18 December 2018

Who wants to be a Turkey this Christmas?

by IFT

For Jeremy Corbyn it is an ideal end-state; for Theresa May, it is her answer to the Irish border question. With both major parties pushing for policies that will place the UK in a customs union with the EU, it would be wise to examine the realities of Turkey’s experiences.

Turkey formed a customs union with the EU in 1995. For all goods covered by the agreement, customs unions provide tariff free trade between members; remove the need for proving rules of origin between members; and apply a common external tariff. The goods covered in the EU-Turkey customs union include industrial goods, but not agriculture, services, or public procurement. In these other areas, Turkey is able to diverge in the preferential access it can offer to non-EU countries, and therefore is able to conclude some limited trade agreements - as it has, for example, with Malaysia and Chile.

While the customs union has broadly smoothed commerce with the EU - such that Turkey’s trade has naturally diverted toward it (the EU is now Turkey’s top import and export market) - their trade is far from frictionless. At the border, queues for trucks have been known to extend up to 17km with waiting times of up to 30 hours. As the FT has reported:

“Each driver [requires] several dozen documents — an export declaration, a carnet from Turkish customs officers, invoices for the products they are hauling, insurance certificates and, when lucky, a transport permit for each EU nation they will drive through. They face mounds of paperwork, hours of waiting, a scrabbling for scarce transport permits and random inspections, all before trucks can enter the borderless trading bloc… the total value of trade lost because of the delays, cost and hassle is estimated to be about €3bn, according to a 2015 study.”

While customs union membership has liberalised Turkey-EU trade, this has come at significant costs to Turkey’s trade with third countries.

Here is the problem in a nutshell: the EU negotiates away access to Turkey’s market for goods to third countries, but Turkey’s exporters aren’t secured reciprocal access to third country markets in return. Turkey is therefore left in a position to negotiate access to third country markets after its own market has already been opened up - at which point its negotiating position is significantly diminished.

This is more than a theoretical problem. Many countries have simply refused to agree trade deals with Turkey after the agreement of their EU FTA, because they have already won significant non-reciprocal access to Turkey’s good market. From the point of (typically mercantilist) trade negotiators - who tend to consider exports good, and imports bad - why would they voluntarily open their market to imports from Turkey, once they’ve already secured access to Turkey’s market for their own exporters?

This is exemplified by Mexico’s actions with regards to Turkish trade. After agreeing a trade deal that came into force with the EU in 2000, Mexico have prevaricated trade talks with Turkey. To date, there is still no trade agreement between the two nations. This is not for lack of trying from Turkey - there is simply no mercantilist incentive for Mexico to engage in trade talks. Similar responses have been made by South Africa and Algeria.

Naturally, Turkish companies then have to consider what the advantages are, to remaining in Turkey, when EU countries enjoy the benefit of both cheaper imports and greater global market access? As Daniel Dalton MEP has pointed out, this issue grows over time: as the EU makes more trade deals, the parts of the world that enjoy preferential access to Turkish markets without giving reciprocal access grows, leading to ever greater incentives for companies based in Turkey, to relocate to the EU.

This is compounded by another issue: the lack of formal (voting) Turkish representation at major trade talks that the EU conducts on its behalf. The frustration this causes was evidenced in the TTIP talks, when Turkish ministers threatened to suspend the customs union due to a lack of role.

As the government, and the opposition, consider the way forward through Brexit, it is important that they reflect on one question in light of these facts: do they really want to be a Turkey this Christmas?