What will happen to Turkey’s customs union deal on 20th anniversary?

Turkey and the European Union will celebrate the 20th anniversary of their decision to bring the former to shared customs with the latter on March 6.

Questions center around what they will decide to do with the deal in the coming days: Will they revise it in order to include further sectors, or will they burn it down for the sake of the transatlantic trade deal negotiations between the EU and the United States, without Turkey?

The planned Transatlantic Trade and Investment Partnership (TTIP) will be a game changer for the global economy. The resulting trade volume is expected to be more than 40 percent of the world.
However, since the potential partnership would force Turkey to open up its market to export goods from the U.S. without being granted reciprocal preferential access for Turkish goods, Turkey would be one of the biggest losers of this planned deal if it is not included.

There are several estimates about Turkey’s possible losses. According to a 2013 analysis prepared by the Brookings Institute and Turkey’s leading business association TÜSİAD, the planned deal could cause the Turkish economy to lose $20 billion if it is left out of a final agreement. Turkish EU Minister Volkan Bozkır said on Feb. 5 that Turkey stands to lose roughly $5 billion per year in direct losses alone.

Many talk about Turkey’s potential losses, as it has been more or less the biggest winner of the customs union deal. But nobody can deny that the EU has also been a winner.

The customs union has enabled trade between the two sides to boom. The value of bilateral trade, dominated by industrial products and components, has increased from 58 billion euros in 2003 to around 140 billion euros in 2013.

There is also always more than trade. Foreign direct investment inflows to Turkey peaked in 2007 at $19.1 billion and the EU, led by the Netherlands, Austria, the U.K., Luxembourg, Germany and Spain, has been the largest foreign investor in Turkey over the past five years, accounting for three-quarters of total FDI inflows, according to a 2014 World Bank report titled “Evaluation of the EU-Turkey Customs Union.”

As indicated in the report, this has helped integrate Turkish companies in European production networks, increasing the competitiveness of Turkey in the world economy.

This is a win-win game in economic terms, as Turkey’s trade with Central Asia and MENA suggests that EU foreign affiliates in Turkey are well placed to exploit new opportunities in these markets. “While EU-majority owned firms in Turkey predominantly export to the EU, they have shifted to some extent their destination markets to MENA, Central and South Asia and sub-Saharan Africa, although this has been even more marked for other non-EU foreign-majority owned firms in Turkey,” said the World Bank’s report.

The customs union deal between Turkey and the EU was supposed to be extended after it came into force, and it was thought that the deal would reach its maximum potential when Turkey finally became a full EU member.

As this has not happened, upon the still-unrevised version of the original deal’s conditions, Turkey is required to import goods from any countries with which the EU has a free trade deal without trade restrictions.

This creates enormous asymmetries in Turkey’s trade with third parties, with which the EU has a free trade agreement. For instance, Turkey purchased $1.3 billion worth of goods from South Africa in 2012, while selling $382 million. It imported $867 million worth of products from Mexico in the same year, but exported $206 million there.

“Turkey faces preference erosion in the EU market as the latter signs FTAs with countries that actively compete with Turkey, such as Chile and Morocco,” the World Bank report stated.

If Turkey is excluded from a deal between the U.S. and the EU, one of the best ways forward for it seems to be to negotiate its own free trade deal with the U.S.

At the same time, Turkey needs to revise its customs union deal with the EU.

Otherwise, the losses might be much higher than all current estimates - in a world where there are many countries that can produce and export the same (or better) products that Turkey does.