Written evidence from Turkish Industry & Business Association (TÜSİAD) (BCA0004)

European Union (EU)-Turkey Customs Union: Upgrade and Modernisation

Background

• Turkey applied for associate membership of the then European Economic Community (EEC) on 31 July 1959, which resulted in an Association Agreement between the EEC and Turkey signed on 12 September 1963 (the Ankara Agreement) whereby the parties agreed to create a Customs Union.
• An Additional Protocol was signed on 23 November 1970, which set out a timetable for the abolition of tariffs and quotas on goods circulating between Turkey and the EEC and the free movement of workers.
• The EU-Turkey Customs Union (CU) was established on 31 December 1995 by the EU-Turkey Association Council Decision. Turkey was officially recognised as an EU candidate country in December 1999 and accession negotiations began on 3 October 2005.
• The CU encompasses industrial goods but not agriculture (except processed agricultural products), services or public procurement. Bilateral trade concessions govern agricultural as well as coal and steel products.
• Although called a CU, this agreement is more accurately described as a hybrid arrangement ensuring free movement of goods and a common tariff with non-EU countries. Consequently, Turkey had to align with the:

-          EU Common Commercial Policy (i.e. the trade agreements negotiated by the EU with non-EU countries),

-          EU Common External Tariff (i.e. a harmonised tariff regime and rules of origin with non-EU countries; and

-          EU acquis communautaire (the corpus of EU rules, regulations and principles) prescribing product regulations and standards.

• Consultations on the modernization of the CU started in early 2014 between EU and Turkey. Negotiating framework has been decided in May 2015. Impact analysis has been concluded as well by both sides in 2016. In December 2016, the European Commission proposed to modernise the Customs Union and to further extend the bilateral trade relations to services, public procurement and sustainable development. The Commission's proposal is currently being discussed in the Council.
• The key issues of the modernisation agenda are outlined below:

Negotiating Framework

1- Restoring structural problems

i. Trade Agreements

• EU trade agreements do no automatically cover Turkey, which has to separately negotiate an identical or nearly identical trade agreement with that non-EU country. For instance, South Africa and Algeria refuse to conclude a trade pact with Turkey such that South African and Algerian products enter Turkey via the EU without reciprocal arrangements for Turkey.
• To remedy the negative consequences of trade diversion, Turkey has imposed origin controls for imports coming from the EU, particularly on sensitive goods to verify whether they originate from the third countries with which the EU concluded a Free Trade Agreement and Turkey not. For example, Turkey has introduced measures based on rules of origin for Mexican car imports.

ii. Participation to EU’s decision-making mechanisms regarding CU

• Turkey wants to have a voice, if not a decision-making role, in any EU trade negotiations with non-EU countries as well as in EU committees determining product regulations and standards.
• In contrast, the EU will only agree to greater consultation with its Turkish counterpart on trade agreements and limit Turkey to observer status at EU committees (i.e. Turkey has rights to witness but not participate in committee deliberations).

iii. Removal of Quotas on Road Transport

• Road quotas, and notably transit permits, create hurdles to the free movement of goods and obstruct transit traffic between Turkey and the EU.
• Turkish truck and lorries must secure a transport licence at each EU member state that they drive through. Each state sets the number of licences without recourse to any objective criteria or standards.
• This requirement impedes the free movement of goods between the EU and Turkey costing nearly €3 billion annually in lost trade. The right of lorries to move freely is granted by the EU so far only on the condition of the free movement of persons between the bloc and a non-EU country. EU member states also undermine frictionless trade by imposing cumbersome visa restrictions on Turkish lorry and truck drivers. Any visa liberalisation that has been achieved has depended almost entirely on rulings by the Court of Justice of the European Union (CJEU).
• EU member states also undermine frictionless trade by imposing cumbersome visa restrictions on Turkish lorry and truck drivers. Visa liberalisation has depended almost entirely on rulings by the Court of Justice of the European Union (CJEU).
• As part of the Customs Union modernisation process road transport quotas both on bilateral and transit transportation could be eliminated, particularly for those goods covered by the CU.

2- Modernization of Customs Union

(i) Improvements are needed in several areas: Better harmonisation on technical regulations; enhancement on IPR implementations; better cooperation between customs through the implementation of Trade Facilitation Agreement; lifting or reducing antidumping and safeguard measures

(ii) Dispute settlement mechanism

• Both sides want to have a robust dispute settlement mechanism on CU-related issues which will consider rulings of the Court of Justice of the European Union (CJEU) as well as EU acquis.
• Currently the dispute settlement mechanism under the CU is exclusive to safeguard measures while the mechanism in the Ankara Agreement cannot be invoked unless both sides agree and is not obliged to follow CJEU and the relevant EU acquis.
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3- Enlarging the scope of Turkey-EU Trade Relations

• The CU does not include services, public procurement and free trade in agriculture. Both sides, are, however, to widen its scope to include the liberalisation of services, public procurement and a more liberal regime for agriculture.
• According to the impact assessment of Turkish Economy Ministry, in case of the most comprehensive update of the CU (resolving structural problems, full liberalisation in agriculture, mutual opening of services and public procurement, enacting further FTAs) the following % increases will be observed: Turkey’s GDP by 1,9%, exports to the EU by 24%, total exports by 15%, household consumption by 1,6%. On the other hand, consumer price will drop by 1,5%. Consequently, this will have a positive impact on consumer welfare.

Importance of the Modernization of CU for business community in Turkey

• The modernization of the customs union, which was designed as a transitional pre-accession step can be a timely opportunity and one of TUSIAD main priority areas to break the current stalemate in EU-Turkey relations in favour of reforms with democratic benchmarks.
• After twenty years of implementation, the Customs Union mechanism does not fit the realities of the global economy nor provide any remedies to the problems of investment environment. We observe and hear from the business people not only in Turkey but also from Europe that the two sides have more and more divergent positions especially in the fields of tariff and non-tariff barriers to trade, trade defence instruments and regulations for settling trade disputes. It is clear that lack of incoherence of both sides’ trade policies has caused the erosion of the common trade regime and increasingly puts the proper functioning of the Customs Union at risk. So, the modernization of the Customs Union is necessary for both sides interests.
• The deepening of the Customs Union is certainly not an alternative to the accession negotiations of Turkey, but rather a complementary part of it. In that sense, modernization of the Customs Union cannot substitute the accession process.
• The modernization of the Customs Union is a strategic priority for TÜSİAD. It has been a major instrument of integration for the Turkish economy into both European and global markets. From an economic perspective, it is evident that upgrading the Customs Union is a win-win for the EU and Turkey. Its true potential, however, goes beyond the removal of tariffs in new sectors such as the services and agriculture.
• Through the active use of this tool, EU can regain its positive influence on the national reform process in Turkey, promote democratization of the economic governance with the regulatory harmonization, for instance in public procurement, foreseen in the scope of the negotiations.
• Turkey and the EU agree to upgrade the CU to take account of modern technological developments, namely digital innovations, the Internet and mobile telephony. Dialogue and integration cooperation in the fields of energy, transport, research, development and innovation as well as Turkey’s full integration to the EU Digital Single Market need to be on the agenda.
• Attention must be given to ensuring that these areas are included in the scope of a revised Customs Union in an ambitious and comprehensive manner.
• BusinessEurope supports this position by stating in its most recent position paper on the Future of Europe that “preserving the conditionality of Turkey’s EU process, both sides should focus on starting the negotiations on revision of the customs union and making further progress in the fields of digital economy, security and energy, while emphasising the importance of rule of law and democracy”.

• *Turkish Industry & Business Association (TÜSİAD) is the largest voluntary and independent business organization in Turkey. It is the association of the internationally integrated businesspeople. TÜSİAD is a member of BusinessEurope, Business at OECD (BIAC), the G20’s Global Business Coalition and BRICA. it is the Turkish counterpart of Confederation of Business and Industry (CBI) in the UK and in Turkey’s business spectrum TÜSİAD represents about:

•        80% of Turkey’s exports

•        over 50% of the private sector’s employment

•        85% of the state corporate tax revenues.

• Our work is organized through a system of round tables, expert committees, representative offices, SME and youth platforms, academic forums and international partnerships. We have representative offices in Ankara, Brussels, Washington DC, Paris, Berlin and London alongside with our networks in China and Silicon Valley.
• Acknowledging Turkey - UK burgeoning relations, TUSIAD has established a permanent base in London headed by Dr. Hasan Turunç in 2015. TUSIAD London will focus on the following areas:

•        strengthening political and public relations

•        expanding business, commercial, financial and trade relations

•        building bridges between Turkish-British civil society, think tanks and academia.

• Since 1971, TUSIAD has been a pioneer of progress in Turkey and we are determined to undertake a tenacious program for 2017. We are in the UK to establish long term and effective partnerships.

1 June 2018