US embassy cable - 05ANKARA6744

UNCLAS SECTION 01 OF 03 ANKARA 006744 
 
SIPDIS 
 
SENSITIVE 
 
E AND EB FOR U/S SHINER AND A/S WAYNE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON, TU 
SUBJECT:  NEW DIRECTIONS FOR US-TURKEY ECONOMIC RELATIONS 
 
REF: ANKARA 6386 
 
1.  (SBU)  Summary.  Following the last meeting in December 
2003, it is Turkey's turn to host the Under Secretary-level 
U.S.-Turkey Economic Partnership Commission (EPC) in Ankara. 
Turkey's strong economic recovery since the 2001 financial 
crisis, notwithstanding large risks of backsliding, creates 
new opportunities to take our economic dialogue in directions 
that will help lock-in Turkish growth, support economic 
change in the region, and open opportunities for U.S. 
business.  An effective agenda for a high-level bilateral 
economic dialogue should engage a range of U.S. and Turkish 
economic and foreign policy agencies on energy, economic 
policy, terrorism finance, regional initiatives, and business 
development, as well as more "traditional" trade and 
investment issues.  End Summary. 
 
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Turkey's Growth Creates New Opportunities 
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2.  (SBU)  After four years of strong economic performance 
and the start of EU accession negotiations, Turkey's economy 
has crossed a watershed.  Private sector-led growth based on 
sound monetary and fiscal policy has brought down inflation, 
real interest rates, and government debt; spurred capital 
inflows; led to massive trade growth, private investment and 
consumption; and created new jobs.  Lured by the prospect of 
EU membership, European, American, Middle Eastern, and Asian 
investors are once again looking at opportunities in Turkey 
and driving Turkish asset prices to new highs.  For 
instance, GE Capital's recent acquisition of a $1.6 billion 
stake in Garanti Bank is a big bet on Turkey's economic 
future, as is interest by leading U.S. corporations in 
Turkey's telecom, energy, automotive, and financial sectors. 
The resolution of headline commercial disputes involving 
U.S. companies (e.g., Cargill, Motorola) adds to the 
positive new atmosphere. 
 
3.  (SBU)  Turkey's economic success story comes as its 
strategic importance continues to grow.  Economic growth and 
widening prosperity offers an unprecedented opportunity to 
(a) lock Turkey into the global economy (showing that market- 
driven economic success is possible in a Muslim country), 
(b) turn Turkey into an agent of regional economic growth 
and change, and (c) open new opportunities for U.S. business 
that would undergird a durable bilateral relationship.  Yet, 
Turkey's continued success is not assured.  Economic reform 
is incomplete; Turkey's most pressing economic issue is no 
longer how to return to positive growth, but how to avoid 
backsliding and sustain strong growth for the many years 
needed to catch up with its EU partners to be. 
 
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But the Risks Remain Large 
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4.  (SBU)  Implementing sound macro policies under an IMF 
program is easy compared to the microeconomic, 'structural' 
reforms now needed to sustain growth.  The EU process will be 
a major driver of the tax, banking, social security, 
agricultural, regulatory, legal and judicial reforms that 
will keep investment and growth on track.  Nevertheless, 
reforms will shake traditional power relationships and 
undermine entrenched interests in the traditional corporate 
realm as well as in the bureaucracies and military.  Economic 
change will create new tensions as millions of hitherto 
protected agricultural and textile workers are displaced and 
new entrants into the fast growing workforce clamor for jobs 
and opportunity.  Already harsh regional economic disparities 
are likely to be aggravated.  Turkish Islamists and 
nationalists remain hostile to foreign investment and 
privatization.  Thus, even as political and human rights 
reforms create their own tensions, the uncertainties of 
economic change alone will create myriad opportunities to 
plunge Turkey back into its economic and political 
nightmares. 
 
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A New Mix of U.S.-Turkish Economic Engagement 
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5.  (SBU)  This new mix of great opportunity and large risks 
calls for a new mix in our economic engagement with Turkey. 
Since the financial crisis, our bilateral focus has been on 
keeping IMF-sponsored economic reforms on track, resolving 
outstanding trade and investment disputes, and leveling the 
playing field for new investors.  For its part, Turkey has 
sought concessional access to the U.S. market, notably for 
 
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its textile exports, even as it keeps its agricultural 
markets closed and threatens to deprive U.S. pharmaceutical 
firms of their intellectual property. 
 
6.  (SBU)  A new mix would not neglect the important issues 
of macro policy and commercial equity.  Indeed, it is 
critical that having resolved some long-standing disputes, 
Turkey move on to modernize judicial and regulatory 
infrastructure to ensure that foreign firms are treated 
equally in the future.  A new mix, however, would add (a) 
greater attention to the micro-policies needed to sustain 
growth (sharing, for example, U.S. experience with 
deregulation and employment and income policies), (b) global 
issues on which Turkey will be a more important player, and 
(c) new opportunities for expanding regional economic 
integration, and for U.S. trade and investment. 
 
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A New Agenda 
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7.  (SBU)  Encompassing market access, IPR, and investment 
issues, the trade dialogue led by USTR and the Turkish 
Foreign Trade Undersecretariat under the Trade and 
Investment Framework Agreement (TIFA) will be an important 
part of a renewed economic dialogue.  Post looks forward to 
an early TIFA Council meeting (perhaps in January 2006).  At 
the same time, trade and investment dialogue is not 
sufficient.  The Economic Partnership Commission (EPC) 
(which last met in December 2003 under the leadership of 
former Under Secretary of State Larson and former MFA Under 
Secretary Ziyal) affords a potential umbrella for an 
 
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enhanced dialogue with the participation of various U.S. 
agencies that looks at the following issues: 
 
-- Energy: The impending completion of the BTC project 
   should not mark the end of cooperation on "East-West" 
   and "North-South" gas and oil transport systems that 
   enhance global energy security and reinforce regional 
   economies.  This will require improvement of Turkey's 
   domestic energy investment environment, which also 
   offers local opportunities for U.S. business and clean 
   coal technology, energy efficiency, hydrogen, nuclear, 
   and LNG technologies.  DOE and its Turkish counterpart 
   have expressed interest in stronger cooperation.  A 
   productive first step could be a visit to the U.S. by 
   Energy Minister Guler (ref). 
 
-- Economic Growth:  The Turkish system does not have a 
   capacity for generating sound economic policy 
   recommendations, and Turkish politicians reflexively 
   turn to subsidies and transfers to address social 
   objectives.  Enhanced economic policy discussion should 
   include not only macro policies, but sharing of U.S. 
   experience on market-led policies that that promote job 
   creation, poverty reduction, and reduction of regional 
   economic disparities.  Engagement of Council of Economic 
   Advisors staff in addition to Treasury, and perhaps non- 
   USG economists, could support such a discussion. 
 
-- Terrorism Finance/Financial Crime:  As economic 
   exchanges with the rest of the world grow, so do 
   opportunities for abuse.  Turkey does not yet have a 
   robust counter terrorism finance system, lacking for 
   example an independent capacity to designate terrorist 
   groups and a fully effective Financial Intelligence 
   Unit.  U.S. Treasury and DOJ have offered greater 
   engagement with the Turks at the working level.  Policy- 
   level engagement by State and Treasury, however, is 
   needed to get things done. 
 
-- Regional Economies:  Turkey's economic linkages with 
   Middle East and Central Asian countries are growing, but 
   remain far less than their potential.  Encouraging 
   greater infrastructure, energy, trade, and investment 
   linkages with the region would allow for a greater 
   spillover of robust Turkish growth, particularly to the 
   Middle East.  In addition to energy projects, it could 
   be useful to explore the potential for including Turkey 
   in emerging regional economic mechanisms, like the 
   Middle East Free Trade Area. 
 
-- Business Development:  Despite, or perhaps because of, 
   the multiplicity of bilateral business organizations, 
   U.S.-Turkey private sector linkages remain 
   underdeveloped.  U.S. business appears unaware, or wary, 
   of the changed environment in Turkey and Turkish 
   businesses are intimidated by the size of the U.S. 
   market.  A new project between the U.S. Chamber of 
 
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   Commerce and the leading Turkish business federation, 
   TOBB, to develop SME connections has received $400,000 
   in U.S. funding.  This is, however, a small start. 
   Intensified engagement by the U.S. Commerce Department 
   and private sector, perhaps including U.S. subsidiaries 
   in Europe, could help create stronger connections, 
   including institutional connections, between the two 
   business communities.  This would also create more 
   effective business-led constituencies for investment 
   oriented judicial and regulatory reforms. 
 
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A Broader-Based Mechanism 
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8.  (SBU)  One reason past EPC's have been unsatisfactory 
was the bureaucratic mismatch between the U.S. Under 
Secretary of State for Economic Affairs and the MFA Under 
 
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Secretary, whose normal portfolio is almost entirely 
 
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political and whose agency has limited economic capacity and 
sway over economic ministries.  There is no easy solution to 
this problem, but an effective mechanism might be the 
creatio of issue-oriented working groups led by Turkish 
line agencies with their counterpart U.S. agencies that 
report to an umbrella group led by the two Under 
Secretaries. 
 
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Comment 
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9.  (SBU)  With a new E in place, we expect the Turkish MFA 
to come forward with a proposal for an EPC meeting, picking 
up where the last session left off.  We believe that high- 
level economic dialogue has the potential to make a positive 
contribution to the bilateral relationship.  However, for a 
dialogue to be effective it will be important to be prepared 
to come back to the Turks with a new, forward-looking 
agenda, like the one described above, that effectively 
engages a range of Turkish economic agencies. 
 
McEldowney