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Cablegate: Draft National Trade Estimate Report

VZCZCXRO5200
PP RUEHDA
DE RUEHAK #1928/01 3120502
ZNR UUUUU ZZH
P 070502Z NOV 08
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC PRIORITY 7913
INFO RUCPDOC/USDOC WASHDC PRIORITY
RUEATRS/TREASURY DEPT WASHDC PRIORITY
RUEHIT/AMCONSUL ISTANBUL PRIORITY 4959
RUEHDA/AMCONSUL ADANA PRIORITY 3369
RUEHRC/USDA FAS WASHDC

UNCLAS SECTION 01 OF 07 ANKARA 001928

DEPT PASS USTR FOR GBLUE/MMOWREY
DEPT FOR EEB/TPP/BTA
TREASURY FOR OASIA
USDOC/ITA/MAC/KNAJDI

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD ECON EFIN EINV TU
SUBJECT: DRAFT NATIONAL TRADE ESTIMATE REPORT

REF: STATE 88447

The following is Embassy Ankara's input for the
National Trade Estimate Report for Turkey (text
has also been emailed per instructions in
reftel):

TRADE SUMMARY

The U.S. goods trade surplus with Turkey was
$4.7 billion in January-August 2008, an increase
of 291 percent from $1.2 billion in the same
period of 2007. U.S. goods exports in the first
eight months of 2008 were $7.5 billion, up 75.9
percent from the previous year. Corresponding
U.S. imports from Turkey were $2.9 billion, down
6.9 percent. Turkey is currently the 31st
largest export market for U.S. goods.

According to Turkish Treasury data, the stock of
U.S. foreign direct investment (FDI) in Turkey
was $6.3 billion in 2007 (latest data
available), up from $2.1 billion in 2006. U.S.
FDI in Turkey is concentrated largely in the
banking, manufacturing, and wholesale trade
sectors.

IMPORT POLICIES

Tariffs and Quantitative Restrictions

Turkey applies the EU's common external customs
tariff to third-country nonagricultural imports
(including from the United States) and imposes
no duty on nonagricultural items from EU and
European Free Trade Association (EFTA)
countries.

Turkey maintains high tariff rates (an average
28.3 percent Most Favored Nation rate) on many
food and agricultural product imports, which is
estimated to cost U.S. importers over $500
million per year in lost trade. Duties on fresh
fruits range from 15.4 percent to 145.8 percent.
Tariffs on processed fruit, fruit juice, and
vegetables range between 19.5 percent and 130
percent. The Turkish government also levies high
duties, excise taxes and other domestic charges
on imported alcoholic beverages that increase
wholesale prices by more than 200 percent.

Importers of rice, dried beans, wheat, barley,
rye, oats, corn, and hazelnuts must comply with
a reference price system, which sets the minimum
prices on which duties are assessed, rather than
using customs declarations or market prices.
This reference system costs importers between an
estimated $10 and $25 million per year.

Import Licenses and Other Restrictions

Import licenses are required for products that
need after-sales service (e.g., photocopiers,
advanced data processing equipment, and diesel
generators), distilled spirits, and agricultural
products. Lack of transparency in Turkey's
import licensing system results in costly
delays, demurrage charges, de facto bans and
other uncertainties. The Turkish government
routinely stops issuing import licenses for
domestically produced food (such as pulses,
nuts, and dried fruits) during the harvest
season to eliminate competition and keep prices
high. For some crops, like wheat, the
government simply does not issue licenses and
therefore maintains control over the level of
imports through quotas. In addition,
documentation requirements for all food imports
are inconsistent, non-transparent, and do not
follow standard international practices. This
often results in shipments being held up at port
over onerous certification requirements that
have changed or are unclear. The estimated cost

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of this barrier is between $100 and $500
million.

In November 2005, the United States brought a
dispute against Turkey in the World Trade
Organization (WTO) arguing that, inter alia,
Turkey's tariff-rate quota (TRQ) scheme for
rice, which contains an onerous domestic
purchase requirement, and its refusal to issue
import licenses for rice outside the TRQ, are
inconsistent with Turkey's WTO obligations. In
September, 2007, the dispute settlement panel
agreed with the United States that Turkey's
failure to grant licenses to import rice and its
operation of a discretionary import licensing
system for rice are in breach of Turkey's market
access obligations under the WTO Agreement on
Agriculture. The panel also agreed with the
United States that Turkey's domestic purchase
requirement, under which Turkey required
importers of rice to purchase large quantities
of domestic rice in order to import rice at
preferential tariff rates, is in breach of the
national treatment provisions of the WTO. The
reasonable period of time for Turkey to bring
itself into compliance with the WTO's rulings
and recommendations expired at the end of April
2008. Turkey and the United States are
currently engaged in discussions to explore the
possibility of entering into a Memorandum of
Understanding that would set out commitments by
Turkey on its import practices affecting U.S.
rice. It is estimated that this agreement, once
finalized, will result in $25 to $100 million in
increased trade.

For some products, notably for meat and poultry,
the Turkish government simply does not issue
import licenses, thereby creating a de facto ban
on imports of these products. Turkey has not
allowed meat imports from any country since 1996
and has not established any public health
requirements for the entry of meat. Outbreaks of
Bovine Spongiform Encephalopathy (BSE) and foot
and mouth disease (FMD) in Europe strengthened
Turkey's resolve to keep poultry and meat
products out of its market. As a result of
ongoing discussions, a protocol permitting the
import of live breeding cattle from the United
States was agreed to in July 2007. Turkey
continues to require inspection and approval of
all foreign poultry processing facilities at the
expense of Turkish importers, a condition that
has the effect of preventing poultry imports.
Turkey maintains that the ban on meat imports
relates to valid health concerns, but if imports
were to be allowed it is estimated that the
benefit to U.S. exporters would be worth $100 to
$500 million.

Despite liberalization of the spirits and
tobacco markets - including a completed
privatization of the state-owned alcoholic
beverage company and the state-owned tobacco
company, as well as privatization of imports of
wine and alcoholic beverages - increases in
consumption have been inhibited by inordinately
high tariffs (85 percent to 100 percent) and
special consumption taxes (275 percent), along
with the value added-tax (VAT). In 2006,
legislation was introduced to reduce the number
of control certificates required to import
distilled spirits from two to one, but full
jurisdiction could not be transferred to just
one entity, so the legislation was never
enacted. Instead, the Turkish government has
focused on improving the efficiency and speed of
the process so as not to put an undue burden on
importers. This topic was discussed at all
recent Trade and Investment Framework Agreement
(TIFA) Council meetings.

STANDARDS, TESTING, LABELING, AND CERTIFICATION

ANKARA 00001928 003 OF 007

The Turkish government has a poor track record
of notifying WTO Members of proposed or final
technical regulations and phytosanitary
requirements. Most changes in regulations become
effective immediately upon publication with
little or no notification to trading partners.
This often results in significant disruptions in
trade. Furthermore, laws and regulations do not
appear to be implemented or enforced immediately
or consistently at every port, creating
unpredictability and making it difficult for the
exporter and the importer to comply. The
inconsistent requirements from port to port
occasionally result in long delays or denial of
entry for imported products, and the estimated
cost of this barrier is between $10 and $25
million per year. The United States Government
has raised the issue with the Turkish government
on several occasions.

Importers report difficulty in obtaining
information on sanitary and phytosanitary (SPS)
requirements. The United States Government has
raised the issue of transparency with the
Turkish government on multiple occasions,
including informal discussions at the July 2007
TIFA Council meeting, the October 2007 WTO
Sanitary and Phytosanitary Committee meeting,
and during Turkey's November 2007 Trade Policy
Review by the WTO. In January 2008, Turkey
notified the WTO of an SPS measure related to
phytosanitary requirements for seed potatoes -
the first Turkish notification since 2004.

U.S. companies have reported that products
bearing the EU certificate of conformity (CE
mark), particularly medical devices, have been
detained by Turkish customs authorities for
inspection. In some cases, U.S. products
apparently have been subjected to additional
tests, despite their CE marks. For importation
of distilled spirits, Turkish customs requires
that between two and four bottles per
consignment be submitted for unspecified
analyses, raising the cost of importing.

Turkey does not have any regulations related to
biotechnology in force and the fourth draft of a
National Biosafety Law is being reviewed by
office of the Prime Ministry. The previous
draft would have effectively halted U.S. exports
of soybeans, soy and corn-based products and
affected cotton exports to Turkey. The current
draft has not been made public. The total value
of U.S. transgenic crop exports to Turkey was
over $1 billion in 2007, all of which could be
endangered depending upon how any future law is
written. The United States Government and
private industry have been actively raising
awareness among Turkish regulators as to the
benefits and safety of biotech crops.

GOVERNMENT PROCUREMENT

Turkey is not a signatory to the WTO Agreement
on Government Procurement; however, it is an
observer to the WTO Committee on Government
Procurement.

Turkey's public tender law established an
independent board to oversee public tenders.
Foreign companies can participate in state
tenders that are above an established threshold.
The law provides a price preference of up to 15
percent for domestic bidders, which is not
available if they form a joint venture with
foreign bidders. Turkey has expanded the
definition of domestic bidder to include
foreign-owned corporate entities established
under Turkish law. Although Turkey's laws
require competitive bidding procedures for
tenders, U.S. companies have complained that

ANKARA 00001928 004 OF 007


they can be lengthy and overly complicated.

Military procurement generally includes an
offset requirement in the tender specifications.
The offset guidelines were recently modified to
encourage foreign direct investment and
technology transfer.

EXPORT SUBSIDIES

Turkey employs a number of incentives to promote
exports, although programs have been scaled back
in recent years to comply with EU directives and
WTO commitments. Export subsidies ranging from
10 percent to 20 percent of export values are
granted to 16 agricultural or processed
agricultural product categories in the form of
tax credits and debt forgiveness programs, and
are paid for by taxes on exports of primary
products such as hazelnuts and leather. The
Turkish Grain Board generally sells domestic
wheat at world prices (which are well below
domestic prices) to Turkish flour and pasta
manufacturers in quantities based upon their
exports of flour and pasta.

Similarly, the Turkish Sugar Law allows a
certain amount of domestic sugar ("C quota") to
be sold at world prices for utilization in
products that will be exported. The current
price for this C quota sugar is $390/MT; while
the normal domestic selling price is $1,370/MT.
Exporters also do not pay import duties on the
amount of sugar imported for use in their
exported products. The impact of this subsidy
on U.S. exports to Turkey is estimated at less
than 10 million dollars.

INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION

Turkey's intellectual property rights regime
(IPR) has improved markedly in recent years. As
a result of notable progress on copyright
enforcement, seizures of pirated goods, and
imposition of deterrent penalties by the courts,
Turkey was lowered to the Special 301 Watch list
in 2008, from the Priority Watch List in 2007.
In 2008, the Ministry of Culture published a new
circular, reminding all government agencies of
the requirement to use licensed software, which
the software industry welcomed. A new patent
law is also under consideration by Parliament.

In spite of this progress, the pharmaceutical
sector continues to be concerned about
protection for confidential test data against
unfair commercial use. Turkey provides six
years of data exclusivity from the date a
product is first approved in the Customs Union
Zone which, due to lengthy approval times in
Turkey, may mean that data exclusivity for a
product approved elsewhere in Europe has already
expired or is near expiration by the time the
product can be brought to market in Turkey.

Trademark holders contend that there is
widespread and often sophisticated
counterfeiting of their marks in Turkey,
especially in apparel, film, cosmetics,
detergent, and other products.

SERVICES BARRIERS

Telecommunications Services

In November 2005, 55 percent of the government-
owned Turk Telecom was sold to a foreign
investor. Although Turkey has committed to
ending Turk Telecom's exclusive rights on fixed
telephony services, its delay in issuing
implementing regulations has resulted in a delay
in the establishment of alternative fixed line
suppliers. The Telecommunications Authority (TK)

ANKARA 00001928 005 OF 007


has been actively issuing the regulations needed
to promote a competitive market, but it still
lacks adequate authority to provide effective
enforcement. The Turkish Parliament passed an
Electronic Communication Law which would have
given greater authority to TK, but it was vetoed
by the President, requiring certain changes.
The revised law is under consideration by
Parliament, and passage is expected by the end
of the year. The new law aims to harmonize
Turkey's communication legislation with the EU.
It will also reduce the Ministry of Transport
and Communications' (MOTC) influence over TK's
decision making. This year, TK took some
important steps to support market
liberalization, such as the decision to start
implementing mobile number portability (MNP) as
of November 2008. This will also help encourage
more companies to bid for the 3G license tender
to be held at the end of November 2008.

Applicable licensing regulations and tender
announcements are published on the TK website.

Cellular telephone and paging services are open
to competition.

Other Services Barriers

There are restrictions on establishment in
financial services, the petroleum sector,
broadcasting, and maritime transportation (see
Investment Barriers section). Turkish
citizenship is required to practice as an
accountant or certified public accountant, or to
represent clients in Turkish courts. Legislation
awaiting final approval by Parliament would
permit foreign doctors to work in Turkey.

INVESTMENT BARRIERS

The United States-Turkey Bilateral Investment
Treaty entered into force in May 1990. Almost
all areas open to investment by the Turkish
private sector are fully open to foreign
participation without screening or prior
approval, although establishment in the
financial and petroleum sectors requires special
permission. Foreign equity ownership is limited
to 25 percent in broadcasting and 49 percent in
maritime and air transportation. Parliament is
considering draft legislation easing
restrictions on foreign ownership in the media
sector.

Once investors have committed to the Turkish
market, they have sometimes found their
investments undermined by legislative action,
such as the imposition of production limits.
Turkish law calls for a liberalized energy
market in which private firms are able to
develop projects with a license obtained from
the Energy Market Regulatory Authority, an
independent regulatory body. The state
electricity utility has been unbundled into
power generation, transmission, distribution,
and trading companies, and after years of
delays, the first four electricity distribution
regions were privatized in 2008. The Turkish
government plans to finalize privatization of
distribution facilities and start privatization
of generation facilities by the end of 2009.
This ambitious schedule may be delayed by
limited access to credit caused by the global
financial situation. Liberalization in the
natural gas sector also has faced delays. The
state pipeline company, BOTAS, will remain
dominant in gas importation, but legislation
requires a phased transfer of 80 percent of its
gas purchase contracts to the private sector by
2009. Except for a small scale contract
transfer tender in 2005, BOTAS has failed to
reach its targets and still has an 86% share in

ANKARA 00001928 006 OF 007


the gas market. The Turkish government now
realizes its goals for reducing BOTAS' market
share are not realistic. The government will
soon introduce an amendment to the Natural Gas
Market Law that will liberalize the importation
of gas into Turkey but will drop provisions to
downsize BOTAS. Natural gas distribution in
cities is dominated by the private sector. The
only exceptions to this are the Ankara and
Istanbul distribution networks, where the local
administrations hold the distribution license.
In 2008, a deal was reached to privatize
Ankara's pipeline network, Baskent Gaz, but the
financing for the deal fell through as a result
of the global financial crisis and the future of
the project is unclear.

As the result of a 1997 court decision, the
Turkish government blocked full repatriation of
profits by oil companies under Article 116 of
the 1954 Petroleum Law, which protected foreign
investors from the impact of lira depreciation.
Affected companies have challenged the 1997
decision but the judgments in almost all such
lawsuits have been against the claimant
companies. Oil and gas companies also have
difficulty getting visas for workers to enter
Turkey and complain that license fees and taxes
are too high in the sector. A new petroleum law
that seeks to provide greater investment
incentives and protections still awaits passage
in the parliament.

Obtaining work permits for professional or
highly skilled foreign workers is a pervasive
problem among both foreign and Turkish
employers. The process is time-consuming and
requires extensive documentation, the
adjudication process is lengthy (often exceeding
the time for which the permit is requested), and
the chances of approval are low.

Foreign ownership of real estate in Turkey has
long been a contentious issue. In early 2008,
the Constitutional Court issued two decisions
that suspended portions of the Foreign Direct
Investment Law and the Title Deed Law, which had
allowed foreign individuals and companies to
purchase land. In response, the Turkish
government passed new legislation to permit
these purchases again, but imposed an upper
limit on the amount of land that can be owned by
foreign individuals - no foreign individual may
own more than 2.5 acres and all foreign
individuals together can own no more than 10
percent of the land in any given development
zone. As information on the amount of land
currently held by foreigners in any development
zone is not readily available, this may in the
future cause problems and legal challenges for
individual investors seeking to purchase land in
Turkey. There are no limits on the amount of
land that can be owned by foreign companies with
a legal presence in Turkey, so long as the land
is being used in accordance with their business
activities.

OTHER BARRIERS

Corruption

Turkey has ratified the OECD anti-bribery
convention and passed implementing legislation
that makes bribery of foreign and domestic
officials illegal and not tax deductible.
Despite this, many foreign firms doing business
in Turkey perceive corruption to be a problem,
particularly by some government officials and
politicians. The judicial system is also
perceived to be susceptible to external
influence and to be somewhat biased against
outsiders.


ANKARA 00001928 007 OF 007


Energy

Turkey's decision to cancel 46 contracted power
projects in 2001 led to a number of arbitration
cases against the government, with the end
result that most companies were compensated.
However, this action and the uncertainty it
generated, combined with GOT controlled prices
despite rising fuel costs, delayed private
investments in the sector from 2001-2008. At
the same time, demand for electricity increased
substantially over this period, as the Turkish
economy experienced record growth rates. In
order to address the supply gap problem which
Turkey is likely to face as of 2009, the
government passed an energy security law in 2007
and introduced a number of incentives to
facilitate investment in the energy sector.
Turkey also implemented an "automatic pricing
mechanism" in 2008, according to which
electricity prices are revised three times a
year, based on changes in the FX rate, oil
prices, and the consumer price index, and gas
prices are adjusted monthly.

Turkey passed its long-awaited Nuclear Power Law
in 2008, and conducted a tender in September
2008 to build a nuclear plant. Several
international companies, including U.S. firms,
expressed interest in the tender. However the
government turned down the companies' request
for a delay in the bidding deadline, and as a
result only one Russian consortium submitted a
bid. The government has not yet indicated the
final disposition of this bid or the manner in
which bids for future projects will be
considered. A new law will need to be passed
before another nuclear power plant tender can be
conducted.

Taxes

Taxation of all cola drinks (raised in 2002 to
47.5 percent under Turkey's "Special Consumption
Tax") discourages investment by major U.S. cola
producers. Turkey assesses a special consumption
tax of 27 percent to 50 percent on all motor
vehicles based on engine size, which has a
disproportionate effect on U.S. automobiles.

Corporate Governance

A recent OECD report stated that Turkey's
overall corporate governance outlook is positive
because the authorities have already adopted, or
are introducing, high quality corporate
governance standards (including audit standards)
and because transparency has improved
significantly. The report cautions, however,
that it is important for Turkey to improve
further in the areas of control and disclosure
of related party transactions and self-dealing,
the protection of minority shareholders, and the
role of the board in overseeing not only
management but also controlling shareholders.

Pharmaceuticals
Aside from their intellectual property concerns
detailed above, the pharmaceutical industry's
sales have been affected by government price
controls and an awkward and burdensome
reimbursement system. In 2008, Turkey
implemented changes in its discounting scheme
that increased the cost borne by pharmaceutical
manufacturers. U.S. research-based
pharmaceutical firms are also concerned about
achieving transparent and equitable treatment in
upcoming reforms of the government's health care
and pension system.

WILSON

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