DRAFT NATIONAL TRADE ESTIMATE REPORT

UNCLAS SECTION 01 OF 06 ANKARA 007777

SIPDIS


STATE FOR EB/TPP/MTA/MST
TREASURY FOR OASIA
DEPT PLEASE PASS USTR FOR GBLUE/LERRION
FAS FOR ITP/THORBURN
USDOC FOR ITA/MAC/DDEFALCO


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


Ref: STATE 310953


The following is Embassy's input for the National Trade
Estimate Report for Turkey:


TRADE SUMMARY


Turkey is a beneficiary of GSP, has Bilateral
Investment and Tax Treaties with the United States, and
has a customs union with the European Union.
(Trade/investment statistics to be provided by
Washington agencies).


IMPORT POLICIES


Tariffs and Quantitative Restrictions


As a result of its 1996 customs union with the European
Union, Turkey applies the EU's common external customs
tariff for third country (including U.S.) imports and
imposes no duty on non-agricultural items from EU and
European Free Trade Association (EFTA) countries. The
simple average tariff for industrial products from the
United States and other third countries dropped to 4.4
percent in 2003. Turkey's harmonization of trade and
customs regulations with those of the EU and the
overall decline in tariff rates benefits third country
exporters.


Turkey maintains high tariff rates (25 percent average
Most-Favored-Nation rate) on many food and agricultural
products to protect domestic producers. Imports of
animal products carry the highest tariffs, with ad
valorem rates ranging up to 227.5 percent on meat
products and edible meat offal. The Turkish government
often increases tariffs during the domestic harvest or
during times of high stocks. In 2003, the government
increased the tariff on corn from 20 to 70 percent.
High feed prices have negatively impacted Turkish
livestock industries, particularly for beef and
poultry. Duties on fruits range from 61 percent to 149
percent. Processed fruits, fruit juices and vegetable
tariffs range between 41 and 138 percent. The GOT also
levies high duties as well as excise taxes and other
domestic charges on imported alcoholic beverages that
increase wholesale prices by more than 200 percent.


Import Licenses and Other Restrictions


While import licenses generally are not required for
industrial products, products which need after-sales
service (e.g., photocopiers, ADP equipment, diesel
generators) require licenses. Non-tariff barriers
result in costly delays, demurrage charges, and other
uncertainties that stifle trade for many agricultural
products.


Private traders report that Turkish import policies are
often implemented in a nontransparent manner. In
addition, gaps in communication between Ankara and
regional offices often result in improper
implementation of regulations. Turkey is in the
process of rewriting its import regulations for
agriculture products in order to comply with EU
regulations. However, some new regulations have not
been fully consistent with those of the EU. For many
products, no written standards exist. For example,
despite repeated requests, the GOT failed to provide
guidelines for red meat imports. For the past four
years, the Ministry of Agriculture and Rural Affairs
(MARA),through its quarantine service, stopped issuing
import licenses for rice prior to the harvest. In July
2003, the GOT stopped issuing licenses and has not
lifted this ban as of December.


The import process for alcoholic beverages is
exceedingly complicated, requiring both MARA control
certificates and TEKEL (a parastatal company) permits
which strictly limit trade and distribution channels
and are made available under only limited and
unpredictable circumstances. The government is in the
process of privatizing the alcohol operations of TEKEL.
Recent changes in Turkish law call for a liberalization
of the spirits and tobacco market over a five-year
period, which should improve the competitive
environment.


Turkey applies discriminatory price controls for
imported pharmaceuticals, allowing lower mark-ups for
imported drugs relative to those produced domestically.
U.S. pharmaceuticals companies claim this policy has
cost them over USD 250 million since it was last
modified in April 2001.


STANDARDS, TESTING, LABELING AND CERTIFICATION
The Turkish government has not consistently notified
the WTO of changes in import policies and phytosanitary
requirements, and implementation has been arbitrary.
Importers have had increasing difficulty in obtaining
information on sanitary and phytosanitary
certifications. The GOT often requires laboratory
testing on items not normally subject to testing by
trading partners, often without any scientific basis.
Finally, the GOT often requires phytosanitary
certification on quality issues that are normally
handled on a contractual basis.


The government requires laboratory tests and
certification that quality standards are met for the
importation of foods, human and veterinary drugs, and
medical equipment and appliances intended for use by
humans.


GOVERNMENT PROCUREMENT


Turkey is not a signatory of the WTO Government
Procurement Agreement. Although its laws require
competitive bidding procedures for tenders, U.S.
companies sometimes become frustrated over lengthy and
often complicated bidding and negotiating processes.
Some tenders, especially large projects involving co-
production, are frequently opened, closed, revised, and
opened again.


In 2003, a new public tender law which establishes an
independent board to oversee public tenders, and lowers
the minimum bidding threshold at which foreign
companies can participate in state tenders, entered
into force. However, the law gives a price preference
of up to 15 percent for domestic bidders and is not
applicable to domestic bidders who form a joint venture
with foreign bidders. Amendments to the law in 2003
enlarged the definition of domestic bidder to include
corporate entities established under Turkish law,
including those established by foreign companies.


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


The entry into force of a Bilateral Tax Treaty between
the United States and Turkey in 1998 eliminated the
application of a 15 percent withholding tax on U.S.
bidders for Turkish government contracts.


EXPORT SUBSIDIES


Turkey employs a number of incentives to promote
exports, although programs have been scaled back in
recent years to comply with EU directives and WTO
standards. Historically, wheat and sugar were the main
subsidized commodities. Export subsidies, ranging from
10 to 20 percent of export values, are granted to 16
agricultural or processed agricultural products. The
Turkish Eximbank provides exporters with credits,
guarantees, and insurance programs. Certain tax
credits also are available to exporters.


INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION


Turkey's intellectual property rights regime has
improved in recent years, but still presents serious
problems. Beginning in 1995, the Turkish Parliament
approved a series of patent, trademark and copyright
laws in connection with Turkey's customs union with the
EU and the WTO Agreement on Trade Related Aspects of
Intellectual Property Rights (TRIPS). In recognition
of Turkey's progress in the IPR area, USTR removed
Turkey from its Special 301 Priority Watch List and
placed the country on its Watch List in 2002, where it
remained in 2003.


Turkey's 2001 copyright law substantially modernized
the legal regime, providing deterrent penalties for
copyright infringement. However, it does not prohibit
circumvention of technical protection measures, a key
feature of the World Intellectual Property Organization
(WIPO) "Internet" treaties. In addition, the Turkish
courts have failed to render deterrent penalties to
pirates as provided in the copyright law. They have
instead applied the Turkish Cinema Law, which has much
lower penalties. The copyright industries' key demand
is for better enforcement. Currently, the police
generally do not intervene in pirate production or
sales unless the rightholder specifically requests that
they do so. U.S. industry estimated losses to piracy
at USD 93 million in 2002.


In 1995, new patent, trademark, industrial design, and
geographic indicator laws revamped Turkey's foundation
for industrial property protection. Turkey also
acceded to a number of international conventions,
including the Stockholm Act of the Paris Convention,
the Patent Cooperation Treaty, and the Strasbourg
Agreement. Although the Turkish Patent Institute (TPI)
was established in 1994 to support technological
progress, protect intellectual property rights and
provide public information on intellectual property
rights, it is currently understaffed.


In accordance with the 1995 patent law and Turkey's
agreement with the EU, patent protection for
pharmaceuticals began on January 1, 1999. Turkey has
been accepting patent applications since 1996 in
compliance with the TRIPS agreement "mailbox"
provisions. The patent law does not, however, contain
interim protection for pharmaceuticals in the R&D
"pipeline."


The key intellectual property concern for research-
based pharmaceutical companies is Turkey's lack of data
exclusivity protection for confidential test data,
which is required by the TRIPS agreement. U.S.
industry contends that at least 165 products infringing
data exclusivity have been approved or are pending
review by the Turkish Health Ministry, and that lack of
data exclusivity protection costs U.S. companies some
USD 400 million annually in lost sales. Patent holders
have also note that the Health Ministry has accepted
applications to register generic copies of products
which have a valid patent in Turkey.


Trademark holders also contend that there is widespread
and often sophisticated counterfeiting of their marks
in Turkey. According to one industry association,
Turkey is the world's third-largest exporter of
counterfeit products.


SERVICES BARRIERS


Telecommunications Services


State-owned Turk Telekom currently provides voice
telephony and most value-added and basic
telecommunications services. In the WTO negotiations
on Basic Telecommunications Services, Turkey made
commitments to provide market access and national
treatment for all services at the end of 2005, and
permitted value-added telecommunications services to be
licensed to the private sector with a 49 percent limit
on foreign equity investment. In the interim, Turkey
committed to provide national treatment for mobile,
paging and private data networks. In 2000, the Turkish
government passed a law unilaterally accelerating the
opening of the market for basic telephone services to
January 1, 2004. A 2001 law provides for
liberalization of areas under the Turk Telecom monopoly
once the state's share in that company falls below 50
percent. The Turkish government has not yet issued
implementing regulations. These laws also created an
independent regulatory body - the Telecommunications
Regulatory Board - and made licensing criteria publicly
available. U.S. firms complain that the licensing
process still lacks transparency and that revenue
sharing with Turk Telecom is required where competition
is permitted. There are three private GSM cellular
operators in Turkey, with a fourth license held by Turk
Telecom.


The Turkish government plans to announce its strategy
for privatizing Turk Telekom in the near future. In
November 2003, the Transport and Communications
Minister said that the Council of Ministers had agreed
on a block sale of a majority stake in Turk Telecom by
the end of May 2004, with a possible sale of additional
shares to the public after that date. The Minister
stated that foreign investors would be eligible to buy
a majority stake in the company.


Other Services Barriers


There are restrictions on establishment in financial
services, the petroleum sector, broadcasting, aviation
and maritime transportation (see Investment Barriers
section). A 2003 law on work permits for foreigners
repealed earlier legislation defining certain
professions and services open only to Turkish citizens.
This has significantly broadened the range of
occupations in which foreigners can be engaged, but
there are still restrictions for doctors, attorneys and
several other professions.


INVESTMENT BARRIERS


The U.S.-Turkish Bilateral Investment Treaty (BIT)
entered into force in May 1990. Turkey has a liberal
investment regime in which foreign investments receive
national treatment. Once approved, firms with foreign
capital are treated as local companies. However,
private sector investment is often hindered, regardless
of nationality, by: excessive bureaucracy; political
and macroeconomic uncertainty; weaknesses in the
judicial system; high tax rates; a weak framework for
corporate governance; and frequent, sometimes unclear
changes in the legal and regulatory environment.


Almost all areas open to the Turkish private sector are
fully open to foreign participation, but establishments
in the financial and petroleum sectors require special
permission. The equity participation ratio of foreign
shareholders is restricted to 20 percent in
broadcasting and 49 percent in aviation, value-added
telecommunications services, and maritime
transportation. Nonetheless, once investors have
committed to the Turkish market, they sometimes find
the rationale for their initial investments
significantly undercut by arbitrary legislative action,
such as laws imposing limits on the production corn
sweeteners.


The Turkish government accepts binding international
arbitration of investment disputes between foreign
investors and the state; this principle is enshrined in
the U.S.-Turkish BIT. For many years, there was an
exception for "concessions" involving private
(primarily foreign) investment in public services. In
1999, the Parliament passed a package of amendments to
the constitution allowing foreign companies access to
international arbitration for concessionary contracts.
In 2000, the Turkish government completed implementing
legislation for arbitration. In 2001, the Parliament
approved a law further expanding the scope of
international arbitration in Turkish contracts.


In 2003, Parliament passed legislation which
streamlined the process of establishing a company in
Turkey, and which eliminated screening of foreign
investors in favor of a notification system, provided
national treatment for foreign-owned entities in
acquisition of real estate, and abolished of specific
minimum capital requirements for foreign investors.
The Turkish government passed legislation in February
2001 that will introduce a fully liberalized energy
market, under which private firms will develop projects
with the approval of an independent regulatory body,
but little progress has been made in privatizing power
generation and distribution.


ANTICOMPETITIVE PRACTICES


As part of its customs union agreement with the EU,
Turkey has pledged to adopt EU standards concerning
competition and consumer protection. In 1997, a
government "Competition Board" commenced operations,
putting into force a 1994 competition law. Government
monopolies in a number of areas, particularly alcoholic
beverages and telecommunications services, have been
scaled back in recent years, but currently remain a
barrier to certain U.S. products and services.


Corruption


CORRUPTION IS PERCEIVED TO BE A MAJOR PROBLEM IN
TURKEY BY PRIVATE ENTERPRISE AND THE PUBLIC AT
LARGE.


Corruption appears to be most problematic in government
procurement, with frequent allegations that contracts
are awarded on the basis of personal and political
relationships of businesspersons and government
officials. The judicial system is also perceived to be
susceptible to external political and commercial
influence to some degree.


U.S. firms have sometimes alleged that corruption, or
at a minimum, nontransparent practices, have been a
barrier to direct foreign investment. American
companies operating in Turkey have complained about
contributions to the community solicited, with varying
degrees of pressure, by municipal or local authorities.


The Turkish government conducted two significant anti-
corruption operations in 2001, one in the energy
ministry and the other in the public works ministry.
Several individuals were charged with corruption and
wrongdoing in government contract tenders. Parliament
continues to probe corruption allegations involving
senior officials in previous governments, particularly
in connection with energy projects. In 2003, after the
government intervention in a bank owned by the Uzan
group, evidence of corrupt practices at the bank was
discovered.


Turkey ratified the OECD antibribery convention, and
passed implementing legislation providing that bribes
of foreign officials, as well as domestic, are illegal
and not tax deductible. In 2003, Turkey ratified the
convention on Combatting Bribery of Foreign Public
Officials in International Transactions, the Council of
Europe's Civil Law on Corruption and the UN Convention
against Transnational Organized Crime. The GOT has
signed the Council of Europe's Criminal Law on
Corruption, but has not ratified it. The Turkish
Government signed the UN Convention Against Corruption
in Dec 2003.


OTHER BARRIERS


Energy: In 2001, the Turkish Government cancelled 46
contracted power projects based on the build-operate-
transfer (BOT) and transfer-of-operating-rights (TOR)
models. Turkey's constitutional court ruled in 2002
that the government would have to either honor the
contracts or compensate the companies involved. To
date, the Turkish government has not commenced
negotiations with the companies, one of which has
launched an international arbitration case. In 2002,
the government required BOT projects already in
operation -- which include U.S.-owned companies -- to
apply for new licenses from the new Energy Market
Regulatory Authority (EMRA),and has pressed them
unilaterally to lower their prices while the license
application process is still underway.
Cola tax: Punitive taxation of cola drinks (raised in
2002 to 47.5 percent under Turkey's "Special
Consumption Tax") discourages investment by major U.S.
cola producers.
Corporate Governance: Weaknesses in the protection of
minority shareholder rights and regulatory oversight
have left some American companies at a disadvantage in
disputes with Turkish partners.
Edelman