Turkey and the EU Have To Expand Their Trade or Expect Losses

EU-Turkey relations are currently being dragged down, due to the refugee crisis. The trade relationship between Brussels and Ankara may soon be tested too. TTIP and other proposed EU free-trade agreements would be to Turkey’s disadvantage as a non-EU member country. One way to avoid that outcome would be to deepen EU-Turkish trade relations.

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Up to now, the customs union between the EU and Turkey has been a win-win situation: it allowed a continuous increase in mutual trade and contributed to commercial gains on both sides. But this productive collaboration may be approaching a turning point. New EU trade agreements, such as the Transatlantic Trade and Investment Partnership (TTIP), would be clearly disadvantageous for Turkey as a non-EU member. The customs union that has been so successful until now could turn into a one-way street for Ankara. Because of the customs union, Turkey would be forced to lower its duties on imports from new EU trade partners, like the USA. Since Ankara is not an EU member, however, the Turks could not expect equivalently lowered duties for their exports to these countries.

Without a modified EU-Turkey Trade Agreement, Turkey faces the threat of significant foreign trade losses. The potential welfare loss in the medium term, about 0.01% of Turkish GDP, is relatively small, but certain Turkish export sectors could expect substantial losses. The automotive and mechanical engineering sectors could experience declines in trade volume of 10% and 4%, respectively. If further long-term adjustments of the EU’s free trade agreement with third countries are accounted for, welfare losses of more than 1.5% in Turkish GDP are possible.

Looking back is not an option

An alternative that many conservative politicians in Turkey are currently calling for is to dissolve the mutual customs union. That, however, would be a step backward for Ankara’s economy, as our study shows. The imbalance in the trade relations would be eliminated, but without a customs union, the Turkish economy would face an end to its privileged access to the European market, causing some serious effects. Termination of the current EU-Turkish customs union would lead to a decline in Turkish GDP of 0.81%. The effects of a new EU trade agreement would then cause Turkish GDP to fall by another 0.96%. The EU, too, would have to expect some losses.

Deeping trade relations could help both sides

Instead, our study suggests an enhancement of the existing agreement. Its expansion to agriculture and services could not only offset the negative effects of the asymmetry for the Turks, but also lead to gains for both sides. Expansion of the customs union could lead to a 1.84% increase in Turkish GDP. Agricultural exports to the EU could rise by 95% and exports of services by as much as 430%.

Should the new trade agreements of the EU be included, the income level in Turkey would continue to rise. The reason is increased demand for services in the EU. Expansion of the customs union plus signing the currently planned agreement could generate rise in Turkish GDP of 1.96%. Per capita income would rise by nearly $200. If Ankara signs its own trade agreements with new partners in the EU, GDP would rise an additional 2.5%, which would correspond to a nominal increase of $18 billion.

Conclusion

Integration of the Turkish agricultural and services sectors with the European customs union also offers commercial opportunities for EU countries. This would give the Turkish government a bargaining chip for correcting its asymmetric trade agreement with the EU. Concretely, the agreement should be formally expanded in connection with the free trade agreement between the EU and non-member countries so that any future easing of duties for European companies in third countries could be considered for Turkish companies as well.

Recent events, such as the BREXIT referendum in the United Kingdom, have highlighted the problems and the complexity of European integration. Multiple crises and diverse developments have increasingly resulted in a multi-speed Europe. For candidate countries like Turkey, this means that a convergence towards Europe should start economically. Deeping the customs union would be an important step in the right direction.