It is unclear how exports will increase enough to reduce the current account deficit to the levels in the NEP with alleged real appreciation in lira.

Moreover, with public investment cuts and highly indebted export companies, production activities will probably decline, making these current account deficit targets too ambitious. Turkey's external debt stock to GDP ratio has hit 61%, above the 60% threshold widely viewed as a signal of an external debt crisis.

Turkey sees a sudden spike in Chinese investments through BRI

Strengthening Turkish-Chinese economic ties have been observed in the increasing number of Chinese firms investing in Turkish energy, infrastructure, finance, tourism, and e-commerce sectors as their number hit nearly 1,000 by April this year.

Chinese firms that have been operating in Turkey's logistics, electronics, energy, tourism, finance and real estate sectors are expanding their businesses in the country. With the entry of Bank of China and Industrial Commercial Bank of China (ICBC), the flow of Chinese companies into Turkey has accelerated and also expanded into the e-commerce sector in the recent period.

Turkey's unique position in the BRI makes the country a gate to Europe and Africa for China's trade operations on the project's route, and would become a logistics hub for trade on the three continents. With the aim of expanding Turkish-Chinese cooperation in the logistics sector, Turkey's national flag carrier Turkish Airlines (THY) announced that it will form a logistics company in Hong Kong in partnership with China's ZTO Express and Hong Kong's PAL Air.

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In addition to logistics, the two countries have been cooperating heavily in the energy and transportation sectors. Both the Turkish and Chinese Transportation, Maritime & Communications Ministries also signed an agreement during last year's Belt and Road Initiative Summit in Beijing, on an international passenger and cargo transport company, which stipulates that transport vehicles in China and Turkey can have access to, and transit within, one another's territory.

Moreover, the Istanbul-Ankara high speed train, which has been operating since July 2014, was also constructed within the scope of the Turkish-Chinese partnership. For the construction of the Edirne-Kars high speed railway route, the Turkish government continues to negotiate with the Chinese government.

While Chinese foreign direct investment (FDI) in Turkey exceeded US$ 2 billion according to the data of the Economy Ministry for the last 15 year, the largest FDI from China was the acquisition of Turkey's third largest port, Kumport, in Istanbul by the Chinese giant container terminal operator Cosco Pacific for US$ 940 million in September 2015. The company holds a 65% stake in the port. Meanwhile, the volume of bilateral trade between Turkey and China was recorded at US$ 26.3 billion in 2017. Turkey's exports to the country totaled to nearly US$ 3 billion while its imports from China exceeded US$ 23 billion. In a bid to encourage the use of national currencies in bilateral trade as a medium of exchange, the central banks of Turkey and China signed a swap agreement first in 2012 and later renewed it in 2015, for three years.

Turkey saw a huge 166% increase in shopping by Chinese tourists in the first quarter of 2018, according to Global Blue, which handles "tax-free shopping" transactions in more than 51 countries. The company said, Chinese tourists make up for more than 40% of global tax-free sales. As for Turkey the uptick was related to China's declaration of 2018 as "Turkey Tourism Year." More than 250,000 Chinese tourists visited Turkey in 2017. That number is expected to reach 500,000 this year due to the "Turkey Tourism Year" announcement.         

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