1. FOREIGN TRADE

2. OUTLINE Evolution Of The Foreign Trade Policies
1.Foreign Trade Policies in Plans
2. Foreign trade Policy in the period of Import Substitution
3. Foreign Trade Policies in the Period of Export-oriented Industrialization
4. Foreign Trade Policies in the Period of Financial liberalization
Evolution of Exchange Rate
Foreign Trade Balance and current account
1. Current Account
2. Evolution of foreign Trade
3. Sectoral distribution of Foreign Trade
4. Country Distribution of foreign trade
Capital movements
Other International Formations

3. Evolution of the foreign trade policies
1. Foreign Trade Policies in Plans:
The factors for the basis of economic development policy of the first three plan periods were:
Growth of national income
Rapid Industrialization
The base of foreign trade arrangements of the first plans was:
Production oriented industrialization instead of export => to achieve balance in economy
The common aim of the first three plans was to realize economic growth without external recourses.

4. Evolution of the foreign trade policies
The first Five Year Plan (FFYP):
The aim was to form guiding principle of foreign trade policy; to benefit from international partnership.
The new adopted principles were: a) Protection of economy from foreign competition; b) if one production sector becomes competitive, protectionism can be removed.
Incentive provisions in exports.
Returning all indirect taxes back to the exporter of industrial products in custom gate. In some issues, like credit and marketing, public support was provided.

5. Evolution of the foreign trade policies
The second Five Year Plan (SFYP):
The main aim was to provide economic development with internal resources.
For providing this, the provisions of the FFYP were arranged in a more concrete way. The new adopted principles were:
Increasing exports of industrial products,
Domestic and foreign industrial investments must be export-oriented.
Priority of domestic production instead of imports.
To improve protection and incentive provisions.

6. Evolution of the foreign trade policies
The third Five Year Plan (TFYP):
The main reason of adopting this plan was the lack of achievement of most of the provisions of FFYP and SFYP.
New development strategy was formed, also liability to European Economic Community was considered.
The main difference of the new strategy from previous plans was to give more consideration to international relations.
External factors got more precise in the foreign trade.

7. Evolution of the foreign trade policies
The Fourth Five Year Plan (FFYP):
There was economic depression during preparation period of this plan.
For moving out of depression, the obligations of EEC were frozen for some period and multilateral partnership was planned.
The reason for these approaches were to provide external credit possibility and to find new external markets for industrial products.
The policy, providing domestic production instead of imports, was abandoned for some period.
It was aimed to increase exports of industrial products and to raise annual export growth rate.

8. Evolution of the foreign trade policies
2. Foreign trade Policy in the period of Import Substitution:
The aim of import substitution policies was provide local production of goods which priorly were imported from abroad.
The implementation of this policy started in 1963.
The policies intended for this purposes were:
Protection of domestic market from foreign competition;
Encourage industrial investments;
Reinforce domestic demand with income and wage policies,
Over-valued foreign exchange rate policy.

9. Evolution of the foreign trade policies
Protectionist activities and over-valued exchange rate implementation were related especially with the evolution of the foreign trade.
The protectionist policy implemented in this period was absolute protectionism.
Absolute protectionism: Absolute restriction of industrial goods, regardless of price and quality, when domestic production satisfies domestic demand.
Also relative protectionism (custom tariffs and quota) was implemented for some goods.

10. Evolution of the foreign trade policies
Over-valued exchange rate created convenient environment for local manufacturers, providing them with cheaper capital and intermediate goods which were not produced domestically and that’s why the importing of such goods wasn’t amenable to custom barriers.
In import-substitution period, foreign trade deficit increased because:
An industrialization move began in Turkish economy and as a result of this movement, exports of consumption goods, produced domestically, was growing in very limited rate, but imports of capital and intermediate goods, necessary for domestic production, increased considerable because of exchange policy.

11. Evolution of the foreign trade policies
After the over-valued exchange rate policy, exports did not increase sufficiently and most of the exports were in agricultural products. Constraints in exports exposed Turkey with the serious problem of external debts.
Foreign trade deficit was attempted to be decreased with the help of foreign aids, foreign debts and remittances, but period has concluded with the foreign exchange bottleneck.

12. Evolution of the foreign trade policies
3. Trade Policies in Export oriented Industrialization Period
This policy proposes export-oriented industrialization to the countries, experienced foreign exchange bottleneck after 1970s.
The applications implemented in Turkey:
Reduction of custom barriers,
Devaluation,
Reduction of domestic demand and labor cost,
Direct financial supports to exports.
These industrialization policies, which began with economic stability provisions and were implemented in 1980, provided an increase in exports. (Especially in manufacturing industry goods)

13. Evolution of the foreign trade policies
During 1980s, increase in exports was realized by the effective use of industrial capacity, left from before 1980.
This was ensured with decreasing of wages, export-incentive implementations and devaluation.
These policies are not export-intended industrialization policies, rather they are export-increasing policies.

14. Evolution of the foreign trade policies
4. Trade Policies in the Period of Financial liberalization:
In 1989, Turkey proceeded to financial liberalization, which was proposed by IMF following good movements liberalization.
After this progression, speculative capital movements took its orientation toward developing countries.

15. Evolution of the foreign trade policies
Effects of excessive speculative capital entrance on foreign trade were:
Appreciation of domestic currency against foreign currency: Price of export goods - increases;
Price of import goods – decreases.
Increase of interest rates: In addition to the increase in the profit of financial tools, real investment decreased and manufacturing industry was affected negatively.
Increase of domestic demand: Appreciation of domestic currency against foreign currency and increase of domestic demand, together caused rising in foreign trade deficit.

16. Evolution of Exchange Rate
Currency movements in the world, foreign developments and foreign payments determine the value of TL.
In 1970s, there were attempts for regulation of the monetary system. USA advocated to leave the value of currency to free market conditions. Turkey and other developing countries were against this attitude, but eventually gold lost its role in international payments and floating exchange rate was accepted.
To increase exports of industrial goods and to decrease foreign trade deficit, TL was devaluated. This situation caused increases in currency which was sent by workers from abroad.

17. Evolution of Exchange Rate
During devaluation years, as a result of the depreciation of the dollar in international markets, dollar was also depreciated against TL and then again was revaluated. This was done for making continuous devaluation effect.
The aim of these adjustments were to follow differences in the values of foreign currencies and prevent speculation which could rise from this.
Increase in the price of crude oil and ever growing foreign trade deficit caused diminishing of currency reserves. Hereupon in 1979, with the IMF pressure, there was again devaluation and floating exchange rate policy has continued.
Also institutional and legal regulations were made according to floating exchange rate policy.

20. Current account and Foreign Trade Balance
Current account deficit means that an economy spends more than it produces. It leads to an increase in foreign borrowing.
Payment of debts is the prerequisite of continuing of foreign borrowing.
Permanent use of foreign resources is not a common phenomena for developing countries. In a particular period using of external resources would be followed by the period of transferring resources to abroad.
In Turkey this period began in 1989 with the foreign financial liberalization.
In Turkey, current account surpluses are the periods with high devaluations after the crisis periods. This fact shows that there is a relation between current account deficit and foreign trade deficit in Turkey.

22. Current account and Foreign Trade Balance
In countries like Turkey, high and continuous current account deficits can be indicators of possible crisis or devaluation.
It is important to identify which tools affect current account deficit. There are 4 basic parts in the current account:
Foreign trade balance: The main element of this tool is goods trade, which includes exports and imports.
Balance of Services: Includes incomes and expenditures of transportation, tourism, building and construction services, financial services and other services.

23. Current account and Foreign Trade Balance
Balance of investment income:
Balance of Direct investment income: Shows the net profit transfers from foreign investment.
Portfolio investment: Indicates incomes and expenditures of portfolio investment which involves dividend and interest payments of stocks bought by foreigners and domestic government bonds.
Other investments: Consists of interest incomes and expenditures.
Current transfers: contains worker incomes.
In Turkey experienced extensive current account deficit. For recovering of this deficit, unbalance of foreign trade must be decreased.

25. Current account and Foreign Trade Balance
2. Evolution of foreign trade:
Until 1980, foreign trade was enforced according to import substitution industrialization policy.
The main tools during this period:
Currency saving by producing goods which before were imported.
Protection of domestic manufacturing.
Import was enforced in the form of liberalization and quota.
Liberalization: Involves the goods whose imports are free and are not produced domestically or domestic production does not meet domestic demand.
Quota: for certain goods, foreign resources are used.

26. Current account and Foreign Trade Balance
In the period of import substitution, 80 % of imports were pursued in the scope of liberalization.
Parallel with these restrictions, limitations were widened also with custom taxes and other implementations.
As domestic production of durable consumer goods and some intermediate goods did not cause enough currency savings, demand for imports increased.
All these evolutions were concluded with the increase of foreign trade deficit.

28. Current account and Foreign Trade Balance
After 1980, foreign trade policy changed to export oriented industrialization. For this purpose:
Financial aids were given to producers for encouraging exports.
Labor costs were decreased for lowering export costs.
As a result of these implementations, exports increased extensively.
The share of exports in manufacturing goods (textile, provisions industry, iron-steel industry, etc.) in total export grew to 80%.

29. Current account and Foreign Trade Balance
Towards the end of 1980s, export increase began to slow down due to the following reasons:
Export prices were elevated by high devaluations;
Export increase, which was achieved by cutting down domestic demand, was not based on existing capacity;
High import prices affected new investment possibilities negatively.
These evolutions caused foreign trade deficit reduce in

30. Current account and Foreign Trade Balance
The reasons why financial liberalization, implemented in 1990s, had negative effects on export were:
Appreciation of TL;
Low devaluations caused competitiveness to decrease.
3. Sectoral distribution of Foreign Trade
Group of goods causing import increase:
Import of Consumption goods: after import liberalization began to increase rapidly.
Import of intermediate goods: began to increase from 1970s.
But import of capital goods showed declining tendency.
These increases and decreases has made foreign trade deficit to grow.

32. Current account and Foreign Trade Balance
Appreciation period of TL was in contradiction with the efforts of increasing exports and growth of Turkish economy.
Appreciation of TL caused sectors, which were competitive and intended to external markets, to reduce their competitiveness. This fact caused:
Profit and investment increase in sectors, which were not related with commerce;
Negative effects in manufacturing industries which were open to foreign competition;
Swell in service and commerce sectors.

34. Current account and Foreign Trade Balance
The main part of the total export consisted of manufacturing industry goods.

35. Current account and Foreign Trade Balance
4. Country Distribution of foreign trade:
52% of Turkish exports is towards EU countries. Among these countries, Germany has the biggest share.
This fact is also valid for imports.

37. Capital movements
Investigation of capital movements in the scope of BoP (balance of payments) is based on two important points:
Quantitative: Increase of capital movements to very higher numbers;
Qualitative: using of new forms of capital movements, which had not been used before 1980.
Balance sheet must equal zero and consists of 3 tools:
Current account;
Capital and financial accounts;
Net errors and omissions.

38. Capital movements 1. Current account:
In the case of current account deficit, balance sheet equation can be achieved by the financing the deficit with capital inflows .
The part of deficit, which can not be financed by capital inflow, is financed by reserve movements.
2. Capital and financial accounts:
Capital inflow is the sum of three sub-parts:
Direct Investment;
Portfolio investment;
Other investments.
Classification of sub-parts according to their usage type and usage period is :
IMF credits;
IMF long-term investments.
In 1999 there was increase in IMF credits.

39. Capital movements
Reserve movements are the tools which balances the sum of current accounts and capital inflow.
Positive BoP => resources exit country.
Negative BoP => resources enter to the country.
Foreign trade mobility of Turkey exhibited ascending increase after Especially, after implementation of financial liberalization policies, capital inflowws increased.

43. Other International Formations
Data, about the outer world, shows that Turkish economy has been sensitive to external developments.
Permanently changing of TL due to foreign currency. Factors which affect TL’s price:
Internal and external price movements;
Export and import developments;
Developments in public finance;
Other foreign payments.

44. Other International Formations
Necessity of production determination according to exports: export possibilities created foreign currency entrance and market problems. Capital resources could not be used for reproducing because of uncertain environment in the country. It is the main reason why private sector did not investment.
Liberalization of capital movements after 1989: economic depressions in developing countries caused international speculative capital to move to developed countries. Also this period caused domestic currency to appreciate and foreign trade deficit increases.

45. Other International Formations
These improvements in capital movements, facilitated increase in the country’s currency reserves.
Extraordinary increase in international reserves in 1990s, shows that capital incoming to Turkey due to high interest rates is more than the from the current account deficit.
This situation shows that external and internal imbalances were tried to be overcomed with external resources.
Speculative foreign capital realized high profits due to high interest rates and low devaluations.
The use of imported goods in capital goods production and consumption, caused adverse developments, in case of foreign currency demand, in production and consumption markets and price increases.