Turkey WT/TPR/S/44
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IV. TRADE POLICIES BY SECTOR
(1) OVERVIEW
1. The imbalance in the policy treatment of the different sectors of the Turkish economy has
increased since the previous Review, shifting resources to an even greater extent towards agriculture,
where intervention has been extended and deepened.  Little change has occurred in the services sector,
where privatization has been very slow.  By contrast, there has been considerable liberalization of themanufacturing sector, mainly as a result of implementation of the customs union with the EU.
2. Agriculture, which is excluded from the customs union, continues to be characterized by
extensive and costly government interventions th at insulate farmers from foreign competition and
world market price signals.  If anything, intervention has increased since Turkey's previous Review.
In the case of meat and preparations of meat, and fish or aquatic invertebrates, tariff duties (includingMHF levies) add as much as 130 and 90%, respectively, to import prices.  Under some preferential
trade agreements, Turkey has introduced tariff quotas to implement reduced preferential rates on
limited imports of certain agricultural and processed agricultural products.  Export incentives in the
agricultural sector, re-introduced in 1997, cover, inter alia , cut flowers, dehydrated vegetables, fruit
juices, olive oil and prepared or preserved fish.
3. The overall level of support to the agricultural sector has increased in recent years, although
the year-to-year variations are considerable.  The OECD estimates that total transfers to the
agricultural sector (expressed in U.S. dollars) almost doubled between 1994 and 1997, reaching the
equivalent of 7.5% of GDP in 1997.
1  Cereals (mainly wheat) and milk are among the most heavily
supported products.  Support price interventions and fertilizer subsidies continue to be a serious drain
on state finances.  In the Uruguay Round, tariffs were bound at statutory rates which were equal to or
above the sum of the prevailing applied rate and MHF levies.
4. In contrast, the manufacturing sector has been opened to increased competition since Turkey's
previous Review.  Under the CUD Turkey elimin ated  tariffs and levies on manufactured imports
from the EU on 1 January 1996 and adopted the EU common external tariff (CET) on imports from
third countries.  As a result, average tariffs, the main border measure, have more than halved since the
previous Review to 12% in 1998.  Moreover, the coverage of the Mass Housing Fund (MHF) levy hasalmost been eliminated, thus simplifying the calculation of taxes payable on imports and improving
transparency.  The opening of the Turkish market has been matched by improved access to foreign
markets as a result of the Uruguay Round and the CUD.  As an example, in 1995 about half of textile
and clothing exports were subject to quota restrictions, while in 1996, after the elimination of quotas,
this proportion was less than 7% (mainly restrictions  in the U.S. market).  However, Turkey's textiles
and clothing industries are likely to face intensified competition from third countries in the future as
quota restraints are phased out on an MFN basis under the WTO Agreement on Textiles and Clothing
(ATC).
5. Although the CUD generally involves overall liberalization, Turkey was also required to
adopt EU policy with respect to textiles and clothing, introducing quotas on some of these productson 1 January 1996 (now the subject of a dispute with  India).  Turkey also has a number of anti-
dumping measures (independent of the EU), textile imports being the main target.  In the automobile
sector, foreign investors generally agree, without any legal obligation, to incorporate a certain share of
local content.
                                                     
1 OECD (1998a).WT/TPR/S/44 Trade Policy Review
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6. The manufacturing sector is also the main beneficiary of a generous and complex state aid
system and export assistance to domestic producers (see also Chapter III).  Although less than the
transfers to farmers, the cost of these schemes are still substantial, equivalent to some 2.3% of GDP
(1994).  In 1997, 63% of the incentives were granted to manufacturing investors, while services
accounted for an other quarter.  Textiles and clothing, followed by chemicals, were the main
recipients, receiving more than one third and one tenth, respectively.
7. The services sector accounts for just under half of GDP and of export earnings (mainly
tourism).  Turkey is party to the WTO Agreements on Financial Services, Telecommunications and
Information Technology, and in the Uruguay Round made specific commitments in almost half of
scheduled activities.  The State continues to play an important and sometimes dominant role in the
services sector, through the SEEs and state banks, and, as noted in Chapter III, privatization has beenslow and subject to legal challenge.   This is a particular problem in the energy and transport sectors,
where shortages have adversely affected other parts of the economy.  In the banking sector,
preferential lending in agriculture and housing accounts for more than half of loans by the state banks,
while cross-ownership of private banks and industrial enterprises may also create problems for
prudential supervision.
(2) 
AGRICULTURE
(i) Main Features
8. Agriculture plays an important but diminishing role in the Turkish economy:  its share of
GNP declined from 18% in 1990 to 14% in 1997, and  its share of export revenues dropped from 25%
to 21% over the same period.  However, it continues to provide almost half of the employment
opportunities.  The crop sector accounts for more than three-quarters of agricultural production in
Turkey, the most important products being cereals (mostly wheat), fruit and vegetables (Table IV.1).However, since 1990, the share of milk in agricult ural production has also become important, almost
doubling to 11.2%.  While edible fruit and nuts (mainly hazelnuts and, to a lesser extent, grapes and
citrus fruit) is the largest export category, cereals (mainly wheat and, to a lesser extent, maize and
rice) is the largest import category (Chart IV.1).
2
9. The agricultural sector benefits from extensive and costly government interventions.  High
tariffs constitute a significant barrier to imports, while support price interventions and fertilizer
subsidies continue to be a serious drain on state finances.  The OECD estimated value of total
transfers (expressed in U.S. dollars) to agriculture resulting from agricultural policies almost doubled
between 1994 and 1997.  The producer subsidy equivalent (PSEs) of assistance to Turkey's main
products show that milk and wheat are major beneficiaries (Table IV.1).  The customs union decision(CUD) between Turkey and the EU is not expected to directly influence the price regime measures
because Turkey is not participating in the EU common agricultural policy (CAP).
                                                     
2 Data presented in Chart IV.1 is based on the Uruguay Round definition of agriculture (HS 01-24
less fish and fishery products plus selected products) while trade data presented in Chapter I are based on theSITC classification.Turkey WT/TPR/S/44
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Table IV.1
Production and producer subsidy equivalents by farm sector, 1996 and 1997
(TL billion and per cent)
Production (1996) Producer subsidy equivalents (1997)
(TL billion) (% of total) (TL billion) (% of GNP)
Crops: 2,054,445 76.7 .. ..
    Cotton 106,403 4.0 .. ..
    Sugar beets 1,989 2.5 84,217a0.3
    Cereals 503,033 18.8 251,344b0.9
         Wheat 337,132 12.6 170,435 0.6
         Maize 34,375 1.3 23,376 0.1
    Oil seeds 39,812 1.5 29,025 0.1
    Fruit 586,304 21.9 .. ..
    Vegetables 480,350 17.9 .. ..
        Fruit bearing 405,898 15.1 .. ..
Animal products: 624,874 23.3 416,592c1.4
    Meat 155,397 5.8 152,827d0.5
       Sheep 36,835 1.4 39,501 0.1
       Poultry 63,372 2.4 -12,763 0.0
    Milk 299,551 11.2 212,443 0.7
    Hen eggs 68,462 2.6 51,322e0.2
Total 2,679,319 (100.0) 781,178 2.7
.. Not available.
a Sugar refined equivalent.
b Includes wheat, maize and other grains.
c Livestock products.d Includes beef, veal, poultry and sheepmeat.
e Eggs in general.
Note: The producer subsidy equivalent measures the value of transfers to agriculture resulting from agricultural policies in a g iven
year; the estimate includes transfers from consumers of agricultural production (through domestic market price support) and
transfers from taxpayers (through budgetary or tax expenditure).
Source: WTO Secretariat based on date supplied by the Government of Turkey (production);  and OECD (1998),  Agricultural Policie s in
OECD Countries – Monitoring and Evaluation 1998, Paris (producer subsidy equivalents).
(ii) Policy instruments and indicators of assistance
10. Turkey has a wide range of policy objectives in the agriculture sector, including the
stabilization of farmers income, meeting the nutritional needs of the population, ensuring an increase
in output and exports by emphasizing those products in which Turkey has comparative advantage.3
These objectives are to be achieved through a number of measures, including:  (i) import tariffs, tariff
quotas, SPS measures, export subsidies and export taxes;  (ii) domestic price support schemes;
(iii) subsidies for capital and operating costs of state economic enterprises (SEEs) responsible for the
implementation of the price support programmes;  (iv)  input subsidies for fertilizers, pesticides and
irrigation;  (v) concessional credit (direct support to farmers or indirectly through the AgriculturalSales Co-operative Unions (ASCUs) or throug h SEEs);  and (vi) livestock incentives.
                                                     
3 Government of Turkey (1995), p. 65.WT/TPR/S/44 Trade Policy Review
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Chart IV.1
Trade in agricultural products, 1990 and 1997
1990 1997    Exports
HS 08
31.8
Total:   US$3.1 billion Total:   US$5.2 billion
Total:   US$2.2 billion Total:   US$4.0 billionPer cent
Other  8.5
HS 52  5.7
HS 01  6.5
HS 24
14.4
HS 20  9.7HS 07
12.6HS 15
6.4HS 11  2.2HS 09  2.4HS 08
25.1Other  14.4
HS 21  2.0
HS 19  5.7
HS 24
13.1
HS 20  11.8HS 07  9.4HS 15  7.8HS 11  5.9HS 17  4.8
    Imports
HS 10
25.0Other  10.4
HS 51  3.7
HS 52
6.1
HS 15  13.5HS 24  15.1HS 12  2.0HS 17 
 13.4HS 01  4.9HS 10
17.4Other  12.8
HS 51  2.1
HS 23  3.8
HS 52
15.7
HS 41  14.5
HS 15  14.4HS 24  9.5HS 12  7.3HS 07  2.3
HS 41
5.7
Note:
Source :Data based on HS definition of agriculture as agreed in the Uruguay Round.  UNSD, Comtrade database. HS 01 - Live animals;
HS 07 - Edible vegetables and certain roots and tubers;HS 08 - Edible fruit and nuts; HS 09 - Coffee, tea, maté and spices;
HS 10 - Cereals;
HS 11 - Products of the milling industry; malt; starches; inulin; wheat gluten;HS 12 - Oilseeds and oleaginous fruit, misc. grains, etc.;HS 15 - Animal or vegetable fats and oils (excl. 1504);HS 17 - Sugars and sugar confectionery;
HS 19 - Preparations of cereal, flour, starch/milk; pastrycooks' products;
HS 20 - Preparations of vegetables, fruit, nuts or other parts of plants;HS 21 - Miscellaneous edible preparations;HS 23 - Residues and waste from the food industries, prepared animal fodder (excl. 230120);HS 24 - Tobacco and manufactured tobacco substitutes;
HS 41 - Raw hides and skins (other than furskins) and leather (4101-4103);
HS 51 - Wool, fine coarse animal hair, horsehair yarn and fabric (5101-5103);HS 52 - Cotton (5201-5203).Turkey WT/TPR/S/44
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11. Most recent OECD estimates on transfers to the agricultural sector in Turkey indicate
increased flows to the agricultural sector over the recent years (Table IV.2).  The  producer subsidy
equivalents (PSEs), which capture the value of transfers to agriculture resulting from agricultural
policies in a given year, almost doubled (in U.S. dollar terms) from 1994 to 1997, while the implicit
tax on consumers as measured by the consumer subsidy equivalents (CSEs), capturing the value of
money transfers to consumers resulting from agricult ural policies in a given year, more than tripled
over the same period.4  Some 80% of agricultural support is in the form of market price support, but
input subsidies are also significant.  Direct payments to farmers do not constitute a significant part of
the PSE.5  The OECD estimates that total tran sfers associated with agricultural policies have
increased from 6.0% of GDP in 1994 to 7.5% of GDP in 1997.  Government interventions, by policy
instrument, in the agricultural sector are described below.
Table IV.2
Transfers associated with agricultural policies, 1986-97
1986-88 1994 1995a1996a1997bChange 1996-97
(%)
PSE TL trillion
(US$ billion)
(%)c2
2
2657
2
25154
3
30257
3
25781
5
38204
63
CSE TL trillion
(US$ billion)(%)
d-1-1
-18-36
-1
-14-118
-3
-20-201
-2
-18-776
-5
-34286
107
Total transferseTL trillion(US$ billion)6
6232
8506
11867
112,177
14151
35
Memo:
Total transfers/GDP (%) 6.5 6.0 6.5 5.8 7.5
a Provisional.b Estimate.
c PSE as a percentage of total value of production (valued at domestic producer prices), adjusted to include direct payments and  to
exclude levies on production.
d CSE as a percentage of total value of consumption (valued at domestic producer prices).
e Total transfers are not the sum of PSE and CSE; they cover the total value of production and include not only transfers to
agriculture, as measured by the PSE and CSE, but also other transfers associated with agricultural policies.
Source: OECD (1997), Agricultural Policies in OECD Countries
, Paris; OECD (1998), Agricultural Policies in OECD Countries , Paris;
and Secretariat calculations (memo item).
12. In its Uruguay Round commitments, Turkey undertook to reduce its budgetary outlays for
export subsidies for 46 products (at the HS four-digit level) by 24% and the volume of subsidized
exports by 14% in equal instalments over a ten-year period starting in 1995.  Turkey did not undertake
any commitments to cut financial support for agricultural producers; the authorities estimated thattheir support - as measured by the Aggregate Measurement of Support (AMS) - was below the de
minimis level of 10% for which no reduction commitments were required.
6   Within the WTO,
members have raised questions concerning Turkey's method of calculating domestic support; while
Turkey's most recent WTO notification on domestic support commitments is expressed in
                                                     
4 The PSE estimate includes both transfers from consumers of agricultural products (through domestic
market price support) and transfers from taxpayers (through budgetary or tax expenditures).  The CSE, whennegative, measures the implicit tax imposed on consumers by agricultural policy.  The major component ismarket transfers due to market price support to production; it also includes other transfers such as subsidies toconsumers from government budgets.
5 OECD (1998a).
6 The main difference between the AMS and the PSE is that price differences in the AMS calculations
are estimated by reference to domestic administered prices and not actual producer prices.  Moreover, the AMSfixes the external reference prices at the average levels of the 1986-1988 base period, and several budgetarytransfers that are included in the PSE are not included in the AMS (OECD, 1997b).WT/TPR/S/44 Trade Policy Review
Page 102
U.S. dollars, Turkey's commitments as laid out in its Schedule are expressed in Turkish Lira which
has depreciated against the U.S. dollar in the last two years.7
(a) Border measures
Import regime
13. In the agriculture sector, the high overall simple average MFN tariff (including the MHF
levy) constitutes a significant barrier to imports.  Moreover, tariff protection has increased sinceTurkey's previous Review in 1994, whether calcul ated on HS chapter 01-24 or on the Uruguay Round
definition of agriculture (Table IV.3).  This is also the case if tariff averages are calculated only on
ad valorem  tariffs excluding AVEs of specific rates.
8  In the case of meat (HS 02) and preparations of
meat, fish or aquatic invertebrates (HS 16), tariff duties increase the landed price in Turkey by as
much as 130% and 90%, respectively (Chart IV.2).   MFN tariffs at the HS two-digit level are
provided in Table AIII.1 and at ISIC-four digit level in Table AIV.1.
Table IV.3
Agricultural sector tariffs
(Per cent)
By definition 1993 1998 (second half)
HS chapters 01-24 37.1  (14.5) 47.9  (42.0)
Uruguay Round definitiona35.1  (14.5) 42.9  (45.2)
ISIC 1 28.4  (15.4) 28.1  (27.5)
a HS chapters 01-24 less fish and fishery products (HS 0301-0307, 0509, 1504, 1603-1605 and 230120) less some selected
products (HS 290543, 290544, 3301, 3501-3505, 380910, 382360, 4101-4103, 4301, 5001-5003, 5105-5103, 5201-5203, 5301,
and 5302).
Note: Standard deviation is provided in parenthesis.  Tariff averages (including Mass Housing Fund levy) include  ad valorem
equivalents of specific, alternate and formula duties, as available.
Source: WTO Secretariat.
14. On the other hand, the transparency of the tari ff structure has improved with the substantial
reduction in the rate of the MHF levy.  Currently, the MHF levy only applies to fish and fishery
products (equivalent to 514 out of the total of 531 fi sh and fishery items at the HS twelve-digit level)
raising the overall simple average MFN tariff on  agricultural products (HS 01-24) from 45 to 48%.
15. Unlike many other WTO Members, Turkey did not undertake any "tariffication" for
agricultural products.  The WTO Agreement on Agriculture required, inter alia , countries to abolish
non-tariff measures (such as quantitative restrictions, discretionary licensing and variable levies) or
convert them to tariffs by calculating their tariff equivalents and adding these to the fixed rates.Turkey did not notify any non-tariff measures, it bound its MFN rate as statutory rates, which were
equal to or above the sum of applied MFN rates and MHF levies.  Subsequently, Turkey unilaterally
merged most of its MHF levies with the MFN rate.
                                                     
7 WTO document G/AG/R/10, 23 April 1997.
8 Excluding AVEs, the average MFN tariff calculated on HS chapters 01-24 increased from 39.3%
in 1993 to 49.7% in 1998, and if calculated on the Uruguay Round definition of agriculture the averageincreased from 31.3% to 44.6% over the same period.WT/TPR/S/44 Trade Policy Review
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16. As a result of the Uruguay Round, Turkey has bound all agricultural lines.  Applied MFN
rates are generally well below 1998 bound rates (Chart IV.3).  It should be noted that applied tariffs
shown in Chart IV.3 include all tariff lines, bound and unbound.  However, in some categories, only a
few lines are bound and/or the applied tariffs on non-bound products differ substantially from bound
rates.  Thus, in fishing, the applied MFN rate in 1998 appears to be higher than the bound rate, but
this is a reflection of the fact that few lines are bound while a much larger number of lines, included inthe calculation of applied rates, are unbound.
17. Since the previous Review, Turkey has introduced tariff quotas on imports of certain
agricultural or processed agricultural products under preferential trade regimes with the EU, Israel,
Hungary, Lithuania and Romania (Chapter III (2)(i i)(h) and Table III.6).  For the EU, tariff quotas
apply to a few processed agricultural products (equivalent to 26 items at the HS twelve-digit level)including certain pasta products, sealing wafers, rice paper, dry dough and pastry.  Tariff quotas for
Israel affect some agricultural goods and processed agricultural products (equivalent to 20 items at the
four-digit level),  including avocados, mangoes, carr ots, sweet corn, citrus fruit, orange juice, coffee,
kosher brandy, and vodka.  Tariff quotas have also been opened in the context of the free-trade
agreement with Hungary (19 items at the six-dig it level), Lithuania (10 items) and Romania (31
items);  these apply to,  inter alia , live bovine animals and their meat, wheat, sunflower seed, apple
juice, sparkling wine and beer .  Similar arrangements will be made in the context of the free-trade
agreements with Estonia, the Czech Republic and Slovak Republic.
18. Members have raised concerns in the WTO Committee on Agriculture regarding the use of
import bans on agricultural products, which Turkey considers necessary to protect the domestic cattle
industry.
9  A sanitary ban on imports of live animals (dairy and beef cattle, sheep, goats, and poultry)
and meat (beef, sheep, goat, and poultry) has been in place since May 1996.  The United States hasalso noted that the required control certificate for imports of sunflower seeds has acted as a temporary
import ban.
10
Export subsidies and taxes
19. Export subsidies are extended to agricultural products and processed agricultural goods.
In 1997, they covered five agricultural products (at the HS four-digit level), all within the limitsagreed in the context of the Uruguay Round.
11  Such subsidies took the form of rebates, paid as cash
grants, ranging between 10% to 20% of the export values, depending on the commodity (Table IV.4).
Export subsidies were also provided to 13 processe d agricultural products (at the four-digit level)
(Table IV.4).  These subsidies were not paid in cash but provided to producers or exporters by
deducting their debts to public corporations (taxes, social insurance premium costs, energy costs, and
telecommunication costs) from their subsidy entitlement.  The total export subsidy paid in 1997 was
TL 2.3 trillion (or US$15 million).12
                                                     
9 WTO documents G/AG/R/12, 31 October 1997 and G/AG/R/13, 19 December 1997.
10 WTO documents G/AG/R/5, 5 July 1996 and G/AG/R/13, 19 December 1997.
11 Turkey has not been able to provide the WTO with 1997 data for the non-subsidized products.
According to the authorities, the difficulty is linked to the restructuring of Turkey's statistical system required aspart of the implementation of the customs union with the EU (WTO document G/AG/R/12, 31 October 1997).
12 OECD (1998a).Turkey WT/TPR/S/44
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19.028.548.044.7
42.90.230.528.1
02 0 4 0 6 0 8 0Chart IV.3
Average tariff levels and bindings in agriculture, forestry and fishing, 1998
MFN 1998 
(second half)
Bound by 1998Agriculture and 
livestock
Forestry and logging
FishingAgriculture, forestry and fishing
14 16 844 28 82
18 1 7447 28 99
 a 
 
Note:
Source :Using the Uruguay Round definition of Agriculture (i.e. HS 01-24 less fish and fish products plus selected 
products) 100% of the tariff lines are bound.
 
The MFN rate includes the Mass Housing Fund levy.  Tariff averages include ad valorem  equivalents of 
specific, alternate and formula duties, as available. Applied tariffs include all tariff lines (i.e. bound and 
unbound lines).  When only a few lines are bound and/or the applied tariffs on unbound products differ 
substantially from bound rates, caution needs to be exercised in comparing bound rates with applied rates.
WTO Secretariat.Standard 
deviation
Bound MFNBounda
By ISIC category (per cent)
20. The total amount, as well as the coverage of export subsidies for 1998 had not been decided at
the time of completion of this report (July 1998).  At the time of writing, the export subsidies applied
to the 13 processed agricultural produces mentioned above in 1997 were still being extended.  Onagricultural products, subsidies for citrus fruit and apples were extended for a limited period
(Table IV.4).
21. Exports of hazelnuts are subject to export taxes at the rate of US$0.04 per kg. for unshelled
hazelnuts and US$0.08 per kg. for shelled hazelnuts. Exports of semi-processed leather are subject to
an export tax at the rate of US$0.5 per kg.  The taxes on hazelnuts are intended to limit exports and,hence, achieve price stability;  they are applied for environmental reasons in the case of semi-
processed leather.WT/TPR/S/44 Trade Policy Review
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Table IV.4
Export subsidies in the agriculture sector, 1997-98 (per June 1998)
(U.S. dollar and per cent)
Subsidy rate
(US$ per tonne)Share of exported quantity
eligible to receive subsidy (%)Maximum rate in %
of f.o.b. export  price
1997 1998 1997 1998 1997 1998
Agricultural products:
1.    Apples a , b50 65 100 100 10 10
2.    Citrus fruits a, c34 34 67 95 15 15
3.    Onions a21 n.a. 100 n.a. 15 n.a.
4.    Potatoes a21 n.a. 31 n.a 20 n.a.
5.    Tomatoes a18 n.a. 99 n.a. 15 n.a.
Processed agricultural products:
1.   Cut flowers (fresh) d310 297 64 59 20 20
2.    Fruit juices (concentrated) d172 170 38 33 20 20
3.    Fruits (frozen) d96 94 99 32 20 20
4.    Homogenized fruit preparations d54 55 61 69 20 20
5.    Olive oil d110 96 100 100 10 10
6.    Preserves, pastes d55 57 85 72 20 20
7.    Vegetables (dehydrated) d375 370 22 23 10 10
8.    Vegetables, frozen (excl. potatoes) d110 107 52 40 20 20
9.    Eggs e7f7f69 10 10 10
10.  Meat of poultry e204 202 33 28 20 20
11.  Milk powder e70 70 87 87 10 10
12.  Potatoes (frozen) e55 55 85 85 20 20
13.  Prepared or preserved fish e150 150 100 100 10 10
n.a. Not applicable.
a 1 January - 31 December 1997 (Decision No. 97/1).
b 22 June - 22 July 1998 (Decision No. 98/6).c 1 January - 30 April 1998 (Decision No. 98/2).
d 1 January - 31 December 1997 (Decision No. 97/2).
e 1 January - 31 December 1997 (Decision No. 97/4).f Per 1,000 pieces.
Note: The 1998 coverage may change during the year.Source:  Government of Turkey.
(b) Domestic policy measures
Agricultural support schemes
22. Table IV.5 shows the main domestic supports and Table IV.6 indicates the cost of the
programmes.  Since 1994 the agricultural support schemes have been reduced in coverage from
some 24 products to three:  cereals (wheat, barley, rye, oats, maize and paddy), tobacco and sugar beet
(Table IV.5).  Although the coverage has decreased, the programme continues to be the largestexpenditure item accounting for more than three quarters of total planned agricultural expenditure
in 1998 (Table IV.6).
23. In setting the support prices under these schemes, factors such as the level of production, the
international price, consumer demand and the rate of inflation are taken into account.  The support
prices, which are announced annually, have varied substantially, but most have increased more than
inflation (as measured by the wholesale price index)  since 1994 (Table AIV.2). The policy measures,
in addition to reducing potential trade opportunities for competitive foreign producers, have often ledTurkey WT/TPR/S/44
Page 107
to substantial losses for the agricultural SEEs (often financed through the Budget) as they were
obliged to purchase as much as farmers produced and hold large inventories.
Table IV.5
Main domestic supports in the agriculture sector
Sub-sector Policy instruments Mechanism of intervention
Cereals (wheat,
barley, rye, oats,
maize and paddy),
sugar beet and
tobaccoPrice support scheme TMO (the state cereals board), the TSFAS (the state sugar producing firm, also known
as SEKER) or TEKELa (the state tobacco and alcoholic beverages monopoly) purchase
the output from the farmers using their own resources, and then charge the Treasury
with the amount of purchase plus a 10% margin (termed "duty loss").  About 12months after completion of an audit, compensation is made from budget appropriation.
At the end of 1996, the Government decreed that the selling price of cereals should not
be less than the buying price.  Previously, the minimum selling price was 15% abovethe buying price.
Crops and livestock Subsidized credits In 1997, the credits were lower than the commercial rates by 46 percentage points for
crops and 35 percentage points for livestock.
Cereals (wheat,
barley, rye, oats
and maize),
hazelnuts,
sunflower, cotton
and teaSubsidized credits Introduced in December 1995, the Support Price and Stabilisation Fund (SPSF)
extends new concessional funds (at 40-90 percentage points below commercial rates).
The loans are channelled to the TMO (cereals), or the Agricultural Sales Co-operative
Unions (ASCUs)b (hazelnuts, cotton, and sunflower)  or CAYKUR (tea) through the
Turkish Agricultural Bank.  Up to the end of 1996, TL 6 trillion (US$74 million) had
been extended for cereals; TL 33 trillion (US$409 million) for hazelnuts, cotton, and
sunflower; and TL 2 trillion (US$25 million) for tea.
Fertilizers &
pesticidesSubsidy provided directlyto farmersOn presentation of receipts for the purchase of fertilizers or pesticides, the Agricultural
Bank (Z.B.) refunds farmers.  Up to the end of November 1997, the fertilizer subsidywas 50% of the buying price.  Since then, the subsidy has been a fixed amount per kg.
output.  The pesticide subsidy is 20% of the buying price.
Vineyards and milk Specific subsidies Specific subsidies are temporary provided to vineyard plants in less favoured areas and
to low-income milk farmers.
Tobacco and tea Direct payment programme Deficiency payments, an output subsidy in which the rate per unit of output of a
commodity is the difference between the administered price and the market price.
Livestock incentive Direct payment programme Almost no funds allocated in 1998 (TL 72 billion).  In 1997, payments were mainly to
compensate for the slaughter of animals for sanitary reasons.
Irrigation Provision of irrigation Government funds invested in irrigation schemes.  The operation and maintenance is
being transferred to user associations.
a TMO, TSFAS, and TEKEL intervene through purchases and stockpiling; they are also allowed to determine the level of
production through forward contracts with growers, handling sales and marketing activities, disbursing subsidies, and
administering investment, import and export policies.
b Agricultural Sales Co-operative Unions (ASCUs) are commercial organizations formed by an association of three or more
agricultural sales co-operatives, authorized to set prices for their members' commodities.
Source: WTO Secretariat based on World Bank (1996), Turkey- Challenges for Adjustment ; IMF (1996), "Turkey - Recent Economic
Developments", IMF Staff Country Report No. 96/122;  OECD (1997), Agricultural Policies in OECD Countries - Monitoring
and Evaluation 1997; and OECD (1998), Agricultural Policies in OECD Countries - Monitoring and Evaluation 1998 .WT/TPR/S/44 Trade Policy Review
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Table IV.6
Payments to agriculture sector in Turkey, 1993-98
(TL billion, unless otherwise indicated)
1993 1994 1995 1996 1997 1998
Programme
Budgetary expenditures for agricultural SEEsa8,011 2,433 3,330 5,650 27,830 10,000
   Duty loss 4,861 0 0 3,150 0 0
   Equity injection 3,150 2,433 3,330 2,500 27,830 10,000
Support purchases (partially from Budget) 33,942 41,828 58,907 158,847 558,666 743,459
   Cereals by TMO 8,231 7,801 2,370 29,500 190,340 194,962
   Tobacco by TEKELb7,602 10,913 11,408 19,805 47,860 165,400
   Sugar-beet by TSFAS 16,248 19,646 37,148 54,157 180,342 267,894
   Green tea leaf (by CAYKUR) 1,861 3,468 5,254 13,167 28,236 45,203
   From SPSF (from Budget) 0 0 2,727 42,218 111,888 70,000
Input subsidies payments (from Budget) 3,546 8,771 12,264 52,575 94,617 120,000
    Fertilizers 3,311 7,923 9,231 44,983 83,635 99,000
    Agricultural pesticides 105 177 1,138 2,573 3,789 9,250
    Seeds and plant (including vineyard) 35 62 70 194 768 2,210
    Milk premium 96 609 1,824 4,825 6,425 9,540
Compensation payments (partially from Budget) 4,647 4,311 3,710 5,943 13,854 2,800
    Tobacco quota (by TEKEL) 0 0 1,596 4,261 6,033 0
    Tobacco premium (by TEKEL) 0 4,028 1,351 0 5,410 0
    Cotton premium (by Ziraat Bankasi) 4,647 0 0 0 0 0
    Tea pruning project (by Ziraat Bankasi) 0 283 763 1,682 2,411 2,800
Livestock incentive payments (from Budget) 457 883 584 118 2,045 72
    Meat premium 0 129 146 0 12 0
    Animal husbandry based on projects 99 590 205 46 59 3
    Artificial insemination 0 0 0 0 0 0
    Contractual animal husbandry 348 78 0 0 0 0
    Imported breeding stock 2 60 215 40 1,938 66
    Certified animal husbandry 9 26 18 32 37 3
Total payments 50,603 58,226 78,794 223,133 697,012 876,331
    Total payments/GNP (%) 2.5 1.5 1.0 1.5 2.4 1.8
Memo:
    GNP (TL trillion) 1,997 3,888 7,855 15,125 29,054 49,079
a Costs associated with transfers to state economic enterprises through Budget appropriations.
b Includes own requirement and support purchases.
Source: Government of Turkey.
Concessional credit
24. Farmers continue to benefit from loans extended at concessional rates:  in 1997 the rates
were 35 and 46 percentage points below the commercial rates for crops and livestock, respectively.
Since December 1995, farmers co-operatives (ASCUs) have benefited from even lower interest rates
(40-90 percentage points below commercial rates) for the purchase of selected commodities.  The
loans are channelled to the ASCUs, which are pr oducer-owned bodies with statutory powers, through
the state-owned Agricultural Bank (Z.B.) (hazelnu ts, cotton and sunflower) or to the state-ownedTurkey WT/TPR/S/44
Page 109
Turkish Grain Board (TMO) (cereals) or to the C AYKUR (tea).  In addition, the livestock sector
benefits from three recently introduced programmes, providing mainly subsidized loans.13
Other input subsidies
25. Fertilizer subsidies are also a substantial budget item (Table IV.6).  On presentation of
receipts for the purchase of fertilizers, the state-owned Agricultural Bank (Z.B.) refunds farmers at a
fixed amount per kg. output.  Up to the end of November 1997, farmers were refunded at the rate
of 50% of their buying price.  The new system, which is not indexed, should over time be less costly
as inflation erodes the value of the transfer.  Under a subsidy mechanism for pesticides, farmers are
refunded at the rate of 20% of their buying price.
26. Part of the cost of the operation and maintenance of irrigation schemes operated by the State
Hydraulic Works (DSI) was transferred to user associations in 1993.  In schemes managed by theDSI, users pay an annual fee approved by the Government, but this fee has not been adjusted for
inflation since 1985 and is currently negligible.  Furthermore, the collection rate from farmers is
low (41%).
27. Specific subsidies are periodically provided on a temporary basis (generally for one year) to
vineyard plants in less favoured areas according to a Government Communiqué, dating back to 1992,and to low-income milk farmers in order to increase productivity.
14
Other internal measures
28. Limits are placed on the extent of the area planted with tobacco, and tea plantations are
subject to pruning requirements to control output and improve quality.  Farmers affected by these
supply control measures are provided with compensation payments.  The livestock incentive
payments, which have varied in recent years, are estimated to account for a negligible share of
expenditure in 1998.  In 1997, payments were mostly made to livestock farmers to compensate for theslaughter of animals for sanitary reasons.  Most farmers pay no levies on the production of
agricultural products, and are exempt from income tax.
15  There is a withholding tax of 2 to 4% on
sales, but this is halved if the marketing is done through the commodity exchanges.
(iii) Planned reforms
29. Changes in agricultural policies are being made in the light of Turkey's obligations under the
WTO and the CUD between the EU and Turkey.  As  noted above, Turkey's obligations under the
WTO regime cut budgetary outlays for export subsides by 24%, and the volume of subsidized exports
by 14% between 1995 and 2004, in equal instalments.  Moreover, Turkey has bound all its
agricultural products, and is making a minimum reduction of the tariffs of 10% on a
product-by-product basis, and a 24% reduction on average.  The reductions are being implemented inequal annual instalments over the 1995 to 2004 period.
                                                     
13 The programmes are:  (i) low-interest loans for the procurement of feeder cattle (valued at
TL 1 trillion or US$22 million);  (ii) low-interest loans for general livestock development in eastern and south-
eastern Turkey (TL 2 trillion or US$44 million);  and (iii) subsidized loans for the purchase of cattle for both
breeding and slaughtering (TL 14.4 trillion or US$288 millio n) and subsidize feed and other inputs to small
livestock farmers (TL 3.6 trillion or US$72 million) (OECD, 1996, p. 74).
14 WTO document G/AG/R/11, 28 July 1997.
15 Farmers with incomes below TL 864 million (in 1997) are exempt from taxation.WT/TPR/S/44 Trade Policy Review
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30. While the CUD applies only to manufactures (including agrochemicals) and processed
agricultural products, Turkey and the EU have also agreed to work towards free circulation in
agricultural products.  However, before this can take place, Turkey will need to adapt its agricultural
and trade-related policies to those of EU CAP.  At present, agricultural trade between Turkey and the
EU is subject to a preferential regime with limited coverage, delaying the exposure of the sector to
greater competition.16  To align its agricultural policies with those of the EU, Turkey will need to
establish Common Market Organizations (price support systems) for certain agricultural products, as
under the CAP.   Meanwhile, processed agricultural products imported into Turkey are subject to
customs duties comprising an industrial and an agricultural component; the industrial share enjoys
duty-free treatment while the agricultural component will continue to be subject to customs duty.17
(3) ENERGY
(i) Main features
31. The energy sector accounts for an increasing share of GNP (from 2% in 1990 to 3% in 1997)
and fuel remains an important import item (US$5 billion in 1997 or 10% of merchandise imports
(Table AI.5)).  As a share of net imports, Turkey's total energy requirements have steadily increased,
amounting to some 55% in 1996 (Table IV.7).  In spite of a decrease in relative terms, petroleumremains the major fuel, providing some 46% of Turkey's total energy requirements.  Coal is also an
important fuel source, providing 27% of requirements  (17% by lignite or brown coal and 10% by hard
coal).  Natural gas has only recently been made available in Turkey.  Demand for natural gas is
projected to increase substantially over the coming years, with imports covering the increased
demand.
32. The Government plays a prominent role in the energy sector.  The state economic enterprises
(SEEs) dominate the market and most prices are regulated (Table IV.8).  In the hard coal sector,prices do not cover the cost of supply.  After years of operating losses, Turkish Lignite Enterprises
(TKI) made a profit in 1995 due to price increases and cost reductions.  In the oil sector, the
Government until recently set ex-refinery prices and did not systematically increase oil product prices
in line with the cost of supplies;  in consequence, the state economic enterprise, TUPRAS, made
periodic losses.  In July 1998, the Government launched a new price fixing system for petroleumproducts, whereby prices are fixed in line with world market prices.  In the natural gas sector, there
are cross-subsidies between industries and households in favour of the latter.  Most of the SEEs rely
on the Treasury for the financing of their investments as well as resource transfers for the financing of
losses.
                                                     
16 OECD (1996).
17 The agricultural component of each good is calculated by multiplying the quantity of primary
agriculture products used in processing, according to an ag reed set of ratios, by a specific rate charge (so called
"basic amount").  These basic amounts vary by commodity, and will be reduced proportionally in line withsubsequent reductions in actual duties on primary agricultural commodities (OECD, 1996, p. 75).Turkey WT/TPR/S/44
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Table IV.7
Turkey's energy balances, 1973-2010
(Million tonnes of oil equivalent)
1973 1990 1994 1996 2000 2010
Total production 15.62 25.12 25.06 26.92 31.09 52.70
Coala5.28 11.72 12.11 12.30 16.15 28.23
Oil 3.69 3.90 3.87 3.68 2.85 1.19
Gas 0.00 0.19 0.18 0.19 0.56 0.12
Comb. renewables & wastesb6.41 7.21 7.11 7.05 6.96 7.16
Nuclear 0.00 0.00 0.00 0.00 0.00 3.66
Hydro 0.22 1.99 2.63 3.48 3.76 7.34
Geothermal 0.00 0.09 0.12 0.16 0.69 4.64
Solar/Wind/Otherc0.00 0.02 0.05 0.08 0.12 0.36
Total net importsd9.02 28.48 33.72 36.49 59.94 122.38
CoalaExports
Imports
Net Imports0.00
0.01
0.010.00
4.56
4.560.00
4.76
4.760.00
5.20
5.200.00
8.08
8.080.00
25.44
25.44
Oil Exports
ImportsBunkers
Net Imports0.86
9.960.09
9.012.03
23.40
0.36
21.022.23
25.69
0.40
23.061.85
29.48
0.46
27.170.00
35.38
0.00
35.380.00
49.45
0.00
49.45
Gas Exports
Imports
Net Imports0.00
0.00
0.000.00
2.96
2.960.00
4.89
4.890.00
7.13
7.130.00
16.47
16.470.00
47.49
47.49
Electricity Exports
ImportsNet Imports0.00
0.000.000.08
0.02
-0.060.05
0.00
-0.050.03
0.02
-0.010.00
0.000.000.00
0.000.00
Total stock changes 0.27 -0.95 -0.10 0.38 0.00 0.00
Total supply (TPES) 24.46 52.63 58.68 66.89 91.03 175.07
Coala5.24 16.38 16.76 18.00 24.23 53.67
Oil 12.60 23.90 27.14 30.94 38.24 50.64
Gas 0.00 3.11 4.92 7.19 17.03 47.61
Comb. renewables & wastesb6.41 7.21 7.11 7.05 6.96 7.16
Nuclear 0.00 0.00 0.00 0.00 0.00 3.66
Hydro 0.22 1.99 2.63 3.48 3.76 6.67
Geothermal 0.00 0.09 0.12 0.16 0.69 4.64
Solar/Wind/Otherc0.00 0.02 0.05 0.08 0.12 0.36
Electricity Tradee0.00 -0.06 -0.05 -0.01 0.00 0.00
Shares (%)
Coal 21.4 31.1 28.6 26.9 26.6 30.7
Oil 51.5 45.4 46.3 46.3 42.0 28.9
Gas 0.0 5.9 8.4 10.7 18.7 27.2
Comb. renewables & wastes 26.2 13.7 12.1 10.5 7.6 4.1
Nuclear 0.0 0.0 0.0 0.0 0.0 2.1
Hydro 0.9 3.8 4.5 5.2 4.1 4.3
Geothermal 0.0 0.2 0.2 0.2 0.8 2.7
Solar/Wind/Other 0.0 0.0 0.1 0.1 0.1 0.2
Electricity Trade 0.0 -0.1 -0.1 0.0 0.0 0.0
a Includes lignite and peat.
b Comprises solid biomass and animal products, gas/liquids from biomass, industrial waste and municipal waste.
c Other includes tide, wave and ambient heat used in heat pumps.d Total net imports include combustible renewables and waste.
e Total supply of electricity represents net trade.  A negative number indicates that exports are greater than imports.
Source: Data supplied by the Government of Turkey.WT/TPR/S/44 Trade Policy Review
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Table IV.8
Selective State interventions in the energy sector
State-economic enterprise Market share Price regulation Other
Oil & Gas:
Turkish State Petroleum
Company (TPAO): productionand explorationProduces 73% of Turkish oil
(1995); owns and operatesseven out of eight gas fields.Price of crude oil is set by the
Government.Oil producers may only export up
to 35% of oil production from newreservoirs.
Turkish Petroleum RefineryCorporation (TUPRAS)
a: refiningOwns four out of five
refineries;  85% of total
capacity.Ex-refinery oil product price is
set in line with Italian c.i.f.
price in a band of plus or minus
3%.The price system was introduced in
July 1998.
Petrol Ofisia: oil products
distribution and marketingMarket share of about 50%
(1996); 12 other distribution
companies operating in
Turkey.At the distribution level, prices
of oil products are market
determined.Oil product importers must hold
stock of minimum 90 days of
annual imports. Distribution
companies must hold stock ofminimum 10 days.
Botas: import, distribution andsale of oil and gasLegal monopoly status. Botas sets price of natural gas,
except in the cities.  Fertilizerindustry is charged the least.
Coal:
Turkish Hardcoal Enterprises(TTK): hard coalSole producer of hard cole. Prices set by TTK and the
Government may influence the
prices.Heavily subsidized.
Turkish Lignite Enterprises
(TKI): ligniteProduces 60% of Turkish
lignite (1995).Prices set by TKI and the
Government may influence the
prices.
Electricity:
Turkish Electricity Generating
and Transmission Corporation
(TEAS): generation and transportOwns 74% of electricity
generation capacity (1995).Prices set by TEAS are
influenced by Government
policies.TEAS's and TEDAS's operating
rights are being transferred to
private sector.
Turkish Electricity Distribution
Corporation (TEDAS):
distributionOwns and manages the main
distribution lines.Prices set by TEDAS are
influenced by Government
policies.
a TUPRAS and Petrol Ofisi have small private shareholdings (3.6% and 6.7%, respectively).
Source: WTO Secretariat based on information provided by the Government of Turkey;  and the International Energy Agency (1997),
Energy Policies of IEA Countries - Turkey 1997 Review, Paris.
33. With the objective of meeting energy demand, improving the functioning of the sector, and
reducing transfers to the SEEs, the Turkish electricity sector - which is over 90% state owned - is a
primary target of the privatization programme.  However, legal disputes have caused delays in the
implementation of the BOO/BOT schemes, which are be ing used to draw the private sector into large
scale infrastructure projects.18   The Government has decided to sell the operating rights for lignite
mines, electricity plants, and distribution plants in the electricity sector.  State petroleum distributionand refining industries are also slated for privatization.
                                                     
18 Under the BOT (build, operate and transfer) sche mes, private investors recover their costs for
building a plant through operating it for a certain period before handing it back to the Government, while underthe BOO (build, operate and own) schemes, ownership remains with the private investor.Turkey WT/TPR/S/44
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(ii) Policy objectives and instruments19
34. Issues related to energy and mining are under the responsibility of the Ministry of Energy and
Natural Resources (MENR), whereas issues related to quarrying are under the responsibility of the
Ministry of Interior.  The General Directorate of Mining Affairs is responsible for the administration
of the Mining Law on behalf of the MENR.  Th e State Planning Organization (SPO) evaluates
Turkey's energy needs in consultation with the MENR and the relevant SEE and makes annualinvestment decisions, while the Privatization Administration is responsible for the sale of
state-economic enterprises, preparing them for privatization.
35. Tariffs are not a barrier to trade in the energy sector.  The simple average MFN tariff in
mining and quarrying (ISIC 2) is only 0.2%, dow n from 21.4% in 1993 (Table AIV.1).  Imports from
EU/EFTA are free of duty.  The Mass Housing Fund levy has been gradually abolished since theprevious Review, while the minerals levy of 2.5%, which had been applied since 1985 on imports of
minerals used for energy production, metallic minerals, industrial minerals and precious stones to
finance the Mining Fund, was abolished on 27 January 1996.
20  Concessional credits were extended
through the fund, at the same rates as export credits to finance stockholding prior to export.
36. According to Mining Law No. 3213, foreign na tionals and companies may invest in the
mining sector only through locally incorporated companies.  In the petroleum subsector, foreign
enterprises may invest in marketing and sales activi ties without restriction.  In petroleum exploration,
they may invest provided they are not controlled or owned by foreign States.  Petroleum-related
activities can be carried out through locally incorporated stock companies or Turkish branches of
stock companies incorporated abroad.  For investment in refining, transportation through pipelines
and storage, approval by the Council of Ministers is required.  Investments in all minerals are open to
foreign investors, except baron, uranium and thorium, where exploration and exploitation are reservedfor the Government.
37. A number of sector-specific incentives are offered to national and foreign investors on an
equal basis.  In order to provide financial support to power projects and to maintain stability of
electrical energy prices, the Electrical Energy Fund (EEF) was established in March 1990 under
Law No. 3613.  In 1997, the EEF's resources were TL 6.5 trillion (equivalent to US$43 million).Financial support in the form of credits is provided through the fund for hydro and thermal projects.
Hydro power projects also receive the following incentives:  (i) if the energy generation amount is
less than expected due to insufficiency of natural ra te of flow, the EEF pays a portion of the tariff;  (ii)
if the company does not generate energy due to force majeure , the EEF pays the tariff;  (iii) the above
EFF payments are reflected as an increase to the tariff and repaid by the Turkish ElectricityGeneration and Transmission Corporation (TEAS) to the EEF;  (iv) if the concession agreement is
terminated due to force majeure , the equity of the company not repaid through the tariff is paid by the
EEF;  and (v) if the concession agreement is terminated due to force majeure  or company default, the
debt not repaid through the tariff is assumed by the EEF.  Support is also extended to electricity
related companies for R&D activities, planning, projecting and controlling studies, patent and licenceapplications, and know-how and marketing activities.
38. In 1985 a Mining Fund was established (Article 34 of Law No. 3613) under the supervision of
the Ministry of Energy and Natural Resources to provide financial credits for exploration, technical
research, development, project preparation, installation, construction, production and export activities.
There are currently five types of schemes providing credits at rates well below market rates
(Table IV.9).  Five per cent of gross profits obtained from a mining operation  are payable to the fund.
                                                     
19 This sector draws on the International Energy Agency (1997).
20 WTO document WT/BOP/W/6, 11 September 1995.WT/TPR/S/44 Trade Policy Review
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Other resources include:  transferred deposits;  revenues obtained by selling confiscated ore and
material;  public auction revenues;  and a budget allowance.
Table IV.9
Credit  schemes through the Mining Fund, June 1998
Scheme General features Nominal interest rate
A. Mine research and development Maximum three year credit;  no repayment on principle for the first
year; amount cannot exceed 50% of expenditure on exploration
and definition of  mineral reserves and other properties in thepermitted area50%
B. Installations, enlargement and
developmentMaximum five year credit; no repayment on principle for the first
two years; amount is proportional to self-source rate; credit covers
expenditure on expansion of facility, for enlargement and
renovation investment, and for infrastructure expenditure in thepermitted area55%
C. Management (operating) credit Maximum three year credit; no repayment on principle for the first
year55%
D. Export credit 50%
(i) Export credit One year credit; 50% of total expenditure to meet the needs of
production and exports of the mineral
(ii) Letter of credit of export
certificate creditSix month credit period; maximum 50% of the letter of credit; the
credit is to supply the finance until the export of the mineral
E. Stock credit Stock credit maximum 20-40% of the stock cost for minerals
produced and prepared50-60%
Note: All credits require a bank guarantee letter, covering one and a half times the credit amount.
Source: WTO Secretariat based on information provided by the Government of Turkey.
(b) Oil and natural gas
39. There are four SEEs in the oil sector: the Turkish State Petroleum Company (TPAO), the
Turkish Petroleum Refinery Corporation (TUPRAS), Petrol Ofisi and Botas.  Although only Botas
has legal monopoly status (on import, distribution and sale of oil and natural gas), the other three
SEEs all have the largest shares in their respecti ve markets (Table IV.8).  Oil resources are owned by
the State, which grants licences for exploration and production.  There are 25 companies in the
upstream oil sector in Turkey, located mainly in the south-east of the country where the fields produceheavy and high sulphur content oil.  Almost three quarters of domestic oil production is  accounted for
by TPAO, with foreign operators (including Shell and Mobil) accounting for the remainder.  There are
eight gas fields, seven of which are owned and operated by TAPO.  Out of Turkey's  five refineries
with a total capacity of 32 million tonnes, TUPRAS  owns four and accounts for more than 85% of
total capacity.  In distribution, there are 13 active companies, with the national distributor companyPetrol Ofisi accounting for about half of the market share.
40. Several prices in the oil and gas sector are not determined by the market (Table IV.8).  The
Government also intervenes in other areas in the oil sector.  For example, domestic oil producers are
only allowed to sell up to 35% of their oil production on the international market.  Moreover,
according to Decree No. 89/14264, all oil product importers are obliged to hold emergency productstocks of at least 90 days of their annual imports.  Since August 1995 distribution companies are
obliged to hold stocks equivalent to at least ten days' consumption.
41. In the early 1990s, the Government decided to privatize TUPRAS and Petrol Ofisi.
Currently, the share of the private sector is 3.6% for Tupras and 6.7% for Petrol Ofisi.  The
Government is considering liberalizing the importation, transportation and distribution of natural gas.Eventually, the Government plans to establish an independent regulator to handle access to pipelines
and pricing issues.Turkey WT/TPR/S/44
Page 115
(c) Coal
42. Coal (mainly brown coal or lignite) is a major fuel source and Turkey is a major producer.  In
the brown coal sector, the Turkish Lignite Enterprises (TKI) produces some 60% (1995) of all lignite
in Turkey.  Turkish brown coal has a low calorific value and a high sulphur, dust and ash content,
while Turkish hard coal is low grade.  The state economic enterprise Turkish Hardcoal Enterprises
(TTK) is the only hard coal producer.
43. The state economic enterprises in the coal sector set the prices of hard coal and lignite, taking
account of world prices of hard coal.  However, these prices do not allow the TTK to recover its costs.
The Government may influence the prices for social and economic reasons.
44. Recently, the Government has tried to increase productivity in the coal sector.  TTK's
workforce was reduced from 34,000 in 1990 to 21,500 in 1995.  The Government is transferring to theprivate sector the operational rights for most of TTK's profitable lignite mines.  The workforce of TKI
also decreased, from 27,855 in 1990 to 12,192 in 1995.
45. Hard coal production is heavily subsidized.  According to the producer subsidy equivalent
(PSE) method, total subsidies paid by the Treasury to TTK amounted to TL 12.2 trillion (equivalent to
US$267 million) in 1995, up from TL 0.2 trillion in 1990 (equivalent to US$24 million).  Deficitgrants to cover losses not benefiting current production increased substantially in 1995.  In 1995, total
subsidies amounted to the equivalent of TL 489 million (US$9,600) per employee.
(d) Electricity
46. Turkey has diversified the fuel mix used for its increased electricity generation.  The share of
oil in total electrical capacity has decreased substantially, while lignite and hydro-electric power have
increased their share.  Natural gas also become an important fuel for electricity generation.  Overall,
the growth in non-hydro capacity has not kept pace with the growth in overall electricity demand,resulting in a situation where electricity production has become sensitive to weather conditions.
However, since 1990, Turkey has been a net-exporter of electricity despite some localized shortages
(Table IV.7).
47. Electricity generation, transportation and distribution is primarily dominated by large SEEs.
In 1995, the Turkish Electricity Generation and Transmission Corporation (TEAS) owned some 74%of electric generation, while the Turkish Electricity Distribution Corporation (TEDAS) owned and
managed the main distribution lines.  The prices charged by TEAS and TEDAS are influenced by
government policies.  For example, the Government uses energy prices to achieve social objectives
and, in the past, the selling price of electricity has not allowed the TEAS and TEDAS to make the
necessary investment.  This is exacerbated by the fact that more than 7% of electricity consumption isnot paid for by customers.  However, a TEAS-Wor ld Bank project team has been working on a new
pricing model which takes account of the long-run marginal costs of generation, transmission and
distribution.
48. The lack of adequate investment and large energy wastage have led to power shortages in
some areas.  Increasing the country's electricity generating capacity is a top priority for theGovernment, which is now turning to the private sector for new investment and restructuring of the
sector.  Parliament passed new laws in 1994 to  encourage investment in BOT projects through
measures such as exemption from certain duties and a Treasury guarantee for the execution of the
power purchase agreement.  However, in February 1995, the court ruled that all BOT projects had to
be reviewed by the country's highest administrativ e court, the Council of State.  To speed up the
process, the Government decided to turn to BOO schemes and issued a Decree in June 1996.  TheWT/TPR/S/44 Trade Policy Review
Page 116
programme once again experienced a set-back in March 1997 when the Decree was declared illegal.
In July 1997 a law on BOO programmes was adopted by the Parliament.  Between 1984
and June 1998 there were only six hydro-electric pl ants and one thermal power plant built and run
under the BOT programme. At the beginning of 1999, three combined-cycle natural gas power
projects with a total capacity of 1,135 MW are expected to be in operation.  The operating rights of
both TAES and TEDAS are being transferred to the private sector as part of the privatizationprogramme.
21  The operating rights of the thermal power plants have been transferred to the private
sector for a period of 20 years, while that of the distribution foundations have been transferred for 30
years.  Turkey plans to commission a nuclear power plant at the beginning of the next century; an
international tender was opened in December 1996 for the building of the plant.
(4) MANUFACTURING22
(i) Main features
49. The Turkish manufacturing sector has experienced strong growth since the initiation of the
structural reform programme in the early 1980s, but has suffered from periodic recessions, the most
recent in 1994.  Over the period 1981 to 1996, annual real growth amounted to some 6.5% and
manufacturing now accounts for about one quarter of GDP.  Private investors have gradually movedinto more sophisticated areas such as consumer electronics and the automotive industry.  The
composition of Turkey's manufacturing sector and international trade reflects its strength in labour-
intensive production: almost one third of manufacturing value added is in the textiles and leather, and
food, beverages and tobacco sectors (Table IV.10).  Similarly, manufacturing exports (accounting for
some three quarters of total merchandise exports) mainly consist of textiles, clothing and food.  On
the other hand, imports of manufactured products (72% of total merchandise imports) are
concentrated in the more capital intensive industrial chemicals, and transport equipment sectors.
50. The State continues to play an important role in manufacturing production:  the share of state
economic enterprises (SEEs) in GDP (at constant prices) expanded from 9% in 1993 to 11% (1995).
Over the same period, the manufacturing sector accounted for an increasing share of the SEEs' total
output (from 26 to 38%) (Table III.21).  SEEs have significant shares in heavy industries, such as
petroleum refineries, non-ferrous basic metals, industrial chemicals, and iron and steel basic metals,but also extend to such fields as tobacco and beverages (Table IV.10).
                                                     
21 Law No. 3096 of December 1984 removed the exclusive rights of TEK, a state economic enterprise
that was split up into TEAS and TE DAS in 1994, to supply electricity, an d authorized private operators to
generate, transmit, distribute and trade electricity.  Acco rding to the Law, the term of the contract may be up
to 99 years, but contracts generally last 15 to 20 years and the plant is then to be transferred to the Government.
22 Unless otherwise indicated, the ISIC classifica tion of industry is used throughout the section.Turkey WT/TPR/S/44
Page 117
Table IV.10
Overview of the manufacturing industry, by ISIC category
(Per cent)
Share of
manufacturingShare of
manufacturingShare of
manufacturingShare of
manufacturing
Description (ISIC No.) value added employment imports exports
1990 1994 1990 1994 1990 1997 1990 1997
Food, beverages and tobacco (31) 16.0 (47.1) 14.8 (26.9) 18.0 (45.9) 18.0 (39.9) 7.4 4.7 15.7 15.2
    Food (311-312) 8.8 (25.9) 8.4 (22.8) 13.3 (37.4) 10.8 (26.0) 5.5 4.5 15.3 14.4
    Beverages (313) 3.1 (51.3) 2.6 (34.6) 1.4 (36.8) 1.2 (36.7) 0.1 0.1 0.2 0.3
    Tobacco (314) 4.0 (89.8) 2.2 (43.8) 3.3 (84.1) 2.8 (83.3) 1.8 0.1 0.2 0.5
Textiles, clothing and leather (32) 14.9 (7.1) 17.3 (3.5) 29.1 (11.5) 30.8 (8.5) 4.4 7.5 43.2 43.0
    Textiles (321) 11.2 (8.4) 12.5 (3.5) 20.3 (13.8) 19.9 (10.0) 3.6 6.1 25.8 30.6
    Clothing (excl. footwear) (322) 3.3 (1.3) 4.3 (2.3) 7.6 (3.3) 9.5 (4.0) 0.0 0.4 16.2 10.8
    Leather & leather products (323) 0.2 (0.0) 0.3 (10.8) 0.5 (0.0) 07 (19.3) 0.7 0.8 0.9 0.9
    Footwear (324) 0.2 (33.0) 0.2 (14.5) 0.6 (44.6) 0.6 (17.2) 0.1 0.2 0.2 0.6
Wood and wood products (33) 0.9 (25.4) 0.9 (11.0) 1.8 (32.3) 2.2 (21.3) 0.3 0.5 0.5 0.6
    Wood & cork products (331) 0.6 (36.4) 0.5 (19.7) 1.4 (42.6) 1.4 (32.7) 0.2 0.2 0.3 0.3
    Furniture & fixtures (332) 0.3 (0.0) 0.4 (0.1) 0.4 (0.0) 0.8 (0.3) 0.1 0.3 0.2 0.3
Paper, printing and
 publishing (34)3.4 (22.9) 3.9 (14.0) 3.6 (39.9) 3.6 (31.6) 1.9 2.3 0.6 0.7
    Paper & paper products (341) 1.9 (34.7) 1.9 (22.1) 2.2 (54.6) 2.1 (44.7) 1.7 2.0 0.5 0.5
    Printing, publishing & allied
    industries (342) 1.5 (7.8) 2.0 (6.0) 2.0 (6.0) 1.5 (13.6) 0.2 0.2 0.1 0.2
Chemicals, petroleum, plastics &
rubber products (35) 29.9 (59.6) 26.8 (52.2) 9.9 (41.7) 9.6 (25.8) 24.9 21.8 11.6 8.1
    Industrial chemicals (351) 4.9 (39.0) 5.0 (46.8) 3.2 (100) 2.6 (54.0) 14.8 12.7 5.6 2.3
    Other chemical products (352) 5.0 (2.4) 6.0 (2.0) 2.8 (8.4) 2.8 (7.5) 3.9 4.9 2.3 2.9
    Petroleum refineries (353) 15.7 (100) 11.4 (100) 0.5 (100) 0.5 (100) 4.8 2.7 2.8 0.7
    Petroleum & coal derivs. (354) 1.6 (4.3) 1.1 (1.8) 0.5 (24.6) 0.5 (30.2) 0.1 0.2 0.0 0.0
    Rubber products (355) 1.6 (0.7) 1.9 (1.4) 1.3 (3.0) 1.4 (10.0) 0.9 0.7 0.7 1.4
    Plastic products n.e.c. (356) 1.1 (1.8) 1.5 (3.4) 1.6 (1.5) 1.8 (1.2) 0.4 0.6 0.2 0.8
Non-metallic products (36) 8.2 (11.9) 7.6 (5.1) 7.6 (15.9) 6.9 (9.9) 1.5 1.0 3.6 3.8
Basic metal (37) 6.9 (33.3) 9.3 (38.7) 8.4 (58.8) 6.8 (56.6) 13.1 10.5 15.3 10.8
    Iron & steel basic metal (371) 4.9 (36.1) 8.1 (37.3) 6.4 (59.9) 5.5 (58.4) 10.1 8.0 13.2 9.2
    Non-ferrous basic metal (372) 2.0 (26.6) 1.1 (49.1) 2.1 (55.3) 1.3 (49.0) 3.0 2.5 2.1 1.5
Fabricated metal products,machinery & equipment (38)
19.5 (6.1) 19.2 (5.3) 21.1 (15.0) 21.3 (11.7) 45.6 50.4 9.3 16.6
    Fabricated metal products (381) 3.1 (4.7) 2.9 (6.0) 4.1 (6.1) 4.4 (6.7) 1.8 2.3 1.5 2.3
    Machinery & equipment (incl.
    prof. & scientific equi.)
    (382-383, 385) 10.4 (6.3) 10.1 (4.6) 10.4 (14.8) 9.9 (11.6) 33.0 32.4 5.7 9.4
    Transport equipment (384) 6.0 (6.6) 6.1 (6.1) 6.5 (21.1) 7.0 (15.0) 10.8 15.7 2.2 4.9
Other manufacturing (39) 0.3 (3.9) 0.3 (8.0) 0.5 (9.6) 0.6 (10.5) 0.9 1.4 0.3 1.2
Note: Data in parenthesis show public sector share.  Private sector data for 1990 include only establishments where 25 or more p ersons
are engaged and data for 1994 include establishments of ten or more
Source: WTO Secretariat calculations based on data provided by the State Institute of Statistics;  State Institute of Statistics  (1997),  1996
Statistical Yearbook of Turkey, February, Table 216;  and UNSD, Comtrade database.WT/TPR/S/44 Trade Policy Review
Page 118
(ii) Policy instruments
51. One of the most notable achievements since Turkey's previous Review is the sizable reduction
of applied tariffs, which are now the main border measure.  Moreover, the virtual elimination of the
MHF levy has simplified the calculation of total taxes payable on imports and thus improved the
transparency of protection for manufactures.23  As a result of the customs union between Turkey and
the EU, Turkey eliminated tariffs and levies on manufactured imports from the EU on 1 January 1996and applied the EU common external tariff on imports from third countries.
24  Except for a few tariff
peaks (food, beverages and tobacco products) import protection is now moderate (Chart IV.4).  The
simple average MFN tariff (ISIC 3) has been reduced by more than half from 26.7% in 1993 to 11.8%
in 1998 (Table AIV.1), well below the bound 1998 rates (Chart IV.5).  However, the standard
deviation, which measures tariff dispersion (and, hence, neutrality in the allocation of resources acrosssectors), has increased from around 13 to 24 percentage points over the same period.  Overall, the
manufacturing sector shows negative tariff escalation from raw materials to semi-processed products:
the simple average MFN tariff is 19.4% for raw materials and 7.3% for semi-processed products.
However, certain industries – such as non-metallic mineral products; textiles, clothing and leather
industries; and wood and wood products – show substantial tariff escalation, with protection morethan doubling from the first to the last stage of  production (Chapter III (2)(ii)).  These large
differences in tariffs between different stages of processing are also indicative of distortions in
resource allocation.
52. Other border measures include import quotas, but these affect only a small share of imports
(below 1% of total merchandise imports and 12.7% of textile and clothing imports in 1996).  The
CUD obliged Turkey to introduce quotas on certain textiles and clothing products, and in 1998 they
were distributed among 21 supplier countries, of which 15 were WTO Members.  Import licensingonly applies to few lines (just over 1%).  However, a large number of anti-dumping measures are in
force;  between 1989 and 1997 final measures mainly affected textiles (25% of final measures), base
metals and articles of base metal (20%) and plastics and rubber (14%).
53. On internal measures, the Government maintains a system of generous and complex state aids
to domestic producers, and the manufacturing sector is the major beneficiary.  The total cost of thegeneral investment aid programme and the export incentives amounted to some 2.3% of GDP in 1994
(latest available data).  In 1997, 63% of the total investment incentive certificates were granted to
investors in the manufacturing sector (a breakdown by  realized investment is not available).  Textiles
and clothing, followed by chemicals, were the main industry recipients, accounting for more than a
third and a tenth, respectively, of total manufacturing certificates.  The manufacturing sector is alsothe main beneficiary of duty concessions for exports as well as export credits and guarantees
(Chapter III(3)).
54. Price controls in certain sectors are intended to benefit the broad population.  However, in the
pharmaceutical industry these controls adversely affect the profitability of companies and may affect
the availability of some items.  Price controls in the food and tobacco industries have reduced tradingopportunities for competitive foreign firms.
                                                     
23 Currently the MHF levy applies only to 514 fish and fishery products at the HS 12-digit level
(Chapter III(2)(ii)).
24 Turkey will maintain rates of protection above those specified in the CET for certain "sensitive"
goods (Chapter III(2)(ii)).Turkey WT/TPR/S/44
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010203040506070
Source : WTO Secretariat calculations.Note:    Tariff averages (including Mass Housing Fund surcharge) include ad valorem  equivalents of specific, 
              alternate and formula duties, as available.Average tariff rates by ISIC categories (per cent)
Average rate  11.8%
ISIC        Description
311-312   Food products
313          Beverages314          Tobacco321          Textiles322          Clothing323          Leather products324          Footwear331          Wood products
332          Furnitures and  
                 fixturesISIC   Description
369      Other non-metallic mineral products
371      Iron and steel372      Non-ferrous metal381      Fabricated metal products382      Non-electrical machinery including             computers 383      Electrical machinery384      Transport equipment
385      Professional and scientific equipment 
390      Other manufactured productsISIC   Description
341     Paper products
342     Printing and publishing351     Industrial chemicals352     Other chemical products353     Petroleum refineries354     Petroleum and coal products355     Rubber products356     Plastic products
361     Pottery and china
362     Glass and glass productsChart IV.4                                              
Tariffs on manufactured products, 1998 (second half)WT/TPR/S/44 Trade Policy Review
Page 120
29.616.021.426.527.041.034.182.333.8
3.93.35.34.64.83.94.09.753.711.8
18.1
0 2 04 06 08 0 1 0 0Chart IV.5
Average tariff levels and bindings in manufacturing, 1998
By ISIC category (per cent)
Food, beverages and tobacco
Textiles, clothing and leather
Wood and wood products, 
including furniture
Paper, paper products,
printing and publishing
Chemicals, petroleum, coal, plastic products
Non-metallic mineral 
products
Basic metal industries
Fabricated metal products, machinery & equipment
Other manufacturing 
industriesManufacturing
MFN 1998 (second half)
Bound by 1998
 a  
Note:
Source
:Using the Uruguay Round definition of Agriculture (i.e. HS 01-24 less fish and fish products plus         
selected products) 100% of the tariff lines are bound.
Tariff averages (including MHF levy) include ad valorem  equivalents of specific, alternate and formula duties, 
as available. Applied tariffs include all tariff lines (i.e. bound and unbound lines).  When only a few lines are 
bound and/or the applied tariffs of unbound products differ  substantially from bound rates, caution needs to 
be exercised in comparing bound rates with applied rates. 
WTO Secretariat.Standard 
deviation
Bound MFNBounda
42
63
20
1614
15
14
8
9
1224
46
 4
 5 3
 3
 5
 4
 4
 545
86
13
27
38
55
35
25
55
21
55. The level of foreign direct investment is well  below Turkey's potential; investment in the
manufacturing sector has been about US$400 milion per year, accounting for just over half of the
inflows between 1993 and 1996.  Data are not availa ble on inflows by industry; however, annual data
on approved permits indicate that inflows of foreign direct investment continue to be heavilyconcentrated in machinery and equipment (46% of total manufacturing permits), as well as in food,
beverages and tobacco (16%). The likely reasons for the modest level of foreign direct investment are
political uncertainties, macroeconomic instability (inflation and foreign exchange rate), and, possibly,
government red tape.Turkey WT/TPR/S/44
Page 121
(iii) Developments in selected industries25
(a) Textiles, clothing and leather
Introduction
56. The textile industry is Turkey's largest industry (Table IV.10).  Altogether, textiles, clothing
and leather (ISIC 32) account for some 17% of manufacturing value added and provide employment
for about one third of all workers in the manufacturing sector.  A key factor behind the sector'ssuccessful performance is Turkey's ample supply of home-grown cotton: Turkey is the world's sixth
largest producer in raw cotton.  Other factors behind its success are low wage costs and strong
integration between the textiles and clothing industries.
26  In the past, the State played a significant
role, but it now accounts for only a few percent of value added.  Turkey also has substantial textile
design capabilities.
57. Turkey's exports of textiles and clothing products have performed well, accounting for
some 43% of total merchandise exports in 1997, and the composition of exports has progressively
shifted towards higher-value-added finished pr oducts and ready-made clothing.  The EU has
traditionally been the largest foreign market for bo th textiles and clothing (Chart IV.6).  However,
hopes for a surge in demand following the lifting of quotas (see below) on Turkish textiles under thecustoms union were dampened by weak growth in demand in the European economies.  Moreover, the
EU continues to apply anti-dumping measures on certain Turkish textiles and clothing products
(definitive anti-dumping duties on polyester fibres and yarns and provisional anti-dumping duties on
unbleached grey cotton fabrics).  Finally, the domestic currency may be somewhat overvalued, with
consequential negative effects on exports.  On the import side, trade in textiles and clothing is minor.
Domestic policies
58. The textiles, clothing, and leather industries do not enjoy any special sectoral incentives.
However, these industries are major beneficiaries of the incentives provided under the general
investment aid programme, such as exemption from customs duties, tax credits, corporate tax
postponement, postponement of VAT, and VAT refunds from domestically produced capital goods
and equipment.  In 1997, investors in the textiles and clothing industries accounted for 23% of the
investment incentive certificates (Chapter III(4)(ii)).  Export credit and guarantee programmes(Chapter III(3)(xii)) are also among the more important incentives provided to investors.
59. The performance of the textiles and clothing industries have suffered, in the past few years,
from volatile domestic prices for raw cotton.  To counter this problem, the private sector is working
with the Government to establish a futures market in  an attempt to help stabilize prices on raw cotton.
Another problem facing the industries, and many other sectors in Turkey, is the frequent power cuts.Moreover, the industries also suffer from high domestic prices for electricity compared with
international tariffs (Turkish rates are three times the OECD average).
27
                                                     
25 Details on food, beverages and tobacco manufacturing (ISIC 31) are provided in section (2) on
agriculture.
26 Textiles Outlook International (1997).
27 Textiles Outlook International (1997).WT/TPR/S/44 Trade Policy Review
Page 122
(a) TextilesPer centChart IV.6
Exports of textiles, clothing and leather by destination, 1997
United States
8.8
Other Europe
11.4
US$ 3.0 billionGermany
28.7
Other EU15
11.1(b) Other
Russian
Federation
7.3Other
6.3
Asia
6.7
Note:       By ISIC category.  Figures do not include "suit-case" trade.  Clothing accounts for 88% of the category
               "Other".Source
:   UNSD, Comtrade database.                  United
Kingdom
8.0
France
6.4
Italy
5.3EU15
59.6Other 
40.4United States
7.7
Other Europe
7.5Germany
36.8
Other EU15
8.3Russian
Federation
13.9Other
6.0
Asia
4.1
United
Kingdom
5.8
France
4.9
Netherlands
5.0EU15
60.7Other 
39.3
US$ 7.4 billion
Trade policies
60. Tariff protection for textiles, clothing and leather industries has traditionally been among the
highest of the economy.  However, Turkey has substantially lowered its customs duties on textiles,
clothing and leather imports as a result of the C UD.  The simple average MFN rate (including the
MHS levy) has come down from 31.8% in 1993 to 9.7% in 1998 with a standard deviation
of 4 percentage points for the industries as a whole, while the tariff reduction for individual sub-
industries follows a similar pattern (Table AIV.1).
61. On the other hand, the industries are subject to strong tariff escalation, maintaining higher
levels of effective protection to the industries than that reflected by the nominal rates (Chart IV.7).
The increase in protection from the first to the final stage of production is more than double, and
higher than under the 1993 tariff structure.
62. The CUD required that Turkey introduce import quotas on certain textiles and clothing
products.28 The quotas, which were not part of EU global quotas, were introduced under Article XXIV
of GATT 1994.  In 1998, quotas for a variety of products  (equivalent to 1,044 items at the eight-digit
level were distributed among 21 countries, of which 15 were WTO-Members (Table IV.11).29  Within
the WTO, some Members (Hong Kong, China;  India and Thailand) have expressed concern that the
restrictions are not consistent with Turkey's obligations under the GATT/WTO, and in February 1998
                                                     
28 In this context, Decree No. 95/6815 on Surveillance and Safeguard Measures on Imports of Certain
Textile Products and Decree No. 95/6816 on Surveillance and Safeguard Measures on Imports of Textile
Products from Certain Countries not Covered by Bilateral Agreements, Protocols or Other Arrangements and
their implementing regulations have been published in the Official Journal on 1 June 1995 and repealed by theRegulations published in the Official Journal on 26 December 1997.
29 The countries were: Argentina;  Brazil;  Hong Kong, China;  India;  Indonesia;  Korea;  Macao;
Malaysia;  Pakistan;  Peru;  Philippines;  Singapore;  Sri Lanka;  Thailand; and Egypt.Turkey WT/TPR/S/44
Page 123
India requested the establishment of a panel (Chapter II(3)(ii)).30  As noted above, the amount of
textiles and clothing imports is quite small (less than 6% of merchandise imports in 1997), but
Turkey's customs union with the EU may be perceived as a trading opportunity by countries wishing
to export to the EU, because once a good has been exported to Turkey it may be freely traded within
the EU.
133035
13313331
2541
1812
1911
0314
051015202530354045
01
Overall02 03 01
Textiles02 03 01
Leather02 0319981993
Source : WTO Secretariat.Note:    Clothing (including footwear) consists entirely of fully-processed products.Chart IV.7
Tariff escalation in textiles, clothing and leather, 1998 (second half)
01=Raw materials     02=Semi-processed     03= Fully processed     Per cent
63. Turkey does not auction its quotas, which would transfer the economic "rent" gained by the
quota holders to the Government as public revenues.  Instead, the larger part of the quotas are
distributed among firms that had exported the same category in the previous year (Box IV.1).  The
remaining quotas are allocated to firms that did not previously export that category of goods.  The
quota allocation licence may not be sold or transferred.
64. Under the WTO Agreement on Textiles and Clothing (ATC), which became effective
on 1 January 1995, Turkey has submitted the list of products included in the first and second phases of
integration into GATT 1994. 31  The list of the first phase of integration contains some 18% of the
volume of imports in 1990, comprising 54 six-digit items.32  The list of the second phase also covers
some 18% of the volume of imports in 1990, including 23 categories of mostly tops and yarns (16.2%
of volume imports), followed by fabrics (1.7%), clothing (0.08%) and made-up textiles products
                                                     
30 WTO documents WT/DS29/1, 15 February 1996; WT/DS34/1, 25 March 1996;
WT/DS34/1, 26 June 1997; and WT/DS34/2, 2 February 1998.
31 The sector will be integrated in GATT 1994 in four stages to be implemented by 1 January 1995,
1 January 1998, 1 January 2002 and 1 January 2005.  Each member can choose which products to integrate ateach of the four stages provided that they cover at l east one product from each of the following groupings: tops
and yarns, fabrics, made-ups and clothing.
32 WTO document G/TMB/N/44, 28 April 1995.WT/TPR/S/44 Trade Policy Review
Page 124
(0.02%).33  Furthermore, the products in category 124 were integrated into the GATT 1994
on 1 January 1998;  this category represents 29.1% of 1990 imports by volume.34  Turkey has retained
its right to use the transitional safeguard mechanis m under the provisions of the ATC (Article 6), but
has not made use of this provision.35
Table IV.11
Allocation of textile and clothing quotas to WTO member countries, 1998
Country Number of quota categories Main fibre coverage
Argentina 3 C
Brazil 10 C, M,. W
Egypt 2 C
Hong Kong, China 19 C, M, W
India 14 C, M, W
Indonesia 19 C, M, W
Korea 4 C, M, W
Macao 10 C, M, W
Malaysia 15 C, M, W
Pakistan 2 C
Peru 12 C, M, W
Philippines 8 C, M, W
Singapore 39 C, M, W
Sri Lanka 20 C, M, W
Thailand 69 C, M, W, SBOV
Note: C denotes cotton; W denotes wool; M denotes man-made fibre; and SBOV denotes silk-blends and other vegetable fibres.
Source: Government of Turkey.
65. Traditionally, a substantial share of Turkey's textiles and clothing exports (51% in 1995) have
been faced with quota restrictions. However, upon the entry-into-force of the CUD, the EU eliminated
the quotas (the so-called "consultation levels") faci ng Turkish exporters; in consequence, the share of
textiles and clothing exports still subject to quotas is estimated at less than 7%.36  However, Turkey
continues to face quotas in the United States' and Canadian markets for certain categories of textiles
and clothing, regulated by bilateral agreements (Table AIV.3).
66. In its bilateral agreement with the United States, Turkey has agreed to limit its exports of
underwear of cotton and man-made fibre fabrics.  According to the agreement, a specific limit
of 1,681,644 dozen was established for the period 28 March to 31 December 1995 (notional annual
level of 2,200,000 dozen).  From 1996 until the agreement expires on 27 March 1998, the annual
growth was set at 6%.37  The WTO Textiles Monitoring Body noted that the agreed specific limit was
substantially above the rollback level (1,291,118 dozen) envisaged in Article 6(8).38 In 1997, exports
to the United States of several products were close to quota limits (Table AIV.3).
                                                     
33 WTO documents G/TMB/N/228, 12 February 1997 and  G/TMB/N/2228/Add.1, 28 May 1997.
34 WTO document G/TMB/N/240, 18 March 1997.
35 WTO document G/TMB/N/18, 6 March 1995.
36 Textiles Outlook International (1997).
37 WTO documents G/TMB/7, 10 January 1996 and G/TMB/288, 22 July 1997.
38 WTO document G/TMB/7, 10 January 1996.Turkey WT/TPR/S/44
Page 125
Box IV.1:  The quota distribution system
The distribution of quotas is based on two systems: pa st performance (PP) and free distribution (FD).  The
larger part of the quotas is distributed as PP among firms that exported within the category in the previous
year. Firms that have not previously exported within the category or that have exported in the previous year(PP) but need more quota shares may apply for the FD quotas.  These quotas are allocated at the beginningof each month and if the quota reserved for FD is no t completely distributed then any firm can apply for a
quota.  The quota allocation licence may not be sold.
The system applies exclusive rules to "sensitive" categories, i.e. categories in which the quota level is below
demand.  The sensitive categories are announced at the beginning of each year; for 1998, sensitive
categories are 338, 339, 638, 639S, 351, 361, and 410.  Only manufacturer-exporters may apply for the FDallocation of sensitive categories.  In order to apply,  they must prove that they exported a certain part of
their PP quota share.
One of the most important criteria for both PP and FD is the distinction between exporter firms and
manufacturer-exporters.  Exporter firms are allocated 40% of their previous year's exports, whilemanufacturer-exporters are allocated 80%, as the PP allocation.  The firms have to prove theirmanufacturing capacity by means of a report to the Chamber of Commerce for the product for which theyrequire quota.  The manufacturer-exporters must also prove that they employ at least 15 persons and havecontributed to the social security fund.
A firm has to fulfil the minimum unit price (MUP) condition to be eligible to apply for a quota allocation.
The MUP is in force to encourage the exportation of  high-quality value-added products.  The MUPs are
defined and announced at the beginning of each quot a year for each category; MUPs differ by category, as
well as for PP and the FD.
Source:  Based on information provided by the Istanbul Textile and Apparel Exporters Association.
67. In its bilateral agreement with Canada, Turkey will limit its exports of trousers, shorts,
overalls, underwear, bed sheets and pillowcases.39  Quotas have been allocated mainly based on past
performance.
(b) Pharmaceuticals
68. The pharmaceutical industry (ISIC 3522) has enjoyed high growth, with an average annual
growth of 10% since 1990.  Exports of pharmaceuticals have increased during the same period, now
accounting for about 10% of chemicals manufacturing exports;  antibiotics rank first among exported
pharmaceuticals.  However, import penetration is high (18.8%).  The pharmaceutical industry in
Turkey supplies about 86% of the total drug requirement.  However, the number and volume ofimported drugs continue to increase.  These imported drugs consist of certain specific technology
products such as vaccines, medicines for cancer, insulin, etc.  Of the 160 companies active in the
sector, 33 are partially or wholly owned by foreigners.
69. The customs union with EU has brought about the harmonization of related regulations for
the sector.  In this respect, the Ministry of Health has promulgated regulations on GoodManufacturing Practices, Good Clinical Practices, Good Laboratory Practices, Bioavailability/
Bioequivalence, Packaging/Labelling, Promotion/Advertising, Drug Research and Medicinal Product
                                                     
39 WTO document G/TMB/N/180, 12  January 1996.WT/TPR/S/44 Trade Policy Review
Page 126
Registration and Stability Requirements.  Regulations on good distribution and storage practices are
under preparation.
70. The importation and exportation of pharmaceuticals are not permitted unless registered with
the Ministry of Health.  According to Law No. 2313 relating to narcotics, the 1961 United Nations
Single Convention and the 1971 Convention on Psychotropic Substances, importation and exportation
of pharmaceuticals containing controlled substances (narcotics, drugs and psychotropic substances)can only be realized by a special import or export certificate (permit) issued by the Ministry of Health.
In addition, the importation and exportation of narcotic drugs and psychotropic substances themselves
may only be effected with the permission of Ministry of Health.
71. Border protection in the sector has fallen substantially since the previous Review.  The simple
average MFN tariff (including the Mass Housing Fund levy) on pharmaceuticals, coveringsome 573 lines at the 12-digit level, has dropped from 13.7% in 1993 to only 1.7% in 1998
(Table AIV.1).
72. The production and marketing of all pharmaceuticals must be authorized by the Ministry of
Health, and pharmaceutical products and firms must be registered with the Ministry.  Prices of all
locally made products are subject to the approval of the Ministry of Health (Government Decree onPharmaceutical Pricing No. 8845 of 1984).  Prices are intended to ensure a reasonable rate of return to
pharmaceutical firms, while bearing in mind the objective of keeping drugs available to the broad
public.  In order to set ex-factory prices, the Ministry determines the margins for wholesalers (9%)
and retailers (25%).  It also limits the profits of pharmaceuticals companies to 15% on a company
basis and 20% on a product basis, and restricts promotional expenses to less than 5% of sales.  In
practice, pharmaceutical companies often discuss price increases among themselves and each
company then applies to the Ministry for the agreed price increases for all its products.
40
73. Similar restrictions on profits and promotional expenditure apply to imported
pharmaceuticals, whether imported by domestic or foreign companies.  A 14% margin of profit is
allowed on the price paid by the importer.  This margin is calculated on the exchange rate prevailing
at the time of physical import of each shipment, thereby dampening the impact of the continuing
depreciation of the domestic currency.  Foreign companies also have to register their products withthe Ministry before they can be sold.
74. As noted earlier, in practice, the pricing policy may well discourage research and
development as well as new investment in this sector, and may also limit the availability of some
items.
75. Pharmaceuticals products and processes have been excluded from patent protection
until 1 January 1999, in accordance with Turkey's commitments to the EU, but ahead of the time-
schedule envisaged in the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS).  At that date, Turkey will amend its patent law so as to provide product patent protection.
According to Article 5 bis, Annex No. 8 of the EU-Turkey Asso ciation Council Decision, Turkey will
adopt legislation or revise existing legislation to secure the patentability of pharmaceutical productsand processes before 1 January 1999.  For that reason, the Government issued a Decree and made an
amendment to the existing Patent Protection Law on September 1995, and patent protection for
pharmaceutical products and processes will be enforced in 1999.
                                                     
40 EIU (1997), EIU Views Wire, July (web-site: www.viewswire.com).Turkey WT/TPR/S/44
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(c) Iron and steel basic industries
76. Turkey is the world's 15th largest iron and steel producer.41  However, the iron and steel
industries (ISIC 371) have grown more slowly th an average manufacturing.  Crude iron output
increased from 4.9 million tonnes in 1991 to 5.3 million tonnes in 1996 and steel
from 9.4 million tonnes to 13.4 million tonnes.  Exports of iron and steel, which accounted for 9.2%
of Turkey's merchandise exports in 1997, have fallen in recent years.
77. The iron and steel industries have been exposed to moderate border protection compared to
the manufacturing sector as a whole.  In 1993, the simple average MFN tariff (including the MHF
levy) was 17.9% for iron and steel products compared to 26.7% for the manufacturing sector, while
in 1998 the corresponding numbers are 6.3% and 11.8% (Table AIV.1).  However, tariff rates
continue to rise with the level of processing.  The average 1998 MFN tariff rate on semi-processedproducts is as much as seven times more than the rate on raw material imports.  This reflects the high
dependence of the industries on imports of scrap, which is imported duty free.
78. In July 1996, Turkey signed an agreement with the European Coal and Steel Communities
(ECSC) to abolish customs duties on mutual steel tr ade.  In accordance with the agreement, free-trade
between EU/EFTA and Turkey applies to the major ity of iron and steel products (509 items at the
twelve-digit level).  Customs duties on the remaining 142 products (long products and special steels
produced in Turkey) will gradually be abolished by the end of 1998.
79. The iron and steel industries do not enjoy any special industry incentives.  The industries
account for a relatively small share (3.1% in 1997) of investment incentive certificates issued under
the general investment aid programme (Chapter III(4)(ii)).  Iron and steel manufactures accounted
for 9% of Türk Eximbank's credits in 1997.
80. The public sector accounts for about 27% (1995) of value added in the iron and steel
subsector.  Of the three SEEs active in the iron and steel sector at the time of the previous Review, the
oldest, in Karabuk, which produced some two thirds of SEE output, was sold to its employees in 1995
for the symbolic price of TL 1.  The SEE in Eregli is slated for privatization in 1998;  a tender for the
flat-steel producer had to be cancelled when it failed to attract satisfactory bids.  Alongside the two
SEEs, some 20 smaller private firms are active in the sector.
(d) Motor vehicle manufacturing
81. The Turkish motor vehicle manufacturing industry (ISIC 3843) has undergone substantial
restructuring in recent years, partly as a result of the reduction in import taxes (Table IV.12).  The
reduction in border protection as a result of the agreement with the EU has led to a surge in imports.
Imports of motor vehicles increased by 181% to 125,025 units in 1997, compared to 1996, while salesof locally manufactured cars only increased by some 21% to 219,810 units in the same year.
Nevertheless, the domestic industry, which is still heavily dependent on imported designs and some
components, is predicted to enjoy significant growth in the near future.  The number of vehicles in
Turkey per 1,000 persons is only 50, while the world-wide average is 86 and in the EU it is 350-400.
82. Overall, the Turkish motor vehicle industry consists of 19 assemblers and manufactures (of
which 12 are foreign-owned or joint ventures) operating under licences, and some 500 component
suppliers.  In the commercial vehicles sector there are 12 companies operating under licence with
foreign manufacturers.  The capacity is quite small at some 200,000 vehicles per year.  Ford (jointventure with Koc Com) is the largest.  However, the passenger car industry is much larger and
                                                     
41 EIU (1998), EIU Views Wire, April (web-site:  www.viewswire.com).WT/TPR/S/44 Trade Policy Review
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expanding.  For many years, the United States was the only supplier to the Turkish passenger car
market.  Gradually European vehicles expanded their presence with the introduction of locally
produced models by Renault (in a joint venture with Oyak) and Fiat (in a joint-venture with
Koc Com);  these now account for about 84% of car output.42  Today, as the primary producers in the
Turkish market, Renault and Fiat dominate the market for imported parts through joint-venture
partnerships and licensed production, while other foreign companies now include Opel (100% foreigncapital), Toyota (joint venture with Sabanci Com.) and Ford (joint venture with Koc Com).  Honda, in
a joint venture with Anadolu, and Hyundai, in a joint venture with Kibar, recently began production.
Two other Asian manufactures, Kia and Daewoo, are currently planning factories in Turkey to take
advantage of Turkey's relatively low labour costs and unimpeded access to the EU automotive
market.
43  However, most production is expected to remain closely linked to sales on the domestic
market.
Table IV.12
Main policies in Turkish motor vehicle manufacturing sector, 1993 and 1998
Area 1993 1998
Customs duties Above average for manufacturing industryaBelow average for manufacturing industrya
Import licensing Certificate issued by Ministry of Industry and
Trade required for most itemsNo changes
Incentives (GIAP)bPlants with a minimum of 100,000 cars
enjoyed 100% tax credits (investment
allowance)No special treatment
Export incentives Deduction of certain amount of export revenue
from taxable corporate incomeNo special treatment
Domestic taxes VAT of 23%.  In addition, motor vehicles
purchasing tax (MVPT) levied at specific rates,depending on weight, type, model and engine
capacity.  Also supplementary MVPT of 12%
and environmental fund tax of 25% of MVPT.VAT of 23% or 40%, depending on the type of engine.
In addition, MVPT levied at specific rates, dependingon weight, type, model and cylinder capacity.  Also,
supplementary MVPT of 12, 18 and 24%, depending on
the capacity of the engine, environmental fund tax of 25%
of MVPT.
a See table IV.13 for details.b General Investment Aid Programme.
Source: GATT (1994), Trade Policy Review – Turkey
;  and information provided by the Government of Turkey.
83. The motor vehicle manufacturing industry, which traditionally enjoyed higher than average
manufacturing tariffs, has been exposed to greater competition in recent years.  As a result of theintroduction of the EU CET as of 1 January 1996, border protection has dropped sharply.  For
example, tariffs on passenger cars have decreased from 58% (transport of less than ten people)
or 48.6% (ten or more people) in 1993 to 13.9 and 18%, respectively, in 1998 (Table IV.13).
However, cars with an engine capacity of less than 2000cc. will continue to receive tariff protection
above the CET level until 1 January 2001.
84. Other border measures include an import licensing system.  Most motor vehicles (six items at
the four-digit level) may only be imported against a pro forma  invoice certified by the Ministry of
Industry and Commerce (Table IV.14).
44  As noted by the authorities, these restrictions are to assure
the suitability of imported vehicles for highways.
                                                     
42 EIU (1996), EIU Views Wire, December (web-site: www.viewswire.com).
43 EIU (1998), EIU Views Wire, March (web-site: www.viewswire.com).
44 The procedure is laid out in Communiqué No. 8 of 1996, published in Official Gazette No. 22510
on 31 December 1995.Turkey WT/TPR/S/44
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Table IV.13
Selected average MFN tariffs in the motor vehicle manufacturing industry, 1993 and 1998
(Per cent)
Item HS-item 1993 1998 (second half)
Cars and vehicles:
     Motor vehicles for transport of ten or more persons 8702 48.6  (6.9) 18.0  (4.2)
     Other motor vehicles for  transport of persons 8703 58.0  (22.3) 13.9  (7.5)
     Motor vehicles for transport of goods 8704 43.7  (13.3) 15.0  (9.1)
     Chassis fitted with engine 8706 31.0  (0.0) 10.4  (5.3)
     Bodies 8707 30.0  (0.0) 5.2  (0.2)
     Parts and accessories 8708 29.4  (5.0) 4.3  (0.7)
Engines:
     Spark-ignition reciprocating or rotary internal combustion piston engines 8407 27.2  (0.0) 3.7  (0.7)
     Compression-ignition internal combustion piston engines 8408 27.2  (0.0) 4.5  (0.6)
     Engine parts for ignition 8409 10.8  (6.1) 2.9  (0.7)
Memo:   Average manufacturing MFN tariff (ISIC 3) 26.6  (12.9) 11.8  (23.6)
Note: Standard deviation is provided in parenthesis.  The tariff averages (including MHF levy) include  ad valorem equivalents of
specific, alternate and formula duties, as available.
Source: WTO Secretariat.
Table IV.14
Motor vehicles subject to import licensing, 1993 and 1998
Item HS code Status
1993 1998
Road tractors of semi-trailers 8701.20 Required Required
Other 8701.90aRequired Required
Motor vehicles for the transport of ten or more persons 8702 Required Required
Other motor vehicles for transport of persons 8703 Required Required
Motor vehicles for transport of goods 8704 Required Required
Special purposes motor vehicles, other than those principally
designed for the transport of persons or goodsb8705 Not required Required
Trailers and semi-trailers; other vehicles not mechanically
propelled; parts thereof8716 Required Required
a Except 8701.90.00.11.19
b For example, breakdown lorries, crane lorries, fire-fighting vehicles, concrete-mixer lorries, road sweeper lorries, spraying
lorries, mobile workshops, and mobile radiological units.
Source: Government of Turkey.
85. In addition to customs duties, vehicles sold on the domestic market, either through importers
or domestic producers, are subject to high domestic taxes.  Vehicles are subject to the highest of the
five VAT rates (23 or 40%, depending on the type of engine).  Moreover, the vehicles are subject to a
motor vehicles purchasing tax (MVPT), levied at a wide range of specific rates, depending on weight,type, model year and cylinder capacity and for which the  ad valorem  equivalent is not available. An
environmental fund tax, at 25% of the MVPT, is also collected, to finance environment-related
projects.
86. Automobile manufacturers are not granted any sector-specific incentives; however, as for all
investors, they have access to those offered within the framework of the general investment aid
programme (Chapter III(4)(ii)) and the export incentive programme (Chapter III(3)(xii)). They are not
regarded as a "priority" sector under the general investment aid programme, which would haveWT/TPR/S/44 Trade Policy Review
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qualified the sector for enhanced incentives.  Automobile plants producing a minimum
of 100,000 cars a year benefit from 100% tax credits, allowing investment to be deducted from the tax
base.45
87. Although not legally required, foreign companie s setting up a joint venture in the automobile
sector typically agree to incorporate a certain share of local content in their production.  For example,
in the case of the 50-50 joint venture between Honda and Anadolu - which will initiallyproduce 30,000 Civic cars - the proportion of Turkish- made parts used at the US$50 million factory
was initially set at 31% but should rise to around 70%.
46  In the case of Hyundai, which has a 50-50
joint venture with Kibar, the local content is set at  35% during the first five years, but will increase
over the years to a level of 70%.47  The Turkish authorities have not notified these arrangements to the
WTO as trade-related investment measures.
(5) SERVICES
88. In 1996, the services sector contributed 49% of GDP, employed about one third of the labour
force, and accounted for 47% of the export earnings (Chapter I).  Its expansion in recent years has
been driven mainly by transport and communications; commerce; and business and personnel
services.  Turkey has a substantial surplus on its foreign services trade, amounting to almostUS$7 billion (equivalent to 4% of GDP) in 1996;  in this respect, tourism is a major net foreign
exchange earner.
89. State involvement in several services areas is significant, and some sensitive sectors remain
closed for foreign investors.  Business in certain sectors, particularly finance and banking, must obtain
special government permission before commencing operations in Turkey.  In the telecommunications
sector, the Government owns the monopoly provider of basic services but is in the process of
divesting up to 49% of its shares.  In the meantime, the granting of licences to private operators invalue-added services has been marred by disputes for several years.  Five ports have so far been
privatized (foreign equity up to 49% is allowed), but the main ports are still owned and operated by
state-economic enterprises.  In maritime transportati on, cabotage is reserved for national flag carriers.
Registration of commercial ships is granted only to locally incorporated companies whose
management is under the control of Turkish citizens and the majority of whose voting shares areowned by Turkish citizens.  In the area of air services, the privatization (divestiture of up to 49% of
equity) of the state economic enterprise with a monopoly on international air routes has shown slow
progress.
(i) Commitments under the General Agreement on Trade in Services (GATS)
90. Turkey actively participated in the Uruguay Round services negotiations and its Schedule
provides for specific commitments in 72 activities (compared with an average of 23 for developing
countries) out of a total of 161.48  Since the conclusion of the round, Turkey has become a party to the
Interim Agreement on Financial Services reached in 1995, the 1997 Agreement on
Telecommunication Services, the 1997 Information Technology Agreement (ITA), and the 1997
Agreement on Financial Services.  Table AIV.4 contains a summary of Turkey's specific services
                                                     
45 GATT (1994b), Trade Policy Review - Turkey, Geneva.
46 EIU (1998).
47 Istanbul Chamber of Commerce (1997).
48 GATT (1994a).  The WTO secretariat has divided these activities into 12 sectors: business services;
communication services; construction and related services; distribution services; educational services;environmental services; financial services; health-related and social services; tourism and travel-related services;
recreational, cultural and sporting services; transport services; and other services not included elsewhere.Turkey WT/TPR/S/44
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commitments, excluding the 1997 Financial Services Agreement which has not yet entered into force
(a protocol is open for acceptance until 29 January 1999 and will enter into force on 1 March 1999 at
the latest).  Turkey has listed MFN exemptions under Article II of the GATS, reserving the right to
offer more favourable treatment to some WTO Memb ers applying to all sectors and in some specific
areas of business, communication, financial, and transport services (Table AIV.5).
91. The extent of Turkey's commitments vary across sectors with certain restrictions on market
access and national treatment in cross-border supply, consumption abroad, and presence of
commercial and natural persons.  In general, these commitments (excluding ITA) bind the existing
policy framework.  However, in the area of foreign direct investment, the Government has
autonomously undertaken greater liberalization than is reflected in its Schedule of specific
commitments;  according to the Schedule, foreign investment above US$150 million requires theapproval by the Council of Ministers but this requirement was removed in July 1995.  In the context
of the ITA, zero rates by year 2000 will apply to 358 tariff lines at the eight-digit level in the area of
computers, telecommunications equipment, semiconductors, semiconductors manufacturing
equipment, software, and scientific instruments.  Details on Turkey's tariffs on IT products are
provided in Chapter III(2)(ii)(f).  The major commitments made by Turkey under the 1997 FinancialServices Agreement include:  the abolition of the previous requirement to obtain permission for
acquiring 5% or more of the capital of already established intermediary securities institutions;
allowing actuaries of all nationalities to operate in services auxiliary to insurance; and no limitations
on market access for direct life insurance.  Although, not included in its MFN schedule, actuaries may
act in Turkey on the basis of reciprocity, provided they have at least three years of experience in their
country of origin and at least one year experience in Turkey.  To operate in Turkey, it is essential that
they are a member of a professional organization in the country where they operate.
92. The services sector is not included in the customs union agreement between Turkey and the
EU.  However, a working group covering services has been set up with the aim of harmonizing
policies with those of the EU.  Exploratory talk s between the Commission and the Turkish authorities
were held in March 1998, but were subsequently suspended.
(ii) Financial services
(a) Banking
93. By the end of 1997, Turkey's banking system (investment and development banks, state
banks, private domestic commercial banks and foreign banks) comprised 72 banks,
employed 152,512 workers and had assets of some US$95 billion.  All banks ope rating in Turkey are
universal banks, allowed to operate in almost all types of financial activities, including underwriting,and managing mutual funds.  They do not face any effective competition from other financial
institutions; most insurance and leasing companies are affiliated to and/or owned by banks.
94. The seven state banks (four public banks and three investment and development banks) play
an important but decreasing role, accounting for about 39% of total bank assets at the end of 1997,
down from 43% a year earlier.49  Investment and development banks do not take deposits, but rely
heavily on borrowed funds (47% of total liabilities including interbank deposits in 1997);  they
manage only a small share of total bank assets (less than 5% at the end of 1997).  The state banks take
on large amounts of preferential lending, channellin g funds to government selected sectors of the
economy: agriculture (T.C. Ziraat Bank);  and small business, and young and women entrepreneurs
                                                     
49 These sums exclude the Excluding Etibank, which was privatized in March 1998.WT/TPR/S/44 Trade Policy Review
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activities (T. Halk Bank).50  By the end of 1997, preferential lending represented 56% of total state
banks loans;  losses associated with subsidized lending have been ample (Box IV.2).
95. Private domestic banks account for about half of total bank assets (54% at the end of 1997).
Almost all of these banks are owned by families or  industrial groups, as legislation in Turkey does not
require a separation of banking and non-banking companies.  The IMF notes that this cross-ownership
of private banks with industrial enterprises may obstruct prudential supervision: regardless ofcreditworthiness there is risk of pressures on bank management to grant credit to associated
enterprises without the normal risk appraisal.
51  Foreign banks (19 at the end of 1997) manage only
about 6% of bank assets and deposits (excluding interbank deposits).  Foreign banks have typically
specialized in foreign-trade related operations.
96. According to Article 49 of the Banks Act, banks may not engage in purchase and sale of
commodities for commercial purposes (excluding trad e of minted and ingot gold).  Thus, commercial
banks are not allowed to engage in trading goods or immoveables for commercial purposes, nor
directly  in leasing.  On the other hand, investment and development banks may not accept deposits
but they may engage in trading goods or immoveables for commercial purpose, and in leasing.
Following the release of the Capital Market Board's regulations in August 1996, banks have beenallowed to engage in equity intermediation through their subsidiaries.
                                                     
50 The term preferential lending is here used for lending below-market interest rates.  As noted by the
authorities the T. Emlak Bank discontinued in 1988 its concessional credit programmes for housing andproperty development.
51 IMF (1996).Turkey WT/TPR/S/44
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Box IV.2     Preferential lending through the state banks
According to the establishment law of the state banks, the Government may direct preferential loans to
agriculture, housing and property development, small- scale business, and young and women entrepreneurs
activities.  However, the housing and property segment has de facto not benefited from preferential lending
since 1988 when the T. Emlak Bank discontinued its programme.  By the end of 1997, preferential lendingaccounted for 56% of the total state bank loans.  The losses associated with the preferential loans have beenrunning at about 1% of GNP over the past two years.
Nominal interest rate Total lending (billion TL) Expected loss (billion TL)
(%) End Oct. 1997 End of 1996 End of 1996
Agriculture 50, 57, 60 130,571 90,500 128,300
Young and women 40    9,693   4,800   6,700
Small-scale business 59, 70, 76 428,000 68,000 121,063
Total 568,264 163,300 256,063
Total/GNP (%) 1.1 0.9
The T. C. Ziraat Bank provides preferential lending to the agricultural sector.  The interest rates are fixed by
the Board of Directors of the bank.  The T. Halk Bank opens credits lines to small-scale business, and youngand women entrepreneurs.   The interest rates are fixed  by various decrees of the Council of Ministers.
The amount and sectoral allocation of preferential lending are approved by the High Board of Credits,
responsible for the arrangements of the preferential lending.  The Prime Minister or an authorized Minister isthe President of the Board.  The Board consists of representatives of the following authorities: the related
ministries, the Undersecretariat of Treasury, the Undersecretariat of Foreign Trade, the Undersecretariat ofState Planning Organisation, the Central Bank, and the Bank's board of directors.
Source:  Government of Turkey.
Regulation and prudential supervision
97. The Central Bank of the Republic of Turkey (CBRT) - the sole regulator of the volume and
circulation of the Turkish lira - is responsible for setting liquidity requirements, supervising banks,
monitoring compliance with reserve requirements, managing reserves, acting in the Turkish lira and
foreign exchange interbank markets to sustain stability, setting the monetary programme, and carrying
out open-market operations to fulfil monetary objectives.  It is also responsible for centralized riskevaluation, in particular, the setting of prudential regulations.
52  The Central Bank's objectives are
determined through consultation with the Undersecretariat of Treasury.  Of the share capital, 51% is
owned by the State.  Consequently, its board is government-appointed, and its operations are strongly
linked with government policies.53
98. Following the mini-crisis of early 1994, legislative reforms were introduced in June 1994,
which involved:  (i) an increase in the minimum paid-up capital required to open a bank
(to TL 1 trillion);  (ii) a tightening of limits on credits extended to related parties, equity participation
in non-financial institutions and real estate investments;  (iii) stronger disclosure requirements;  and
(iv) balance sheets and profit and loss statements of credit-customers whose credits
exceed TL 85 billion need to be approved by a chartered public accountant for conformity with the
                                                     
52 The Banks Association of Turkey (1995).
53 Bloomsbury (1997).WT/TPR/S/44 Trade Policy Review
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generally accepted accounting principles for statements of accountant.  Changes to the banking law
since then include an increase in the minimum paid-up capital to TL 6 trillion.
99. In February 1995, the definition of capital to asset ratios were changed in terms of
risk-weighted assets, in conformity with internat ional standards.  The net open position in foreign
currency a bank may hold were limited to no more than 50% of its net worth; the new limit exceeds
the EU standard, which ranges between 20% and 40%.  Exchange rate indexed assets and liabilitiescarrying a 50% weight and five investment banks (three of which are state-owned) are exempt from
this regulation.
100. Banks established in Turkey are subject to Banking Law No. 3182 of 1985 and the provisions
of other laws pertaining to banks.  The establishment of a bank in Turkey or the opening of the first
branch by a bank founded in a foreign country requires the authorization of the Council of Ministers.Banks must be joint-stock corporations with a minimum paid-up capital of TL 6 trillion (equivalent to
about US$29 million at end-1997).  Moreover, their shares have to be registered, issued against cash
subscriptions and quoted on the stock exchange, each share having a nominal value not exceeding
TL 1 billion.  Banks' articles of association must  conform to the provisions of the Banking Law.
54
101. The establishment of up to ten new branches per calendar year is unrestricted for banks that
meet the standard ratios laid down in Article 56 of the Banking Law55, while the establishment of
more than ten branches during a calendar year requires the approval of the Undersecretariat of
Treasury.  Procedures and principles for permission to open branches are determined in a regulation to
be laid down by the Undersecretariat.
102. Foreign banks can operate in Turkey either by establishing a branch, a subsidiary or by going
into a joint venture with a bank established or about  to be established.  The first branch of a foreign
banks requires the approval of the Council of Ministries.  A foreign bank may open up to ten branchoffices per calendar year, while the opening of more than ten branches is subject to the permission of
the Undersecretariat of Treasury.  The minimum capital required for foreign banks is the same
(TL 6 trillion) as for domestic banks.  A reciprocity provision is in force with respect to the operation
of foreign banks, allowing the Council of Ministers to take counter measures if the conditions in any
of the countries in which Turkish banks operate are changed unfavourably.
56  According to the Banks
Act, lending limits for the branches of foreign banks are based on branch capital rather than world-
wide capital.
103. Although off-shore banking is allowed, no off-shore bank is currently operating.  The only
off-shore banking zone, which has existed since 1990, is located in Istanbul.  The main advantages
offered are that the minimum capital requirement (US$ 1 million) is lower than for other banks and the
banks are exempted from tax and other duties, as prescribed in the Free Zones Act.  These banks are
                                                     
54 Founders of banks should not have been bankrupt or entered into competition with their creditors or
been sentenced for imprisonment to more than five year s, even if they have been pardoned, excluding for
negligent offences, or been sentenced for felonies such as embezzlement, extortion, bribery, theft, swindling,
forgery, breach of trust or forget bankruptcy, and smuggling offences other than smuggling for their ownconsumption, and treachery in public bid tenders and purchases, disclosure of secrets of the state, tax evasion orattempts to evade tax.
55 The Undersecretariat of Treasury should be informed no later than 30 days prior to the date of
opening.
56 If a country imposes laws on Turkish banks that are more restricted than (or subsequently aggravate)
the conditions applied to that country's bank operating in Turkey, the Council of Ministers may demand that therelevant foreign bank fulfill similar conditions.Turkey WT/TPR/S/44
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also exempt from all provisions of the Banking Act and other regulations such as reserve
requirements.  On the other hand, they are not allowed to collect funds from residents.
Reserve and liquidity requirements
104. Banks operating in Turkey are subject to reserve and liquidity requirements on their deposits
and non-deposit liabilities.  The reserve requirements are 8% for Turkish lira deposits and 11% for
foreign currency deposits; there is no reserve requirement for gold stock accounts.  Domesticinterbank deposits and certain treasury deposits are exempted from the reserve requirement.  The
liquidity requirement is 14% on non-deposit liabilities (8% through free deposits and 6% through
government paper), as well as on non-deposit foreign exchange liabilities (11% through free deposits
and 3% through government papers).
105. As banks are required to hold unremunerated reserves at the CBT and to hold shares of their
liabilities in indexed government securities, these regulations impose costs on the banks that act as a
tax on financial intermediation; this is reflected by a relatively wide spread between borrowing and
lending rates.
57
106. The statutory limit on Central Bank short-term advances to the Treasury in 1996 was an
amount not to exceed 10% of excess amount of the current year's total budgetary appropriations.  Thisratio was reduced to 6% in 1997 and in 1998, the limit was due to be reduced further to 3% (see also
Chapter I).  The interest rate to be applied to th is advance account shall be determined by the Prime
Ministry and the Bank each year.  These measures should enable a more effective monetary policy.
58
Challenges
107. Several areas of Turkey's banking sector represent challenges for the authorities.  The IMF
Executive Board, in the Article IV consultation on Turkey on 9 July 1997 noted that the low earnings,
capitalization and the liquidity of the state banks required immediate attention.59  T h e  T u r k i s h
authorities were urged to strengthen banking sector supervision and accounting standards and to end
the preferential lending of state banks to favoured sectors, a practice that introduces distortions and
undermines the stability of the banking sector as a whole.
108. There are several additional challenges in the area of regulation.  First, as stipulated in the
Banking Act, the Government does not disclose when it assists banks in trouble.  Funding providedthrough the Deposit Insurance Fund is of as mu ch as TL 213 trillion (or US$1 billion at end-1997).
According to the authorities, the fund supports bank s under privatization, by providing them with low
interest rate deposits.  Second, at the time of the mini-crisis in 1994, government deposit guarantees
(100% of all the saving deposits) were introduced as a "temporary" measure.  This measure may
enable shaky banks to attract cheap deposits.  The variation in deposit rates would probably widenconsiderably if the guarantee were lifted, threatening the viability of some banks.
60  The authorities
indicated that studies are under way with a view to decreasing the coverage of the full insurance
system.  Finally, as Turkey's largest banks all belong to powerful industrial holding companies, there
                                                     
57 IMF (1996).
58 Law No. 3985 of 21 April 1994 amended Article 50 of Law No. 1211 of the CBRT, which regulates
the account of short-term advances to the Treasury (Gökbudak, 1996).
59 IMF, Press Information Notice No. 97/17.
60 Financial Times (1997), 12 December.WT/TPR/S/44 Trade Policy Review
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is a close relationship between owners and borrowers, thus credits may be granted without regard to
the degree of creditworthiness that might be required of other borrowers.61
(b) Securities
109. The Istanbul Stock Exchange (ISE), the only stock exchange in Turkey, was established to
provide trading in equities, bonds and bills, revenue-sharing certificates, private sector bonds, real-
estate certificates and foreign securities. The ISE operates nationwide and is an autonomous, semi-public organization. The fully computerized trading system of the stock market, which was
inaugurated in November 1994, enables trading in stoc ks and rights coupons.  Margin trading, short-
selling, securities lending and borrowing have been regulated by the Capital Market Board (CMB).
Authorized ISE members are entitled to engage in sh ort-selling transactions in stocks constituting the
ISE National-100 Index. The bonds and bills market of the ISE provides a trading environment forgovernment bonds, treasury bills, revenue-sharing certificates, bonds issued by the Privitization
Administration and real-estate certificates.  Striving to offer an international platform for investors as
well as issuers, the ISE International Free Zone provides an opportunity for foreign securities to be
traded in a tax-free environment.  It is a depositary receipts market where currently only one bank
trades, in depositary receipts (Kazkommertsbank of Kazakhstan) and Turkish Eurobonds are traded.
110. Many new financial institutions and instruments such as investment trust, mutual funds, rating
agencies, portfolio management corporations, repo’s/reverse repo’s, asset-backed securities, margin
trading and short selling have been introduced in the last ten years.  Studies to establish a futures
exchange specialized on commodities are about to be completed and the exchange is expected to start
its operation as soon as an amendment in Capital Market Law has entered into force.
111. The legal framework for the capital markets are laid out in the Capital Market Law of 1981
(most recently amended in May 1992).  The CMB, which was established in 1982, has the authority toregulate primary and secondary markets in securities, supervise securities intermediaries and mutual
funds, and register all public offerings of securities (except government paper).  In addition, it has
authority to determine the main aspects of the securities to be issued by the private sector.
112. Regulations related to the re-opening of the ISE were approved by the CMB
in December 1985, and the ISE commenced operation in 1986.  Measures to strengthen the powers ofthe CMB and bring the regulatory structure more closely into the line with EU practices were
incorporated in a Decree Law issued in June 1995, but this law was annulled on procedural grounds
by the Constitutional Court in November the same year.
62
113. The opening up of the securities markets to foreign investors in August 1989 provided a
major boost to the development of capital markets (Box IV.3).  Another contributing factor is theinvestor-friendly tax regime for securities purchased by foreign investors; except when foreign
investors wish to exercise voting rights, there are no capital gains or dividends taxes on investments
by institutions, provided at least 25% of the funds allocated to Turkey is invested in equities and the
institution is a properly established financial institution.
63   New securities issues registered with the
CMB more than doubled (in U.S. dollar terms) in 1990, as did trading volumes in secondary markets.The number of companies whose shares are traded in the ISE increased from 110 at the end of 1990
to 266 at the end of May 1998, while total market capitalization of traded companies also rose
                                                     
61 However, a bank may not extend to a natural or legal person credits exceeding 20% of its own funds
in any form (cash, properties, bail bonds and guarantees) and may not accept endorsement or bail bonds orpurchase securities than stocks.
62 IMF (1996).
63 Bloomsbury (1997).Turkey WT/TPR/S/44
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considerably over the same period from US$19 billion to US$58 billion.  In parallel to the market
upsurge, the yearly total traded value in the stock market increased to US$58 billion in 1997
from US$6 billion in 1990.  The yearly total traded value in the bonds and bills market also increased
significantly, to US$410 billion in 1997.  Foreign fund managers' share of the free float has
substantially increased in recent years, from 20% in 1993 to currently some 52%, equivalent to
US$6 billion.
114. The markets in private securities have been constrained by the heavy financing needs of the
public sector.  Indeed, government paper (mainly T-bills) accounted for 97% of new issues of
securities in 1996 (up from 90% in 1994-95) and for some 94% of the trading volume in the
secondary market.64  The stock of government securities was equivalent to some 48% of broad money
(M2X) at end-1995.65  Domestic banks are captive buyers of treasury bills, being required to hold bills
as a fixed share of 6% and 3% of their Turkish Lira and foreign exchange deposit base, respectively.
Given the dominant position of government paper in the financial markets, markets for corporate debt
instruments remain underdeveloped, forcing companies to rely heavily on bank financing for their
funding.
Box IV.3:  Limitations on market  access in the securities sector
Permission of the Capital Market Board is required for th e establishment of capital market institutions (such as
securities intermediary in stitutions, investment trusts, mutual f unds, portfolio management companies and
rating and auditing institutions).  If banks or insurance companies apply to the Board to form a mutual fund or
to increase fund capital or to issu e securities, the opinion of the Unde rsecretariat of Treasury has to be
obtained to finalize the applicati ons.  Establishment of branches and agencies by securities intermediary
institutions established in Turkey also requires the Board's permission.  The permission of the Board is
required for one shareholder (natural or legal person) to obtain 5% or more of the capital of alreadyestablished securities intermediary institutions.  The B oard shall also be informed of the transfers of shares
representing less than 5% of the capital of inte rmediary institutions.
Intermediary institutions, investment trusts, portfolio management companies and rating agencies may only be
established in the form of joint-stock companies.  Foreign intermedia ry institutions may es tablish liaison offices
in Turkey, but may not establish branches to carry out intermediary activities.  However, foreigners can
participate in domestic intermediary institutions or ac quire the majority of shares.  International rating
agencies can operate in Turkey with the approval of the Capital Market Board.
Source:  Government of Turkey .
(c) Insurance
115. The Turkish insurance market consists of re-i nsurance companies, insurance companies, and
insurance intermediaries (such as brokers and agencies).  By the end of 1997, there were 60 insurance
and four re-insurance companies operating in Turkey .  According to field of operation, 19 insurance
companies were in life and 41 in non-life groups (17 of these companies were operating as composite
companies).  According to ownership, three in surance companies were state-owned, 45 private,
while 10 were foreign owned with two other insura nce companies operating as branches of foreign
insurance companies.  In total, there were 10,723 insurance agencies in operation at the end of 1996,
excluding bank branch offices marketing insurance policies.  Insurance and re-insurance companieshave a total of 6,578 employees.
                                                     
64 In this context, it is interesting to note that T-bills are exempted from the financial transaction tax.
65 IMF (1996).WT/TPR/S/44 Trade Policy Review
Page 138
116. The market is dominated by a few large companies of which three represent approximately
one third of the market.  The relatively high degree of concentration is exacerbated by
cross-ownership through holding companies.  Fo reign companies, which are much smaller than
domestic companies, account for about 8% of total premiums.
117. Regulations governing operations of insu rance companies are laid down by the
Undersecretariat of Treasury, and on-site supervision is carried out by the Insurance SupervisoryBoard.  The Insurance Supervision Law No. 7397 (as amended by Statutory Decree No. 539 of 1994)
lays out the supervision of the insurance and re-insurance companies.  All insurance and re-insurance
companies, whether foreign or domestic, are subject to the same legislation.
118. The establishment of insurance or re-insurance companies and the opening of a branch of a
foreign insurance or a re-insurance company are subject to permission by the Ministry of State towhich the Undersecretariat of Treasury is attached.  Following establishment, companies must obtain
a separate licence for each branch from the Undersecretariat of Treasury.  Insurance and re-insurance
companies must be established either in the form  of a joint-stock company or a mutual company.
Foreign insurance or re-insurance companies may also operate in Turkey by opening branches
provided they have not been prohibited from carrying out insurance business in the country wherethey operate.
119. Insurance companies may only engage in insurance business and must perform either life or
non-life insurance business, but not both.
66  No class of insurance is monopolized apart from export
credit insurance, which, by law, is provided solely by the Turkish Export-Import Bank.  The only
form of insurance activity prohibited in Turkey is tontines (by which the last survivor of a group of
persons acquires the capital invested).  The minimum paid-up capital requirement of insurance and
re-insurance companies is TL 1.6 trillion (some US$8 million) as of end-1997.  The minimumsolvency margin for insurance companies is set in terms of premium production and claims figures;
the margin varies in life and non-life insurance branches.  Compulsory reserves must be invested
locally except for premiums earned abroad in life insurance, as well as statutory and free reserves,
which can be invested overseas, subject to certain criteria.  There are no restrictions on portfolio
composition and risk exposure of insurance companies.  Since 1990, insurance tariffs have beenderegulated.
(iii) Transportation
(a) Maritime
120. Maritime transport is important for domestic and international trade, since three of Turkey's
main industrial centres (Istanbul-Izmit, Izmir, and Adana) are on or near the sea. The capacity of themerchant marine fleet over 300 gross tonnage (grt) ships, reached 6.2 million grt in March 1998,
compared with 3.2 million grt in 1987.  Port facilities are increasingly overcrowded and inadequate to
deal with the 36% rise in ship traffic between 1987 and 1997.
121. Maritime activities are administered mainly by the Undersecretariat of Maritime Affairs, and
subject to Turkish Commercial Law No. 6762, Ca botage Law No. 815, Ports Law No. 618, and the
International Convention on Standards of Training, Certification and Watchkeeping for Seafarers
of 1978 (STCW78).
                                                     
66 Companies that were previously licensed to operate both in life and non-life branches were required
to transfer their life insurance portfolio no later than 31 December 1997, failing which they would not be
permitted to issue life insurance policies.Turkey WT/TPR/S/44
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Market access
122. In commercial shipping, the share of public ownership and government involvement has
gradually been reduced by opening some activities, such as pilotage and towing (since 1993), to the
private sector through lifting the monopoly rights of  the Turkish Maritime Organization (TDI).  Six
ports have so far been privatized (foreign equity of up to 49% is allowed), but the main ports are still
owned and operated by public enterprises, such as  the TDI and the Turkish State Railways (TCDD).
State-owned ships have also been sold to the private sector.67  All activities, except cabotage, are open
to foreign investors.
123. Merchant maritime transport and passenger services, pilotage and all other port services may
only be provided by Turkish flag ships (Cabotage La w No. 815).  In order to fly the Turkish flag, the
shipping companies must have a majority of 51 % Turkish shareholders (Commercial Law No. 6762).
First mates and masters of ships must be of Turkish nationality, while up to 40% of the officers of
ships engaged in international seaborne transportation (i.e. excluding cabotage) are  allowed to be
foreign nationals.68  National vessels can be authorized to change flag for a period of between one and
two years when they are bareboat "chartered out", while foreign vessels can be authorized to fly the
national flag for a period between one and two years when they are bareboat "chartered in".
National and most-favoured-nation treatment
124. Vessels flying the Turkish flag benefit from a price preference:  when bidding for public
cargoes to be shipped to overseas countries or carrying strategic raw materials, they are awarded the
bids even when their quotations are up to 10% higher than the lowest foreign flag vessel quotation.
125. The Undersecretariat of Treasury is authorized to permit public entities to transport their
imported goods under foreign flags.  Foreign flag vessels are used in the following cases:  (i) if
Turkish flag vessels' quotations are more than 10% higher than quotations by foreign flag vessels;(ii) if loading is at ports not used by Turkish flag vessels;  and (iii) if the capacity and/or technology
used by the Turkish flag vessel is insufficient for the cargo and route.
126. A new tariff system for Turkish ports, which entered into force on 1 July 1995, is based on
the principle of non-discrimination between Turkish and foreign flags.  Special tariffs at each port are
established, and discounts on port dues and charges are linked to the frequency of calls at the sameport.  Since 1 January 1997, port services charges for foreign and Turkish ships have been the same.
127. Special tax incentives are provided to Turkish investors in the maritime sector.  Incentives
include:  an income tax of only 10% on the wages of the seafarers during international voyages;  and
the book profit resulting from sale or loss of a vessel can be deducted from the purchase price of the
same kind of replacement vessel within three years and after deducting the realized depreciationamount.
128. At the main ports the following services are provided:  pilotage, towing and tug assistance,
provisioning, fuelling and watering, garbage collecting and ballast waste disposal, navigation aids,
                                                     
67 In November 1997, the state-owned share of the deadweight tonnage of the nationally owned fleet
was 8% or 837,977 dwt (out of 10,125,406 dwt for ships of 150 grt and above).
68 However, the following ships are also considered as Turkish: (i) ships that belong to legal persons,
such as bodies, institutions, associations, and foundations set up in accordance with Turkish law, the majority ofwhose Board of Directors are of Turkish nationality;  and (ii) ships that belong to trading companies, the
majority of whose managerial staff and representatives are of Turkish nationality and are registered on theTurkish Trade Register (WTO document S/NGMTS/W/2/Add.23/Rev.1, 25 September 1995).WT/TPR/S/44 Trade Policy Review
Page 140
shore-based operational services essential to ship operations, including communications, water and
electrical supplies, emergency repair facilities, anchorage, and berth and berthing services.  Loading
and unloading operations at Tekirdag, Dikili and Güllük ports are provided by private companies in
accordance with the contracts made between the port authorities and companies.
129. All services, access to ports, pilotage, towing and tug assistance, provisioning, fuelling and
watering, and navigation aids, are available to the user at port without any discriminatory orpreferential treatment.  All TDI and TCDD ports are open to foreign-flag vessels.
130. Although there are MFN clauses in some bilateral maritime and/or trade and navigation
agreements signed in the early years of the Republic, Turkey is in a position to select and/or eliminate
such clauses via diplomatic channels and/or negotiations with the relevant countries.
69
Shipping conferences
131. Turkey has no laws and regulations governing the operation of liner conferences.
(b) Air transport
132. Air transport is dominated by the state-owned Türk Hava Yollari (THY), although,
increasingly, private airline companies - both charter and scheduled services - are competing on
national routes.70  In addition to THY, there are 118 air carrier companies (43 general aviation
airlines, 59  charter and non-scheduled air taxis, ten airlines and six air cargos) and 38 agricultural
spraying companies; all of these are privately owned except for 13 air taxis.  THY enjoys a monopoly
on international routes, with the exception of routes between Turkey and Germany.  Although
the 1994 privatization law provides for the unconditional privatization of 49% of THY, there has been
little progress so far towards its privatiza tion; the company is even undertaking major new
investments.71
133. With the enactment of Public Law No. 2920 on Turkish Civil Aviation, private air carriers
have been allowed to establish since 1983.  Authority for approval of new carriers is vested in the
Ministry of Transportation (pursuant to Law No. 2920 and the Regulation on Commercial Air
Transport Operations issued under the law).  Air carriers are authorized to operate scheduled domestic
services if they have a minimum of five "large bodied" aircraft in their fleet, of which two are fully
owned, or, where there are no company-owned aircraft , upon provision of a bank letter of guarantee
for an amount of US$2 million.72  The technical and financial supervision of existing carriers is
carried out by the Directorate General of Civil Aviation.
134. The majority of the company executives and authorized representatives are required to be of
Turkish nationality (Article 49 of Law No. 2920) and the Turkish partners must have voting majority.
Hence, the equity participation ratio of foreign shareholders is restricted to 49%.  There are no plans
                                                     
69 WTO document S/NGMTS/W/2/Add.23/Rev.1, 25 September 1995.
70 In 1997, THY carried some 14.8 million passengers (of which 10.3 million were on domestic routes).
The total number of passengers carried by the three next  largest air carriers was:  Istanbul Airlines 2.7 million
(0.9 million on domestic routes), Onur Airlines 2.3 million (0.1 million on domestic routes) and
KTHY 0.8 million (0.01 million on domestic routes).
71 THY - which recently secured US$123.5 million in financing to purchase a four-engine
Airbus A340-300, the fifth in its fleet - is planning to purchase 54 medium-range jets at a cost of aboutUS$2.5 billion (EIU, 1997).
72 According to Article 18 of Regulation SHY-6A (Regulation on Commercial Transport Operations)
aircraft with a seating capacity of 50 and above are termed "large bodied".Turkey WT/TPR/S/44
Page 141
to ease the restriction on foreign direct investment.  Airlines with a majority of the shares controlled
by foreigners are not permitted to carry passengers from one national point to another.
135. Access to the main national airports is allocated following application to the Turkish Civil
Aviation Authority under the rules prescribed in the FAL Chapter of the Turkish AIP, and acquisition
of a contract signed with a ground-handling company for the provision of services.  Landing and take-
off rights are allocated on a first-come-first served basis.  Slot allocation is applied at Atatürk,Antalya, Adnan Menderes, Dalaman and Esenboga Airports.  Air carriers operating scheduled
services to Turkey are authorized on the basis of reciprocity within the framework of bilateral
agreements.  Charter services are authorized on the basis of reciprocity under the rules of the
European Civil Aviation Commission (ECA C) of which Turkey is a member.
136. Access to cargo flights is provided under the provisions of Law No. 2920 and relevant articles
of the Regulation on Commercial Air Transport Operations as well as the applicable provisions of
bilateral air transport agreements signed by Turkey.
73
137. Cabotage rights are not granted to foreign carriers.
138. Public Law No. 4054 on the Protection of Competition does not grant any exemptions
specific to the national air transport services industry.  No special privileges are granted to thegovernment-owned air companies, except that, as in a number of other countries, Turkish civil
servants are obliged to use the national airline for official travel overseas.
139. Two private-sector ground-handling companies provide services at all airports open to
international civil air traffic.  Furthermore, catering services at the international airports are provided
by three catering firms of which one is entirely owned by foreign capital, one is a mixed
foreign-Turkish partnership and one is entirely owned by Turkish capital.  The rates for these services
are set by the market.
140. The prices charged by air carriers operating scheduled services are formally approved by the
Ministry of Transport and Communications (Article 25 of Law No. 2920).  However, in recent years
prices have been set by the carriers in accordance with the requirements of free market economy
principles.  The Government does not intervene in any way in the prices of non-scheduled and air taxi
operators.
141. Infrastructure facilities have been operated and provided by the Administration of State
Airports (DHMI).  During recent years, the Government has been encouraging foreign and domestic
private sector participation in construction and operation of new terminal buildings, using the BOT
(build, operate and transfer) model.  The widespread use of this model is planned in the construction
of new airports, or terminal buildings at existing ones.
142. Imports of a wide range of aircraft-related items (78 items at the four-digit level) are only
permitted on approval by the General Directorate of Civil Aircraft in the Ministry of Transport.  The
purpose of the restriction is, according to the authorities, to assure that the imports are used only in the
civil aircraft industry.  Most import applications are approved;  in 1997, 1,350 applications out of a
total of 1,500 applications were approved.
                                                     
73 Turkey has signed bilateral air transport agreements with 82 countries.  Under these
agreements 63 foreign airlines are operating scheduled serv ices to Turkey.  On the other hand, THY is operating
scheduled services to 100 cities abroad.WT/TPR/S/44 Trade Policy Review
Page 142
(iv) Telecommunications
143. The telecommunications network has expanded rapidly, now covering all villages and remote
areas.  In 1985, the total number of mainlines was only 2.5 million, but today there are
around 14.7 million.74  In 1996, Turkey ranked 9th in terms of network size, compared with 17th a
decade ago in the OECD community.  Turkey's "tele -density" rose from 4.4 in 1985 to 25.2
per 100 inhabitants in 1997 (Table IV.15).
Table IV.15
Overview of the telecommunications sector, 1985-97
1985 1990 1997
Total number of main lines (million) 2.5 7.5 14.6
Waiting list (million) 1.8 1.4 0.4
Telephone penetration
Lines per 100 inhabitants 5.1 13.2 28.1
Subscribers per 100 inhabitants 4.4 12.1 25.2
Telephone traffic (million minutes)
International outgoing 66 159 558
International ingoing 178 474 839
Public telephones (payphones) ('000) 10.8 39.4 70.7
Subscribers of analogue cellular telephones ('000)a0 31.8 126.7
a Global System for Mobile Communication (GSM).
Source: Government of Turkey.
144. In 1994, with the enactment of Law No.  4000 of 1994, the state Posts, Telegraphs and
Telephones (PTT) was split into the post and telecommunications functions and thetelecommunications division was incorporated as Türk Telecom Co., Inc (TTAS).  TTAS, a wholly
government-owned corporate entity, enjoys a monopoly.
(a) Basic services
145. The 1994 law gave the power to the Ministry of Transport and Communication to decide on
the sale of 49% of TTAS's shares, including the pr inciples and procedures to be followed.  Although
the privatization of TTAS has been slow, it has re ceived renewed political support, and, following the
rejections of previous proposals on constitutional grounds, revised telecom legislation was passed in
early 1995 (Law No. 4107 of May 1995).
75  This will pave the way for faster private-sector
involvement. In March 1997, an advisory agreemen t was signed with Goldman Sachs for the initial
sale of the telecommunications giant, with 10% of th e shares to be sold in the first tranche.  The
Government hopes that the sale will yield about US$3.3 billion in 1998.  Ultimately 49% of the
company's equity will be sold, of which 34% will be offered on the domestic and internationalmarkets, 10% will go to the country's postal services, and 5% will go to Turk-Telekom employees and
other small investors.
                                                     
74 The web-site of the Turkish State Planning Organization (http://www.dpt.gov.tr/~eakdemir/
turkmarket.html).
75 The Constitutional Court examines whether laws comply with the articles of the Constitution.Turkey WT/TPR/S/44
Page 143
(b) Value added services
146. Currently, no licences for the provision of value-added services have been awarded to private
sector investors, despite the power of the Ministry of Transport and Communication under Law
No. 4000 to grant 49-year licences for the provision of some value-added services.76  However,
cellular phone licences (with a value of about US$1 b illion) have been in dispute for several years.
Moreover, the Ministry's power to evaluate and finalize licensing procedures was recently cancelledby the Constitutional Court.  In response, the Go vernment is now preparing necessary modifications
to be issued as a law or government decree.
77
147. Call-back services are not permitted by law, and TTAS may initiate legal action against such
services.  However, these services are not physically blocked.
(c) Regulatory structure
148. The regulatory structure in Turkey is somewhat fragmented among government agencies.
The Ministry of Transport and Communication is responsible for sectoral policies and regulation
through its two offices:  the General Directorate of Communications, the regulatory body for wired
communications;  and the General Directorate of Radio Communications, the regulatory body for
spectrum management.  The Radio Television Supreme Council is an independent regulatory bodyresponsible for broadcasting, a sector comprising more than 1,500 private broadcasting stations.
149. Turkey is a signatory to the following inter-governmental agreements:  ITU Constitution and
Convention;  ITU Radio Regulations;  ITU International Regulations;  Agreement and Operating
Agreement of INTELSAT;  Convention and Oper ating Agreement of INMARSAT; and Convention
and Operating Agreement of EUTELSAT.  Turkey has not signed any bilateral agreement in the area
of telecommunications.
(d) Forthcoming changes
150. In the area of telecommunications, Turkey has made commitments under the WTO 1997
Agreement on Telecommunication Services, which is appended to the General Agreement on Trade in
Services (GATS).  Within this framework, Turkey will abolish TTAS' monopoly on basic services
by 31 December 2005.
(v) International tourism
151. The international tourism industry developed late in Turkey but has expanded fast, especially
in Istanbul and on the western and southern coasts.  Large numbers of hotels, guest houses and
holiday apartments have been built, but the length of coastline has allowed much of its natural beauty
to be preserved.  There are also important historical sites.  New forms of tourism that can be labelled
eco-tourism activities are being introduced.  The number of licensed tourist beds rose from 62,000in 1982 to 553,090 in 1997.  Tourists arrivals increased from 4.1 million in 1988 to 9.7 mi llion
in 1997, while receipts increased from US$1.5 billion to US$7.0 billion during the same period
78;  as a
result of the increases in receipts from tourism, Turk ey has been able to offset about one third of its
                                                     
76 Mobile telephone, pager, packet-switched data transmission, circuit-switched data transmission,
facsimile services, data networks, intelligent network, cable television, coin-operated telephone, satellitesystems, similar value-added services and directory printing services.
77 State Planning Organization's web-site (http://www.dpt.gov.tr/~eakdemir/turkmarket.html).
78 State Planning Organization (1997).WT/TPR/S/44 Trade Policy Review
Page 144
merchandise trade deficits during the 1990s (Chart IV.8 and Table AI.2).79   About 45% of the visitors
come from Western Europe (mainly Germany), and another 45% from Eastern Europe and the former
Soviet Union.
152. The Tourist Board, TÜRSAB, established in 1972 according to Law No. 618, under the
purview of the Ministry of Tourism is responsible for supervising travel agencies.  Within the
Ministry of Tourism there is a section responsible for inspection of hotels, holiday villages, yachtenterprises, travel agencies, the professional or ganization (Union of Turkis h Travel Agencies) and
professional tourist guides.  Under the Tourism Encouragement Law No. 2634 of 1982, tourist
regions, areas and centres were designated and invest ment in tourism facilities was encouraged, while
the State was in charge of investment in infrastructure.
80
153. The Turkish Government has played an active role  in the tourism sector.  It grants incentives
for tourism investments (Box IV.4) in accordance with the Tourism Encouragement Law;  provides
infrastructure and public services for tourism; defines zones with high tourism potential, promulgates
designated tourism centres or areas by decree; elaborates and approves land use plans; conducts
environmental controls; promotes the country abroad; carries on research and the collection of
statistics; and provides vocational training.  Local administrations are responsible for similar mattersat local levels.
81  In addition, investors in the tourism sector have priority in incentives granted under
the general investment aid programme (Chapter III (4)(ii)).
154. Data are not available on the total cost of these government-sponsored activities.  However,
as noted above, the Government provides substa ntial funds for marketing; in 1997 expenditure
amounted to US$22 million for participation in various international fairs for tourism, inviting
journalists from various countries to travel within Turkey, and advertising in foreign newspapers and
magazines.82   The total 1998 budget allocation for the Ministry of Tourism is TL 17.5 trillion (or 0.1%
of total government expenditure).
                                                     
79 In 1994, when the merchandise trade deficit drastically improved as a result of the contraction in
merchandise imports, the tourism balance covered as much as 82% of the merchandise trade deficit.
80 Yamamoto (1997).
81 Kaya (1997).
82 Yamamoto (1997).Turkey WT/TPR/S/44
Page 145
0123456
1990 91 92 93 94 95 96 1997020406080100120Chart IV.8
Tourism and merchandise trade balances, 1990-97
US$ billion Per cent
Source :   State Planning Organization (various issues),  Main Economic Indicators .Tourism balance
    (left scale )
Toursim balance/Merchandise trade deficit     (right scale)
Box IV.4:   Incentives offered only to the tourism industry
Special incentives are offered to national and foreign investors for investment in the construction and
management of tourist facilities (Law  No. 2634 on the Encouragement of T ourism).  Investors with a Tourism
Operation Certificate issued by the Ministry of  Tourism may benefit from the following incentives:
- corporate income tax exemptions (temporary measure) :  maximum 20% of the foreign exchange earnings o f
tourist establishments is deducted from the total gross profit subject to taxation;
- the Central Bank of Turkey provides up to 20% of fixed inves tment costs in cash;
- a property tax exemption for five years (temporary measure);
- the allocation of public land  for the construction of tourist facilities on long-term lease;
- permission to employ foreign personnel and artists (up to 20% of the total personnel);- discount rates on water, electricity and gas prices;- priority in allocation of telephone, fax and telex lines; and- foreign exchange retention quot as: a percentage of foreign exchange ea rned by tourist establishments may
be retained by the investors and used for essential imports required for operation.
Source:  Government of Turkey;  and Yamamoto, K. ( 1997), "Development of International Tourism in Turkey
- its effects and problems", Journal of International Economic Studies, No. 11, p. 80.
155. Foreign companies have increased their role in the tourism sector since the mid-1980s.
Foreign capital in Turkey is US$1.7 billion (1997) of which US$0.2 billion (or 14%) is invested in the
tourism sector.  Foreign investors may have an equity share up to 49% of total investment forWT/TPR/S/44 Trade Policy Review
Page 146
accommodation facilities, if the bed capacity is between 100 and 200;  if the capacity is more
than 200, foreign investors may hold an equity share of up to 100%.83
156. Neither foreign nor domestic companies are allowed to set their own prices.  Companies are
required to have their prices annually cleared by the Ministry of Tourism.  However, enterprises are
not required to charge uniform prices.
157. Restrictive visa requirements are, according to the authorities, a constraint on the growth of
Turkish citizens travelling abroad.  The costly visas, with subjective criteria, applied by the developed
countries constitute a barrier for Turkish tourists as well as for businessmen.  The authorities further
note that the administrative formalities applied to citizens travelling abroad could usefully be included
in the agenda of the WTO services negotiations.
                                                     
83 Yamamoto (1997).Turkey WT/TPR/S/44
Page 147
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