Israel-Turkey commercial links: a case study in political disruption of economic logic – an article at Knowledge@Wharton

Anyone following the Middle East via headlines in the mainstream media would know that diplomatic and political relations between Israel and Turkey have ruptured in recent years. It would therefore seem safe to assume that the economic and commercial links that once formed a central element of a generally close relationship between the two countries had shrivelled, under the impact of the diplomatic freeze.

Nevertheless, that ‘safe’ assumption is factually incorrect, because the data show that trade is surging in both directions. The specific example of Israel-Turkish trade ties thus serves to illustrate two important general conclusions about the Middle East: first, headlines are a bad tool for trying to understand developments and, second, things are far more complex and multi-faceted not merely than they appear, but than could even be guessed.

The volume of Israel-Turkish trade has grown significantly in the four years since the ‘Mavi Marmara incident’ — in which Israeli commandos stormed a ship sent by a Turkish pro-Palestinian NGO to try and break Israel’s blockade of the Gaza Strip, resulting in the deaths of nine Turkish nationals.

Does this mean that the subsequent massive downgrading in diplomatic relations implemented by Turkey, and the very hostile attitude adopted by the Turkish government — in particular, by Prime Minister (now President) Recep Tayyip Erdogan — was ignored by Turkish businessmen and consumers, or by their Israeli counterparts? Definitely not, as the subsequent voluntary boycotts of Turkish vacation resorts by Israelis, and of Israeli goods by Turkish shoppers, amply illustrates.

What then is happening?

“Israel and Turkey are the only countries in the region which are committed to free trade and market-driven economies. Everywhere else, businesses have to make sure they are on good terms with the government and they tend to look to their governments for direction”. That insight, from Prof. Guven Sak, managing director of TEPAV, the Economic Policy Research Foundation of Turkey, provides the key to understanding the processes at work in Israel-Turkey commercial relations.

But before analyzing the implications of Sak’s point, let’s first recall the ‘good old days’ in Israel-Turkish relations, in the latter part of the twentieth century. Turkey was then staunchly secular, in the tradition of the Turkish Republic’s founder, Kemal Ataturk; a firm ally of the US and a staunch member of NATO; in the process of moving from an under-developed economy and largely rural society, to an industrialized and urbanized socio-economic structure.

Most of these features were shared by Israel — as well as common enemies (notably Syria and Iran) — and were more than sufficient basis to make the countries natural allies. By the 1990s, Israel was developing its technological prowess and Turkey was rapidly industrializing, while their military establishments were forging close links that encompassed everything from joint exercises to Israeli companies upgrading Turkish planes with advanced avionics systems — all with American encouragement. Not only trade, but significant investment deals flowed in both directions: Turkish contractors played a leading role in constructing the new terminal at Israel’s Ben Gurion International Airport, while Bank Hapoalim — Israel’s largest bank — acquired a controlling stake in Turkey’s Bank Positif and Israeli industrialist Stef Wertheimer, founder of the Iscar machine tools company, established an industrial park in Turkey along the lines of his highly-successful Tefen Park in the Galilee.

The election victory, in 2002, of the Islamist-oriented Justice and Development Party (AKP), led by Erdogan, signaled a change in Turkey’s political and cultural orientation and hence in its relationship with Israel. “The AKP”, notes Menashe Carmon, chairman of the Israel-Turkey Business Council, “set goals for Turkey’s foreign policy that, at least implicitly, meant that the alliance with Israel would be abandoned”.

After his second election victory in 2007, and especially following Israel’s “Cast Lead” military operation in the Gaza Strip in December 2008 and the Navi Marmara incident in May 2010, Erdogan became increasingly outspoken against Israel. His vituperative outbursts convinced many Israelis that he was not merely pursuing Turkish interests as he saw them, but was personally deeply anti-Semitic — thereby leading to a mass cancellation of Israeli vacation bookings to Antalya, a highly popular Turkish resort.

Yet, while diplomatic ties were largely cut and the opposing leaderships exchanged barbs, the volume of trade in goods between the two countries continued to expand. To cite the most recent data, Israeli imports from Turkey climbed 13% in 2013 from 2012, to $2.35bn — and then climbed another 16% in the first seven months of 2014, compared with the parallel period of 2013. By way of comparison, it might be added that in 2013, total Israeli imports actually fell, as did its imports from the OECD as a whole — an organization in which both Israel and Turkey are members.

Israeli goods imports from Turkey are quite varied, ranging from food and raw materials to machinery and autos — with no dominant sector, although base metals and metal goods comprise over 20% of the total. The picture for exports is quite different: these surged by 77% in 2013, to over $2.5bn, and rose by 21% in January-July 2014 — but the increase has been overwhelmingly concentrated in the chemicals sector, primarily in the petro-chemicals industry.

Data on trade in services, including travel and tourism, online casino is usually more difficult to measure on a country-by-country basis. However, the ebb and flow of Israeli vacationers to Antalya tells its own, readily-observable story. Yet, to underline how easy it is to be misled by impressions, it should be noted that Turkish Airlines is — or at least was, until very recently — the most popular foreign airline serving Israel, with many Israeli businessmen using it and its Istanbul hub as their preferred route to destinations around the world, especially in the Far East and — an open secret — the Persian Gulf, notably Dubai.

On the one hand, the growth of Israel-Turkish trade in a period of unprecedented inter-government hostility seems to confirm Prof. Sak’s point that Israeli and Turkish businessmen make their own decisions and follow their own interests, rather than simply taking their cue from their political leadership. On the other hand, even the positive trade data need to be seen in a wider perspective.

“The growth in Israel’s trade with Turkey has lagged far behind that of most other countries in the region”, notes Dan Catarivas, head of the Israel Manufacturers Association’s Foreign Trade and International Relations Division. “In other words, Israel has been a very minor beneficiary of the tremendous growth in the Turkish economy over the last decade and more”.

Catarivas adds that Turkey has emerged as an industrial powerhouse, with large investments on the part of many major multi-nationals, especially from Europe. These companies also effectively dictate much of the trade patterns of the companies in which they operate. Thus an auto manufacturer may notify its Israeli importer that they are to buy specific models from its Turkish plant — and neither Israel nor Turkey has much say in this.

Menashe Carmon amplifies this point. “The growth in the volume of trade reflects, at least in part, the upgrading of the Turkish economy so that, whereas in the past Israel would buy textiles and other cheaper products from Turkey, today it imports far more expensive items such as cars and machinery”. His conclusion is, therefore, that although “the two countries’ business communities generally ignored the politicians, the actual increase in trade was quite moderate and could, under other circumstances, have been much greater”.

What could have happened — and maybe still will happen, if the political leadership changes and brings a change of attitude — is described by Guven Sak.

“The two countries’ economies are fundamentally complementary. Turkish industry requires a technological upgrade, which it could obtain via investments in and know-how from Israeli companies. Furthermore, Israel has excellent access to the US market, which Turkey needs, but Israel needs to obtain access to the rapidly-growing markets in this region and in the Caucasus and Central Asia — where Turkey is very well-situated. The opportunities for working together to obtain mutual benefits are very clear”.

As if all this was not enough, there is the new and potentially dramatic area of energy. Israel’s large offshore natural gas fields are being developed and Turkey, with its burgeoning energy requirements, is a logical customer. Turkish companies are willing and eager to lay the pipelines and provide the other infrastructure necessary to bring Israeli gas to the Turkish market.

In addition to the Israeli fields, there are significant deposits in Cypriot waters that need to be developed. But if Israeli-Turkish relations have become problematic in recent years, the Cyprus problem has been weighing on Turkish relations with the entire EU for decades. Economic and business logic and the dictates of geography and geology are held up, seemingly indefinitely, by entrenched political positions and ideological considerations.

Original article published at Knowledge@Wharton

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