Turkey's industrial and supply chain policy: Goals and prospects for German-Turkish economic cooperation and bilateral relations

Aydın, Yaşar Research Report Turkey's industrial and supply chain policy: Goals and prospects for German-Turkish economic cooperation and bilateral relations SWP Research Paper, No. 2/2025 Provided in Cooperation with: Stiftung Wissenschaft und Politik (SWP), German Institute for International and Security Affairs, Berlin Suggested Citation: Aydın, Yaşar (2025) : Turkey's industrial and supply chain policy: Goals and prospects for German-Turkish economic cooperation and bilateral relations, SWP Research Paper, No. 2/2025, Stiftung Wissenschaft und Politik (SWP), Berlin, https://doi.org/10.18449/2025RP02 This Version is available at: https://hdl.handle.net/10419/325477 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ SWP Research Paper Stiftung Wissenschaft und Politik German Institute for International and Security Affairs Yaşar Aydın Turkey’s Industrial and Supply Chain Policy Goals and Prospects for German-Turkish Economic Cooperation and Bilateral Relations SWP Research Paper 2 August 2025, Berlin Abstract ∎ Turkey’s geopolitically motivated industrial and supply chain policy implies close ties to Germany as well as a security and economic policy orientation towards the EU. ∎ Ankara wants to bring production and sales into line with EU standards and establish a green high-tech and services economy. However, its decarbonisation measures remain inadequate. ∎ Turkish stakeholders see disruptions to global supply chains as creating the opportunity to relocate European production chains to Turkey (nearshoring). The government, the private sector and business organisations are all working to expand sustainable energy supplies. ∎ Turkey’s authoritarian domestic policy – namely, the dismantling of democracy, repression and disregard for the rule of law – makes it extremely difficult to deepen bilateral cooperation. ∎ Despite close economic ties, there are normative differences between Germany and Turkey and a consistent strategy to overcome them is lacking. Rather, the Turkish government is focused on using industrial policy to compensate for shortcomings in the rule of law. ∎ Amid the geopolitical tensions between the United States and China, Turkey is performing a delicate balancing act: it is maintaining its ties to the West while at the same time expanding its technology partnership with China and energy cooperation with Russia. ∎ German policy towards Turkey requires a strategic rethink. It should endeavour to promote economic stability, strengthen Turkey’s security policy integration into Europe and counteract Ankara’s strategic rapprochement with Moscow and Beijing. Going forward, cooperation should be made conditional on democracy, the rule of law and human rights. SWP Research Paper Stiftung Wissenschaft und Politik German Institute for International and Security Affairs Yaşar Aydın Turkey’s Industrial and Supply Chain Policy Goals and Prospects for German-Turkish Economic Cooperation and Bilateral Relations SWP Research Paper 2 August 2025, Berlin This work is licensed under CC BY 4.0 SWP Research Papers are peer reviewed by senior researchers and the executive board of the Institute. They are also subject to factchecking and copy-editing. For further information on our quality control procedures, please visit the SWP website: https:// www.swp-berlin.org/en/ about-swp/qualitymanagement-for-swppublications/. SWP Research Papers reflect the views of the author(s). SWP Stiftung Wissenschaft und Politik German Institute for International and Security Affairs Ludwigkirchplatz 3–4 10719 Berlin Germany Phone +49 30 880 07-0 Fax +49 30 880 07-200 www.swp-berlin.org [email protected] ISSN (Print) 2747-5123 ISSN (Online) 1863-1053 DOI: 10.18449/2025RP02 (English version of SWP-Studie 11/2025) Table of Contents 5 Issues and Conclusions 7 Turkey: Geopolitical Repositioning and Diversification of Supply Chain Integration 8 Turkey’s ‘Grand Strategy’ 9 Ankara’s calculation: More room for manoeuvre through multipolarity 10 Opportunities for Turkey through US-China rivalry 12 German-Turkish Economic and Supply Chain Integration 12 Growing bilateral trade 12 Raw material and agricultural imports from Turkey 14 German investments in Turkey 16 Turkish companies in global value chains 16 Turkish companies in German value chains 19 Turkish Industrial Policy: Challenges and Opportunities 19 Restructuring supply chains 20 Goals of Turkish industrial policy 21 Goals of Turkish energy policy 25 European Green Deal and CBAM: Blessing or curse? 27 Economic policy and regional challenges 30 Turkish Supply Chain Policy: Shortcomings and Prospects 30 Turkey’s supply chain policy 30 German and European supply chain governance 31 Areas of cooperation: Energy, automotive and defence 34 Conclusions and Recommendations 36 Abbreviations Dr Yaşar Aydın is a researcher at SWP’s Centre for Applied Turkish Studies (CATS). SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 5 Issues and Conclusions Turkey’s Industrial and Supply Chain Policy. Goals and Prospects for GermanTurkish Economic Cooperation and Bilateral Relations German-Turkish relations have been volatile in recent years, mainly owing to Turkey’s autocratisation and its transactional foreign policy. Ankara’s main foreign-policy goal is to reduce the country’s growing security dependence on the European Union (EU) and the United States (US). The guiding principles here are “diverse orientations”, “flexible alliances” and “issuerelated cooperation”. It could be argued that these principles suggest Turkey is turning away from the West, especially the US and the EU. But this research paper argues that inherent in Turkey’s industrial and supply chain policy is a strong drive towards cooperation with the EU and Germany. Anchored in a geopolitically and geoeconomically motivated “Grand Strategy”, Turkey’s industrial and supply chain policy serves as a pull factor and keeps Turkey in NATO and within the orbit of the EU – and thus Germany. At the same time, economic cooperation with Russia and China as well as attempts to establish closer ties to the BRICS (Brazil, Russia, India, China and South Africa) are also part of Ankara’s foreign trade strategy. In accordance with this strategy, Turkey wants to diversify its export markets and leave various cooperation options open in a world characterised by multipolar interdependencies. Turkey’s industrial policy is centred around a supply chain strategy and an energy policy that is oriented towards the EU. The aim is to transition to a green high-tech and services economy that is carbonfree and to achieve the closer integration of Turkish companies into European and German supply chains. But although Turkey is pursuing ambitious goals, there are considerable weaknesses in its implementation of decarbonisation measures. Despite political tensions, German-Turkish economic relations have expanded and diversified in recent years. Germany is Turkey’s most important trading partner in the EU. However, the current trend can be expected to continue only if regulatory risks – such as those arising from supply-chain governance requirements and the European Green Deal (EGD) – are mitigated by the state and through entrepreneur- Issues and Conclusions SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 6 ial activity. These risks present a challenge for bilateral trade, for German direct investment in Turkey and for the integration of Turkish suppliers into German supply chains. If Turkish economic policy fails to develop suitable strategies and the private sector does not make the necessary adjustments, the economic ties between the two countries could weaken. The answer to the central question of this research paper – whether the trend towards economic integration will continue or reverse – can be summarised as follows: the Turkish government, the private sector and business organisations are working closely together to ensure compliance with the EGD, accelerate the transition to sustainable energy supplies and strengthen Turkey’s position in Europe’s supply chains. Although Ankara is striving to improve the investment climate in the country, the effectiveness of purely economic policy initiatives is limited by democratic shortcomings and disregard for the rule of law. While Turkey distancing itself strategically from the EU and Germany does not appear a rational prospect, it cannot be ruled out in the context of geopolitical and regional crises and Turkey’s intensified autocratisation. Ankara’s current efforts to deliberately weaken the opposition requires a new Turkey strategy – one that enables Germany and the EU to put their economic and political relations with Turkey on a sustainable footing without indirectly legitimising authoritarian tendencies. Raw material and agricultural imports from Turkey SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 13 Raw material and agricultural imports from Turkey Figure 1 Figure 2 German-Turkish Economic and Supply Chain Integration SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 14 of most raw materials. 30 However, Turkey is the main supplier of the critical raw material boron to the EU and Germany in particular: around 98 per cent of EU demand is met by Turkish production. Boron is strategically important because of its use in numerous key industries, including defence, aerospace and rocket fuels, specialised weapons as well as glass and ceramics, manufacturing, agriculture (for example, as a fertiliser), detergent production, nanotechnology, automotive engineering, energy technology, metallurgy and construction – in short, wherever hardness, chemical stability and heat resistance are required. Owing to its broad industrial use, boron is of considerable economic relevance; and security of supply is at high risk when there are delivery bottlenecks. In terms of reserves, Turkey is the global leader, with a share of around 73 per cent, ahead of Russia and the US. 31 Turkey is also a supplier of agricultural products. In 2023, Germany imported agricultural products worth €1.8 billion from Turkey. That is the equivalent of 0.8 per cent of total German imports of agricultural and food products. 32 German investments in Turkey Germany is one of the most important countries of origin for foreign direct investment in Turkey – in terms of volume, duration of presence and number of companies (see Figure 6, p. 17). As of late 2024, German direct investment in Turkey since 1980 stood at almost US$14.5 billion. 33 In 2023 alone, some US$687 million was invested by German firms (compared with US$972 million the previous year). As of August 2023, 30 Lisandra Flach et al., Wie abhängig ist Deutschland von Rohstoffimporten? Eine Analyse für die Produktion von Schlüsseltechnologien [How dependent is Germany on raw material imports? An analysis for the production of key technologies] (Munich, 2022), https://tinyurl.com/2p8xpsk2 (accessed 12 November 2024). 31 See “Türkei besitzt fast alle Bor-Reserven der Welt” [Turkey Has Almost All the World’s Boron Reserves], Deutsche Wirtschaftsnachrichten, 10 February 2018, https://tinyurl.com/ mr2eu7bj (accessed 12 November 2024). 32 Federal Ministry of Food and Agriculture (BMEL), “Außenhandel mit der Türkei” [Foreign trade with Turkey] (online), https://tinyurl.com/3andeb7y (accessed 12 November 2024). 33 See German Representative Offices in Turkey, “Deutsche Investitionen in der Türkei” [German investments in Turkey] (online), https://tinyurl.com/vzef7xua (accessed 12 November 2024). more than 8,000 companies with German capital investment were registered in Turkey, providing employment for more than 100,000 people. Most German direct investments in Turkey are transformative investments that have contributed to the creation of a large number of jobs. German companies are represented in many sectors: industrial production, marketing, services and retail. For example, the North Rhine-Westphalian family business EJOT, which specialises in joining and fastening technology, invested €25 million in a new plant. 34 Mercedes-Benz Türk has a bus plant in Istanbul and a lorry plant in Aksaray. While neither BMW nor Audi has its own production facilities in Turkey, both companies work with Turkish suppliers. As Europe’s fourth-largest car-manufacturing country, Turkey is an important procurement and supplier market 35 for German car manufacturers. Other major German companies in Turkey include the consumer goods and adhesives manufacturer Henkel, which has been operating in Gebze since 1963 and employs 750 people at three sites. The Bosch Group has a strong presence, too, with five subsidiaries and around 17,500 employees. And Deutsche Post has been active in Turkey for almost 40 years and plans to invest €135 million in a modern operations centre at Istanbul Airport. All in all, Turkey is an attractive economic partner for Germany and a popular location for German companies. Cost advantages, a large sales market and good export prospects – for example, in automotive production – make the country interesting for major global companies like Mercedes-Benz. Turkey’s other advantages include its geographical location at the crossroads of Europe, Asia and Africa, its relatively young population of 84 million, as well as its growing purchasing power, modern transport infrastructure, efficient logistics and dynamic and competitive private sector. Combined, all these factors offer German companies considerable growth opportunities. 34 See Karin Senz, “Warum deutsche Firmen in der Türkei investieren” [Why German Companies Are Investing in Turkey], Tagesschau, 25 June 2023, https://tinyurl.com/ 4p8prbm2 (accessed 27 October 2024). 35 See Turnkey Sourcing, “Großhandel für den Import von Autoteilen und Autozubehören aus der Türkei” [Wholesale trade for the import of car parts and car accessories from Turkey] (online), https://turnkey-sourcing.de/automobil industrie (accessed 11 December 2024). German investments in Turkey SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 15 German investments in Turkey Figure 3 Figure 4 German-Turkish Economic and Supply Chain Integration SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 16 Turkish companies in global value chains Integration into global value chains has a significant impact on a country’s economic strength and prosperity, not least because it paves the way for efficiency gains and technology transfers. There are two pillars on which participation in global value chains rests, namely: ∎ The import of input products (raw materials, intermediate products, expertise) and services that are used in production – both for the domestic market and for export (backward integration); and ∎ The export of input goods and finished products as well as services that are consumed in the export destination country or go into production and are intended either for the domestic market or for export (forward integration). 36 Countries participate in value chains directly via their own finished products and/or the export of input goods or indirectly via supplies for export companies on their own territory or abroad. Small and medium-sized enterprises (SMEs) are often indirectly involved in global value chains as suppliers. 37 Participation in global value chains is determined by several factors, including the infrastructure and connectivity of a country or sector, the regulatory and business environment, the available factors of production and the size of the domestic market. The involvement of Turkish manufacturing companies in global value chains has evolved over the years from limited participation through simple manufacturing products to an advanced role that can be measured by exports of input and intermediate goods. Between 1990 and 2015, Turkey’s participation in global value chains increased by 7 per cent. 38 The year 2011 marked a turning point. Until then, backward linkage had dominated, with imported intermediate goods playing a central role in both production and exports; forward integration – whereby domestically produced intermediate goods account for a growing share of exports– became more important from 2011 onwards. Nevertheless, backward 36 Holger Görg and Saskia Mösle, “Globale Wertschöpfungsketten in Zeiten von (und nach) Covid-19” [Global Value Chains in Times of (and after) Covid-19], ifo Schnelldienst 73, no. 5 (13 May 2020), 3–7. 37 Adnan Seric and Yee Siong Tong, “What Are Global Value Chains and Why Do they Matter?” (Industrial Analytics Platform, August 2019), https://tinyurl.com/3zrwfymf (accessed 18 June 2025). 38 Kuş, “Strengthening Turkey’s Position” (see note 4). integration has remained high and followed a steep growth trajectory in recent years: in 2015, imported intermediate goods accounted for 30 per cent of total imports, 39 while in 2022, imported intermediate goods represented no less than 80.4 per cent of total imports, capital goods 11.1 per cent and consumer goods 8.4 per cent. 40 Turkey plays a significant role in several global value chains. Turkey, accounts for around 1 per cent of global exports of goods and services, plays a significant role in several global value chains. Since around the mid2010s, the growing importance of forward integration and the strong focus on manufacturing exports have helped Turkey move up from “basic manufacturing” country to “advanced manufacturing and services sector” country in the World Bank's classification. Thanks to its geographical location, Turkey has enormous growth potential within the framework of global value chains. Turkish companies have access to the EU’s internal market as well as to markets in Europe, Africa and Central Asia. However, gaining access to markets such as the US, Japan, China and Indonesia, which are protected by above-average tariffs, is more difficult. 41 Turkish companies in German value chains Turkish companies are integrated into German value chains in a range of sectors – from the procurement of raw materials through manufacturing and processing to design, marketing and sales. 42 They are particularly well represented in the automotive, clothing, textile 39 Ibid., 25. 40 ÜİK, “Foreign Trade Statistics, 12/2022” (in Turkish), 31 January 2023, https://tinyurl.com/8nj3tdax (accessed 18 June 2025). 41 Leveraging Global Value Chains for Growth in Turkey. A Turkey Country Economic Memorandum, Report no. AUS0002378 (Washington, D.C.: World Bank, February 2022). 42 Dirk Jannott and Nela Vasova, “Markteintritt Deutschland: Möglichkeiten für türkische Unternehmen” [Entering the German Market: Opportunities for Turkish Companies], Euractiv, 8 May 2017, https://tinyurl.com/2dyz65m9 (accessed 19 November 2024). The German-Turkish Agreement on Establishment of 1927 allows Turkish companies to establish themselves, acquire property and carry out business activities in Germany. Turkish companies in German value chains SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 17 Turkish companies in German value chains Figure 5 Figure 6 German-Turkish Economic and Supply Chain Integration SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 18 German-Turkish Economic and Supply Chain Integration and steel industries. Many Turkish companies are active as suppliers to the German automotive industry – a prominent example is Bosch Sanayi ve Ticaret, with some 8,000 employees. Since around 2010, the participation of Turkish companies in German value chains in the textile industry has increased significantly. For example, Hugo Boss Textil, which employs around 4,000 people, and the clothing manufacturer s.Oliver have production facilities in Turkey. Turkish companies in the clothing industry are successfully integrated into both global and German value chains and cover all stages of production – from local procurement (of 70 per cent of raw materials) to final production. In 2022, the Turkish apparel industry recorded exports worth US$21.2 billion, with goods worth US$3.6 billion going to Germany. 43 The forward integration of Turkish manufacturers into German supply chains is evident from the following list of exports from Turkey to Germany in 2023: 43 “2024 Expectations: Textiles” (in Turkish), GZT.com, 29 January 2024, https://tinyurl.com/mwfth4kj (accessed 12 November 2024); and Elif Ferhan Yeşilyurt, “Ready-toWear and Clothing Industry Broke Export Record in 2022” (in Turkish), Anadolu Ajansı, 13 January 2023, https://tinyurl. com/2wcjhc3y (accessed 12 November 2024). parts and accessories for tractors (worth US$1.65 billion); motor vehicles for the transport of ten or more persons, parts and accessories, vehicles (excluding rail vehicles) and parts and accessories for those vehicles (US$4.99 billion); and electrical machinery, apparatus and appliances and parts thereof, sound recording and reproducing apparatus, televisions (US$1.35 billion). 44 The integration of Turkish companies – both SMEs and large companies – into German value chains is economically advantageous for both countries and promotes innovation. Germany benefits from this close integration through stable trade relations, high security of supply and low-cost inputs and end products. But at the same time, Turkey faces challenges to integration – both now and going forward. These are discussed in detail in the next two sections. 44 International Trade Centre, “Bilateral Trade between Germany and Türkiye” (online), https://tinyurl.com/42p6f38k (accessed 12 November 2024). Figure 7 Restructuring supply chains SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 19 Turkey’s industrial policy, 45 which comprises a supply chain strategy and a decarbonisation strategy, integrates both horizontal and vertical measures. The horizontal measures include stabilising macroeconomic conditions, reducing macroeconomic imbalances, securing a competitive exchange rate, expanding human capital and improving the business environment. The vertical measures focus on the targeted promotion of selected sectors, in which the state intervenes by providing tax incentives, subsidies, trade policy protection and subsidised loans in order to strengthen the country’s strategically relevant industries. Restructuring supply chains The globalisation of economic cycles has led to companies relocating numerous stages of production to faraway countries. As a result, global value and supply chains have expanded significantly. Today, around 80 percent of global trade is based on such chains, providing for the livelihood of more than 450 million people. 46 No later than since 2020 and the outbreak of the Covid-19 pandemic, this close international interdependence has been increasingly perceived as a risk; and there is now an acute awareness of the high susceptibility of the globalised economic system to disruption. Thus, cost efficiency is no longer the only guiding principle of entrepreneurial activity and economic policy strategies. Factors such 45 Industrial policy comprises economic policy measures aimed at changing the structure of economic activities. On the concept of industrial policy and its topicality, see Holger Görg, “Comeback der Industriepolitik?” [Comeback of Industrial Policy?] Aus Politik und Zeitgeschichte, no. 4–5 (2024), 4–9. 46 See Federal Ministry for Economic Cooperation and Development (BMZ), “Lieferketten” [Supply chains] (online), https://www.bmz.de/themen/lieferketten (accessed 8 October 2023). as security, resilience and strategic autonomy are becoming markedly more important. And when business partners are being selected, it is political and normative criteria – such as reliability, stability and value-orientation – that are increasingly taken into account, alongside economic criteria. Today’s extensive trade linkages have created dependencies that pose a security risk for the West – including the EU and Germany. As a result, there is now more focus on the diversification of supply chains, not least with regard to China. Accordingly, in Germany’s National Security Strategy, China is described as a “partner, competitor and systemic rival”. 47 Major events such as the trade dispute with China, the Covid pandemic and Russia’s war of aggression against Ukraine have not only exposed the vulnerability of global supply chains; they have also raised questions about the supply of critical raw materials and energy dependency. Until recently, Russia was an important supplier of raw materials such as nickel, titanium and aluminium, all of which are central to Germany’s energy transition. For this reason, Germany and the EU have increasingly taken measures over the past few years to reduce their dependence on Russia. 48 Among the top priorities of Germany and Europe are the reorganisation of supply chains and the security of supply for raw materials. The German govern47 Federal Foreign Office, ed., Integrierte Sicherheit für Deutschland. Nationale Sicherheitsstrategie [Integrated Security for Germany. National Security Strategy] (Berlin, June 2023). The designation of China as “partner, competitor and systemic rival” is seen as in need of “updating”, while the strategy itself is criticised as “more of a strategy on Germany” and as lacking an overarching and long-term goal for German-Chinese relations. See Nadine Godehardt, The Logic of Germany’s China Policy in the Zeitenwende, SWP Research Paper 16/2024 (Berlin: Stiftung Wissenschaft und Politik, October 2024). 48 Melanie Müller, Inga Carry and Victoria Reisch, “Putin und das deutsche Windrad” [Putin and the German Wind Turbine], Der Freitag, 5 April 2022. Turkish Industrial Policy: Challenges and Opportunities Turkish Industrial Policy: Challenges and Opportunities SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 20 ment has resolved to expand existing partnerships in order to “build sustainable value and supply chains”, to “provide the necessary transport infrastructure for functioning supply chains” and to “make these [supply chains] more resilient in cooperation with the countries concerned”. 49 With its industrial strategy – the EGD – the EU is pursuing not only the digitisation and decarbonisation of business locations but also the goal of strengthening of economic resilience through the reduction of dependence on imports of critical raw materials. 50 In addition to disruptions in supply chains, rising freight costs 51 are frequently cited as a reason for reorganising existing supply chains. In Germany’s automotive, pharmaceutical and aerospace sectors, the focus is on resilience and the reduction of dependencies on other countries, 52 not least China and other authoritarian states. Companies in the chemical, information technology and automotive branches are endeavouring to relocate part of their production and investment away from China. This is where Turkey sees nearshoring opportunities for its industrial sector – something that is also in Germany’s interest. In industrial policy, there are clear overlaps between Europe, Germany and Turkey. Participation in global value chains is crucial for sustainable economic growth in Turkey. The Turkish government is pursuing an active industrial, trade, location and supply chain policy in order to benefit from the reorganisation of value and supply chains. 49 Federal Foreign Office, ed., Integrierte Sicherheit [Integrated Security] (see note 47). 50 Meike Schulze, Security of Supply in Times of Geo-economic Fragmentation. Enhancing the External Dimension of the EU’s Raw Materials Policy, SWP Comment 15/2024 (Berlin: Stiftung Wissenschaft und Politik, April 2024). 51 See “Understanding the Rise of Shipping Costs in 2024”, TEC (Blog), 31 May 2024, https://tinyurl.com/42juehtu (accessed 27 October 2024); and Frederike Berg, “Trends in Transport and Logistics Prices in 2024”, Scafom-rux, 6 September 2024, https://tinyurl.com/9thdsxt7 (accessed 27 October 2024). 52 See, for example, Inga Carry and Mike Schulze, “Resilienz in transnationalen Lieferketten – Diversifizieren und Nachhaltigkeit stärken” [Resilience in Transnational Supply Chains – Diversifying and Strengthening Sustainability], Plus, 6 March 2023. [The page can no longer be accessed.] The advantages offered by Turkey as a business location – such as infrastructure, an innovative industrial base and a variety of logistical options for trade with Europe – have helped form the country’s new industrial policy self-image. It is important to point out that there are clear overlaps between European, German and Turkish industrial policy, 53 mainly in the areas of promoting sustainable technologies and reducing CO2 emissions. Other overlaps can be identified in the integration of digital technologies into industry and the securing of market access for raw materials and primary products. Against this background, the German government and German companies are stepping up the search for partners to secure supply chains, while Turkey, for its part, sees opportunities for industry in its own country. Goals of Turkish industrial policy The long-term goal of Turkey’s industrial policy is the transition to a sustainable high-tech and services economy that is carbon-free. Both the Turkish government and Turkish companies are working to fulfil the requirements of the EGD and supply chain governance while driving forward the green energy transition. Although the decarbonisation strategies of Turkey and Germany are not fully aligned, there are many common goals. Turkey’s industrial policy prioritises economic stability, the promotion of innovation in key technologies and industries of the future (e.g., automotive, defence and energy) and the advancement of manufacturing and exports to strengthen competitiveness. A main concern here is the stabilisation of the macroeconomic base. In this context, three separate sets of measures can be identified. First, Turkey has been pursuing a re53 See European Commission, “European Industrial Strategy”, https://tinyurl.com/2p9ps3pp (accessed 21 January 2025); German Bundestag, Antwort der Bundesregierung auf die Kleine Anfrage der Abgeordneten Reinhard Houben, Michael Theurer, Grigorios Aggelidis, weiterer Abgeordneter und der Fraktion der FDP – Drucksache 19/8218 –. Nationale Industriestrategie 2030 [Response of the Federal Government to the brief query of the parliamentary deputies Reinhard Houben, Michael Theurer, Grigorios Aggelidis, other parliamentary deputies and the FDP parliamentary group – Document 19/8218 –. National Industrial Strategy 2030], Drucksache 19/8917 (Berlin, 29 March 2019), https://tinyurl.com/4hbbpvxm, (accessed 24 January 2025). Goals of Turkish energy policy SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 21 strictive monetary and fiscal policy since June 2023 in a bid to curb inflation and currency depreciation. Under former Central Bank Governor Hafize Gaye Erkan and her successor, Yaşar Fatih Karahan, key interest rates have been gradually raised, while Finance Minister Mehmet Şimşek initiated the return to an orthodox economic policy. That policy includes prioritising monetary stability, limiting exchange rate interventions and abolishing currency-protected savings deposits. However, there has been only limited success so far: inflation remains high and the sustained confidence of international investors has not been regained. 54 Second, Turkey is focusing on import substitution, export promotion and structural adjustments. Third, it plans to improve the general conditions for companies and promote research and development (R&D) through subsidies. The long-term goal of Turkey’s industrial policy is that the country plays a role in what has been dubbed the “Fifth Industrial Revolution”. Industry 5.0 stands for a new way of production based on technologies such as artificial intelligence (AI), the 5G mobile communications standard, voice control systems and digital reality, which paves the way for developments such as autonomous vehicles and smart homes and cities. In Turkey, the National Technology Movement and the Industry and Technology Strategy 2023 provide guidance for a progressive technology policy in the context of the Fifth Industrial Revolution. 55 Moreover, an Industry 5.0 centre has been established to promote technological development in Turkey. There are also plans to intensify cooperation between the public and private sectors to develop and advance technological innovations. Experimental workshops have been set up in 30 provinces so that these plans can be implemented in various regions of the country. Also important is the need to prepare the 68,000 or so factories in Turkey for industrial modernisation in the short, medium and long term. In this context, the restructuring of the 353 organised industrial zones appears promising. The technological renewal and redesign of production facilities, industrial parks and 54 See M. Murat Kubilay, The Weight of Past Mistakes and the Post-election Push for Economic Normalization (Washington, D.C.: MEI, 9 July 2024); and Yaşar Aydın, Ankara’s Economic Policy Dilemma. Europe’s Options for Economic and Security Cooperation with Turkey, SWP Comment 2/2024 (Berlin: Stiftung Wissenschaft und Politik, July 2023). 55 Deniz İstikbal, “The Fifth Industrial Revolution and Turkey” (in Turkish), SETA-Analiz, 7 May 2022, https://tinyurl.com/3w7rz2wd (accessed 20 November 2024). urban areas will play a central role, especially for technical colleges and universities as centres of knowledge and innovation. And it will create opportunities for German and European companies to cooperate and sell their products. Forecasts by the IMF and the auditing firm PricewaterhouseCoopers for the years 2030 and 2050 suggest that in future, Turkish industry will account for a much larger share of global production than it does today. 56 In its medium-term economic programme for the period 2024–26, Turkey is focusing on technologyintensive production with high added value. Other goals include increasing industrial investment, reducing import dependency and promoting technology partnerships. At the same time, the green and digital transformation is to be advanced, domestic production capacities expanded and R&D supported as part of the effort to ensure sustainable growth. Moreover, the programme aims to promote high-quality and large-scale investments and increase export capacities in order to strengthen Turkey’s global competitiveness. Finally, the strategic objectives also include improving the investment climate and facilitating access to finance for industry. Goals of Turkish energy policy In its energy policy, the Turkish government is increasingly pursuing new approaches. The goal is to establish itself as a reliable energy partner for Europe; and to this end, it is making targeted investments in clean energy technologies. The gradual move away from fossil fuels not only has economic benefits but also strengthens the country’s rapprochement with Europe in the area of energy policy; however, establishing a sustainable energy partnership with Europe presents formidable challenges for Ankara. Turkey’s high dependence on gas imports from Russia, Iran and Azerbaijan pushes up the current account deficit and makes the country vulnerable to external shocks and price fluctuations on the energy markets. Overall, Turkey’s energy policy is shaped by both domesticand foreign-policy considerations and is increasingly reactive to geopolitical dynamics. From a foreignpolicy perspective, Ankara is focusing on three main goals: meeting the growing demand for energy, 56 Ibid. Turkish Industrial Policy: Challenges and Opportunities SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 22 diversifying energy sources and reducing CO2 emissions. 57 In its bid for greater energy sovereignty, Turkey is expanding wind and solar energy and investing in nuclear and coal power. For decades now, Turkish governments have been seeking to diversify the country’s energy portfolio in order to secure affordable and reliable energy supplies. Among other things, Ankara has invested heavily in locally produced energy, including the development of natural gas fields in the Black Sea. It also wants to establish itself as a natural gas hub between producer and consumer countries – a project that is geostrategically plausible but could clash with the international decarbonisation agenda over the long term. 58 The drive to diversify energy sources is also evident from investments not only in locally generated energy sources such as wind and solar energy but also in the expansion of nuclear and coal-fired power plants. The latter, however, are clearly at odds with the aforementioned decarbonisation agenda as they cause high CO2 emissions and delay the transition to a low-carbon energy system. 59 Turkey’s foreign-policy strategy of diversification has led to numerous international partnerships: the country maintains close relations with Western buyers of its energy exports as well as with major energy suppliers such as Russia and other energy providers such as Azerbaijan, Iran and Iraq. In the current political discussion, a less transactional relationship between the EU and Turkey is being sought. For its part, the EU has identified the energy sector as a potential area for closer cooperation. To date, EU-Turkish energy cooperation has 57 Francesco Siccardi, Understanding the Energy Drivers of Turkey’s Foreign Policy (Brussels: Carnegie Europe, February 2024), https://tinyurl.com/59j3vcey (accessed 26 January 2025). 58 See Ministry of Foreign Affairs of the Republic of Türkiye (formerly Republic of Turkey), “Türkiye’s International Energy Strategy” (online), https://www.mfa.gov.tr/ turkeys-energy-strategy.en.mfa (accessed 28 October 2024); Siccardi, Understanding the Energy Drivers (see note 57); and Kerem Topuz, The Missing Piece in the Turkey’s Gas Hub Ambitions (Istanbul: Istanbul International Center for Energy and Climate [IICEC] and MNCM Consulting, June 2019), https://tinyurl.com/mvwh4avc (accessed 28 October 2024). 59 Siccardi, Understanding the Energy Drivers (see note 57). focused primarily on natural gas trading. With increased EU demand for natural gas and the discontinuation of the Russian gas trade, Turkey is a potential alternative source of the fossil fuel. Since 2020, the country has contributed to Europe’s energy supply security through the Southern Gas Corridor. The backbone of this project is formed by the TransAnatolian Gas Pipeline (TANAP) and the TurkStream natural gas pipeline, which have a combined capacity of 31.5 billion cubic metres. (Natural gas reaches Turkey via the first pipeline and European countries are supplied via the second.) Moreover, the Turkish Straits are important for global energy security, as around 3 per cent of the world’s oil demand is transported via this route. 60 In the medium to long term, the natural gas trade is expected to become less relevant – a development that would be compatible with the goals of the EGD and the international decarbonisation agenda. Lowcarbon energy sources and carbon-free electricity could be the mainstay of future energy relations between Turkey, the EU and Germany. Going forward, the energy partnership between Germany and Turkey will gain in importance. However, this does not mean that the current political obstacles will have been removed. Energy transition and decarbonisation The EU directives on green foreign direct investment are contributing to the decarbonisation of the Turkish economy in two ways: by encouraging investment in renewable energy and by bringing Turkey into line with European green investment standards. Since more than 40 per cent of Turkish exports are bound for the EU, both the EGD regulations and guidelines are expected to have a transformative effect on Turkey’s industry. In addition to investing in clean energy, emission-intensive sectors such as construction, heavy chemicals and textiles will have to green their production and logistical operations if they want to maintain or expand their trade relations with EU countries. 61 60 Ministry of Foreign Affairs of the Republic of Türkiye” (formerly Republic of Turkey), “Türkiye’s International Energy Strategy” (see note 58). For a more recent overview of gas supplies to Europe via Turkey and the country's role as a gas hub, see Josephine Bollinger-Kanne, “Türkei bietet Gas aus dem Osten” [Turkey Offers Gas from the East], VDI Nachrichten, 7 February 2025. 61 Unlocking Green Finance in Turkey (Washington, D.C.: World Bank, 2022), https://openknowledge.worldbank.org/ handle/10986/40248 (accessed 18 June 2025). Economic policy and regional challenges SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 29 es arise from the EGD and CBAM as well as from European and German supply chain governance, which is discussed below. To sum up, it is evident that there are numerous overlaps between the industrial policies of the EU, Germany and Turkey, particularly in the areas of sustainable technologies, CO2 reduction and digital transformation. Moreover, there is a shared goal of securing access to raw materials and primary products. Turkey sees this as an opportunity to strengthen its industrial sector through stable and reliable partnerships within global supply chains. From both official strategy/position papers published by ministries and business organisations and discussions involving political and economic actors, it can be seen that there is growing awareness of what seizing this opportunity entails. 85 Also, there is a broad consensus that sustainable economic development in Turkey is possible only if Turkish industry meets European environmental and sustainability standards, especially those stipulated by the EGD and the governance requirements of German and European supply chain legislation. 86 Nevertheless, some main goals of Turkish industrial policy have still not been achieved. Since June 2023, Finance Minister Mehmet Şimşek has been pursuing an orthodox, restrictive monetary policy, primarily in order to curb persistently high inflation. This move has been largely welcomed by economic actors, as it is seen as a necessary correction to the earlier highly expansionary and unconventional economic policy. But there are significant doubts about the sustainability of this monetary policy course, not least because of the suspected intervention of President Erdoğan. Moreover, it has not yet been possible to build up the trust of international investors and domestic economic players. Nor has there been any significant correction of the serious macroeconomic imbalances – including the high inflation rate, the persistent current account and trade deficits and the fragile monetary-policy environment overall, high key interest rates notwithstanding. Stuttgart, https://tinyurl.com/4a9n6czz (accessed 19 November 2024). 85 As part of this study, 16 semi-structured expert interviews were conducted with actors from politics, business, the EU bureaucracy and various interest groups. The interviews took place between November 2023 and May 2024 in Berlin, Istanbul, Ankara and Brussels. The interviewees have not been identified by name. 86 Durukan, “Türkiye’s Perspective on the EU Green Deal” (see note 67), 40. Furthermore, despite legislative initiatives such as the planned introduction of an ETS, independent assessments show that Turkey has so far failed to meet its self-imposed climate targets. The continued expansion of coal-fired power plants is clearly at odds with achieving those targets. Because of their high CO2 emissions, Turkey’s power plants are a major obstacle to its transition to a low-carbon energy system. The Climate Action Tracker rates the measures taken by Ankara to meet its net-zero target for 2053 as “insufficient” – those implemented to date, along with the emission reductions planned by 2030, do not suffice to fulfil the requirements of the Paris Climate Agreement, even though climate policy is becoming more important at the institutional level. According to international analyses, significant improvements are necessary for the net-zero target to be achieved by 2053. Turkish Supply Chain Policy: Shortcomings and Prospects SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 30 In this paper, supply chain policy is understood to comprise the strategies, measures and national legislation implemented by the government as well as their alignment with international agreements and global standards. The focus here is on the promotion of the export economy, compliance with international trade standards and the creation of favourable framework conditions for foreign investors. Turkey’s supply chain policy The two main pillars of Turkey’s supply chain policy are the economic framework conditions and export orientation. The country pursues an export-oriented economic policy in a bid to establish itself as a production centre and supplier of industrial goods in Europe, Asia and the Middle East. The establishment of industrial and free trade zones to promote trade and production activities plays a key role. Companies operating in these zones receive tax concessions and are subject to fewer regulations. The zones themselves are not only attractive locations for enterprises but also important hubs in global supply chains. Labour and environmental protection laws are essential for setting standards. Turkey has enacted national laws on occupational health and safety and on labour rights compliance that are based on the standards of the International Labour Organization of the United Nations. But violations are frequently documented, especially in the textile and agricultural industries. 87 Turkey also has an environmental code that regulates waste disposal, emissions and the protection of natural resources. However, shortcomings 87 Ayşegül Kayaoğlu, Auf dem Rücken von Tränen und Schweiß: Syrer in der türkischen Textilindustrie [On the Back of Tears and Sweat: Syrians in the Turkish Textile Industry] (Bonn: Bundeszentrale für politische Bildung, 18 October 2023), https://tinyurl.com/yrumteck (accessed 13 February 2025). in the rule of law as well as political dependencies and inefficiencies in the Turkish judiciary are hampering supply chain integration. The EU-Turkey Customs Union, which facilitates the movement of industrial products, went into effect in 1996. As part of the EU accession negotiations, Ankara has committed to implementing EU standards in areas such as labour protection and environmental protection. 88 This has consequences for supply chain requirements and production conditions in Turkey. Companies in Turkey’s export-oriented sectors face demands from international customers that due diligence obligations are met along the supply chain. Some Turkish companies that export to Europe have voluntarily signed up to international standards such as the ISO standards and social accountability certification (e.g., SA8000 or BSCI), which boosts their competitiveness in international supply chains. Turkey complies with the above-named standards as well as the labour and environmental norms, particularly in sectors with international clients. 89 German and European supply chain governance Supply chain governance refers to a regulatory framework of national and supranational binding requirements for companies to comply with human rights and environmental due diligence obligations along the entire length of global supply chains. Germany’s Supply Chain Due Diligence Act (LkSG), which has been in force since 1 January 2023, provides the relevant legal framework at the national level and the 88 EYS OSGB [Joint Health and Safety Unit], “What Is Health and Safety at the Workplace?” (in Turkish), https://eysosgb.com/isg/ (accessed 18 June 2025). 89 This is the assessment of many of the economic actors interviewed for the purpose of this research paper. Turkish Supply Chain Policy: Shortcomings and Prospects Areas of cooperation: Energy, automotive and defence SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 31 Corporate Sustainability Due Diligence Directive (CSDDD), which the European Parliament voted initially to adopt in June 2023, will do so at the European level. After a temporary setback, the latter was adopted by a qualified majority in the EU Council in a second vote in March 2024 and was finally adopted by the European Parliament and Council in May 2024. The deadline for implementation is June 2028. Because of the primacy of EU law over national law, Germany is obliged to transpose the CSDDD into national law within two years of its entering into force. Both the German and the European directives are under scrutiny: while the LkSG is the subject of controversial debate, particularly with regard to the issues of implementation, bureaucratic outlay and the burden on SMEs, the CSDDD must now be implemented in the member states in a standardised and effective manner and its practical application determined. 90 Supply chain governance requires companies to uphold human rights and environmental standards. They must demonstrate that they are actively identifying risks and taking measures to minimise them. 91 In accordance with the CSDDD, European companies must also ensure that human rights, biodiversity and the environment are protected. 92 Germany’s Federal Office of Economic Affairs and Export Control (BAFA) monitors implementation and imposes fines and sanctions in the event of violations. While the German law applies mainly to sites in Germany and direct suppliers, the European law extends to upstream and downstream activities, including indirect suppliers. Further, the EU directive imposes a duty of care on 90 For more, see Nora Aboushady et al., “The European Supply Chain Law Is Coming After All – What Can We Make of the Compromise?” (Research Network Sustainable Global Supply Chains, 28 June 2024), https://tinyurl.com/ ycxrej4z (accessed 25 January 2025). 91 Thijs Willaert, “Lieferkettensorgfaltspflichtengesetz (LkSG) beschlossen – Was Unternehmen berücksichtigen sollten” [Supply Chain Due Diligence Act (LkSG) Passed – What Companies Should Consider], DQS in Deutschland, 15 June 2021, https://tinyurl.com/#233wwx4f (accessed 12 February 2025). 92 See United Nations Guiding Principles on Business and Human Rights (New Delhi: UNDP India, 2011), https://tinyurl.com/ 4esr9pns; and OECD-Leitfaden für die Erfüllung der Sorgfaltspflicht für verantwortungsvolles unternehmerisches Handeln [OECD Guidance on Due Diligence for Responsible Business Conduct] (Paris, 2018), https://tinyurl.com/3bxkk3uh (accessed 21 October 2024). companies throughout the entire length of the supply chain; this also applies to transport, storage and disposal carried out by the business partners, whereby sellers and consumers are not taken into account. 93 By contrast, the LkSG provides only for the proactive scrutiny of direct suppliers and the reactive scrutiny of indirect suppliers. Lastly, the new EU regulation introduces civil liability for companies; under certain conditions, trade unions and non-governmental organisations can assert claims on behalf of injured parties within five years. Turkish economic players – including entrepreneurs and representatives of leading associations such as TÜSİAD and the Union of Chambers and Commodity Exchanges of Turkey (TOBB) – regard German supply chain governance as part of the overall European architecture of supply chain legislation, industrial policy and the EGD. This “regulatory package” is seen as providing a strategic framework that requires significant adjustments to be made but at the same time opens up opportunities for the deeper integration of Turkey into European value chains. Because of the carbon-intensive structure of the Turkish economy, companies anticipate rising costs owing to the CBAM; therefore, comprehensive integration into green value chains – for example, wind and solar energy – is considered essential. Moreover, TÜSİAD and TOBB believe the EGD offers the chance to increase the competitiveness of Turkish products on the EU market. Turkey has comparative advantages in several industrial sectors that could be utilised to cushion the negative impact of the CBAM and initiate structural reform processes. 94 Areas of cooperation: Energy, automotive and defence Cooperation with Germany is particularly important in three areas of the Turkish economy: the energy, 93 The LkSG has come under criticism for not being comprehensive and for the fact that many companies fall below the threshold value. For their part, industry and business stakeholders fear international competitive disadvantages. The CDU/CSU and FDP parliamentary factions have called for the LkSG to be repealed. See German Bundestag, “Initiative zur Aufhebung des Lieferkettengesetzes beraten” [Initiative to Repeal the Supply Chain Act Discussed] (Berlin, 14 June 2024), https://tinyurl.com/46f3yav6 (accessed 25 January 2025). 94 Tsarouhas, Turkey’s ‘Green’ Transformation (see note 76). Turkish Supply Chain Policy: Shortcomings and Prospects SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 32 automotive and defence industries. Against the backdrop of climate policy objectives – especially decarbonisation – cooperation in the first two areas is most promising. In the automotive sector, there is more forward than backward integration into German supply chains and in the energy sector the two are more or less balanced. However, in the defence industry, backward integration predominates: Turkey is still dependent on input goods and technological expertise from abroad, including Germany. Closer cooperation in the energy and automotive sectors could strengthen Germany’s security of supply, while in the area of defence, Turkey would benefit from technology transfer. The German-Turkish energy partnership The German-Turkish Energy Forum has been held regularly since 2011. The sixth such event, which took place in Berlin in November 2024, was attended by then German Minister of Economic Affairs Robert Habeck and Turkish Minister of Energy and Natural Resources Alparslan Bayraktar. The highlight was the signing of a declaration of intent to intensify bilateral cooperation, along with a cooperation agreement between the Turkish energy company Enerjisa and Hamburg University of Applied Sciences on research projects in the areas of green hydrogen and renewable energies. 95 Hydrogen production, which offers promising investment opportunities in Turkey, could turn the country into a major green-energy hub. This would not only reduce dependence on Russian natural gas but also contribute to Europe’s energy security. At the same time, the EU would come closer to achieving its climate targets as part of the energy transition. Moreover, green hydrogen plays a key role in German industry’s effort to achieve climate neutrality; and hydrogen imports from Turkey could make an impor95 See German-Turkish Chamber of Industry and Commerce, ed., Türkei. Windenergie. Zielmarktanalyse 2022 mit Profilen der Marktakteure [Turkey. Wind Energy. Target Market Analysis 2022 with Profiles of Market Players] (Istanbul and elsewhere, January 2022);“Türkisch-Deutsches Energieforum – gemeinsam für die Energiewende” [Turkish-German Energy Forum – Working Together for the Energy Transition] (Berlin: Bundesverband eMobilität e.V., 6 December 2024), https://tinyurl.com/bdcubk38 (accessed 8 December 2024); and Turkish-German Energy Partnership, “6th Turkish-German Energy Forum”, 27 November 2024, https://tinyurl.com/3mcs9zsw (accessed 12 February 2025). tant contribution here. Germany is already supporting Turkey to the tune of €200 million to promote renewable energies and develop a hydrogen economy. 96 And as part of the International Climate Initiative, €20 million have been made available to Turkey for innovative climate-protection measures, whereby the focus is on increasing energy efficiency. Automotive and defence industry Turkey continues to be an important automotive market for the EU. The Turkish automotive industry is highly integrated into German and European supply chains. China is unlikely to overtake Europe as the most important market for Turkish cars and car parts; however, as noted above, the People’s Republic will play an increasing role in the Turkish automotive market. The Chinese car manufacturer BYD’s plans 97 to open a production facility in Turkey by the end of 2026 is aimed at circumventing EU tariffs on electric vehicles and gaining duty-free access to the EU. Meanwhile, the launch of the sale of China-made electric vehicles in Turkey – BYD planned to sell 10,000 electric vehicles in Turkey in 2024 – could help boost the sales of the Turkish electric car manufacturer Togg and lead to the expansion of the charging and servicing network in Turkey. On the other hand, there is the risk that Turkish car production will be negatively affected and Togg’s market share reduced. Moreover, the closer integration of the Turkey’s automotive industry with that of China threatens putting further strain on Turkish-European relations. Above all, closer economic ties could result in trade deficits and greater dependence on China. And a strategic reorientation of the Turkish automotive industry towards China could have a considerable negative impact on the competitiveness of the European industry. 96 “Riesenpotenzial am Bosporus: Wie entwickelt sich die türkische Energiewirtschaft?“ [Huge potential on the Bosporus: How is the Turkish energy industry developing?], H Zwei. Das Wasserstoff-Magazin von Gentner, 4 December 2023, https://tinyurl.com/2njhn6nw (accessed 18 June 2025). 97 Sebastian Henßler, “Milliardendeal: BYD investiert in türkische E-Auto Fabrik [sic]” [Billion-euro Deal: BYD invests in Turkish E-car Factory], Elektroauto-News, 9 July 2024, https://tinyurl.com/4vpcbn7c (accessed 12 February 2024). Areas of cooperation: Energy, automotive and defence SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 33 Amid the tech rivalry between the US and China, Turkey is pursuing a balancing strategy. Amid the technical and political rivalry between the US and China, Turkey is performing a balancing act in its relations with the two superpowers. Although Turkey is allied with the West, it also maintains strategic relations with China and has entered into technology partnerships, including in the area of 5G. Turkey’s stance is to be seen against the background of the technology transfer and export restrictions that the US and some EU states have imposed on Turkey. These include a regulation introduced by the Biden administration in the field of AI stipulating that Turkey (along with many other countries around the world) is to receive only limited access to advanced AI technology. At the same time, Turkey fears that the second Trump administration ceasing to abide by World Trade Organization rules would create an unpredictable international trade environment that would also affect it. As noted above, the defence industry is integrated into German supply chains mainly via the import of inputs and technology (backward integration). After decades of investments and reforms, the Turkish defence industry has developed into a serious player on the international defence market; however, the participation of Turkish defence companies in international programmes is limited owing to the volatile nature of Turkish politics. The war in Ukraine further limits Turkey’s options: previously, there was the option of cooperation with Russia in the area of defence, but that is no longer possible since Russia launched its war of aggression on Ukraine. In recent years, Turkey’s interest in defence industry cooperation and involvement in arms programmes under the auspices of NATO has increased. At the same time, Ankara is seeking to improve its foreign policy and defence industry relations with its Western partners amid financial constraints. The Turkish defence industry, particularly in the field of drones, is closely coordinated with the US and NATO. The Turkish defence company Baykar, which manufactures the Bayraktar TB2 combat and reconnaissance drone, ensures its technology meets NATO standards. If Turkey and Europe were able to redefine their relations by adapting to the new geopolitical landscape, enormous potential for mutually beneficial defence-industrial cooperation could be unlocked. 98 98 Egeli et al., Adapting Security (see note 27), 4, 18, 22f. Conclusions and Recommendations SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 34 The above analysis shows that Turkey largely aligns its industrial and energy policies with EU guidelines and strategies. Even though there is slow progress towards decarbonisation and a consistent and effective implementation of measures towards achieving that goal is lacking, Turkey’s orientation towards the EU in the economic sector is evident. The Turkish government is making efforts to bring its national growth strategy into line with the requirements of both the EGD and German and European supply chain governance. This, in turn, gives a significant boost to Turkey’s alignment towards the EU in the areas of geopolitics and security policy. A prerequisite for increased economic interdependence and deeper cooperation is a stable and constructive political relationship with the EU, with the individual member states and with Germany in particular. However, Turkey’s growing autocratisation is proving a major obstacle to the intensification of bilateral relations – both in the economy and in the area of (security) policy. So far, there is no clear political will or coherent strategy in sight to overcome the structural impediments that arise from autocratisation and shortcomings in the rule of law, the elimination of which is considered crucial for the success of the targeted growth strategy. Instead, the government appears to be attempting to compensate – at least to some extent – for these deficits by focusing on industrial policy. What are the implications for Germany’s Turkey policy given the discrepancy between the significant potential for economic and the growing normative divergences on account of Turkey’s autocratisation and foreign-policy ambitions for strategic autonomy? A way forward would be for Germany to weigh its interests more strategically – along the lines of aiming to secure economic stability, integrate Turkey into the European security architecture and prevent it from drifting further towards Russia and China in its geopolitical orientation. Based on this premise, the current close economic interdependencies and cooperative relations could be justified – even if normative requirements with regard to democracy and the rule of law are taken into account only to a limited extent. For this to happen, a pragmatic, albeit critical approach would be required – one that links any further deepening of economic relations to clearly defined and non-negotiable conditions regarding democratic standards, the rule of law and respect for human rights. A strategic partnership with an increasingly autocratic Turkey is not sustainable – not only for normative reasons but also given Germany and Europe’s long-term interests. The German government has political and economic levers at its disposal that could help avoid a complete rupture in relations while at the same time setting clear boundaries for cooperation and unequivocally defining the fundamental principles that are not open to negotiation – democracy, the rule of law and human rights. There are five main recommendations to be made based on the above analysis. First, the main task of German policy towards Turkey should be to identify areas of overlapping interests and, based on these intersections, adopt constructive approaches to problem-solving. An in-depth debate that acknowledges both existing differences and shared interests or similar threat perceptions is needed to explore avenues for cooperation. Recognising commonalities as political capital is the first step towards a long-overdue and consistent policy shift in relations with Turkey. Second, it must be understood that the Turkish government’s geopolitical balancing strategy does not signal a gradual turning away from the West (especially the US and the EU) but rather an attempt to remain connected to, and able to manoeuvre among, global power and economic blocs (EU, US, BRICS, the Gulf states, etc.). Turkey is seeking cooperation with Conclusions and Recommendations Conclusions and Recommendations SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 35 Russia and China to offset Western influence. Both policymakers and economic actors in Turkey regard this open approach as crucial for positioning the country as a secure location for supply chains. Like Germany, Turkey is aiming at the resilience and diversification of supply chains and the reduction of dependencies. The development of Turkish-US relations during Donald Trump’s second term will have an impact on Turkish-European relations. Diverging priorities in Syria, tensions over the S-400 air defence missile system and the difficult balancing act between NATO, Russia and China remain major obstacles to deeper and more harmonious relations. Third, a realignment of German-Turkish relations is advisable. The aim should be, above all, of redefining the relationship with Ankara – as a partner, at times competitor, but not a rival. To fully exploit the potential of German-Turkish cooperation in the areas of security, trade, investment and diplomacy, the focus should be on commonalities and a pragmatic, solution-oriented approach. That approach should take into account the current political realities. At the same time, the rule of law and democracy should continue to serve as the prerequisites for sustainable strategic cooperation. Fourth, the Chinese electric vehicle and battery manufacturer BYD’s decision to invest in Turkey must not be viewed in isolation but should be seen in the context of Turkey’s Asia policy and its efforts for greater autonomy from the West. The decision itself poses an economic challenge for the EU, which should reconsider its trade policy towards third countries. An important economic-policy task for Germany in the coming years is to put its economy back on a growth path. Especially sectors like the automotive industry, which face enormous challenges, could benefit from deepening cooperation with the Turkish automotive industry and the integration of Turkish suppliers into German supply chains. Promising investment opportunities for German companies are to be found in the expansion of renewable energies in Turkey, especially through projects in wind power and the production of green hydrogen. Such investments would not only contribute to diversifying energy sources but also lay the foundation for deeper cooperation in carbon-free power generation. Fifth, high-level dialogue formats – such as the German-Turkish Energy Forum and the Joint Economic and Trade Commission – and regular government consultations, could be of considerable importance. In this context, the establishment of a discussion group that brought together experts with a specific focus on Turkey would be a significant step. Politics and administration could systematically draw on the expertise of this group to address current and future challenges as well as crises. Admission to the group should not be limited to existing institutions in Berlin but should be coordinated at the national level in order to tap into a broad and well-founded spectrum of knowledge. Abbreviations SWP Berlin Turkey’s Industrial and Supply Chain Policy August 2025 36 Abbreviations AHK Deutsche Auslandshandelskammern (German Chambers of Commerce Abroad) AI Artificial Intelligence AKP Adalet ve Kalkınma Partisi (Justice and Development Party) BAFA Bundesamt für Wirtschaft und Ausfuhrkontrolle (Federal Office for Economic Affairs and Export Control) BDI Bundesverband der Deutschen Industrie e.V. (Federation of German Industries) BMEL Bundesministerium für Ernährung und Landwirtschaft (Federal Ministry of Food and Agriculture) BMZ Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung (Federal Ministry for Economic Cooperation and Development) BRICS Brazil, Russia, India, China, South Africa CBAM Carbon Border Adjustment Mechanism CDU Christlich Demokratische Union Deutschlands (Christian Democratic Union of Germany) CO2 Carbon dioxide COP Conference of the Parties CSDDD Corporate Sustainability Due Diligence Directive CSU Christlich-Soziale Union in Bayern e.V. (Christian Social Union in Bavaria) DIHK Deutsche Industrieund Handelskammer (German Chamber of Commerce and Industry) DOTS Direction of Trade Statistics EGD European Green Deal ETS Emissions Trading System EU Euopean Union FDP Freie Demokratische Partei (Free Democratic Party) HAW Hochschule für Angewandte Wissenschaften (Hamburg) IFRI Institut français des relations internationales IICEC Istanbul International Center for Energy and Climate IMF International Monetary Fund IPC Istanbul Policy Center ISO International Organization for Standardization JETCO Joint Economic and Trade Commission LkSG Lieferkettensorgfaltspflichtengesetz (Supply Chain Due Diligence Act) MEI The Middle East Institute NATO North Atlantic Treaty Organization OECD Organisation for Economic Co-operation and Development PwC PricewaterhouseCoopers R&D Research and development SME Small and medium-sized enterprises SPD Sozialdemokratische Partei Deutschlands (Social Democratic Party of Germany) TANAP Trans-Anatolian gas pipeline TOBB Türkiye Odalar ve Borsalar Birliği (Union of Chambers and Commodity Exchanges of Turkey) TÜİK Türkiye İstatistik Kurumu (Turkish Statistical Institute) TÜSİAD Türk Sanayicileri ve İşadamları Derneği (Turkish Industrialists’ and Businessmen’s Association) UNDP United Nations Development Programme VDI Verein Deutscher Ingenieure e.V. (Association of German Engineers) Further Reading Yaşar Aydın Turkey on the Path to Autocracy. Economic Consequences and Policy Options for the EU and Germany SWP Comment 20/2025 (Berlin: Stiftung Wissenschaft und Politik, May 2025). Yaşar Aydın PKK Disarms – But Will This Bring Peace? SWP Point of View (Berlin: Stiftung Wissenschaft und Politik, 15 July 2025). Yaşar Aydın Syria: What Role Do Turkey and Germany Play? SWP Point of View (Berlin: Stiftung Wissenschaft und Politik, 7 February 2025). Yaşar Aydın, Jens Bastian and Maximiliane Schneider Visualising the Dynamics and Potential of Economic Relations between Germany and Turkey. Flourishing Trade, Investment and Transnational Relations Promise Further Synergies for Both Countries CATS Network (Berlin: Stiftung Wissenschaft und Politik, 23 October 2024). Yaşar Aydın Ankara’s Economic Policy Dilemma. Europe’s Options for Economic and Security Cooperation with Turkey SWP Comment 2/2024 (Berlin: Stiftung Wissenschaft und Politik, January 2024). The Centre for Applied Turkey Studies (CATS) is funded by Stiftung Mercator and the German Federal Foreign Office.