Tariffs, Trade, and Türkiye: A Case of Global Interdependence

Tariffs are essentially taxes on imported goods. Recent developments involving U.S.-imposed tariffs not only impact its own market but also create ripple effects across the globe, particularly in countries like Türkiye. The central theme here is interdependence, emphasizing how economies are intricately linked through global trade.

The situation can be understood through a simplified economic model representing the U.S. domestic market. Although the model assumes a small-country framework—where a country’s trade activity doesn’t influence global prices—in reality, the U.S. import behavior could affect world prices due to relatively inelastic global supply.

Initially, Türkiye exports a quantity represented by Q1Q4, generating revenue shown as the area TVQ4Q1. After the U.S. imposes a 10% tariff, Turkish exporters must sell at the same price while paying PwxTPw to the U.S. government as tariffs. As a result, the export volume drops to Q2Q3, reducing revenues to KVQ3Q4 + ZTQ1Q2.

However, the situation is nuanced. Turkish exporters might still gain a relative advantage over competitors like China and the EU, who face higher tariffs. This relative price competitiveness can shift the demand curve for Turkish exports rightward (from D1 to D2), as American importers look for cheaper alternatives. Consequently, export volume rises to Q5Q3, boosting revenue by KLQ5Q3 and recovering the earlier loss (KVQ3Q4). Additionally, the new demand adds further gains (VLQ5Q4). This dynamic demonstrates that a country’s export performance is not solely shaped by domestic factors but also by the global positioning of its competitors.

Whether this demand shift fully offsets the initial revenue loss (TZQ1Q2) depends on its magnitude. The outcome hinges on two key elasticities. First is the cross-price elasticity of demand (XED): Turkish goods will benefit more in sectors where they are close substitutes for goods from heavily taxed countries. Second is the price elasticity of demand (PED): goods that are necessities and thus have inelastic demand are less vulnerable to the initial contraction.

Sectors such as chemicals, automotive, furniture, and electronics may be particularly promising. These products often compete closely with global alternatives (implying higher XED) while also being somewhat essential or less sensitive to price changes (implying lower PED). However, there’s a trade-off. When substitutability is high, demand is also more elastic, which can deepen the initial contraction and reduce the gains from demand shifts.

An important additional factor is brand loyalty among American consumers. If buyers are less attached to current suppliers and open to new alternatives, Turkish products can secure a stronger foothold, enhancing the potential benefit of this trade environment. Türkiye’s success, then, is closely tied to the relative position and perception of its competitors—an embodiment of interdependence in trade.

Another channel through which Türkiye may benefit involves foreign direct investment (FDI). Companies located in countries hit by higher U.S. tariffs may consider investing in Türkiye to access the American market via Turkish production. These investors would need to convert capital into Turkish lira, driving up demand for the currency (from D1 to D2), creating excess demand (Q1Q3), and pushing the market toward a new equilibrium (e2Q2). This likely appreciation of the lira underscores how trade can influence exchange rates—another layer of global economic interdependence.

However, currency appreciation comes with drawbacks. As the lira strengthens, Turkish exports become more expensive for foreign buyers while imports become cheaper for Turkish consumers. This could worsen Türkiye’s balance of trade (BOT) and expose domestic industries to greater competition, particularly in vulnerable sectors such as textiles and apparel. In fact, the U.S. supplies more than half the cotton used in Türkiye’s textile sector, which exported around $1 billion to the U.S. in 2024. These structural dependencies reinforce the need for stronger institutional frameworks to protect domestic markets.

One possible short-term policy response is the use of retaliatory tariffs. While this could shield strategic sectors—such as steel, crucial for both military and infrastructure—it risks triggering a chain reaction. A round of retaliatory measures could harm the global multiplier, dragging down overall world output. This sequence of events illustrates how trade decisions in one country can reverberate internationally, creating a cascade of reciprocal actions.

Ultimately, the evolving trade relationship between the U.S. and Türkiye is a powerful case study in economic interdependence. The outcomes for Türkiye will depend not only on tariff levels but also on global market positioning, consumer preferences, investment flows, and institutional readiness. Protectionist policies may offer short-term advantages in specific sectors, but they also invite complex consequences that stretch far beyond bilateral trade flows.