Turkey has raised the stakes in the “economic war” it claims has been declared by Washington by raising tariffs on US imports.

As officials in Ankara welcomed a continuing rebound in the value of the embattled Turkish lira (TRY)—as of around 17:20 local time on August 15 it was up more than 5% against the dollar, to stand at 6.055, a stark improvement from the all-time weak rates beyond 7.0 seen five days ago—Turkish Vice-President Fuat Oktay stepped forward to announce the tariff hikes, saying they were ordered "within the framework of reciprocity in retaliation for the conscious attacks on our economy by the US administration".

A decree signed by President Recep Tayyip Erdogan pushed up the tariffs on cars to 120%, alcoholic drinks to 140% and leaf tobacco to 60%. The already severely embattled TRY went into freefall on August 10 after US President Donald Trump doubled tariffs on Turkish steel and aluminium, seemingly as a response to Ankara’s refusal to arrange the release of American evangelical pastor Andrew Brunson, who is under house arrest charged with espionage and terrorism offences the US claims are groundless.

Tariffs were also increased on US cosmetics, rice and coal, following the August 14 announcement from Erdogan that he was introducing a boycott of American electronics. The day also saw Turkish environment minister Murat Kurum announce that Turkey would not use US goods in construction projects. Kurum, reported Reuters, said Turkey was going through an economic siege achieved through “speculative moves” in the value of the dollar.

Turkey’s new tariffs cover around $1bn of US imports, according to a Bloomberg calculation. The figure is similar to the amount of Turkish steel and aluminium exports targeted with higher tariffs by Trump last week.

The TRY’s gains on August 15 were ascribed by analysts to measures aimed at deterring foreign investors speculating on the lira and by a hidden interest rate hike brought in on August 14. The announcement of the raised tariffs did not get in the way of the currency’s ongoing recovery.

A list of the tariff hikes published by Turkey’s Official Gazette confirmed that the levies on some products will more than double. The rice tariff is now 50%, up from 20%, while for spirits the figures are 140%, up from 40%; coal, 14% from 10%; beauty and make-up products, 60% from 30%; certain types of paper, 50% from 25% and cars, 120% from 35%.

“US not our only partner”
Turkish trade minister Ruhsar Pekcan said the new tariff rates would “protect the rights of Turkish companies”, as well as retaliating against the US tariffs on steel and aluminium.

In remarks reported by Turkish state-run news service Anadolu Agency, he added: “The United States is an important trading partner, but it is not our only partner. We have other partners and alternative markets.”

Hiking tariffs won’t help Turkey address its key financial challenge—to keep servicing its foreign loans. Turkish companies owe almost $300bn in foreign exchange-denominated debt, given that Turkish banks tapped foreign wholesale markets to help fund a credit-fuelled economic expansion.

Jurgen Odenius, economic counsellor at PGIM Fixed Income, said in a note: “The slide in the lira in recent weeks has pushed up the cost of refinancing those loans (finding a new lender when an existing debt matures).

“The root cause of the crisis lies in a leverage-financed domestic demand boom that increased the external financing requirement of Turkey’s corporations, banks, and government to an estimated $229 billion this year. Most of these liabilities fall on the private sector, mainly banks and corporations; the sovereign owes only $11 billion. What makes the problem worse is that the external financing requirement is trending up over the medium term, indicative of a long-standing over-reliance on foreign-funded leverage.

“As the lira collapses, this lending boom now is undoubtedly grinding to a sudden halt. Foreign financiers, whether they exist as banks or bond investors, are re-assessing the outlook and related repayment prospects. Western European banks from Spain and France are particularly exposed, with over half of the debt owed to them. The trouble is that the Turkish financial system and the corporate sector are short dollars.”

Backing the market consensus that Turkey requires a weighty interest rate hike to reverse its present economic plight, Robert Ward of the Economist Intelligence Unit said Turkey needed a “decisive orthodox” response to the currency crisis, rather than tariffs on US goods.

Ward tweeted: “Erdogan tariff increase on US cars, alcohol etc point to doubling down on “economic war” line. Suggests decisive orthodox policy move from #Turkey’s govt to draw line under crisis still unlikely. Normalisation of TR relations w US now also critical to lira crisis resolution.”