Turkey and the EU should deepen their trade relations

Erdal Yalçın*

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 economic 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 up to 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 U.S. Since Ankara is not an EU member, however, the Turks could not expect equivalently-lowered duties for their exports to these countries. One way out might be to expand the EU-Turkish Customs Union. 

Without a modernized EU-Turkey Trade Agreement, Turkey faces the threat of significant foreign trade losses. The potential welfare loss in the medium term, about 0.01 percent of the 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 percent and 4 percent, 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 percent in Turkish GDP are possible. 

Deeping trade relations could help both sides 

An alternative that many politicians in Turkey are currently calling for is to dissolve the mutual Customs Union. However, that would be a step backward for Ankara’s economy. The imbalance in trade relations would be eliminated but without the 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 percent. The effects of a new EU trade agreement would then cause Turkish GDP to fall by another 0.96 percent. And in that case, the EU would also have to expect some losses.

The solution lies in enhancing the existing agreement.

At the request of the Bertelsmann Stiftung, the Ifo Center for International Economics has empirically analyzed relevant economic policy integration scenarios, giving consideration to national and international value chains for the EU and Turkey. The process paid particular attention to possible options for the future economic integration of Turkey in the EU, a topic that is also the subject of current political discussion.

According to the analysis, the current agreement’s 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 percent increase in the Turkish GDP. Agricultural exports to the EU could rise by 95 percent and exports of services by as much as 430 percent over next decade.

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 a rise in the Turkish GDP of 1.96 percent. Per capita income would rise by nearly $200. If Ankara signs its own trade agreements with new partners in the EU, the GDP could rise an additional 2.5 percent, which would correspond to a nominal increase of $18 billion.

Integration of the Turkish agricultural and services sectors with the European Customs Union would also offer economic opportunities for EU countries. This would give the Turkish government a bargaining chip for correcting its asymmetric trade agreement with the EU. More precisely, 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 an EU that travels at different speeds. For candidate countries such as Turkey, such a prospect means that integration is promoted primarily in the economic or political spheres first of all, which is meaningful and achievable both from a national and from a European point of view. Based on this logic, therefore, Turkey and the EU should aim to deepen the Customs Union as soon as possible. The advantages of this policy are not only economic. If implemented successfully, it offers politicians room to maneuver for further reforms in the future, in addition to the welfare effects.

*Erdal Yalçın is the deputy director of the Ifo Institute