Azerbaijan - Türkiye: Trade in preferential regime Review by Caliber.Az

As key partners in major international energy and transportation projects, Azerbaijan and Türkiye are steadily increasing efforts to expand non-oil trade. A significant driver enhancing bilateral trade ties has been the preferential trade agreement that came into effect in March 2021, notably reducing customs duties on the import of various goods.

A logical continuation of this policy was the recent decision by Turkish President Recep Tayyip Erdoğan to expand duty-free trade volumes with Azerbaijan. Starting from July 1, 2024, Türkiye has lowered customs duties on new categories of Azerbaijani export products.

Türkiye is Azerbaijan's second most significant trading partner, and according to recently updated data, bilateral trade in 2023 reached a record $7.65 billion, marking a 31% increase compared to the previous year. Overall, this indicates robust trade dynamics. According to Azerbaijan's State Customs Committee, the bilateral trade turnover in 2022 amounted to $5.842 billion. It is noteworthy that the foundation of this bilateral trade is Azerbaijan's exports, primarily comprising oil and gas products, fuel, petrochemicals, electricity, agricultural raw materials, and more. Last year, Azerbaijani shipments to the Turkish market increased by over half, surpassing $5.1 billion.

In turn, Turkish exports to Azerbaijan are almost entirely represented by non-oil sector products, primarily consumer goods. These include food and pharmaceuticals, clothing and footwear, household appliances and electronics, automobiles, furniture, household goods, as well as industrial equipment, power tools, and more. The dynamics of Turkish imports have significantly strengthened over the past year and a half, influenced notably by the depreciation of the Turkish lira against the Azerbaijani manat, which reached 19.32 lira per 1 manat by July 1, 2024. Importantly, the relatively low exchange rate of the Turkish lira, coupled with the rapid development of Azerbaijani-Turkish e-commerce platforms like Trendyol, has also acted as a catalyst for growth in retail trade between the two countries.

Overall, Azerbaijan has been consistently increasing its non-oil export volumes to the Turkish market in recent years. A significant factor supporting this trend has been the preferential trade regime in effect since March 2021, which introduced zero customs duties on mutual supplies of certain goods between Türkiye and Azerbaijan. This important agreement initially included zero customs duties on 15 types of goods, primarily food items. Specifically, the initial list covered various Azerbaijani cheeses, grapes, plums, persimmons, black tea, tomatoes, cucumbers, fruit preserves, apple juice, wine, and others. In return, Azerbaijan grants market access for nearly 15 types of Turkish goods, including processed cheese, sunflower seeds, chewing gum, chocolate products, biscuits, tomatoes, and more. In some cases, annual quotas apply to the listed export products.

Recently, the presidents of Türkiye and Azerbaijan, Recep Tayyip Erdogan and Ilham Aliyev, during numerous meetings, expressed their readiness to increase bilateral trade to $15 billion in the coming years. Building on last year's achievements, these ambitious goals require a doubling of trade turnover. Accordingly, Baku and Ankara aimed to expand the customs privileges regime.

In April 2023, the countries initialled a protocol amending the previously concluded preferential trade agreement, and in July last year, the Azerbaijani parliament (Milli Majlis) passed a law approving the protocol. Under the new preferential trade regime, Azerbaijan and Türkiye will import and export an additional 15 new types of industrial and other goods, increasing the total number of goods benefiting from preferential treatment to 30. The appendices specify the basic tariff rate or additional customs duties to which a discount will be applied for each commodity.

To recall, the protocol "On Amendments to the Preferential Trade Agreement between the Governments of the Two Countries" was ratified and entered into force in Türkiye at the beginning of March this year. Starting from July 1, 2024, Türkiye implemented a decision to reduce customs duties on several types of Azerbaijani products: the corresponding decision signed by President Recep Tayyip Erdogan was published in the official government gazette — Resmi Gazete.

According to the changes and amendments in the preferential trade regime in Türkiye, customs rates have been revised downwards for several Azerbaijani products, such as quince, mulberry, semi-finished steel products, and others. Specifically, the import duty on Azerbaijani mulberry and quince has been set at 7.7%. Additionally, duties on semi-finished steel products with a cross-section of up to 130 mm containing 0.25% carbon, and any size with carbon content below 0.25% up to 0.6%, have been reduced from 22.5% to 11.25%. Duties on rods, and reinforcement bars for concrete, including those supplied in coils, have also been reduced from 30% to 15%.

As reported by the specialized resource SteelOrbis, Türkiye imported 18,560 tons of steel billets and 7,170 tons of semi-finished steel from Azerbaijan in the first quarter of this year, with Baku Steel being the main producer of these products. Another significant step in promoting bilateral trade was the abolition of additional customs duties on plastic pipes, hoses, as well as non-alloy aluminium sheets and plates imported from Azerbaijan. Moreover, Azerbaijani wines are exempt from customs duties within an annual quota of 15,000 hectoliters.

All the mentioned initiatives are crucial for stimulating domestic producers of non-oil products in their efforts to penetrate the expansive Turkish market. This direction was the subject of discussions during the 11th session of the Joint Intergovernmental Commission (JIC) on Economic Cooperation between Azerbaijan and Türkiye, held in Ankara on May 8 of the current year. The parties reaffirmed their commitment to jointly work towards achieving the goal set by the heads of state to increase bilateral trade volume to $15 billion. Following the JIC, a Memorandum of Understanding was signed between the Ministry of Economy of Azerbaijan and the Ministry of Trade of Türkiye to establish a joint working group on trade facilitation.

Participants of the JIC identified the expansion of investment cooperation and the implementation of new large-scale joint projects in transportation, energy, and industry as key drivers for mutual trade growth. Recently, Turkish Vice President Cevdet Yılmaz noted that Türkiye's direct investments in Azerbaijan's economy have reached $13 billion, while Azerbaijani capital investments in Turkish businesses have exceeded $21 billion. Currently, Turkish contractors have implemented 526 projects in Azerbaijan with a total value of $19.3 billion.

In turn, it is crucial to note the development of bilateral transportation projects, as the link between freight transport and potential trade growth is direct. In 2023, the total volume of freight transport between the two countries increased by 42.5%, and it is expected to further rise in the near future following the completion of the Baku-Tbilisi-Kars (BTK) railway modernization, with a potential freight capacity of up to five million tons per year. In the longer term, with the opening of the Zangezur corridor and the implementation of the Kars-Nakhchivan railway project, trade turnover between the two fraternal countries will also increase. During the JIC meeting, it was noted that Azerbaijan has already begun the reconstruction of the relevant railway line in the Nakhchivan Autonomous Republic (NAR).

Another source of expansion for Azerbaijani-Turkish business cooperation is the imminent completion of the Igdir-Nakhchivan gas pipeline project: by the end of this year, gas supply to NAR through Turkish territory will commence along this route. Furthermore, Baku and Ankara are actively collaborating on initiatives to export electricity generated from renewable energy sources (RES) in Karabakh, NAR, and other regions of Azerbaijan to the Turkish market.