Joining the global value chain…!

The theory of foreign trade does not whatsoever propose any approach that praises protectionism or isolation. It only studies people who got involved in such type of commercial methods from a historical point of view. There are people who still think that protectionism is useful despite the undeniable presence of numerous tested and approved facts. The World Bank offers a global solution to every country in its latest “Global Value Chain” report.

I’ve had the chance to see and hear some interesting things while I was acting as moderator for a meeting held earlier this week to promote the World Bank’s report, which basically tells us: “The countries that participate in the Global Value Chain help increase the value added, the employment as well as the global and national GDP”. The Global Value Chain doesn’t only mean producing goods and services to sell them to foreign countries. It actually involves creating an international supply chain to boost both the country’s and the region’s prosperity.

As a matter of fact, “specialization in foreign trade and cooperation” is often emphasized in Economic Theory, according to which, the more liberal you become in foreign trade the higher will be the level of specialization and cooperation you achieve. It also suggests that specialization and cooperation can help improve the quality of human capital and eventually have to a trading routine with tariff simplification. The world history is full of examples where trade helped both the world peace and prosperity.

Unfortunately, most of the time people chose to use protectionism in their trading activities rather than being more liberal. Especially in the 20thcentury, not only the political leaders, but the business leaders as well chose not to engage in international cooperation so as to take shelter against foreign competition. During that period, everyone has been racing against each other to establish “integrated production plants” that were equipped all stages of production from A to Z. But, they didn’t know or didn’t care that these operations could have been carried for a lot less money and turned into something more profitable with if they chose to create an international cooperation and specialization.

“The problem is not the governments; it’s the business world…”

“You’re absolutely right in everything you say, but how will you convince the business leaders if they say no?” I asked to Caroline Freund, Global Director of Trade, Investment and Competitiveness at the World Bank, when she finished her presentation. Just like in every country in the world, in Turkey too, the government usually does what the business leaders want. These “business leaders” who demand various barriers such as additional customs duties and specialized customs to discourage their foreign are in fact the biggest supporters of practices that can increase inflation exchange rates and interest rates.

Freund’s response to my question was rather cautious: “The business world will always ask for all sorts of favours. But it is the State’s duty to do whatever necessary for society. Given the fact that it is the government that represents the State, it should garner the necessary willpower to control and regulate the activities of companies accordingly by using all of its power if need be”.

The fact that Turkey became a member of the Customs Union years ago actually affirms what Freund says is true. The then Prime Minister Tansu Çiller had shown real tenacity in achieving this goal despite heavy objections from Turkish business world. Ultimately, many of the Holdings and Companies that objected to Çiller back in the day have later become capable of selling goods and services to the whole world. They established factories abroad not to mention they were able to buy raw materials, intermediate goods, and investment goods from different countries. It’s a great accomplishment indeed that Turkish manufacturing has greatly improved only in 30 years, especially when I think about the goods we used to produce in the past like cars with broken centre consoles, washing machines walking all over floors and, noisy refrigerators.

In short, protectionism will not help us get nowhere good no matter what Trump says. Unfortunately, in Turkey, we are making the same mistake because of people trying to control all parts of the industry instead of managing their own companies. It’s just not rational to embrace approaches that punish the industry with high debt levels and unprofitability whereas we may have been improving value added performance, technology and human capital with the help of Global Value Chain.