Time to Revamp the Turkey-EU Customs Union

Nearly 20 years ago, Turkey entered a Customs Union with the European Union that  exponentially increased its trade volume and spurred greater  economic assimilation on an international level. As a recent Brookings Institution report asserts, however, the Customs Union between the EU and Turkey is now in dire need of a facelift. As data compiled by the World Bank indicates, the current Turkey-EU trade volume is nearly four times as great as its 1995 levels. While this Preferential Trade Agreement (PTA) has undoubtedly contributed to Turkey’s rapid economic expansion over the last two decades, its place in Turkey’s future plans as an emerging economy seems questionable. In its current form, the Custom Union is very restrictive in nature; it not only excludes Turkey’s most profitable industries but,  by definition, diminishes Turkey’s sovereignty over its customs as well.

The first of Turkey’s profitable industries restricted by the Customs Union, the services sector,  makes up approximately 60 percent of Turkey’s GDP but is omitted from the Customs Union. Agricultural production represents roughly 10 percent of Turkey’s total GDP, but unprocessed agricultural goods cannot be exported to the willing EU trade partners without duties. By banning the trade of such agricultural products, the EU prevents Turkey from capitalizing on its natural comparative advantage (over most member states) in agricultural production. Turkey cannot sell its goods at a lower price than competitors, which would have theoretically allowed it to profit from increased trade, improve its economy, and counter its large foreign trade deficit.

Moreover, these same agricultural and services industries that account for the majority of Turkey’s GDP are not included in European markets. A 2014 World Bank report noted that the inclusion of services and agriculture into the trade agreement could generate $2 billion “in static gains.” Martin Raiser from the Brookings Institution agrees, stating “a widening of the customs union to include services would allow Turkey to capitalize on its competitive strengths, e.g. in retail and transportation services, while creating welcome competitive pressure on modern service industries.” Likewise, the inclusion of agricultural goods in the Customs Union would allow Turkish products, such as  tomatoes and oils, to actively compete in European and Mediterranean markets.

Despite a World Bank report calling for trade expansion and revision to the Customs Union, no progress has been made. Consequently, Turkey has remained in its status as a processor of intermediate goods, forcing it to rely on the EU for the large amounts of raw materials and parts it must import for manufacturing and consumption.

Additionally, as the Center for Policy and Research on Turkey notes, Turkey’s lack of control over its customs means that other countries (with a comparative advantage in inexpensive manufactured goods) can “cover the internal market of Turkey with the cheap cost goods,” and inherently cause “increasing foreign trade deficits.” This inability to manage duties or negotiate with non-EU countries demonstrates that the Customs Union has given the EU a disproportionate amount of political and economic dominance over Turkey. Ankara can no longer acquiesce to this PTA if it wishes to expand to global markets. Turkey’s Minister of Economy Zafer Çağlayan panned the Customs Union, calling it “an agreement of servitude” that has subjected Turkey to undesirable and increasing EU and domestic market competition.

In 2003, EU countries accounted for 55 percent of Turkey’s trade. Ten years later, this share has dropped significantly to approximately 40 percent. Turkey’s economic future and trade outlook are somewhat uncertain, but a rewriting of the 1995 Customs Union will increase general economic welfare and benefit both Turkey and the European Union.