Turkey in the changing transatlantic trade environment

Economy & Business European Union Trade and tariffs Turkey United States and Canada

Report September 30, 2025 • 4:57 pm ET

Turkey in the changing transatlantic trade environment

We already know 2025 will be remembered for its shocks to global trade. However, the shift from ever greater integration to fragmentation was well under way before President Donald Trump returned to the White House. The challenges experienced by the Turkish economy over the past fifteen years can be partly explained by a global retreat from the trade integration of the 1990s and early 2000s.

Until 2023, the domestic policy focus on boosting consumption was seen as an antidote to this problem. A charitable review of Turkey’s achievements would argue that its growth hasn’t been as badly affected by breakdowns in global trade as that of other countries. Nor is Turkey on the Trump administration’s “Dirty 15” list of markets that have a sizeable goods surplus with the United States, and on which the United States imposed an average tariff far higher than it did before Trump’s tariffs kicked in.

But that policy has brought its own problems—hyperinflation chief among them. It has also had negative consequences for Turkey’s trade balance, which is now firmly stuck in deficit with adjacent current account deficit challenges. The policy normalization under way since Turkey’s 2023 general election relies (among other internal shifts) on a rebalancing of the Turkish growth model, with a renewed emphasis on a trade balance supporting financial stability and rising living standards.

What can this mean in a world that is vastly different from the last time Turkey rode an export-led expansion wave? What clever policies need to be implemented to ensure Turkey harnesses opportunities and mitigates risks? This report will try to answer these questions.

Turkey in the global trade realignment

Over the past few months, the world has needed to adapt to the Trump administration’s high tariffs policy, which is more aggressive than markets and pundits expected. “Reciprocal” country-specific tariffs on any good imported into the United States start at 10 percent and often reach much higher. Given the administration’s self-professed goal of repatriating manufacturing to the United States, exemptions to this policy—even for essential inputs that are currently unavailable in the United States—are very rare.

For now, the Trump administration has shown an uncanny ability to anchor global debates and impose its tariffs without facing much retaliation. However, it seems the United States will remain a strange outlier with its completely different set of policies. Bilateral deals will sometimes bind partners into a specific rate for the United States (in return for a high US tariff lower than it otherwise might have been). But otherwise, markets are still following what has been the general practice of global trade for decades: Countries can set product-specific tariffs and balanced quotas applying to all World Trade Organization (WTO) members or they can enter bilateral trade agreements, which bring tariffs down and lift quotas if they apply.

The reassuring view broadcast by the Turkish government is that the Turkish economy is isolated from new US trade policy.¹ The government also argues that Turkey does 80 percent of the value of its trade with markets with which it has a free-trade agreement (FTA). At 31.2 percent of imports and 41 percent of exports,² the most important of these FTA partners remains the European Union (EU), whose customs union has included Turkey since 1995. The common external tariff policy could have put Ankara in a difficult position had the EU decided to retaliate against US tariffs. But it hasn’t. So Turkey will only face the basic 10-percent rate for the foreseeable future, and apply slightly lower rates for US manufactured goods than before—as agreed between Trump and Commission President Ursula von der Leyen.

The less reassuring reality is that Turkey is trying to reverse its trade deficit at a time of global trade fragmentation. The International Monetary Fund (IMF) has shown that in the first decade of this century, when Turkish gross domestic product (GDP) accelerated rapidly, trade volume growth was 6.5 percent per annum on average and outpaced global GDP growth by more than 2 percentage points. This outpacing became negligible in the next decade: 3.7 percent trade growth for 3.5 percent GDP growth. In this decade, trade growth has been slightly behind GDP growth, and it might even start to become a drag in the next five years.

Several sticky factors entrench Turkey’s trade deficit. Turkey’s reliance on energy imports has been a key driver, especially in high price environments. This effect is currently muffled. On the other hand, Turkey can’t compete on wages and other production costs as much as the depreciation of the lira would usually imply. Frequent pay adjustments have been unavoidable considering persistent inflation. The monthly Turkish gross minimum wage of $817 is close to Romania’s $955 yet Turkey doesn’t enjoy the same access to the EU single market and continues to exhibit high inflation.

The pre-2023 focus on boosting consumption led to a surge in imports. Meanwhile, lower foreign direct investment (FDI) and an ever greater prevalence of real estate investments over more productive sectors have stymied modernization in Turkey’s manufacturing (see Chart 1). A sectoral study of the imports Turkey needs to produce its own exports shows that this dependency was on a downward trend from early 2013 until September 2019, but that it reversed after this date and the import dependency of exports started to increase rapidly.³ The highest import dependence of exports is observed in the manufacturing sector, including textiles, apparel, and basic metals.

It is imperative to reverse these trends to ensure Turkey can again benefit from its trade links, but the global context will make this more challenging than ever. The United States is adding barriers to its market, which will hamper growth in markets that import goods and services from Turkey. These include the EU but also markets which currently face much higher US tariffs, like China, India and Vietnam. Meanwhile, the output of China’s manufacturing capacity continues to far outstrip the country’s own needs.

Turkey’s trade deficit with China exceeded $30 billion in 2023. Ankara has already been taking targeted measures against cheap supply by primarily targeting Chinese electric vehicles through a flat 40-percent tariff and a minimum per vehicle price of $7,000. Investigations into Chinese solar panel components are ongoing and, in October 2024, Turkey imposed definitive anti-dumping duties on hot-rolled flat steel imports from China, Russia, India, and Japan to protect its domestic steel sector. These escalations have led to formal complaints and disputes at the WTO.

There are some encouraging, if very early and mixed, signs in Turkey’s latest Medium-Term Program, published on September 8. When examining the contribution of production factors to growth, the largest contribution to the 3.3 percent growth in 2024 came from capital stock and employment. In 2025, the main determinants of growth are expected to be total factor productivity and increases in capital stock. For the 3.3-percent growth projected in 2025, capital stock and total factor productivity are expected to contribute 1.3 percentage points and 2 percentage points, respectively. On the other hand, exports net of imports switched from enhancing growth in 2024 back to being a drag on growth in the fourth quarter (Q4) of 2024 and the first two quarters of 2025.

So nothing will fall into Turkey’s lap; it will need to fight for trade to contribute more positively to the economy. Section 2 will take a closer look at the opportunities Turkey should seize.

Opportunities for Turkey to seize

Turning trade into a reliable engine for Turkish growth and prosperity will take hands-on coordination between the Turkish government and firms. It is clear that Turkey cannot rely on its web of extant FTAs. There are opportunities for Turkey to seize by diversifying the substance and the geographic reach of its trade relations. The United States might have changed philosophies, but this doesn’t rule out bilateral trade deals with others. It so happens that the European Union, with which Turkey does almost $250 billion of trade every year, is even more committed to updating these agreements.

Figure 2 emphasizes the European Union’s central role in Turkish global trade ties, especially as Turkey’s primary export market. This contrasts with major trade partners, such as Russia or China, where large deficits persist.

The long-professed goal of modernizing the customs union has yielded such little progress that it has become the subject of derision. The fact that Turkey and its main trading partner trade in goods and services from each other in a framework settled in the mid-1990s can seem absurd. As economies have evolved, the proportion of goods falling under the customs union has dwindled to only 37.9 percent of Turkey’s exports and 44.1 percent of EU exports.⁴ This does not cover agriculture (although bilateral trade concessions apply), services, or public procurement.

Volatile political relations have been the dominant reason why possibilities for modernizing this relationship have been left unexplored. The revival of High-Level Dialogues on Economics and Trade in 2024 was a good sign. The Turkish side has keenly argued that Brussels has been even more eager to make progress since Trump’s return to the White House. But the readout from the latest meeting in July 2025 still suggests an incremental approach to removing barriers by streamlining customs procedures and revising quotas for some agricultural goods.

How can the level of ambition be raised, bearing in mind the EU’s reticence to discuss free movement of workers or agriculture? Whether or not these qualify as modernizing the customs union, there are three areas in which feasible updates would positively affect Turkish trade.

First, there is a clear case for further alignment on emissions trading systems as Turkey prepares to launch its own in 2026. It is important that this alignment spares Turkey from the EU’s Carbon Border Adjustment Mechanism duties when the system moves into its next phase. The healthy supply of boron, chromium, thorium, tungsten, and cobalt provides the EU with another reason to keep Turkey “in the tent” on carbon emissions. It will also want to ensure Turkey can build out its processing capacities for these critical minerals in a way that is cost-effective.

Second, although amendments were made in March 2024 to further align Turkish law with the General Data Protection Regulation (GDPR), the EU has not yet issued an “adequacy decision” on Turkish data protection laws. Discussions should aim to bridge any remaining gaps.

And third, geopolitical developments have revived interest in new security arrangements beyond the frozen accession process. Turkey’s role in NATO and the volatile European security landscape—especially concerning the war in Ukraine—make it a vital partner, but innovative partnerships between firms also need to be bolstered. The good news is that June 2025 saw the confirmation that Turkish firms will be able to access loans from the EU’s new fund for defense innovation.

Finally, both sides should continue to think of creative solutions to the disadvantage Turkey has in negotiating its own trade agreements. As part of the customs union, Turkey must currently align its external tariffs with those of the EU. When the EU signs a deal with a third country, Turkey most open its market on the same terms but this is not reciprocal, and the third country is not obliged to open its market to Turkish exports. Naturally, Ankara should not wait for a solution to this long-standing problem to enhance its other existing trade partnerships or initiate new ones.

Turkey’s size and geographic location are often presented as natural advantages, but these should not be taken for granted. Turkish leaders were frustrated by Turkey’s conspicuous absence from the India–Middle East–Europe Economic Corridor (IMEC) when it was first announced at the New Delhi Group of Twenty (G20) Summit in 2023, with US and EU backing. Trump has since signaled support for the project in his own way, even suggesting it could provide opportunities to reconstruct the Gaza strip.⁵ Turkey participates in other big and small connector projects, such as China’s Belt and Road Initiative and Iraq’s Development Road. It even plays a leadership role the Middle Corridor (or Trans-Caspian International Transport Route), which connects Europe and Asia via Turkey, the Caucasus, the Caspian Sea, and Central Asia.

The point is that Turkey’s role as a trade and manufacturing hub isn’t guaranteed and cannot be secured through geography and new infrastructure alone. Incentives like free ports already exist, but Turkish firms will also need to reach new markets—whether these are riskier, like Syria and Ukraine, or farther away. Syria rebuilding activity could provide a 0.6-percent boost to Turkish GDP.⁶ Turkish firms will also be the most willing to go into Ukraine first as soon as there is a ceasefire. They should bear in mind that they will not be eligible for EU funding—the major resource on which Ukraine will rely—if they have major activities in or with Russia.

Projects in the Middle East, Africa, and Southeast Europe already make Turkish construction contractors the second global force after China’s.⁷ The sector makes a positive contribution to Turkey’s trade surplus in services. The government and firms should use this good position to revive manufacturing sectors by aiming to produce a higher share of the construction firms’ inputs domestically. Supply of white goods and electronics, minerals, and construction materials can flow into Turkish-led construction projects. The same strategy could work with Turkey’s impressive trade surplus in medical services; the goal should be to produce more of the goods that this industry requires, instead of importing them.

The High Technology Investment Program (HIT-30), announced in July 2024, commits $30 billion in incentives to establish Turkey as a hub for modern manufacturing. The program pinpoints semiconductors, e-mobility, green energy, advanced manufacturing, healthy living, communication, and space technologies as the promising sectors. This is, of course, welcome as only 3.6 percent of exports are high-tech exports.⁸ While Turkey is already at the cutting edge on drone technology, catching up in enough other fields to affect the trade deficit noticeably is a tall order. Investment partnerships with foreign firms can help speed up the transition, provided these include some technology transfer. Turkey can continue to use the EU customs union to welcome investment from firms that want to sell into the EU. This is happening with Chinese electronic vehicle (EV) brand BYD, which is making a $1-billion investment. To improve the terms, Turkey must make sure it is welcoming investment from different sources.

Finally, on defense partnerships, the prowess of Turkish drones in the early stages of the war in Ukraine have created a considerable amount of interest. Sadly, residual US sanctions on the defense sector, dating back to Turkey’s purchase of a Russian S-400 missile system, continue to have a chilling effect. This needn’t remain so. In 2024, Turkey managed to get itself off the Financial Action Task Force’s gray list by making a limited number of regulatory and transparency reforms.⁹ Ensuring Western firms feel no reticence about partnering with Turkish firms should be a priority.

Cranes and shipping containers are pictured. Photo by Kurt Cotoaga on Unsplash

Stabilizing the domestic economy remains a precondition for rebalancing trade

We have seen how Turkey is blessed with geographic, strategic, and workforce quality advantages that should enable it to continue seizing opportunities in otherwise challenging times for global trade. But we also know the record of the past 10–15 years has been patchy. International investors have been spooked by policy volatility. Opportunities to modernize the manufacturing base have been missed due to state-owned banks placing too much emphasis on consumer spending and high-visibility investment projects. Since 2023, the orthodox turn has gone some way toward alleviating these challenges. But it also comes with risks, especially because of high interest rates.

Many objectives have been squeezed into the Medium-Term Program, which was updated on September 8. They are, at least, coherent. The Turkish government currently aims to strengthen macroeconomic and financial stability to enable sustainable growth. This involves maintaining fiscal discipline and reducing inflation to single digits in the medium term. Ancillary goals include improving research and development (R&D) and innovation capacity, ensuring technological transformation with a focus on transition to a green and digital economy, strengthening human capital, further activating the labor market, improving the business and investment environment, and reducing informality in the economy.

Can Turkey do this?

The plan appears to be working on restoring current account and reserves. But this is also the result of good luck coming with lower energy prices. In the second quarter of 2024, the impact of disinflationary policies became more apparent and, for the first time in eighteen quarters, net exports of goods and services contributed more to growth than domestic demand did. And despite constant pressure to spend and raise wages, the government is slowing the pace of increase for both.

Still, it is alarming that the reshoring of manufacturing has not been seen as a source of growth for Turkish firms. A May 2024 S&P Global survey of Turkish manufacturers found just 22 percent expected growth from reshoring in the next twelve months, with 61 percent not expressing an opinion.¹⁰ Seventy-one percent of firms cited capital cost and availability as challenges to reshoring, while 64 percent cited labor availability. While a small minority also cited access to raw materials as a challenge, it’s clear that high interest rates and wage pressures—the price to pay for the much-needed macroeconomic policy normalization—are taking their toll.

The strategy espoused by Ankara and Turkish firms needs to be more holistic and take Turkey’s own import dependencies into account. Greening the economy is often cited as a way to reduce dependency on energy imports, and Turkey has some of the critical minerals required in its soil. But it shouldn’t neglect other resources that can be used as inputs in services exports. These include raw materials and semi-manufactured goods, such as steel and aluminum, refined oil products, and raw minerals and ores ranging from building materials like marble to industrial metals such as chromium, copper, and lead. Minerals and ores only accounted for a small percentage of total exports, but nearly half of shipments to mainland China.

In the end, Turkey’s ability to turn trade into a lasting engine of growth will depend less on geography or one-off projects than on the strength of its institutions and the consistency of its external partnerships. Transparent, predictable, and rules-based institutions are essential for attracting investment, upgrading production, and ensuring that trade contributes to financial stability rather than volatility. At the same time, maintaining constructive and forward-looking relations with the West, especially the EU and the United States, remains important. They are both Turkey’s largest markets and its most important sources of capital, technology, and credible alternatives to turn to as Ankara rightly courts investment from China.

Acknowledgments

The Atlantic Council would like to extend special thanks to Limak Holding for its valuable support for this report.

About the author

Staff

Charles Lichfield

Director, Economic Foresight & Analysis. C. Boyden Gray Senior Fellow

GeoEconomics Center

Economic Sanctions Economy & Business

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