With European roots reaching back to the mid-19th century, Turkey clearly sees its future in Europe. But ever since the European Union and Turkey signed an association agreement in 1963, progress has come at a snail’s pace. Now even the linchpin of that relationship—the customs union that took effect in 1996—is no longer fit for purpose.
The agreement helped spur Turkish industry to new heights, but today it has come to symbolize an impaired relationship. The union is failing to accommodate trade volume that has skyrocketed to 145 billion euros from 28 billion euros when the agreement was signed. (Turkey’s gross domestic product has grown by four times in that period, too.) Keep in mind that the trade numbers are only one aspect of the full economic partnership: The EU’s foreign direct investment in Turkey is close to 135 billion euros, and bilateral trade in services was 27 billion euros in 2014 alone.
The main problem with the customs union is that it is a highly restrictive agreement, covering only industrial goods. Services, e-commerce and public procurement are all excluded, and its application to agricultural goods is extremely limited.
Another problem with the agreement is its asymmetry. One provision stipulates that Turkey amend its trade policy to reflect the EU’s trade agreements and external tariff policy. Yet Turkey plays no part in the decision-making bodies that formulate these policies and tariffs. If the EU signs a free-trade agreement with a third country, Turkey must grant the same privileges to that country, even if the country refuses to reciprocate.
That would have been the case with the Trans-Atlantic Trade and Investment Partnership, which has now been shelved. The idea that the EU was negotiating a far-reaching agreement with the U.S. without ever consulting Turkey set off alarm bells in Ankara. American companies would have enjoyed the same status as Turkish companies in the EU market without the U.S. giving Turkish industry the same preferential treatment, an arrangement that would have been disastrous for parts of Turkish industry.
In short, we are asked to compromise our sovereignty for a restrictive agreement that no longer reflects Turkey’s value in the relationship. So in April 2014, Turkey’s cabinet authorized talks on an upgraded EU customs union.
Turkey’s demands are clear. The reformed customs union must include services, e-commerce, procurement and an improvement on the current concessions in agriculture. We are demanding that the new agreement rectify the structural shortcomings of the existing one: the inclusion of Turkey in decision-making processes, the lifting of transport quotas, and the extension to Turkey of the terms of any free-trade agreement with a third country.
The EU has resisted affording Turkey the same rights as member countries when it comes to decision-making bodies. The EU is also reluctant to grant Turkish trucks free passage, leaving it to individual member countries to determine the entry arrangements. Turkey has filed legal complaints against member countries for imposing transit fees on Turkish trucks. In January 2016, a court in Hungary ruled that Turkey’s complaint should be heard before the European Court of Justice. Last week, the ECJ’s advocate general said the transit fees are the equivalent of a customs duty and thus a hindrance to the free flow of goods. The full ruling is expected later this year.
Turkey isn’t tearing up her international commitments, but it will not be sidelined as the world’s trading environment evolves. If the EU will not renegotiate the customs union, as it should, Turkey will find the means to offset trade diversion, whereby Turkish goods are rendered less competitive by EU free trade agreements. We have already established a working group with the U.K. to discuss a potential free trade agreement following Brexit. We are also closely monitoring the vote on upgrading the customs union, which is to take place in EU Parliament’s International Trade Committee in early May.
The EU wants Turkey to scrap additional duties, surveillance measures and import restrictions on a range of goods—among other conditions that it says violate the customs union. Yet many of these measures are a direct result of the union’s asymmetric structure.
The customs union is the foundation of Turkey’s economic relationship with Europe, but the current arrangement is broken. It is our hope that the European Union Council will instruct the Commission to begin negotiating a new and more equitable partnership.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.