Spurned Turkey looks east after EU courtship falters

There is a growing sense of separation between the country and its European neighbours, despite Nato membership

Seven years ago, 67% of Turkey's trade was with the EU. Today that figure is 39%. Photograph: Mustafa Ozer/AFP/Getty Images

When European leaders look back on their mistakes, barring Turkeyfrom entry to the EU might rank among the most serious.

After decades of courtship, Turkey is turning east away from Europeand, according to critics of Tayyip Erdogan's 10-year premiership, adopting the state security apparatus of its neighbours, stricter religious education and the tax policies of an offshore haven.

If ever there was nation in need of a warm embrace it is Turkey. It has one foot in the western camp by virtue of Nato membership, but economically there is a growing sense of separation.

Only seven years ago, 67% of its trade was with the EU. Today that figure is 39% and falling.

In the big cities Marks & Spencer, Burberry and Body Shop thrive and Tesco has made inroads as a mainstream supermarket chain. Britain has strong political links through its support for Turkey's EU membership. Yet the below-the-line trade economists talk about as the key to integration – in raw materials, unfinished manufactured goods and services – is static or in decline.

With the economy growing at a fair lick – 8.9% and 8.5% in 2010 and 2011 respectively – and capable of avoiding the predicted slowdown next year to 4% should the government ease credit restrictions, Europe is missing out on a fast developing economy of 75 million people who could give the EU economy a shot in the arm.

Rejection by the EU has created a vacuum that is being filled by religion and closer trade links with Russia, former Soviet states and Egypt that struggle with corruption while paying little regard to workers' rights and concerns about the environment.

There are officials in Brussels desperate to keep the accession process in place. In Ankara, there are several ministers and opposition leaders keen to discuss EU entry, but the rejection orchestrated by the former French president Nicolas Sarkozy, aided by Germany's chancellor, Angela Merkel, still hurts. Combined with the eurozone's woes, it has encouraged Ankara to steal EU business rather than join in.

To understand George Osborne's cut in corporation tax to 21% in 2014, look no further than Ford's decision last month to move Transit van production from a former Spitfire factory in Southampton to vast modern hanger-like units in Kocaeli, near Istanbul.

Kocaeli is one of Turkey's 19 free zones, which registered £13.97bn in turnover last year and created employment for 54,000 people, an indication of Turkey's disregard for the EU's carefully constructed corporatist relations.

Free zones in Turkey break the EU rules because businesses pay no corporation tax and employees pay no income tax if they export 85% of production. Companies and employees inside the zone only pay national insurance, rent and utility bills.

For Europe's manufacturers, the success of the zones is painful. Industrial goods account for 87% of their production. When Britain, France and Italy are desperate to retain or rebuild manufacturing, Turkey's offshoring is a killer.

EU countries can offer time-limited corporation tax holidays and even tax-free berths in ports for ship cargo en route to other destinations. But Brussels has yet to sanction income tax concessions.

Before the financial crisis, Turkey might have thought twice about undercutting old Europe in such callous fashion. Falling trade and success in enticing EU companies has encouraged a more cavalier attitude. More than 80% of foreign direct investment in Turkey is from the EU.

While Britain has failed to divert trade away from France, Spain, Ireland and Germany, Turkey is now selling goods to fast growing economies to the east and beyond.

Opposition Treasury spokesman Faik Öztrak says the EU has played a dangerous game since initiating formal membership talks in 2005. "Erdogan is always angry. He is trying to control everything around him and is giving ground to religious groups who want more power."

He refers to a "deep state" in which the executive has forged an unholy alliance with the state security forced. Öztrak said Erdogan has complained about individual TV programmes and had them taken off air. Hurt by accusations that he was a hypocrite, he sued an opposition mayor in the Kurdish east of the country for defamation. The mayor, Osman Baydemir, must now forfeit a third of his income to Erdogan to repay a fine of 50,000 Turkish lira (£17,388).

Recent education reforms have also fuelled opposition concerns that Turkey is moving away from 80 years of secularism. Children can choose a religious education after four years in elementary school. They can opt back into mainstream schooling four years later, but the opposition fear many parents will encourage their children to stay on, especially after a ban on university entrance from religious schools was lifted.

Mehmet Simsek, the urbane minister of finance and former Merrill Lynch economist in London, dismisses opposition accusations that his government is becoming more authoritarian and says the education reforms simply make the system more pluralistic.

He is more concerned that the economy resists the influx of hot money that over the last 10 years has inflated the currency and boosted property prices. The hidden economy, which accounts for 30% of output, and keeping a grip on credit growth, 35% in late 2010, are also priorities.

Simsek, who studied finance and investment at the University of Exeter, is the government's most prominent EU supporter, but concedes that rejection has encouraged the population to turn eastwards. He also recognises that the Kurdish war on the Syrian and Iranian borders is a barrier to entry.

In 2010, Erdogan risked the wrath of a conservative establishment by endorsing secret talks with representatives of the PPK, which the EU considers a terrorist organisation. The talks failed, and the PKK has abandoned a ceasefire. The last 18 months has seen the heaviest fighting in more than a decade between the PKK and the Turkish army. Since June 2011, when Erdogan was re-elected to a third term, more than 800 people have been killed, according to estimates by the International Crisis Group. Even so, it would be a shame if the EU maintained its cool attitude should the Kurdish situation go unresolved.

Phillip Inman travelled to Turkey with a delegation of European reporters funded by the EU