6. Economy



 Economic Outlook

Since the Second World War the Turkish economy has been transformed by the steady growth of industry and services and the consequent decline in the share of agriculture in national income. Turkey's economic growth rate has been one of the highest in the OECD.

In the early 1980s, Turkey launched a program of structural change and liberalization to prevent the recession of the late 1970s. The program proved to be quite successful in terms of restoring economic growth, improving exports and reducing the inflation rate. Within this context, Turkey's economy grew by 7.5% between 1981 and 1985. However, since 1986, the achievements of the stabilisation program in question have been overshadowed by high inflation rising from gradually increasing public sector deficit.

Nevertheless, Turkey was able to realise an average growth rate of 6% during the period of 1985-1992. 1992 was the year in which economic activity recovered strongly from its stagnant position in the previous years, which was largely the result of the Gulf crisis. Uncertainties and unfavourable external conditions related to the Gulf War led to a sharp contraction in economic activity. Its adverse effects on Turkish exports to the Gulf region are still a major problem. Expansionary policies pursued in 1992 and 1993 kept the growth rate relatively high, but created expensive macro economic imbalances. Briefly, the fluctuation in the economy till 1992 can be summarised as stop-and-go cycles, which were mainly initiated by domestic factors.

High inflation and the devaluation of the Turkish Lira resulted in difficult economic conditions for the year 1994. A series of negative developments such as rising interest rates, stagnation in credit markets, volatility in foreign exchange, an unanticipated inventory build-up and a resulting contraction in domestic demand led the Turkish Government to introduce a Stabilisation and Structural Adjustment Package on April 5, 1994.

The Government's main policy objectives for 1995 focused on public sector deficit reduction, which would subsequently alleviate inflationary pressures. Economic growth as opposed to the significant contraction in 1994, resumed much faster than anticipated, experiencing an unexpected growth of 8 % in 1995. This growth stemmed mainly from the revival of domestic demand.

The Turkish economy grew far more than expected in 1996. The rate of growth almost doubled the official target of 4.5 % and equalled 7.1 %. The expected rate of growth was relatively lower mainly due to two factors. First, it was supposed that the introduction of the Customs Union with the EU would slow down the rate of growth by means of increasing competitive imports. Second and most importantly, general elections at the end of 1995 increased the possibility of putting the long-awaited stabilisation policies into effect via a new government. Imports especially those of consumer goods increased remarkably driven by a live domestic demand supported with expansionary policies, and the real growth rate remained high.

In 1997, GNP increased by 8.3 %. Regarding the sub-sectors, industry was the best performing sector with a growth rate of 10.2%. This sector was followed by the services sector, which had a growth rate of 9.0%. While the construction sector growth rate reached 5.0% the agricultural sector recorded a narrowing down of 2.2%.

The macroeconomic performance of the Turkish economy in the period of 1995-97 can be best described as strong output growth backed with fiscal expansion and an accommodating monetary policy. Strong domestic demand driven by a number of factors including the role played by the large unrecorded economy, high interest rates on government securities held by the private sector and contributed to the high growth performance.

In 1998 growth appeared to be slowing significantly mainly due to a contraction in private consumption and investment resulting from the economic crises in the Russian Federation. GNP growth rate was realised as 3.9%.

Despite the positive signs to overcome the effects of the Russian crises in the beginning of 1999, the earthquakes of August 17 and November 12, continuing high interest rates and increasing domestic taxes deepened the declining trend in GNP. Thus, the growth rate was realised as –6.4% in 1999, which is the greatest decline observed in GNP since the years of the Second World War.

Services, with its share of 66% in total remains to be the most important sector in the Turkish economy followed by industry, which has a 19% share in GDP. Agricultural production on the other hand constituted 16 % of GDP in 1999.

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 IMF Stand-By Program

Taking into consideration the effects of high inflation and interest rates on Turkey’s economic performance over the last 25 years, the government focused on an economic program which aims to free the country from inflation and enhance the prospects for growth and for a better standard of living for all parts of society. Thus, a disinflation and fiscal adjustment program was initiated on December 22, 1999 supported by a stand-by arrangement (SBA) with the International Monetary Fund.

In view the arrangement, the inflation target for the year 2000 is, lowering the 12-month current price index (CPI) inflation rate to 25 percent and wholesale price index (WPI) inflation to 20 percent by end-December 2000. These inflation targets for 2000 also provide a good starting point for lowering both WPI and CPI inflation to 10–12 percent by end-2001, and finally to move to lower single digits (about 5–7 percent) by end-2002.

The program rests on three pillars: Up-front fiscal adjustment, structural reform, a firm exchange rate commitment supported by consistent incomes policies. Up-front fiscal adjustment is necessary because the weakness of public accounts is the ultimate factor behind high inflation. Structural reform is needed to make the fiscal adjustment sustainable, improve economic efficiency, and, through increased privatization receipts, facilitate the decline of public debt. A firm exchange rate commitment and consistent income policies are needed to lead inflation and interest rates down more rapidly, particularly in the first phase of disinflation.

The strength of the program enhances the credibility of disinflation goals, and will in this way make it possible to achieve disinflation and growth at the same time. Thus, while the primary fiscal position of the public sector will be tightened, growth will be spurred by increased confidence related to the; decline in inflation, the expected fall in real interest rates, the revitalisation of the private credit market, sizeable interest payments that will continue to accrue to the private sector on the stock of public debt in circulation, the improvement in the external economic environment, as economic recovery is expected to strengthen in Europe and tourism receipts return to more normal levels.

In line with the measures, GNP growth in the range of 5–5½ percent in 2000, partly reflecting the rebound from the negative growth in 1999 is projected. GNP growth is expected to remain in the range of 5.6 percent in 2001–02. As economic activity picks up, the external current account deficit is projected to increase from ½ percent of GNP in 1999, to 1½-2 percent of GNP in 2000, with deficits of the same order of magnitude expected in 2001 and 2002.

The performance of the program is measured through reviews made every three months in the first year and twice in the following years.

Significant progress has been made towards achieving the program’s goals. Following the second review, progress in the implementation of the undertakings have become more apparent:

  • inflation in the first five months of 2000 fell to the lowest level since 1986,
  • the public debt-to-GNP ratio is falling,
  • interest rates have declined rapidly,
  • output growth is resuming,
  • industrial production accelerated sharply in the first four months of 2000,
  • in the first 5 months of 2000, production has increased by 3.3% in manufacturing, 9.2% in the electricity, gas and water sectors and decreased by 2.9 % in the mining sector compared to the 5 month averages of the previous year.
  • fiscal performance in the first quarter of 2000 has been strong. The floor on the primary surplus of the consolidated government sector was met by a good margin
  • due to rigorous implementation of monetary and exchange rate policies in the first few months of 2000, the end-March performance criteria for net domestic assets and net international reserves of the central bank were met.
  • a protocol for consolidation of the debts and receivables of State Economic Enterprises in the energy sector has been put in effect.
  • progress is made in the improvement the public finance administration and ensuring its transparency.
  • there has been successful progress in efforts to reach the privatization target of USD 7,6 billion in 2000.

These results have been achieved through the strict implementation of the policies, which have garnered credibility in both domestic and international financial markets, as also reflected in upgrades by major credit rating agencies. The Credit Rating Agency Moody’s, has announced that the credit note of Turkey will be reviewed with a possible upgrade.

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 Main Economic Indicators

GNP ($ million)
169 050
180 769
188 491
206 279
185 136

Real GNP Growth Rate






Per Capita Income (US$)
2 759
2 900
3 080
3 255
2 878
DM Exchange Rate (Annual average)
32 106.42
54 207.02
87 862.39
149 782.70
228 938.50
US $ Exchange Rate (Annual average)
45 923.13
81 717.69
152 982.50
262 232.98
422 088.83

Source: Undersecretariat for Foreign Trade + State Institute of Statistics

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 GDP By Sectors (at current prices, %)

GDP (factor cost)

Source: Undersecretariat for Foreign Trade + State Institute of Statistics

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 Banking & Stock Exchange

The financial system consists of the banking sector and other areas such as insurance, leasing, factoring, and stock brokerage.

Most of the activities taking place in both the money and capital markets are carried out by the banks. Consequently, Turkey's economic and historical development dictates that the financial system and the banking sector are virtually synonymous. Turkish finance is principally founded upon a universal banking system. Banks operate in accordance with international rules and practices and offer a wide variety of services at their numerous branches.

Turkey's determination to develop its relations with the European Union means that the country's banking authorities have placed increasing emphasis on ensuring that their regulations are in harmony with those in the Union. Turkey has already accepted EU practices on capital adequacy.

In Turkey, commercial banks are not allowed to engage in two types of activities: first, trading goods or immovables for commercial purposes, and second, leasing. In addition, investment and development banks may not accept deposits.

Turkey has an active and open system made up of state-owned banks and private banks by the end of 1998, excluding the Central Bank of Turkey, the number of banks operating in Turkey increased to 75. Of the 75 banks, 50 were commercial banks and 15 were development and investment banks. 4 of the commercial banks were state-owned, 38 of them were privately-owned and the rest, 18 banks were foreign banks. 3 of the development and investment banks were state-owned while 9 of them were privately-owned and the remaining 3 were foreign banks.

As of the end 1998, there were 18 foreign bank participations (excluding 3 development and investment banks) operating in Turkey. Of these banks, 6 were established in Turkey with foreign capital while 12 are branches. The existence of foreign banks is a reflection of the progressive internationalisation of Turkey's financial system. Despite their small market share, foreign banks have an important place in the Turkish banking system because of the new concepts and practices they have introduced.

In addition, 29 Turkish banks have individual or joint equity participations in 66 banks and/or other financial institutions in Germany, France, the Netherlands, Switzerland, the UK, Hungary, the Russian Federation, Kazahkistan, Azerbaijan, Uzbekistan, Turkmenistan, Ireland, the Channel Islands, Bahrain, Luxembourg, Malta and the Turkish Republic of Northern Cyprus by the end of 1998.

Accelerated by the liberalisation movements of the 1980s, a continuous modification and diversification process took place in the entire economy and it was widely reflected by the reforms made in the financial system. Some of these reforms were the establishment of the Interbank Money Market, the introduction of new tools for the regulation of liquidity, and legal arrangements to promote the development of the capital market. These reforms enable banks to offer new services by using new instruments in addition to their ordinary banking activities. Turkish banks began increasingly operating in inter national markets, dealing with instruments like swaps and forward agreements. The use of new financial techniques, such as leasing and factoring, has also deepened the system. As of the end of 1998, there are 104 leasing firms including special finance institutions and development and investment banks, which give leasing services.

The banking system has undergone a rapid technological transformation in the past decade. In order to increase the speed, quality and efficiency of the banking services banks have concentrated on computerisation and automation projects. While computers were used only for back office services in the beginning of 1980s, they were being used later as on-line real time systems.1990 saw the beginning of electronic banking in Turkey. Turkish banks have invested heavily in computer processing and data transmission systems. Several banks have country-wide electronic networks and a. number of them offer direct access terminals to their major customers.

Most of Turkish banks- including the Central Bank - were members of SWIFT (the Society for Worldwide Interbank Financial Telecommunication). Turkey joined SWIFT in March 1989 and now has a regional processor in Istanbul.

In 1992, an electronic funds transfer system was installed for direct crediting in the banking system. Co-ordinated by the Banks Association of Turkey and the Central Bank, the Turkish Interbank Clearing System (TIC) was launched in April 1992. At the end of April 1999, there were 73 banks and 6 financial houses in this system. The rapid growth of consumer banking is a defining feature of Turkish banking in the early 1990s. Banks are increasing putting emphasis on service quality because individual and retail banking are becoming the most rapidly developing sectors of their business. It also reflects the heightened competition among Turkish banks as they seek to develop high quality services aimed to satisfy client needs better.

The introduction of credit cards to Turkey dates back to the late 1960s, but Turkish banks started issuing credit cards in August 1988. As of end 1999, a cumulative 7,118,358 credit cards have been issued. Of these cards, VISA and MASTERCARD dominate the sector with a 99 percent share, whereas the rest consists of AMEX, DINERS and other credit cards. When the credit cards are classified as national and international cards, the latter gets a high proportion of 80 % percent in total.

The number of banks extending consumer loans informing the Association was 30 at the end of 1998 and the total amount of consumer credits reached 3.7 billion dollar. The number of users was 1,878,462. The purchase of automobiles, consumer durables and housing finance consist a high percentage in the total of consumer loans in general. Banks are also extending consumer loans for financing individuals' education, holidays and health expenses.

Another significant development, which began in 1992 following the related notification of the Capital Markets Board, was the "Asset Backed Securities" policy. This financial instrument was intensively used by some Turkish banks during 1995. Another development includes the rapid spread of Automatic Telling Machines (ATMs) and Point of Scale (POS) terminals. At the end of 1998, 7,471 ATMs and 107,335 machines were installed. Moreover, nearly 19.3 million bank cards have been issued, a reflection of the widespread acceptance gained by these products.

During the mid-1980s, the Central Bank organised new markets which not only facilitated the efficient flow of funds within the banking system, but also helped to acquire a powerful tool to monitor the overall reserve levels of the system. Upon the introduction of the new markets, banks were able to strengthen their ability to control the liquidity and maturity' structures of their assets and liabilities. The first attempt to sell Government securities through periodic auctions started in 1985. Following this, the Interbank Money Market for Turkish lira was established in March 1986, Open Market Operations were started in February 1987, Foreign Exchange and Foreign Banknote Markets were established in April 1989. During 1995 the Gold Exchange started to operate in Istanbul taking the place of the Central Bank's Gold Market.

The banking sector has been supported with the contributions of the above mentioned market and has made more transactions by utilising new financial instruments in the capital market including mutual funds, asset backed securities, Government papers and private sector securities. Banks also distributed clients' portfolio risks to the broader investment areas as far as financial alternatives were concerned.

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 Trade & Investment - Great Reasons

Unique geographical location - Turkey enjoys a very special location at the crossroads between East and West, overlapping Europe and Asia geographically. The proxy to the new emerging markets in Middle East and Central Asia creates unique business opportunities.

A strong international investment record -The experience of more than 4000 foreign capital establishments, including 104 of the Fortune Top 5000 companies, confirms Turkey as a predominant investment location.

A fast developing economy - The average growth rate of 5,4 % for the last 5 years, which is well above many OECD countries, implies a dynamic and growing economy. WTO outputs also state that Turkey is among the most dynamic 20 countries in the world trade.

A huge domestic market - With a population of 63 million and an increasing consumer purchasing power, Turkey offers a huge and dynamic domestic market to investors.

High-skilled, competitive labor - The Turkish labor force is well-known with its skills and learning capacity, and competitive labor rates offer cutting edge for industries.

High quality standards - The new quality oriented generation in both manufacturing and services sectors ensures high quality levels; and this is also proven by Turkish companies winning the European Quality Award : Brisa (1996), Beksa (1996), Netas (1997), Beko (1998), Arcelik (2000), Eczacibasi Vitra (2000)

The gateway of energy resources - Turkey is located at the gateway of Middle East and Caspian petroleum and Central Asian natural gas to the west, which are regarded as the future energy reserves of the world.

A state of art telecommunications network - Turkey has a relatively "young" telecommunications network with the latest technology, which can easily compete with the developed countries.

Strong ties with Caucasia and Central Asia - Turkey is the leading investor in Caucasian and Central Asian Turkic Republics. Due to her strong cultural and historic ties, Turkey provides privileged access and a perfect base to develop business with these countries.

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 Turkish - U.S. Relations

The United States has historically been among Turkey's biggest trading partners. The United States is currently the second largest destination for Turkish exports (after Germany) and currently its fourth largest supplier.

In the year 2001, Turkish exports to the United States equaled over USD 3.1 billion, a 10 % share of all exports whereas imports during the same period totaled over USD 3.2 billion, a 8 % share of all imports.

Although trade volume between the two countries has jumped from USD 1. 6 billion in 1985 to USD 6.3 billion in 2001, Turkey has yet to reach its potential in its trade with the United States.

Compared to 10-15 years ago, the make-up of Turkish - United States trade has changed significantly, reflecting the dynamic nature of bilateral relations. Defence products account for a smaller share of imports. In the year 2001, boilers and machines were the top imports comprising 26.1 % of all imports. During the same period, textiles and clothing held the largest share of Turkish exports, followed by aircraft and jewellery.

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 U.S. Investments in Turkey

Since the early 1980, American investments in Turkey have being multiplied. The U.S. foreign investment in 2000 reached over USD 1.2 billion.

As of the end of 2001, the total investment by American sources amounted to over TL.464 trillion, a 11.9% share of invested foreign capital, while the number of American companies operating in Turkey rose to 375, representing total capital of TL.641 trillion.

The United States is the fourth biggest foreign investor in Turkey after France, Holland and Germany. The official figures understate the actual level of U.S. involvement since they do not include capital belonging to Turkish subsidiaries of Europe originated U.S. firms.

American investments span a range of sectors from construction to chemicals.

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 Cooperation Areas

Business ties between the two countries continue to strengthen. The identification of Turkey as a Big Emerging Market can only further positively influence this partnership, as U.S. authorities predict American exports to these countries will exceed those to Western Europe by 2010.

Turkey and the United States formed a new commission called "Economic Partnership Commission" to boost economic ties after PM Ecevit's visit to Washington D.C. on January 16, 2002. Turkish demands include better access to U.S. markets especially for its textile exports. The related Commision agreed to establish a "Qualified Industrial Zone" in Turkey from where regional products with certain amount of U.S. and Israil inputs would be eligible to enter to the U.S. as duty free.

This Committee occupies the fourth tier of the economic relationship between the United States and Turkey. The Joint Economic Commission, which meets once a year alternately in Turkey and the United States comprises the first tier. The Business Development Council (BDC) occupies the second tier, TIFA- "Trade and Investment Framework Agreement" is the third tier and the Business Councils comprise the fourth tier.

On the other hand, the U.S. Chamber of Commerce and the Union of Chambers and Commodity Exchanges of Turkey and DEÝK/Turkish-U.S. Business Council are continuing their contacts on the subject of the "Turkey-U.S. Business Partnering Initiative" to develop cooperation between the U.S. and Turkish companies focused on the small and medium-scale entreprises.

The potential for American investment in infrastructure projects is immense. Investment opportunities exist in dam building, irrigation systems, power plants, highways and airports.

There are also several opportunities for foreign business in the GAP - Southeastern Anatolia Project. Possibilities will exist in agro-industries to take advantage of the increased production of cotton, grain, fruits and vegetables. Promising opportunities will arise in storing, sorting and packaging facilities, as well as in transportation areas such as ports, railways and container depots.

Energy has been the leading sector in the successful development of Turkish - American cooperation, especially in the second part of the last decade.

Investment challenges and opportunities have been expanded overseas and the region that Turkey bridges has been at the center of attraction due to the abundant energy resources waiting to access world markets.

In the power sector, projections are to increase existing 1382 kWh of per capita consumption to 6092 kWh by the year 2020. These projections put forth the need for annual power investments of USD 4-4.5 billion. Investment needed in the power sector brings up new opportunities and challenges to private power sector investors.

Turkey and the U.S. are cooperating in the energy sector within the framework of two joint statements. The first joint statement on energy cooperation was signed by the U.S. Secretary of Energy and the Minister of Energy and Natural Resources of Turkey on December 9, 1997. The U.S. Secretary of Commerce and the Turkish Minister of Energy and Natural Resources signed another Joint Statement on February 26, 1998 with respect to the bilateral cooperation in hydroelectric power generation.

On the other hand, within the framework of U.S. - Turkey Energy Cooperation, agreements totalling USD 850 million were signed by the U.S. Energy Secretary Bill Richardson and the Minister of Energy and Natural Resources of Turkey C. Ersümer in November 1999. The U.S. has been supporting Turkey to create an East-West Eurasian Energy Transportation Corridor from Central Asia and the Caucasus through Turkey to Europe and other markets. During the visit of President Clinton to Turkey on 15-19 November 1999, five multilateral energy cooperation agreements were signed.

As members of Congress from 13-state Appalachian region have launched a new trade initiative with Turkey, the Turkish - U.S. Business Council intends to reach different key locations within the region to diffuse information on opportunities for collaboration. The first meeting took place in Shepherdstown, WV in March 2001 with the participation of 300 businessmen, whereas the second meeting was held in March 22, 2002 in Pittsburgh, PA.

The State of West Virginia will be leading a trade and investment mission to Turkey on May 4-11, 2002, focusing on the mining equipment, building products and defense industries.


The Export - Import Bank of the United States, the United States Trade Development Agency (TDA) and the Overseas Private Investment Corporation (OPIC) have all invested in various initiatives in Turkey. In terms of the energy sector, these three agencies are involved in the U.S. Government's Caspian Sea Initiative. Representatives from the TDA, OPIC and Ex-Im Bank are at the Caspian Finance Centre which was set up at the U.S Embassy in Ankara. This office seeks to provide help to companies doing business in the Caspian region.

OPIC offers its full range of services to American investors interested in Turkey, including political risk insurance and actively finances private American investments.

Turkey is Ex-Im Bank's fifth largest market. In March 1995, the U.S. - Turkey Cooperative Financing Agreement was signed between Ex-Im Bank and its Turkish counterpart Turk Eximbank. The aim is to support exports to countries that use both American and Turkish goods and services.

The International Finance Corporation has also been very active in Turkey. Certain strategic objectives include providing support for the export - oriented private sector, banking sector, infrastructure, agribusiness and social sector investments. Turkey is the leading recipient of IFC investment financing in Europe.

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Textiles & apparel

Currently 22 textiles and 15 clothing categories, comprising 85 % of Turkey's total textiles exports are subject to quota limits.

Anti-Dumping and Countervaling Duties

The anti-dumping and countervailing duties on products such as dry pasta and iron and steel continue to occupy the agenda of bilateral trade relations.

FDA Implementation

The biggest problem faced by exporters of agricultural produce is the delays resulting from American Food and Drug Administration (FDA) testing.


The increase on duties and export subsidies is placing hardships on American companies. U.S. companies complain that import certificates and phytosanitary control documents are being delayed or not issued which inturn affects U.S. cheese soyflour, corn, wheat, fruit, bananas, rice, beer, pulses and soy meal.


The main focus of the U.S. energy companies has been on the abrupt cancellation of numerous power projects awarded by the Turkish Government. Numerous U.S. companies have invested millions of dollars in development costs over the years with respect to these TOR and BOT projects. Accordingly, U.S. side asks for compensation of their development expenses and lost of profits.

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 Bilateral Agreements Between Turkey and The U.S.

  • Agreement on Trade and Navigation (1929)
  • Agreement on Defence and Economic Cooperation (1980)
  • Agreement on Reciprocal Promotion and Protection of Investments (1985)
  • Main Donation Agreement (1991)
  • Agreement on Science and Technical Cooperation (1994)
  • Memorandum of Understanding on Agricultural Cooperation (1995)
  • Global Learning and Observations to Benefit the Environment Agreement (1995)
  • Agreement on Avoidance of Double Taxation (1996)
  • Customs Cooperation Agreement (1996)
  • Memorandum of Understanding on Establishing the Turkey-U.S. Business Development Council (1996)
  • Joint Communique on Turkey-U.S. Joint Economic Commission (1996)
  • Memorandum of Understanding on Establishing Commercial Consultations Mechanism between Turkey and the U.S. (1998)
  • Agreement Concerning the Development of Trade and Investment Relations (September 29, 1999)
  • Cooperation Agreement for the Peaceful Use of Nuclear Energy (November 1999)
  • Joint Statement for Bilateral Cooperation with respect to the Successful Financing and Development of Irrigation Projects (November, 1999)
  • Agreement on the activity of "Alpha Station" in Turkey and the transfer of management rights from the U.S. military offices to the Boðaziçi University, Kandilli Observatory and Earthquake Research Institute (November 1999)
  • Protocol of Intentions Between the Federal Emergency Management Agency and the Ministry of Public Works and Settlement, General Directorate of Disaster Affairs of the Republic of Turkey on Cooperation in Natural and Man-made Technological Emergency Prevention and Response (November 16, 1999)
  • Agreement Between The Government of The Republic of Turkey and The
  • Government of The United States of America Concerning The
  • Develepment of Trade and Investment Relations (September 29, 1999)
  • Joint Statement on Establishing Economic Partnership Commission (January 16, 2002)
TURKISH-U.S. TRADE (Million U.S. Dollars)

TURKISH-U.S. TRADE by Product (2001)
(Million U.S. Dollars)

Knitted clothing
Boilers and machines
Non-knitted clothing
Raw cotton
Electrical machines
Iron and steel
Boilers and machines
Organic chemicals
Raw cotton

Source: Undersecretariat of Foreign Trade

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