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Is the Turkish Lira Crisis Really Making it Cheaper to Source There?

The Turkish lira has been on a wild ride in recent weeks, and though authorities in the country have made efforts to halt the hemorrhaging, the currency weakened against the U.S. dollar again this week.

Since the start of July, the Turkish lira has declined by as much as 35 percent against the dollar, and while it’s regained some ground, the slide hasn’t yet slowed to a stop. On Wednesday, 16 cents could buy 1 lira, while at the same time last year that 1 lira would have cost 28 cents.

That means the U.S. dollar is going much further in Turkey. Which means sourcing from the country just got cheaper.

Companies making clothing there could stand to see a bottom line boost as the lira loses value.

For Turkish denim brand, Mavi Jeans, the lira’s downturn has already impacted costs.

“In the short term, it does reduce the labor component of our costs as most of our fabrics, trims and energy costs are priced in euros and U.S. dollars,” Arkun Durmaz, president of Mavi North America said. “It is beneficial in the short term for our non-Turkish distribution, and in the long term we expect inflation to neutralize those advantages.”

While U.S. brands and retailers sourcing from Turkish mills and garment factories can count on lower costs for now, the benefits may be moderate.

As Aydin Cubukcu, founder of Turkish mill rep Stella Sourcing, explained, the lira’s decline will have a somewhat “limited effect” considering most mills source raw materials from international and domestic producers in either euros or U.S. dollars.

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“The immediate and direct effect of such increase in these currencies against the Turkish lira are limited where the raw material makes up about 50 percent to 60 percent of fabric cost, on average,” Cubukcu said. “Domestic energy costs are also correlated to fluctuating foreign currency rates as Turkey imports about three quarters of their energy used domestically. Energy costs have already been adjusted given the recent changes in the exchange rates against the Turkish lira.”

Those things considered, some sourcing costs will still come down.

“There are still a few cost factors that will be lower when companies quote their prices, more with garment makers where the labor cost has a higher part of the final prices,” Cubukcu said. “This will help with overall competitiveness of sourcing in Turkey, especially given the recent increased hedging against production exposure in China by our U.S. customer base.”

Companies like Inditex for one, which manufactures as much as 15 percent of its product in Turkey, could benefit from this improvement in the country’s competitiveness from a cost standpoint, though it could take a hit from reduced consumer demand in the country. Inditex could not be reached for comment on the potential impact.

Turkish suppliers, on the other hand, may get shortchanged in the face of this currency crisis.

The lira has been so volatile that some companies have seen input costs climb as much as 40 percent—an increase they’d have to pass on to sustain their businesses. However, those locked into fixed-price contracts will likely have to eat those increases.

“The most serious concern for our suppliers would be if they have any existing fixed price term contracts in Turkish lira, they will have a hard time delivering on those contracts since all production inputs will increase in costs,” Mavi’s Durmaz said. The denim brand has no current plans to adjust its sourcing amid the currency tumult, though the bulk of its raw materials come from Turkey and a small quantity from its factory in Egypt. “It might make it difficult to be viable for some of the Turkish suppliers, but we don’t expect any serious trouble in our supply chain.”

Turkish apparel and textiles supplier Edpa USA’s Ahmet Bereket doesn’t think the lira devaluation will change much for U.S. businesses where raw material costs are concerned.

“We buy very little raw material for USA as Turkey has not been competitive for over 10 years now,” Bereket explained. “Turkey will be more competitive for Europe and neighboring countries.”

The bigger concern amid all of the fluctuation, according to Bereket, is the brewing tension between Turkey and the U.S.

“Negativity is in the air,” Bereket said. “As trade and political relations worsen, USA buyers will be reluctant to place future orders to Turkey.”

A brief history of the U.S.-Turkey fallout

Turkey’s currency slide has been fueled by a standoff between President Donald Trump and Turkish President Recep Tayyip Erdoğan, stemming—at least in part—from Turkey’s refusal to release a U.S. citizen it has been holding for more than a year for allegedly aligning with dissidents trying to undermine the Turkish government.

Trump tweeted about it last week, saying, “Turkey has taken advantage of the United States for many years. They are now holding our wonderful Christian Pastor, who I must now ask to represent our country as a great patriot hostage. We will pay nothing for the release of an innocent man, but we are cutting back on Turkey!”

Trump’s outrage over the detained American pastor, Andrew Brunson, has spurred U.S. imposed sanctions on two Turkish government leaders, for what the Treasury Department deemed the pastor’s “unfair and unjust detention.” The sanctions freeze both Turkey’s Minister of Justice and its Minister of Interior interests or assets in the U.S. and precludes any U.S. citizens from doing business with them.

Turning to tariffs as his problem solver of choice, Trump also said he would double tariffs on Turkish steel and aluminum imports, making the new tariff on aluminum 20 percent, and 50 percent for steel. Turkey is the sixth largest exporter of steel to the U.S.

Erdoğan has made clear his discontent with U.S. actions, and has even accused the U.S. of economic warfare. He’s also called for Turkey to boycott U.S. products, including electronics. On Monday, Turkey initiated a complaint with the World Trade Organization over the U.S. metal tariffs.

What’s next

Needless to say, tensions are high between the two countries and trade is getting caught in the crossfire.

“New potential U.S. tariffs on Turkish products and instability in Turkey will be deterrent, or at lease determining factor for U.S. brands,” Bereket said.

U.S. trade experts think this could be another brewing trade war.

“My initial reaction is that this may be the beginning of another kind of back-and-forth retaliation,” said Julia K. Hughes, president of the United States Fashion Industry Association (USFIA). “I have to imagine there’ll be a response back from the Turkish side as well. In terms of uncertainty and risk, obviously that makes it a little tense for companies sourcing there.”

Tensions aside, Stella Sourcing’s Cubukcu believes Turkey will be able to weather this storm.

“Although Turkey is an Emerging Market economy, its textile and apparel sector is within one of the older and well-rooted industries within Turkey. Our sector has weathered triple digit inflation and interest rates in the past years, as well as other global recessions,” Cubukcu said. “With that experience and limited long-term debt in foreign currencies within the mature industry, we don’t foresee substantial risk in trade with the U.S. or other major trading partners.”