COMMENT: EU-Turkey customs union needs updating but obstacles lie ahead

COMMENT: EU-Turkey customs union needs updating but obstacles lie ahead
By Iana Dreyer of Borderlex February 7, 2017

On February 3, EU member states discussed the bloc’s plans to modernise its economic relationships with Turkey, following the European Commission’s request in December to be given a negotiating mandate to bring the more than 20-year-old customs union that binds the two trading partners up to date. The move, though far less controversial than the process that would end with Turkey actually joining the EU, is still likely to entail difficult decisions for both sides that could derail any agreement.

Observers of the process expect a potential mandate from the member states in March or April, but the EU’s proposal comes at a time of a deepening rift between Europe and Turkey.

Attempts to revive Turkey’s EU accession process in the spring 2016 as part of a package of measures surrounding a deal over migrants became stalled last autumn. Then, following the failed coup in Turkey in June 2016, the government’s subsequent crackdown on the political opposition and freedom of expression dismayed many in Europe. The EU’s attitude over these issues has not gone down well with the Turkish government, nor with a majority of the Turkish population who back President Recep Tayyip Erdogan and his ruling Justice and Development Party (AKP).

Amid this comes the EU-Turkey customs union modernisation, which has been under discussion for several years, as both sides feel the arrangement is out of date. What’s at stake is a huge trading relationship for the EU: Turkey is the bloc’s fifth largest trading partner, with €140bn worth of trade achieved in 2015.

The current customs union only deals with trade in manufacturing. EU business accuses Turkey of not honouring all its arrangements under the agreement and levying illegal fees and causing excessive paperwork for EU exporters. Technical and sanitary standards continue to diverge with the EU’s, and that poses problems for exporters on both sides.

However, real business growth is increasingly happening outside of the manufacturing sector, with services and investment playing an increasing role in bilateral exchanges. But barriers to market entry are high here. The EU wants Turkey to do away with a 15% subsidy that the government gives to support local companies bidding for public contracts (such as infrastructure and construction), while the Turks complain that their road hauliers still need a work permit to deliver goods in the EU and there are obstacles to the country becoming a hub for medical tourism from the EU. Agricultural trade is also not very liberalised: Turkey’s agricultural import tariffs average 42.7% according to WTO data, which is a high level of protectionism. EU agricultural exporters complain about Turkey’s high subsidies and import tariffs, whereas some corners of the EU continue to protect Mediterranean produce from potential competition from Turkey.

Turkey is further deeply frustrated by not being able to shape EU trade policy. As a member of the customs union, Turkey is obliged to apply the EU’s decisions on tariff rates, notably when the EU signs free trade agreements with third countries. But Turkey doesn’t always get a parallel deal with the country that the EU has signed with. On the other side, Turkey has started signing free trade pacts that some in the EU believe hurt the customs union. When the EU launched Transatlantic Trade and Investment Partnership talks with the US in 2013, matters came to a head.

Keeping channels open

EU strategists believe that talking trade – and not EU accession – with Turkey could help improve relations and defuse the current political tensions. It is a good way of keeping communication channels open at a time when the political dialogue between Ankara and EU capitals remains difficult. It is also, some believe, a way of containing what many think is a recent turn to protectionism by Turkey.

Launching customs union talks would be “first and foremost an economic and trade integration tool” that will have an impact on “governance, rule of law, democracy, and so on”, a senior official from the European Commission involved in the process told a recent private meeting in the European Parliament, according to Borderlex sources.

“The plan is to have an improved and modernised customs union plus an FTA [free trade agreement] – an ambitious FTA in the area of services, agriculture and public procurement,” the EU negotiator said. But this would only happen under the condition that “we manage to succeed in keeping the ‘mission impossible’ to keep the politics as far as possible from these discussions”, the official added.

Yet member states must be ready to make concessions to Turkey on two main issues if they want to get anywhere in the upcoming discussions, the official said: they must accept including Turkey in some way in their decision-making processes on trade, and accept their lorry drivers on EU roads. “Closer association into the decision-shaping mechanisms of trade policy” is what the senior official termed a “bottom line”. “This implies Turkish participation in a number of working groups, committees, linked to the implementation of the customs union and trade policy”, the official said. This would be “as observer” only, given that Turkey is not an EU member.

The official also insisted that the EU needs to go some way toward meeting Turkish requests over road transport. “We must get member states to make an effort there,” he said.

EU member states continue to require work permits for Turkish lorry drivers driving EU member state-registered lorries from companies located in Turkey, yet the European Court of Justice has ruled that such moves are illegal. “If we do not manage to accommodate at least these two Turkish requests, it will be very hard to negotiate,” the official said.

The EU in return wants to see signs that Turkey is keeping a lid on any protectionist tendencies: “the bottom line for Turkey is structural reforms”, the official insisted.

Cyprus – a divided island of Greek and Turkish halves, with the former a member of the EU – is another potential stumbling block to the launch of customs union upgrade talks. Cyprus remains highly sceptical of the move, though is not expected to be in a position to block the launch of any customs union talks. “Turkey refuses to implement the existing EU-Turkey Customs Union Agreement vis-à-vis the Republic of Cyprus and practically blocks trade with Cyprus,” a Cypriot government source complains.

“Trade restrictions imposed by Turkey – including restrictions for Cypriot vessels, vessels of any nationality related to the Republic of Cyprus in terms of ownership or ship management, and vessels having landed in Cypriot ports and airports – result in serious trade and economic losses for Cyprus and violate not only Turkey’s obligations towards the European Union, but relevant WTO principles as well,” the source argues.

The current thaw in relations with Turkey, as well as hopes for a deal to resolve the Cyprus issue this year, could help unblock the above situation.

The European Parliament’s trade committee is currently preparing a report on the customs union modernisation plans. The committee appears inclined to broadly endorse the move, but will insist on conditions in the area of socio-economic human rights. The Commission has already signalled a labour and environmental chapter – on ‘sustainable develoment’ – will have to be included in any planned new agreement.

Iana Dreyer is Founder and Editor of Borderlex