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Turkey could go ‘belly-up’ as Trump escalates tariff fight

Here's why that is incredibly dangerous.

Pedestrians pass by a foreign exchange office on Istiklal Street in Istanbul, Turkey, on 9 August, 2018. CREDIT:  Diego Cupolo/NurPhoto via Getty Images.
Pedestrians pass by a foreign exchange office on Istiklal Street in Istanbul, Turkey, on 9 August, 2018. CREDIT: Diego Cupolo/NurPhoto via Getty Images.

The past two weeks have taken a toll onTurkey, a country trying to find itself on stable ground after President Recep Tayyip Erdogan survived an uncertain re-election in June.

Things got tense when President Donald Trump threatened sanctions against the country, with the Treasury Department slapping them on two Turkish officials on August 1.

The Trump administration is angry that Turkey has not released an American pastor, whom Erdogan has accused of being involved in the thwarted 2016 coup, as well as several foreign nationals working for the U.S. State Department in Turkey.

The sanctions, though, have not paid off, prompting President Trump to follow with authorizing the doubling of tariffs on Turkey’s steel and aluminum exports on Friday:

According to Forbes, “steel and aluminum exports account for around 2% of Turkey’s GDP.” The president seems to be taking too much credit for Turkey’s troubles.

Still, the markets did not take kindly to the announcement.

Erdogan, a strongman who has been subjecting his country to increasingly brutal crackdowns since the failed coup of 2016 (which resulted in mass arrests, with some 50,000 academics, activists, journalists and civil servants facing specious charges and another 107,000 fired from their jobs), has responded predictably.

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“I want them to know that we will not surrender. We will keep producing and we will keep increasing exports. We will not give in … if you come at us with your dollars then we will find other ways to do business… The US is sacrificing its 81-million-strong ally Turkey for a pastor with links with terrorists,” he said in a speech on Sunday.

The Turkish lira sank some 25 percent against the dollar, having lost 42 percent of its value since January, and its inflation rate is at 15 percent. This is largely unrelated to Trump’s sanctions and tariffs and has more to do with Erdogan’s rejection of certain financial mechanisms (such as raising interest rates to limit inflation).

“Much of the economic crisis is self-imposed,” said Aaron Stein, resident senior fellow at the Atlantic Council’s Rafik Hariri Center for the Middle East, who blamed Erdogan’s mismanagement, his consolidation and control of the country’s monetary policy, and his appointment of his son-in-law as finance minister, which was, said Stein, “the final straw.”

Turkey’s private sector has been growing, but that expansion has happened because they could borrow foreign currency (which, with the weakening of the lira, will be even tougher to repay), and interest rates have been kept low, which has only fueled the crisis.

Trump got involved when there was talk of a deal to exchange the Pastor Andrew Brunson, along with the foreign nationals, for a Turkish banker serving a short sentence in the United States for his role in circumventing sanctions on Iran.

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With that, “The Trump administration concludes, probably correctly, that the Turks renege on the agreement…so they changed tactics and went to coercion,” said Stein

“They basically ran out of runway,” said Stein, “and because this administration is the ‘We’re America, Bitch’ administration,” the need to act like an ally is out the window.

Turkey is far from blameless, though, he added, with Turkey treating the U.S. as an adversary for some time.

Despite this, Turkey is strategically important to the U.S. — it is a NATO ally and a base for U.S. nuclear weapons. It neighbors Iran and Iraq, and plays a crucial role in controlling refugee movement into the European Union.

And as crucial as being on the right side of the U.S. is for Erdogan, the odds of him capitulating, or losing face, at this point, are slim. And that’s the only off-ramp (if any) that President Trump has left him — one’s he’s unlikely to take in the near future as, said Stein, “it would be a humiliating concession.”

“But nobody is here is paying attention — nobody is listening to the signals,” he added.

Iran, too, will be an issue. Having reimposed sanctions on the country after pulling out of the 2105 nuclear deal, the Trump administration wants to cut Iran’s oil exports down to zero by November. Turkey might have been able to ask for a waiver in better times, but that’s unlikely now, and it has already said it plans to defy those sanctions and continue buying natural gas from Iran.

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President Trump has been playing an escalated game of sanctions and tariffs with friends and foes alike since he took office — tariffs on imports from Canada, Mexico, China, and the European Union; and sanctions on, well, almost everyone, notably, Venezuela, Russia, North Korea, Iran, and Turkey.

The best case scenario, said Stein, is that Brunson will suddenly be said to develop a mysterious illness, he’ll be released on humanitarian grounds, and everything will go back to normal between Erdogan and Trump, who has not signaled that he is in any way troubled about human rights abuses in Turkey.

The worst case scenario is that the Trump administration will escalate this economic war on Turkey, the country’s banking sector can crumble, which might lead to security issues. Turkey, said Stein, has to get its house in order, independent of its issues with the U.S., and the “petty and spiteful” tariffs and threats against it won’t help.

Europe is far more exposed — their banks, as well as their fragile refugee policy, such as it is — to any kind of decline in Turkey.

“It’s in nobody’s interest for Turkey to go belly-up,” he said.