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Future Development

The Turkey-EU customs union at 20: Time for a facelift

In a previous post I argued that European economic integration remains a key driver for Turkey’s future economic prospects. Specifically, the customs union agreement between the European Union and Turkey—a union that turns 20 at the end of this year—could give Turkey’s competitiveness a new boost if it was extended to cover services, agriculture, and procurement. But to do so, the customs union itself would require a facelift. An agreement originally designed as a stepping stone towards full EU membership needs to be modernized to take into account changing trends in world trade and in EU-Turkey relations.

Widening the customs union to include services and agriculture would produce welfare gains of up to $2 billion, even without taking into account the significant dynamic gains from greater investment and faster productivity growth. By liberalizing trade in services in particular, Turkey could boost its overall competitiveness, because the cost and quality of services matter as an input into manufacturing as well. Including procurement in the customs union or accession to the WTO’s General Procurement Agreement would open new markets to Turkey’s highly competitive contractors and experienced civil engineers.

But a widening of the customs union would require that asymmetries in its design are addressed. One concern is that Turkey needs to adopt EU law without participating in its design. Indeed, sometimes Turkey may be informed only with significant delay about a change in common market rules. Improved information sharing and consultation mechanisms are critical to ensure the customs union functions smoothly. While Turkey cannot be granted voting rights, it could be invited as an observer to more of the EU’s committees, including to key policy bodies such as the Trade Policy Committee or the General System of Preferences Committee. Informal information sharing mechanisms, such as “Friends of Turkey” groups could also be considered.  

A second concern, which has received much attention in Turkey, is that Turkey needs to open its markets to countries with which the EU has signed free trade agreements without a clause guaranteeing reciprocal market access. Turkey is especially worried about the prospect of exclusion from the Transatlantic Trade and Investment Partnership (TTIP). Because some tariff peaks still exist between the EU and the United States in sectors like textiles and clothing, for instance, Turkey could face additional competition from U.S. suppliers who under TTIP would enter the EU market duty free (trade economists call this “preference erosion”). For the case of a “shallow” TTIP considering only the elimination of all bilateral tariffs between the EU and the United States, we estimate welfare losses from “preference erosion” to be around $130 million. However, there is a flipside to this: to the extent that TTIP includes liberal rules of origin and that the EU and the United States agree on a system of mutual recognition of quality standards, Turkey through its customs union with the EU could obtain significantly improved access to the U.S. market, which would more than compensate for the losses from preference erosion. Conversely, Turkey’s losses would be far greater if TTIP was to include regulatory harmonization, without recognizing Turkish quality certificates.

However, the real risk of exclusion from TTIP lies in services. This is the area where the gains from greater cross-Atlantic trade would be highest. Because Turkey’s own services trade has not been opened, however, the country would not be in a position to benefit from this trade creation effect. Turkey is a big trader in traditional services such as transport and tourism, but in modern services, including finance, legal services, accounting, design, and IT services, it punches well below its weight.

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. The result could be an upgrading of service quality and competitiveness similar to what happened in manufacturing as a result of the customs union some 20 years ago. At the same time, this would prepare Turkey for the opening of its services sector in the context of potential accession to TTIP.

A final conclusion: To the extent that modernization of the customs union would lay a sound foundation for Turkey’s accession to TTIP, a clear commitment by the EU and the U.S. that TTIP will be open to the accession of third countries could provide encouragement for the work on the customs union to proceed without delay. At a recent Brookings workshop on this subject, almost everyone emphasized that deeper economic integration between Turkey, the EU, and the United States would be good for all three parties.

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This blog was first launched in September 2013 by the World Bank in an effort to hold governments more accountable to poor people and offer solutions to the most prominent development challenges. Continuing this goal, Future Development was re-launched in January 2015 at brookings.edu.

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