How Egypt and Turkey Trade Amid Tensions

 In Egypt, Turkey

Introduction

In 2013, Turkey and Egypt severed diplomatic ties. This move followed harsh Turkish criticism of the forced removal from office of Egyptian president Mohammed Morsi, who was backed by the Muslim Brotherhood. Yet despite the deterioration in relations, trade between Egypt and Turkey kept growing at impressive rates. The two countries had signed a free trade agreement (FTA) in 2005, which went into effect in 2007. The agreement survived the political breakup and remains in place today. The total volume of trade between the two countries in U.S. dollars nearly tripled between 2007 and 2020, jumping from $4.42 billion to $11.14 billion, showing that both countries had agreed implicitly to isolate their economic exchanges from their political disputes.

It made sense for Turkey to preserve the FTA, given that it was consistently running a trade surplus with Egypt from 2007 onward (see figure 1). But what was Egypt’s motivation? The answer lies in the relative improvement of Egypt’s trade position with respect to Turkey after 2013. Not only did the Egyptian trade deficit decline in the years that followed (see figure 1), but the structure of Egyptian exports also changed, through the sustained growth in manufactured goods. Therefore, abandonment of the FTA would have penalized Egyptian manufacturers and forced them to lose valuable foreign markets at a time when their country was facing a severe hard currency shortage.

Another factor favoring preservation of the FTA was that Egyptian-Turkish relations showed strong signs of intraindustry trade, or the exchange of products belonging to the same industrial sector. Intraindustry trade is often a sign of relative sophistication, in which two countries produce and trade manufactured goods rather than raw materials. This implies that more producers, workers, investors, consumers, and distributors are involved in the economic relationship, which raises the direct and indirect costs of disrupting their interactions.

A Paradox in Egyptian-Turkish Relations

In November 2013, because of strong disagreements over Morsi’s ouster, Egypt expelled the Turkish ambassador in Cairo and downgraded diplomatic relations with Ankara. This prompted the Turkish government to do the same. Political relations soon deteriorated further, with Turkey hosting the exiled Egyptian opposition, especially members of the Muslim Brotherhood.

The tension spilled over into regional disputes, as Egypt and Turkey became part of larger alignments supporting opposing sides in the Libyan conflict. In 2019, Egypt threatened to intervene militarily if pro-Turkish forces advanced on the city of Sirte in central Libya, placing Egypt and Turkey on a path to military confrontation. The situation was also exacerbated by tensions in the Eastern Mediterranean following the discovery of offshore natural gas in 2014–2015. In September 2020, Egypt joined with Cyprus, Greece, Israel, Italy, Jordan, and Palestine to establish the Cairo-based East Med Gas Forum, to the exclusion of Turkey. By May 2021, however, Egypt and Turkey sought to reverse course and began addressing their differences so as to normalize their relationship. It is still too early to determine how successful that effort will be.

Despite deteriorating political relations, Egyptian-Turkish economic ties thrived during this period. Not only did the overall volume of bilateral trade increase but the structure of the exchanges between the two countries also shifted. This was especially true of Egypt, whose economy is smaller than Turkey’s. During the period 2005–2012, Egyptian exports to Turkey represented 3.54 percent of total Egyptian exports. This figure almost doubled to 6.2 percent during the period 2013–2020, despite the countries’ mounting political disagreements (author’s calculations). Similarly, Turkish exports to Egypt grew from an average of 3.37 percent of total Egyptian imports in 2005–2012 to 4.47 percent in 2013–2020. In 2020, Turkey was the third largest destination for Egyptian exports and the fifth largest source of imports to Egypt. That same year, Egypt was the fourteenth largest importer of Turkish goods.

During this thirteen-year interregnum, Egypt and Turkey failed to renew only a minor transit-trade agreement, in 2015, which hardly had an impact on the volume of trade between the two countries. Otherwise, the legal and regulatory framework governing their trade and investment exchanges remained largely intact.

This suggested that, unlike the transit-trade agreement, the FTA with Turkey was far too important to oppose. It is notable that a study prepared by an economics professor at Cairo University who is close to Egyptian ruling circles conveyed an expectation that the FTA would be renewed in 2021, regardless of the political ties between the two countries. However, until now this has not yet taken place.

An Agreement Too Big to Abandon

The relative improvement in Egypt’s trade position with respect to Turkey after 2013 was the main factor that protected the Egyptian-Turkish FTA from the political rift between Cairo and Ankara. But beyond this, the structure of trade between the two countries, which was based on an exchange of manufactured goods, helped to emphasize the benefits of pursuing economic relations.

While Turkey had been running a trade surplus with Egypt since 2007, the Egyptian trade deficit declined significantly after 2013. Whereas the average growth rate of the trade deficit was a massive 252 percent during the period 2008–2012, it dropped to 84 percent in 2013–2020 (author’s calculations). A principal reason for this was the devaluation of the Egyptian pound in November 2016, resulting from a decision to float the currency under the auspices of an agreement with the International Monetary Fund. This led to a 17 percent contraction in Turkish exports to Egypt between 2017 and 2020 (author’s calculation; see figure 1). It also led to an expansion of Egyptian exports, as these became relatively cheaper. As of 2018, however, Turkish imports to Egypt began picking up again because of a stronger and more stable Egyptian pound and a weakened Turkish lira.

Since 2007, Egyptian exports to Turkey have grown at an average rate of 10 percent annually, compared to 4 percent annual growth in Turkish exports to Egypt (author’s calculations). The expansion in Egyptian exports during that period outpaced the average rate of growth of the total trade between the two countries (see figure 2). This meant that despite an initially large trade deficit in Turkey’s favor, Egypt’s relative position was constantly improving.

Between 2016 and 2020, Egyptian exports to Turkey grew at an annual average of 7 percent, compared to imports from Turkey that grew at an average of 2 percent (author’s calculations). This constituted an incentive for the Egyptian regime to maintain the FTA with Turkey, despite rising geopolitical strains. Egyptian economic policymakers expressed the impossibility of cancelling the FTA for fear of disrupting trade and investment flows, with the concomitant losses that this would impose on Egypt’s economy, especially the export sector. This explains why the government did not heed demands in parliament to cancel the FTA.

Another reason for Egypt’s preservation of the FTA with Turkey was the composition of its exports to the country (see figure 3). Later, in 2020, around 59 percent of the total volume of trade was made up of manufactured goods. Turkey had become a key destination for Egyptian nonfuel exports at a time when Egypt was struggling to diversify its exports away from oil and natural gas. Since the decline in international oil prices in 2014, Cairo had sought to increase its exports of manufactures. Therefore, abandonment of the FTA with Turkey would have had negative repercussions for Egyptian industrialists, forcing them to lose valuable foreign markets at a critical time.

Just a few years after the new Egyptian leadership took power in July 2013, the government faced a substantial financing gap estimated at $20 billion. Tourism and net foreign direct investment were down due to the security risks and political turmoil after the 2011 uprising. During the same period, Egypt’s external debt rose from $33.7 billion in 2010 to $79 billion in July 2017 to $92.6 billion in 2018. Therefore, an increase in Egyptian exports was crucial for generating hard currency earnings.

It was also necessary to help propel an economic recovery that improved macroeconomic indicators required to achieve favorable borrowing conditions on international capital markets. This was especially true because of the increase in the ratio of foreign debt servicing to export receipts, from 6 percent in 2010 to around 19 percent in 2016—a high figure not seen since 1994, following the massive debt relief of the early 1990s.

Aside from the volume of exports, the structure of exports to Turkey also played a role in sustaining the FTA. The bulk of trade between Egypt and Turkey involved manufactured goods, and bilateral economic relations were further strengthened by the fact that the goods exchanged showed a potential for the creation of regional supply chains—integrated networks of producers that create a product or service. A significant portion of Egyptian-Turkish trade includes inputs used for the production of other goods. This includes raw materials, semifinished or intermediate goods, and capital goods.

For instance, around 20 percent of Egypt’s exports to Turkey in 2019 was made up of cotton, filaments, staple fibers, and intermediate articles for Turkey’s clothing industry. The same year, plastics made up around 22 percent of total Egyptian exports. A significant share of Egyptian imports from Turkey, in turn, included iron and steel as well as iron products such as plates, wedges, and blades, making up 19 percent of imports. Petrochemicals made up another 15 percent of imports.

Significantly, Egyptian-Turkish trade showed strong signs of intraindustry trade. For instance, in 2020 plastics appeared on the list of exports and imports of both countries. This included polymers, rubber, and battery cells. Egypt exported $348.95 million worth of certain types of plastics to Turkey, and imported $129.76 million worth of other types. Even more interesting was the volume of trade in electrical and electronic equipment that year. This included machinery and spare parts as well as some high-tech products. Egyptian exports of such goods were roughly equal in dollar terms to the electrical and electronic equipment imported from Turkey, another manifestation of the growing intraindustry trade between the two countries. Intraindustry trade implies a level of industrialization and sophistication between trading partners that is not present in the export of raw materials. It creates room for partners to upgrade their exports to higher-value niches through the creation of supply chains, technology and skill transfers, and access to export markets. This was especially true for Egypt’s economy, which is less industrialized than Turkey’s.

In 2017, Attila Ataseven, the chairman of the Turkish-Egyptian Businessmen Association, estimated the volume of Turkish foreign direct investment (FDI) in Egypt at $2 billion, with around 540 Turkish firms operating in the country. Total Turkish FDI in Egypt remains quite small compared to that of other countries. According to an Organization for Economic Cooperation and Development report in 2019, Turkish FDI in Egypt in 2016 was a mere 0.4 percent of total net FDI inflows to the country. Yet it is noteworthy that the majority of investments went into the manufacturing sector, which absorbed only 3.4 percent of total FDI in 2016, compared to oil extraction, which absorbed a massive 53.5 percent.

Given the overall modest share of Turkish investment in Egypt, the Egyptian economic partnership with Turkey is taking place primarily through trade rather than investment. This suggests that Egypt’s diversification away from a dependency on oil as the principal destination of FDI inflows requires building regional and global value chains in the manufacturing sector, such as the ones that exist embryonically with Turkish investors in Egyptian industrial zones exempt from income and sales tax and import and export duties.

Implications for Regional Integration

The resilience of Egyptian-Turkish trade relations has implications for the political economy of regional integration in the Middle East. First, economic integration through trade has greater developmental potential than the capital-labor exchanges that have historically characterized dealings among Middle Eastern countries since the time of the first oil shock in 1973. Capital-labor exchange has relied on the transfer of surplus labor from population-rich, capital-poor countries such as Egypt, Jordan, Lebanon, Sudan, Syria, and Yemen to capital-rich, population-poor oil producers in the Persian Gulf, as well as Libya, until 2011. This approach has not created or diversified regional value chains through trade and investment. Rather, it has primarily redistributed oil rent on a regional scale, thereby also transmitting the disorders of the rentier economy to oil-poor countries.

Second, compared to more traditional forms of capital-labor regional exchange, trade arrangements are much more resilient and stable in the face of political tensions and rivalries. That is because trade disruption involves more actors in the business sectors and can inflict high costs on all parties involved, including national economies. In the past, in contrast, it was easier for capital-rich countries, such as those of the Gulf Cooperation Council, to withhold aid, credit, and investment during political conflicts—or even to block access to their labor markets—with detrimental effects on the remittances of laborers to their poorer countries.

The survival of the Egyptian-Turkish FTA and the continued expansion in trade between Egypt and Turkey since 2013 is not unique. Turkey has maintained its significant trade partnerships with many of its regional rivals, including Iran, Israel, Saudi Arabia, and the United Arab Emirates. It is meaningful that this pattern involves Turkey more than other countries, as it is the most industrialized country in the region. Manufactured goods made up 80 percent of total Turkish exports in 2017, unlike the region’s Arab countries and Iran, which remain more dependent on exporting fossil fuels and other raw materials. In this regard, Egyptian-Turkish trade relations stand in stark contrast with earlier experiences in which political conflict has almost invariably undermined economic ties.

Conclusion: A Model That is Limited Regionally

Regardless of its success, the Egyptian-Turkish pattern of sustaining trade relations amid political rivalry may prove to be more complicated in other parts of the Middle East. Overall, modest levels of industrialization across the region make labor-capital exchanges prevalent instead of trade. At the same time, the Egyptian-Turkish mode of economic integration through free trade has its own limitations. It seems to work only with shallow forms of regional integration, based on liberalizing trade by phasing out tariff and nontariff barriers. This falls short of harmonizing regulations for the free flow of investments and labor. Shallow integration arrangements require that competing governments refrain from disrupting existing trade and capital flows. Therefore, these arrangements are more passive in that they are based merely on not extending political conflict to the economic realm.

In contrast, deeper forms of economic integration—such as the European Union or Mercosur, the South American trade bloc—require significant and lengthy institution-building processes and regulatory harmonization, which need to be pushed by political agreements rather than just shielded from disagreement. Given the intensity and multiplicity of geopolitical rivalries among the Middle East’s major powers, including Egypt, Iran, Israel, Qatar, Saudi Arabia, Turkey, and the United Arab Emirates, the institutional bases for deeper forms of integration are not likely to materialize across competing blocs anytime soon in the region.

About the Author

Amr Adly is an assistant professor in the Political Science Department of the American University in Cairo.

Carnegie Endowment for International Peace source|articles

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