Turkey European Union Trade Restrictions,

Turkey EU Trade Restrictions

1. Turkey -EU Trade

2. Turkey’s Trade Relations T o increase  its wealth  development security influence in the international system Besides , diversification of economic and political relations has always been crucial for Turkey to pursue a balanced foreign policy .

3. Outlook o f Turkey’s Trade Policy Establishment of the Turkish Republic  to have secured borders not to have a liberalized economy  mixed economy and planning Post-WWII  Turkey’s involvement in the Western political, security and economic settlements via the membership in the UN, NATO, IMF, WB and participation in the Marshall Plan. Until the early 1980s  a quite closed econom y  all imports were subject to a strict control with some exceptions

4. Outlook o f Turkey’s Trade Policy import substitution industrialisation requir ing considerable amount of imports and external financing  Turkey’s foreign debt and dependence on foreign sources increased vitally .  the 1980 reform package which initiated the gradual liberalization of Turkish foreign trade regime . Transition from the import substitution industrialization to an export-oriented growth strategy was a sign of Turkey’s articulation in the free market economy .

5. Outlook o f Turkey’s Trade Policy World’s largest 17th economy in 2023 GDP  $1024 billion Growth rate  4.5% in 2023 Bilateral trade with  Europe, Asia - Pacific, Eurasia, Middle East and North Africa, Sub-Saharan Africa and Americas R egional and multiple trade relations with  the EU, ECO, D8, BSEC, OIC and COMCEC M ultilateral trade relations with  the WTO, OECD and the G20

6. Turkey -EU Trade Customs Union  Tur key entered into many obligations  elimination of existing customs duties and duties having equivalent effect as well as quantity restrictions and measures having equivalent effect  requires Turkey’s adoption of the EU’s common external tariff and the adoption of the EU’s Common Commercial Policy towards third countries Therefore, the CU constitutes the legal basis of Turkey’s free trade agreements (FTA) and autonomous preferential regimes.

7. Turkey -EU Trade The EU’s decision to govern its trade relations within a bilateral structure in 2006  “ Global Europe - competing in the world” with the launch of a series of FTAs  tremendous impact on Turkey’s commercial relations with many countries Sensitive issues : To conclude a FTA with a third country which the EU has not concluded a FTA is possible for Turkey only with the positive approach of the EU.  Macedonia example !

8. Turkey -EU Trade So far, Turkey has concluded FTAs with 38 countries, 11 of which were repealed due to the accession of these countries to the EU. Currently , the 22 FTAs in force are with EFTA, Israel, Macedonia, Bosnia-Herzegovina, Palestine, Tunisia, Morocco, Egypt, Albania, Georgia, Montenegro, Serbia, Chile, Mauritius, South Korea, Malaysia, Moldova, Faroe Islands, Singapore, Kosovo, Venezuela and United Kingdom. The FTAs signed with Lebanon, Qatar and Sudan are under ratification process.

9. Turkey -EU Trade As a result of the Customs Union, Turkey has opened its internal market to the competition of the EU and third countries, while guaranteeing free access of its exporters to the EU market . Turkey has undertaken to align itself to the preferential regimes applied to third countries by the EU and to harmonize its legislation with the EU’s acquis  in a wide spectrum of areas, including the standards and technical legislation, as well as competition policies .

10. Turkey -EU Trade T rade in agricultural products is managed in the framework of the preferential system between the Parties . T rade in iron and steel products is governed by the Free Trade Agreement between Turkey and the European Coal and Steel Community.

11. Turkey -EU Trade T he volume of trade with the EU increased  from 33.0 billion USD in 1996 to 178.6 billion USD in 2021 . By 2021, Turkey's exports to the EU reached 93 billion USD and its imports from the EU reached 85 billion USD . T he EU accounts for 41% of total exports and 26 % of total imports of Turkey in 2022. Turkey is the EU’s 7 th biggest trade partner in 2023.

12. Turkey -EU Trade Following the establishment of the Customs Union, the product composition of Turkish exports transformed in parallel to changing production scales and structure . Apart from traditional sectors like agriculture or textile and clothing, certain high value added sectors such as electronics, machinery and automotive increase d.

13. Turkey -EU Trade I n Turkey’s exports between 1995 and 2021  the share of agricultural products to the EU decreased from 15.4% to 7%  the share of textile and clothing products decreased from 42.1% to 19.2 %  the share of automotive products increased from 2.5% to 17.4 %  the share of machinery products increased from 2.7% to 10.0%  the share of iron and steel products increased from 3.2% to 10.9%  the share of electronic products increased from 4.5% to 5.5%.

14. Turkey -EU Trade Total trade in goods between the EU and Turkey in 2022 amounted to €198.1 billion. The EU’s imports from Turkey were worth €98.6 billion and were led by textiles (€17.5 billion, 17.7%), closely followed by transport equipment (€17.3 billion), base metals and articles (€16.8 billion), and machinery and appliances (€15.8 billion). The EU’s exports to Turkey totaled €99.6 billion. They were dominated by machinery and appliances (€25 billion, 25.1%), transport equipment (€17.5 billion), base metals and articles (€13.1 billion), and chemicals (€13.1 billion).

15. Turkey -EU Trade Total trade in services between the EU and Turkey in 2021 amounted to €24.2 billion, representing 1.2% of the EU’s total trade with the world in services. EU imports of services represented €11.4 billion and exports €12.8 billion, respectively making each side the other's 12th and 16th biggest trade partner for services in the world. Transport (€4.7 billion, 41.2%) and travel services (€3.9 billion, 34.2%) are EU's the most imported services from Turkey, and transport (€4.5 billion, 35.2%) and ICT services (€2.7 billion, 21.8%) are the EU's most exported services to Turkey.

16. Turkey -EU Customs Union and Trade Relations : What options for the future ? The CU has increasingly led to problems in the EU- Turkish trade relations . In recent years, the EU’s new free trade agreements with third countries (e.g., with Vietnam or Japan) have exposed companies located in Turkey to potentially problematic asymmetric competition . Due to the Customs Union, Turkey has committed to open its market in principle to new free trade partners of the EU but not automatically receiving equivalent free access to the markets of the respective third countries through EU's free trade agreements.

17. Turkey -EU Customs Union and Trade Relations : What options for the future ? Additional tensions arising from the increasingly outdated EU-Turkey Customs Union are due to the lack of a modern and effective dispute settlement mechanism and due to foreign content threshold problems of Turkish goods under the existing rules of origin . Already in 2015, with the objective to improve these deficits, the EU and Turkey formulated a memorandum of understanding, stipulating a modernization of the Customs Union framework.

18. Turkey -EU Customs Union and Trade Relations : What options for the future ? However, because of the worsening domestic political conditions in Turkey, following a failed coup attempt in 2016, the EU Commission stopped its attempts to update the Customs Union. Since then, compliance to the rules of the outdated Customs Union agreement has been highly imperfect, highlighting the need of reform . Besides the contractual shortcomings of the Customs Union arrangement, more recently, political tensions in the Eastern Mediterranean region ( Turkey’s sending drilling ships with a military escort to explore natural gas fields off the coast of EU member Southern Cyprus) but also domestic developments in Turkey have prevented a constructive approach between Turkey and the EU.

19. Turkey -EU Customs Union and Trade Relations : What options for the future ? Already, in its October 2019 resolution on Turkish military action in Syria and its consequences, the European Parliament called on the Council to consider suspending trade preferences under the agreement on agricultural products and, as a last resort, suspending the EU-Turkey Customs Union. In addition , several Members of the European Parliament have called for a total suspension of the Customs Union, arguing that Turkey has repeatedly breached its obligations under the existing trade agreement .

20. Turkey -EU Customs Union and Trade Relations : What options for the future ? Yet, in its efforts to cut down the tension in the Eastern Mediterranean, in October 2020, the European Council launched a positive political EU-Turkey agenda with a specific emphasis on the modernization of the Customs Union and trade facilitation. In March 2021, the EU Council became more specific under which conditions a modernization of the Customs Union is possible. Accordingly , the “European Union is ready to engage with Turkey in a phased, proportionate and reversible manner to enhance cooperation in a number of areas of common interest and take further decisions at the European Council meeting in June” 2021, including a possible start of the Customs Union modernization .

21. Turkey -EU Customs Union and Trade Relations : What options for the future ? Likewise, in its recent resolution (19 May 2021) the European Parliament stressed that a modernization of the existing Customs Union has the potential to benefit both parties, the EU and Turkey, and at the same time it can keep Turkey economically and normatively anchored to the EU . T he resolution emphasizes that a modernization of the Customs Union has to be based on a strong conditionality related to human rights and fundamental freedoms as defined by the Copenhagen criteria, on good relations with the EU and all its Member States . Specifically, it is emphasized that Turkey has to fully implement the Additional Protocol to extend the Ankara Agreement towards all Member States including Cyprus.

22. Problematic issues within the existing Customs Union framework : 1) Constraint scope of the Customs Union 2) Regulatory challenges 3) Limited transportation quotas 4) Insufficient dispute settlement mechanism 5) Travel restrictions (Visa obligation ) 6) Public procurement rules 7) Challenges in law implementation 8 ) Asymmetry problem due to new FTAs between the EU and third parties 9) Non-tariff barriers by Turkey against EU exporters 10) Turkey’s exclusion from EU’s strategis trade decisions

23. Asymmetry problem due to new FTAs between the EU and third parties D ue to the Customs Union, for third parties that signed an FTA with the EU there is no economic incentive to sign a follow-up equivalent FTA with Turkey, since the Customs Union enables third parties to access the Turkish market with preferential conditions while Turkey does not receive the equivalent market access to the third-party markets. From Turkey’s perspective this asymmetry problem creates two trade related challenges, particularly for its manufacturing industry which is covered by the Customs Union.

24. Asymmetry problem due to new FTAs between the EU and third parties The first challenge is the increasing competition for domestic companies in Turkey if the EU applies an FTA with a third party, e.g., Vietnam, and Turkey is unable to establish an equivalent FTA with the same third country . While imports from Vietnam can now enter the Turkish market at lower preferential duties via the Customs Union, Turkish exporters still experience high customs duties in Vietnam. Technically , Turkey is obliged to reduce its border tariffs for Vietnam to the level as agreed on with the EU and at the same time Vietnam keeps import tariffs for Turkey in place . As a result, Turkish exporter of manufactured goods can be confronted with tariffs of up to 35 % and more, while the Vietnamese exporter experience significantly lower tariffs . The same negative effect for Turkish enterprises and exporters appears in every country that signed an FTA with the EU but not with Turkey.

25. Turkey -EU Customs Union and Trade Relations : What options for the future ? 1) Continuation of the current Customs Union framework as it stands 2) Modernization and upgrading of the Customs Union 3) A transformation of the bilateral trade relations into a deep and comprehensive free trade agreement (DCFTA ) 4) Suspension of the Customs Union (in which case WTO rules would apply)

26. 2) Modernization and upgrading of the Customs Union Findings  a modernization of the EU-Turkey Customs Union by covering trade in the agricultural and service sectors – has a strong positive welfare effect on the Turkish economy. Bilateral trade between Turkey and the EU are expected to grow significantly. Turkish exports to the EU are expected to increase by almost 70%. Exports to the EU are expected to increase by 95% for the agricultural sector and by 430% for the service sector. The manufacturing sector is predicted to observe a drop in exports .

27. 2) Modernization and upgrading of the Customs Union Welfare gains for Turkey and the EU turn out to be the largest in this comprehensive scenario . Turkey is predicted to gain more than 2% additional growth in its GDP. The EU can expect an additional GDP growth by about 0.7%. If Turkey aligns its trade policy one by one with the EU, meaning that Turkey signs equivalent FTAs with the EU’s new trading partners , the predicted GDP growth reaches 2.5%.

28. 3) A transformation of the bilateral trade relations into a deep and comprehensive free trade agreement (DCFTA ) By transforming the EU- Turkey Customs Union into a bilateral free trade agreement , Turkey regains full sovereignty over its trade policy and does not have to grant unilateral trade facilitation to any of the EU’s new free-trade partners . Hence , Turkey is no longer confronted with the explained asymmetry problem. If the EU- Turkey Customs Union is transformed into a DCFTA, the level of Turkey’s integration in the European economy would be reduced . Rules of Origin had to be applied , which is likely to reduce trade between Turkey and the EU in comparison to a Customs Union scenario . Since the EU is an important market for Turkish exports , a decline in trade with the EU also implies a drop in Turkey’s overall economic output and as a result Turkish GDP decreases .

29. 3) A transformation of the bilateral trade relations into a deep and comprehensive free trade agreement (DCFTA ) At the same time Turkey gains control over its external tariff policy , since the country has no longer to follow the EU’s foreign trade policy and hence , could experience a positive trade effect with the rest of the world . Indeed , simulations predict that Turkey is likely to extend its trade with the rest of the world , but the reduction in trade with the EU turns out to be significantly larger . Overall , Turkey is predicted to experience a drop in GDP by 0.8%. The EU experiences no major changes in GDP.

30. 4) Suspension of the Customs Union (in which case WTO rules would apply ) Under the assumption that a Customs Union suspension puts Turkey into a trade policy framework similar to the one before signing the Custom Union with the EU, it is legitimate to expect that Turkey and the EU are likely to experience similar but negative trade effects . Accordingly , in case of a suspension the EU would experience a drop in e xports to Turkey by 33%, while Turkey’s export are expected to decline by around 43%.