Import tariffs appear to have become the weapon of choice for this U.S. administration.
Some administrations use military power, but Trump prefers economic pressure to achieve his ends.
His latest skirmish is with Turkey — not that many in the U.S. would notice yet, but in Turkey it is abundantly clear they are under attack.
Value of Turkish Lira Plunges
What sparked the crisis we will come to, but the immediate impact has been a collapse of the Turkish lira, plunging 12% late last week to a new record low — off by a third since the start of the year — in a slide that started with fears of mismanagement of the economy, according to the Financial Times. However, weakness this year has been greatly exacerbated by the current standoff with the U.S.
So severe has been the currency’s slide that it is causing contagion in other emerging market currencies. The Russian rouble is at a two-year low – itself suffering from a similar standoff with the U.S. over sanctions. But other emerging-market (EM) currencies are also down, as are global stock markets, in a marked risk-off shift by investors unnerved by deteriorating trade relations between the U.S. and the rest of the world.
Commodities have followed suit. Oil and gold are both down. It remains to be seen if metals will come off as the dollar rises relative to other currencies, as U.S. Treasuries are back in fashion for a risk-averse market.
How Did the U.S., Turkey Get Here?
So, what caused the rift that led to two NATO allies getting to such a situation?
Turkey was already subject to the 10% on aluminum and 25% on steel import tariffs applied to much of the rest of the world, but a breakdown in negotiations between the two governments for the release of an American pastor, Andrew Brunson, seems to have sparked the announcement by President Trump that tariffs on Turkish metal products should be doubled to 20% for aluminum and 50% for steel. We say “appear” because no reason for the increase was given and some speculation remains that the 15% devaluation in the Lira was undoing the impact of the original tariffs, so the simple answer from the White House was to double them.
However, the detention of the American pastor on terrorism-related charges is certainly an issue. The U.S. claims the allegations are bogus and have been trumped up to use as a negotiating tool to force the U.S. to extradite Fethullah Gülen, a Turkish preacher who Turkish President Erdogan claims is responsible for a failed 2016 coup attempt. There is little or no evidence this is true and the demand for extradition probably has more to do with Ankara’s angst at Gülen’s ongoing criticism of the regime’s behavior and legitimacy than any hard evidence he was involved in the coup.
However, Turkey blocked the agreed release of Brunson from prison and commuted his position to house arrest rather than repatriation to the U.S., sparking the breakdown between Washington and Ankara.
What started as a minor spat has, to Ankara’s dismay, spiraled into an economic crisis.
Foreign banks are withholding funding for fear of further sanctions and may soon call in lira debts over fears companies will not be able to meet their commitments. Certainly, the European Central Bank was looking into lenders with the biggest exposure to Turkey’s economy prompting a slide in bank share prices across Europe.
According to the Washington Post, steel imports from Turkey have already fallen sharply, with only 4% of U.S. steel imports coming from Turkey in the first half of 2018, almost 50% below 2017.