Overview:

The customs union (“the CU”), adopted by the Decision 1/95 of The EC-Turkey Association Council of 22 December 1995 is the main legal source covering the bilateral trade between Turkey and the EU. It is one of the first examples of a trade agreement made by the EU with a non-member state.

The CU harmonises the customs applications, sets common tariffs and eliminates duties to facilitate free the trade between the EU and Turkey. Its coverage is however limited, as only certain goods benefit from these advantages. The experts say that today the CU has become far from addressing the needs of what trade has become between these parties today.

In fact, since 1995, the EU has increased the number of its members from 15 to 28 and expanded the single market enormously. The EU concluded free trade agreements with countries like Mexico and Canada and started the Transatlantic Trade and Investment Partnership (“TTIP”) negotiations with the US. Turkey presented a major economic growth over the past two decades as well. 

Today, there is no doubt that the CU calls for a reformation to adapt itself to these substantial changes and pave the way to realise the full potential of these respective markets.

The Initiatives:

The parties expressed their common intention in this direction on May 12, 2016 through the joint announcement of the EU Trade Commissioner Cecilia Malmström and the Minister of Economy of Turkey Mr Nihat Zeybekci. The negotiations are expected to start in 2017 to be completed by the end of 2018.

The Revision:

Turkey is the EU's 4th largest export market and 5th largest provider of imports. The EU is Turkey's 1st import and export partner representing 41% of Turkey`s global trade. The value of the trade in goods between the parties amounts to nearly 140 billion Euros.

The CU however covers merely industrial goods corresponding to only around %25 of the GDP’s of the respected markets. The remaining %75 corresponding to agricultural goods and service sectors are not covered by the CU.

Public procurement is not covered by the CU either. Companies from both sides do not have access to one and others’ public procurement markets despite the fact that this was one of the very first goals of the CU.

The Efficiency Measures and Legal Requirements:

Being a party to the CU, Turkey undertakes to align its national legislation with the EU acquis for the sake of the bilateral free trade.

Turkey’s food and safety regulations will therefore have to be harmonized with the EU standards for a possible inclusion of agriculture sector in the CU.

Turkey’s public procurement legislation needs harmonization too. Unlike EU, Turkey is not a party to the Government Procurement Agreement of the GATT of the WTO and it is European Commission’s own evaluation that Turkey’s current national legislation with traces of protectionism provides gaps with the EU acquis. They conclude that “further efforts are needed in public procurement, for potential inclusion in a modernised and extended Customs Union ».

While Turkey undertakes to align itself to the relevant EU legislation, the CU does not provide for a solid opportunity for Turkey to have a say in their adoption. Mechanisms are therefore required to ensure that the EU includes Turkey into policy and legislation discussions to a reasonable level.

The EU can provide flexibility on some other restrictions like the rather strict visa regime applied to the Turkish nationals. Visa flexibility for the Turkish business would surely facilitate their access to the EU market in favor of trade.

Finally, a dispute resolution mechanism would surely help ensuring compliance of the parties to the CU. As the current CU does not include a proper mechanism as such, disputed issues may remain unsolved for years, causing a blockage in its application.

Free Trade Agreements and Turkey’s Position:

The current CU creates a de facto asymmetry between EU and Turkey where EU enters into a free trade agreement (“FTA”) with a third party country and Turkey is not somehow included to the new setting .

In this case, the third party country goods will be able to enter Turkey with deflection through Europe within the conditions of the CU. However, Turkish goods will not have the same reciprocal access to the third party market unless Turkey is included in the EU- third party negotiation for the FTA or it concludes separate parallel negotiations with the third party country itself.

The ways to overcome this asymmetry and to give Turkey its place as a trade partner are yet to be discovered. It can nevertheless be said that TTIP negotiations has been an important driving force for Turkey to find such ways by initiating negotiations on the CU.

The driving force of the EU side can be said to be more general compared to Turkey’s. The impact assessment of the European Commission reveals the EU side expects, with a better functioning and modernised CU, prospects and expectations of improved economic growth generated by more integrated economies. The improved preferential access to procurement and services markets will have a positive leverage effect on trade in goods.

The EU seems to accept the fact that the comprehensive third party FTAs might counter erosion of current Turkish benefits in the CU however concludes that increased economic integration between the EU and Turkey will nevertheless have a positive overall impact to attract international investments in the liberalised sectors.

Conclusion:

The advantages for both parties in the modernisation and expansion of the CU are clear, just like the key element to facilitate this process. In order to make the best out of the CU and expand beyond, Turkey shall work on its legislation to harmonise it with the EU standards and EU shall more broadly let Turkey in trade policies and discussions.

Ceren Aral Desnos
Counsel
Gün+Partners