The Turkish lira fell 22% on Friday before recovering to 17% on the backdrop of the Trump administration’s announcement to double the tariffs on imports of Turkish steel and aluminum.
The tariffs affect Turkish exports worth more than $1 billion in trade with the United States.
The US was the top destination for Turkish steel exports in 2017. Turkey came in sixth place among the countries the US imported steel from last year, while the share of Turkish steel was 7% of total US steel imports.
More to the point, President Trump brazenly hinted that this was a political decision and he tauntingly noted that he also kept an eye on the Turkish lira’s exchange rate.
Trump tweeted: “I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!”
Trump’s tweet has been the proximate cause of the market mayhem hitting the Turkish lira. This comes on top of foreign investors pulling back money in recent months from the Turkish market even as the US Federal Reserve raised interest rates and cut back on asset holdings from quantitative easing. Unsurprisingly, the dollar has sharply increased in value and the lira has lost value and Turkish bond yields have risen.
Turkey traditionally resorted to external borrowing in foreign currency to bridge current account deficits. External funds were lured to the Turkish economy due to the higher yields, fueling growth in the Turkish economy, especially in the construction sector.
With the pullback of money from the Turkish market in recent months, Turkish companies and banks, which took out loans in dollars or euros, are staring at a potential crisis in repaying their debts. In sum, the currency exchange rate volatility is turning into a debt and liquidity crisis.
The financial crisis means that many Turkish companies may have to file for bankruptcy, which will hit the banks. Meanwhile, a cycle is forming as investor confidence dips despite Turkish President Recep Tayyip Erdogan’s economic policy of low interest rates.
At such moments, psychological factors inevitably play a big part. Indeed, the Trump administration increasingly prefers to wage economic wars than deploying military force to exert “maximum pressure” in pursuit of foreign policy objectives. Russia, China, Venezuela, Iran, etc are glaring examples. Turkey now joins the rogues’ gallery.
Erdogan too has become a marked man due to his independent foreign policies that are undermining American regional strategies. Trump’s tweet virtually brags about his pressure tactic. Trump’s agenda is unmistakably to bring Erdogan down on his knees.
Turkey’s ruling Justice and Development Party traditionally drew support from the “bazaar” and the so-called “Anatolian Tigers,” who form Erdogan’s core constituency and are the worst affected in this crisis.
The intervention by credit agencies Merrill Lynch and Standard & Poor’s at critical junctures to rubbish Turkey’s credit rating was an early warning of an impending economic conflict.
Erdogan’s dilemma is two-fold. He could approach the International Monitory Fund for a bail-out, which is what Wall Street and Trump expect him to do. But if he does that, Turkish policies will be subject to tight US scrutiny. And Erdogan will not capitulate.
The alternative is that Erdogan takes help from elsewhere. In an op-ed in the New York Times last week, Erdogan sternly warned Trump: “Before it is too late, Washington must give up the misguided notion that our relationship can be asymmetrical and come to terms with the fact that Turkey has alternatives. Failure to reverse this trend of unilateralism and disrespect will require us to start looking for new friends and allies.”
However, Trump has now snubbed him by promptly doubling the tariffs on Turkish steel and aluminum. Erdogan is furious. He said on Sunday: “I declare that we have seen your plot and we are challenging it. There is no economic reason for the present [currency plunge] situation. This a plot to force Turkey to surrender in every field from finance to politics, to make Turkey and its people kneel down.”
The sense of indignation among Turks should not be underestimated, which makes this an exceptional rupture in what has been all along a problematic relationship through the past seven decades. Erdogan on Tuesday said he would enforce an embargo on all American electronic products – including the iPhone famously used to FaceTime CNN Turk the fateful night of the failed coup attempt two years ago.
Alienating Turkey to this extent will be a risky foreign-policy venture on Trump’s part. The US cannot have an effective Middle East policy while antagonizing both Turkey and Iran.
The wider regional geopolitical ramifications are yet to sink in. Turkey is a “swing” state and its policies cast shadows on several regions – from the Balkans, Caucasus and Central Asia to the Middle East and North Africa and the Mediterranean.
Iran has vastly gained in strategic depth. Tehran has expressed strong solidarity with Erdogan. A special envoy from Tehran visited Ankara and met with Erdogan on the weekend. Erdogan expressed a desire for an early meeting with Iranian President Hassan Rouhani.
Statements from Berlin and Rome already convey a growing sense of exasperation over Trump’s unwarranted sanctions against Turkey. In tackling the migrant or refugee crisis, Erdogan is a crucial partner for the EU. Turkey also has a Customs Union agreement with the EU.
The astonishing part is that all this is unfolding at a time when the US and NATO are raring to redraw the strategic map of the Black Sea to challenge Russia and when the US military presence in Iraq and Syria is facing growing local opposition.
Erdogan said on Sunday that Turkey is considering other markets and political alternatives to its “strategic partnership” with Washington. No doubt, China will be the big winner. China prioritizes Turkey as a key partner in its Belt and Road Initiative.
Trump is seriously underestimating the potency of Turkish nationalism, which is rising to a crescendo. In his Art of the Deal, nationalism has no place – business goes to the highest bidder. The Turkish opinion is hardening that the US was behind the 2016 July failed coup attempt in a concerted strategy to take control of Turkish policies, and the “economic war” is its latest manifestation.