Turkey to upgrade its customs deal with the European Union
These days it is a rare incident that a move made by Brussels is received with genuine enthusiasm in Ankara, yet this is precisely what happened last week when the European Commission asked the European Council for a mandate to launch negotiations with Turkey to upgrade the twenty-year old European Union (EU)-Turkey Customs Union.
Turkey is in the awkward position of being bound by a Customs Union agreement despite not being a full member of the EU. In fact, when the customs deal was signed back in 1995, it was deemed a temporary, preliminary step towards Turkey’s full membership. Two decades have passed since, and while the deal has done much to boost bilateral trade and investment, with Turkey’s prospects for being a full member of the European community being bleaker than ever, and the dynamics of global trade having radically changed since the time when the deal was inked, the time is ripe for revising the agreement. As the European Commission stated in its press release, the revision needs to “reflect current EU-Turkey trade relations” as it “would bring substantial economic benefits for both partners.”
Both sides realize that they have robustly benefited from the Customs Union so far. According to data by the Turkish Statistic Institute, 44.5 percent of Turkey’s exports last year were destined to European markets, whereas the share of the EU countries in Turkey’s imports was 38.0 percent. In other words, Europe is the major export marker for Turkey, whereas the Turkish market is vital for European producers, too. Moreover, two thirds of the foreign direct investment (FDI) stock in Turkey has originated from European countries. The Customs Union helped trade and investment relations by not only reducing tariff barriers, but also harmonizing rules, norms and standards, and establishing a culture of doing business with each other. The EU-Turkey Customs Union has been a driver of non-European FDI into Turkey as well, since many companies have invested in production facilities there, such as Japanese and Korean car makers, in order to benefit from the opportunity of tariff-free exports to Europe.
The Turks, however, have been growing increasingly uneasy about the Customs Union with Europe, because in time the costs of the deal came to outweigh its benefits, as in the words of the chairman of the Turkish Exporters’ Assembly, Mehmet Büyükekşi, “this shirt had become too small for Turkey to wear”.
The shirt is too small now for Turkey, because, first of all, the agreement’s scope is limited to industrial goods. In the 1990s, when Turkey was making efforts to orient its industry towards exports after years of import substitution in order to integrate with the global economy, the deal was useful. In time, however, as the Turkish economy advanced, not only has agriculture’s exclusion become a problem, but also sectors that are increasingly more crucial for Turkey’s economy, such as services trade and public procurement were left outside the scope of the liberalized trade with Europe. A more comprehensive deal, incorporating these sectors in addition to the industrial goods, would expand business volumes for the benefit of both sides, and also increase the competitive power of the Turkish companies and contribute to the liberalization of the Turkish economy, perhaps more than it has been doing since the 1990s.
The limited scope is one thing, however the real problem, from the Turkish perspective, is a systemic one. Due to the EU-Turkey Customs Union, Turkey is bound by the external trade policies of Brussels (meaning that Turkey needs to apply joint tariffs with the EU for imports from third countries), but as a non-EU member it cannot take part in decision making mechanisms; in fact, Turkey is not even an observer in EU’s Trade Policy Committee. The EU has currently in force free trade agreements with 33 different countries and territories, however Turkey neither had its interests represented in the negotiations, nor is it a part to these agreements, a majority of which are much more comprehensive than the EU-Turkey Customs Union. Under the current structure, these free trade agreements, and potential future ones, such as the proposed Transatlantic Trade and Investment Partnership (TTIP) effectively open Turkey’s market exports from partnering states, with no reciprocity for the Turks.
The Turkish government is looking forward to commencing the negotiations for the revision of the Customs Union during the first half of 2017, after the European Commission is granted the mandate, and completing them within the course of the following two years. According to a study by Turkey’s Economic Development Foundation (İKV), a revised Customs Union with the EU will provide Turkey with a revenue boost of 12 billion euros in the first place, and an additional 2.5 percent to the country’s GDP growth over the long term.
Two major concerns remain on the Turkish side. First, there is still uncertainty, not only about the future evolution of EU-Turkey relations in general, but also with respect to the non-tariff barriers that have emerged as a result. Visa liberalization between EU and Turkey is an unresolved issue and a major barrier against Turkish business people who conduct trade with Europe. In a similar fashion, transportation quotas imposed on Turkish vehicles carrying export products to Europe is another obstacle against bilateral trade. In other words, while Turkish products can travel freely inside Europe, the business people selling them and the trucks carrying them cannot. Even if/when the deal is revised, the Customs Union will have little to offer in terms of progress in this area, and the issue requires not only economic, but also political rapprochement, which is currently in short supply.
The political dimension of trade brings us to the second concern of the Turks. The above quoted press release of the European Commission states, with respect to the updating of the Customs Union agreement, that “respect of democracy and fundamental rights will be an essential element of the agreement.” Fore sure, it is not only the Europeans, but also the Turks who strive towards greater democracy and stronger rights and would welcome this. The problem is that it is not clear what this conditionality will mean in practice, and in the meantime their previous experience does not preclude the Turks from doubting that the condition set forward is rather a tool for foot dragging by the Europeans. Good news is that companies from both Turkey and the European Union are set to benefit from an updated customs deal, so economic pragmatism can be expected to triumph over politicking.
The Turkish government is now figuring out what to bring to the table when negotiations with Brussels start. The Minister of Economy, Nihat Zeybekçi, has recently announced that there are four possible paths under consideration: revising the deal, but maintaining partial protection in agriculture; full revision including agriculture, services and public procurement; turning the Customs Union into a free trade agreement covering all the sectors and deciding new tariffs for each of them; and a free trade agreement rather than the Customs Union, however again for only industrial goods.
There is no guarantee that the talks won’t fail, however an upgraded Customs Union between the EU and Turkey will undoubtedly be beneficial for both economies; whichever of these four paths is taken. Yet, the significance of this revision, and its potential returns, would go beyond the economic dimension.
Relations between Brussels and Ankara are currently going through difficult times. Tension is increasing over a multitude of issues, a proposed refugee deal created more controversy instead of bringing the two sides closer together, and a mutual erosion of confidence has been the case, which has resulted in the European Parliament’s decision to urge member governments to freeze accession talks with Turkey, and an increasing feeling on behalf of the Turks that they are being treated hypocritically and unfairly. However, given the strong economic and cultural links between the two sides, and the fact that they are facing collective problems that require joint solutions, Europe and Turkey need to have a better mutual dialogue, instead of stop talking to each other. Upgrading the Customs Union can serve this purpose in two ways.
The currently asymmetrical nature of the Customs Union has long been a source of the Turks’ sense of being treated unfairly, together with the fact that Turkey has been making efforts to become a member of the European community since 1963 without much success (and also, more practically, the fact that EU passport holders can easily travel to Turkey whereas Turks must face strict regulations when traveling to Europe). A revised Customs Union can at least partially alleviate this feeling of unfairness by establishing a more balanced framework for economic relations, while at the same time it can also prove to the European citizens the benefits of having Turkey in the game, by opening up better opportunities of trade and investment for European businesses in the Turkish market.
The other way though which a revision of the Customs Union can help rebuilding confidence between Turkey and Europe is simply by opening up a new and potentially fertile channel of communication. Negotiating trade deals is no easy procedure, however since it is mutual material interests that are targeted, it is relatively less complicated for the parties to talk to each other, to do so in concrete terms, and to find a common ground. Confidence can be built and rebuilt through dialogue, and at a time when thorny issues such as visa liberalization and the refugees do not make it possible to improve dialogue between Turkey and Europe, or even maintain it at an acceptable level, trade issues can offer a better staring point to build on and from which to proceed further to other issues areas. Brussels and Ankara do not have a real option but to talk and understand each other.
Turkey, the eighteenth largest economy in the world in terms of GDP, has a Customs Union with the EU. The only other countries to have the same trade framework with the EU are the microstates of Andorra, San Marino and Monaco. There must be something wrong here. The EU-Turkey Customs Union must be upgraded, without losing much time.