Turkey-EU Customs Union: Its Modernization and Potential for Turkey-EU Relations.

• Author: Nas, Cigdem
• Position: COMMENTARY - Essay

Introduction

Turkey is at the same time a candidate and negotiating country to join the EU and an associate partner of the Union. Sometimes these multifaceted relations may confuse the observer since different strands of the relationship run in parallel and with direct and indirect effects on each other. For example, the visa liberalization process is closely related to the migration and refugee issue-area. The visa liberalization process could only be started upon the signature of the Turkey-EU Re-admission Agreement on December 16, 2013. The visa issue is also indirectly related to the customs union since it presents an extra burden for business people who would like to travel to the Schengen area for business purposes. The customs union is not only about the bilateral trade relationship since it, directly and indirectly, triggers Turkey's alignment to the EU acquis, rules governing the economic infrastructure, production norms and standards. The customs union between Turkey and the EU, having served multiple functions in Turkey's integration to the EU until now, is in clear need of an upgrade and overhaul. It has to be adapted to the new realities of world trade, EU trade policy and Turkey-EU relations. This process, which is denoted as a "modernization of the customs union" cannot be initiated due to political conditionality applied by the EU. Turkey is expected to take measures in order to realign the political situation in the country with the EU's Copenhagen criteria, including improvements with respect to rule of law, freedom of expression, political rights and related freedoms. The modernization of the customs union, if it could be started, could also induce an improvement in Turkey with respect to reigniting fundamental reforms and in turn accelerate Turkey's compliance with the membership criteria in the above-mentioned areas. This process is in the interests of both Turkey and the EU since it would work to correct the imperfections in the functioning of the customs union and expand the bilateral trade relationship to include new sectors of the economy, such as agriculture, services and public procurement. In this way, the modernization of the Turkey-EU customs union would act as a trigger that would place the relationship on a new footing and facilitate Turkey's integration to the EU Internal Market.

The customs union between Turkey and the EU dating back to December 31, 1995, is actually based upon the Association relationship between Turkey and the European Economic Community (EEC). The Ankara Agreement of 1963 established an Association between the parties, the last phase of which was based upon a customs union to be gradually built by consecutive steps. Additional Protocol of 1970 determined the timing and conditions of the transition phase leading to the customs union by gradually lifting customs duties and quantitative barriers in the trade of industrial goods between the parties and Turkey's alignment to the EU's Common Commercial Policy (CCP) and Common External Tariff (CET). (1) While the EC of the time abolished all customs duties levied on goods imported from Turkey with the exception of such goods as textiles and oil products above a certain quota, (2) Turkey would abolish customs duties on EC industrial products over a period of 12 and 22 years respectively from the date of entry into force of the Additional Protocol.

The transition to the customs union was finally accomplished upon the Association Council Decision numbered 1/95 of March 6, 1995, and has been in operation since concerning industrial products and the industrial component of processed agricultural products. While it fully liberalized trade between Turkey and EU countries, it also involved the equalization of Turkey's tariffs implemented to goods from third countries as well as harmonization of external trade policy, and related policies such as competition, consumer protection, intellectual property protection etc.

At the time it entered into force, the customs union could be considered as a Plan B, i.e. the second best option for the improvement of Turkey and EU relations. The best scenario would be Turkey's membership and hence becoming a party to the customs union by way of accession to the EU and its institutions. The customs union included mechanisms for consultation and notification with regard to trade policy measures and resolution of disputes between the Parties. However, such mechanisms included in the Association Agreement and the customs union decision later proved to be quite ineffective. Turkey's voluntary application of the common external tariff (CET) and alignment with the CCP began to be questioned as Turkey's membership prospect waned.

Tansu Ciller, Turkish Prime Minister of the time, promised full membership for her country in three years as the customs union was entering into force. Hence the customs union was not seen as an end in itself but as a station before reaching the final destination, which was full membership. Turkey was finally able to open membership negotiations with the EU on October 3, 2005, only to be partially suspended by the Council's decision in 2006. Ironically, those chapters that were considered by the Council to be linked with the customs union (3) were decided not to be opened while none of the chapters were to be provisionally closed until Turkey complied with the EU's demand to open its ports and airports to ships and planes originating from Southern Cyprus. (4)

Background and Preparations for the Modernization Process

As the customs union relationship continued without sufficient progress in accession negotiations and the prospect of membership dimmed, problems in the functioning of the customs union became more noticeable. Turkish officials voiced concerns over the benefits of the customs union. As early as 2002, the then Minister of State responsible for trade, Kursad Tuzmen, answered a question on the customs union by noting that: "Had we signed a free trade agreement instead of a customs union, maybe it would have been more beneficial." (5)

The Transatlantic Trade and Investment Partnership (TTIP) talks that started between the EU and the U.S. in June 2013 further fuelled a sense of urgency in Turkish policy circles and the business community. A free trade area that would ensue from such a partnership would open up the Turkish market to American goods that would be able to enter via the EU, without giving a reciprocal advantage to Turkish goods in the American market. Several solutions were debated such as a "docking" that would make it possible for countries like Turkey which has special trade relations with either of the parties to accede to the Agreement once it is finalized. (6) Then former Minister of Economics, Zafer Caglayan, voiced critical opinions on the customs union and drew attention to its shortcomings. He said "if the EU will not take the customs union process a step forward then we should make a Free Trade Agreement with the EU instead of customs union." (7) Deputy Prime Minister of the time, Ali Babacan, however, stressed the importance of the customs union and the difficulty of withdrawing from it: "It's not that easy to say we're angry and we're out. He who rises in fury reaps damage from his fall. We always have to think strategically." (8)

The "Positive Agenda" launched by Commissioner Fule in 2012 also included enhanced cooperation in trade (9) which would imply preparations for an upgrade of the customs union. As the Association Agreement already embodied targets for an enhanced relationship in areas of services, agricultural trade, free movement of capital and workers, the aim of revitalizing the relations could be based upon this framework. However, the positive agenda did not produce noticeable results due to the difficulties in revamping the relations. While the EU was still recuperating from the financial crisis as the "Fiscal Compact" (10) entered into force, Turkey was embroiled in its internal problems and reacting to disturbances in the region, notably the Syrian crisis.

A report commissioned by the European Commission and prepared by the World Bank acted as a groundbreaking document that proved to facilitate the process by putting forward proposals for an upgrading of the customs union that both sides found to be feasible. (11) Minister of the Economy, Nihat Zeybekci, had discussed the matter with EU counterparts and reached an agreement to renegotiate the customs union no later than June of that year. (12) The report indicated the possibility of a compromise between Turkey and the EU on the revision of the customs union with a view to correcting its malfunctioning, providing solutions to complaints by both sides and expanding its scope. While the report noted that the customs union benefited both parties in terms of increased trade, FDI flows to Turkey, increase in competitiveness and alignment with the EU acquis, it also noted that the benefits from the customs union were eroding due to changes in international trade and "design flaws" (13) in the customs union. The report also recommended the expansion of the customs union to agriculture and services sectors and predicted that it would stimulate further bilateral commercial ties between Turkey and the EU.

A Senior Official Working Group on the Update of the EU-Turkey customs union and Trade Relations (SOWG) had been set up on February 28, 2014 in order to prepare an initial framework for the actual negotiations on the modernization of the customs union. The SOWG met several times and produced its report on April 27, 2015, basically setting out the framework for the modernization of the customs union within the framework of three strands: revision of the customs union decision with a view to solving problems and design flaws, expanding it by the inclusion of additional sectors, i.e. services, agriculture and public procurement and modernizing the customs union by way...