Iana Dreyer of Borderlex -

Could Turkey’s customs union with the EU fall victim to the ongoing transatlantic trade talks? The launch of the Trans Atlantic Partnership on Trade and Investment (TTIP) by Brussels and Washington last year has led to new tensions between Turkey and the EU over their current trade arrangements.

Turkey has long sought to become a member of the EU, and in 1995 Turkey joined the EU’s customs union, which was considered a step towards EU membership.

Since the customs union came into force, trade between both sides has risen dramatically. Turkey is now the EU’s fifth export destination. Bilateral trade volumes reached €128bn in 2013, after growing at an average of 15.3% a year between 2004 and 2013. Industrial supply chains in textiles, the automotive sector and the information and communications technology (ICT) sector have expanded.

EU membership talks started in 2005, but soon petered out. France’s former president, Nicolas Sarkozy, and German Chancellor Angela Merkel have opposed Turkey’s accession. With the recent anti-democratic political developments in Turkey, the EU is now even less keen on Turkish membership. A result of this political impasse, Ankara and the European Commission have started discussing customs union problems and accession issues on parallel tracks. An initiative called the Positive Agenda launched in 2012 kick-started the process. The EU membership process monitors a country’s incorporation of European laws – the acquis communautaire. The aim of the Positive Agenda is to keep part of this process on track.

A customs union is a special type of free trade agreement (FTA). Member countries apply the same tariffs towards non-members and fully free up trade among themselves. Customs unions oblige a state to relinquish sovereignty over its trade policy. Whereas in the EU member states get to decide jointly on the bloc’s trade policy, Turkey is excluded from decision-making. This was deemed acceptable to Turkey as long as it was confident it would join the EU someday. But this is no longer so.

Despite its drawbacks, a customs union is a very efficient trade policy tool. Contrary to classic FTAs, a customs union does not need so-called rules-of-origin for imported products to qualify for duty-free treatment at customs. This reduces red tape significantly. What is more, Turkey had to reduce its import tariffs to join the EU customs union. As a result, the arrangement has helped Turkey’s economy become much more dynamic.

Preferential status erosion

Today, Turkey is worried about the many FTAs the EU has started signing with third countries across the world in the last decade. A major trade deal was signed with South Korea in 2010. Another one with Canada (CETA) is expected to be inked soon. Free trade negotiations were launched with Japan, India and other Asian countries.

As a result of its customs union with Europe, Turkey is or would be obliged to import duty-free from these countries. But Turkey does not receive extra market access to these countries in return, contrary to the EU. In many cases Turkey has been able to compensate for this by signing parallel FTAs with Europe’s trade partners, but not all of them have wanted to sign with Ankara. Turkish frustration has been mounting.

When the EU launched the TTIP talks with the US last year, Turkish business and the government became more vocal. Kenan Koc, board member of the Turkish Textile Employers’ Association (TTEA), recently said: “TTIP is the last straw in the customs union.”

Together, the EU and the US account for almost half of the world's output, a quarter of global merchandise trade, and two-fifths of world services exports. TTIP is also mostly about economic rules and industrial standards. TTIP would have major consequences for Turkey’s economy. Turkey would have to face more economic competition from US businesses and see its preferential trade status with the EU significantly eroded. TTIP would also have wide-ranging implications for Turkey’s EU-style laws.

In response to Turkish concerns, the EU has set up a process by which it keeps Turkey updated about TTIP negotiations. Turkey has filed a request to sign a trade deal with the US too. But Washington does not want an FTA with Turkey. Instead, a “Turkey-US High Level Committee” will work on alternative instruments to liberalise trade.

The Turkey issue is part of a wider debate on TTIP’s consequences for neighbours with which the US and the EU have wide-ranging free trade arrangements. Like Turkey, other countries worry about the impact of TTIP: Norway and Switzerland, as members of the European Economic Area, and Balkan countries that are in the process of joining the EU.

Many analysts say that TTIP should be open to others. This would save the multilateral trading system and avoid damaging valuable trade relationships. In response to these calls, US officials have started saying TTIP would become a “docking station” for third countries.

But how this would work in practice is not clear. Sinan Ulgen, visiting scholar at Carnegie Europe, told Borderlex the Americans “are not clear about how that’s going to be done”. He thinks Washington and Brussels need to write down precise rules on how third countries will be included in TTIP. Bahadir Kaleagasi, Representative to the EU of TUSIAD, Turkey’s main business association, says he “doesn’t feel there has been a dynamic, innovative, visionary response from bureaucrats on both sides.” Kaleagasi would like Turkey to have a formal observer status in TTIP talks and that the final treaty clearly states that Turkey and others can join.

Modernising the customs union

There is another complication: the EU-Turkey customs union needs modernising. “Trade policy has changed. Everything is dynamic. The only thing that is static is the customs union,” Haluk Ozelci, permanent representative in Brussels for the Turkish Textile & Clothing Exporters Association, tells Borderlex in an interview.

The customs union excludes agricultural products. It doesn’t liberalise services as modern trade deals do. Turkey applies EU industrial standards, social and environmental standards and certain rules such as the EU’s competition rules, but still has room to modernise a number of its laws. The EU and reformers in Turkey consider that given that EU accession is not on the cards for now, applying more EU rules as part of a modernised customs union is the way forward. The EU would like Turkey to open up its public procurement and services markets such as transport, energy or finance. Turkey for its part would like to send its construction companies along with their workers to the EU.

An EU-funded World Bank report of 2012 recommended the above reforms and is shaping the current debate. The report further recommended that Turkey become more closely associated to the decision-making process in EU trade policy, and that in any free trade negotiations the EU is engaged in there should be a “Turkey Clause.” The latter would guarantee that European FTA partners negotiate a similar deal in parallel with Turkey. Ankara has turned this last recommendation into an official request to Brussels.

It is not easy for the European Commission to be forthcoming. It cannot force the US to sign an FTA with Turkey. Reforming the customs union would require a mandate from member states. The outgoing Commission team is shying away from requesting one, knowing full well that the process would be highly politicised. Including a “Turkey Clause” in Europe’s FTAs would also require EU member states' agreement. It won’t be easy to convince the European Parliament on these issues either. The Commission is buying time and hopes that other ongoing multilateral trade talks on services – so-called TiSA talks – could help Ankara and Brussels deal with their bilateral services issues in the meantime.

Yet the cost of sticking with the status quo could be high. The customs union debate and TTIP concerns would have to come to a head. To Kaleagasi, “it is technically difficult to exclude Turkey” from TTIP. This could lead to “legislative confusion and be chaotic at the end of the day.”

To Ulgen, “if the EU Commission is not able not get a mandate from the member states to deepen the customs union with Turkey, that would be a very negative political message. It would signal the end of the relationship”. If TTIP comes into force without Turkey being included, the Turkish government could start introducing import tariffs at borders with the EU. This would clearly undermine the customs union and raise costs for European business. It would further alienate Turkey from Europe.

Despite the difficulties, there is hope. On deepening the customs union, Ulgen says he “would be surprised if the EU did not get that mandate, because the EU has interests too.”

On responding to Turkey’s concerns over TTIP, Kaleagasi says Washington and Brussels “will have to come to it.”