Not for the first time, Turkey is facing a dilemma about how to best protect its interests. Toward the end of June, the country is expected to begin negotiations with the European Union about a possible upgrade to their existing trade arrangement. Under the current deal, Turkey is a member of the European Union Customs Union but has no say over the bloc’s trade deals. Both sides have found the agreement lopsided and dysfunctional. But Turkey’s decision to upgrade the deal, rather than limit it, may come as a surprise to some. Turkey’s future opportunities largely lie away from Europe, in Asia and the Middle East. But instead of breaking free from a restrictive EU trade deal to explore them, Turkey will satisfy short-term needs by tying itself closer to its rich western neighbors, though perhaps not for long.
Balancing a Lopsided Agreement
The current EU-Turkey trade arrangements are fairly uneven. Turkey is a member of the bloc’s customs union when it comes to most goods, which means that it sits behind the union’s common external tariff barrier. That barrier allows tariff-free trade for those — like Turkey — who are inside the customs union bubble, whereas there is a common trade barrier for any countries outside it. This has been largely beneficial for Turkey. But unfortunately for the country, the customs union is not the only feature in the European Union’s larger trade picture, and Turkey is excluded from many other trade benefits. Most importantly, free trade agreements negotiated by the European Union do not automatically apply equally to Turkey. When EU negotiators strike a bilateral trade deal with another country, allowing it to pierce the customs union bubble in exchange for opening up aspects of its own market, Turkey’s economy becomes open to the third country, but it doesn’t get the same access to that new market in return.
This situation is unusual, and is a result of the equally unusual history between Turkey and the bloc. When the European Union-Turkey Customs Union agreement was first created in 1995, it was meant to be a temporary step toward Turkey gaining full membership in the European Union. Accession negotiations later stalled, but the customs union nevertheless benefitted Turkey in the years following. As part of its terms of membership, Turkey had to agree to sections of the European Union’s Acquis Communautaire, or, accumulated laws and obligations, which meant that the country had to improve some of its industrial standards. The resulting reforms, along with the access to wealthy European markets that the deal afforded Turkish businesses and citizens, were partly responsible for the economic boom that Turkey experienced in the next two decades. (This boom was helped along by later reforms and other steps to bring Turkey and Europe closer, as well.)
The lopsided trade negotiation aspect also wasn’t a major issue until recently. For much of the last 20 years, the European Union was only negotiating free trade agreements with smaller nations. Turkey’s solution to the problem of potential trade imbalances was simply to negotiate its own free trade agreements with the same countries immediately after the bloc did, securing its access. If these comparative economic minnows didn’t want to talk to Turkey, as happened with South Africa, Algeria and Mexico, the financial impact on the country was minimal.
In Need of Upgrades
But now, this peculiar but workable status quo is unsustainable. The prolonged stagnation of multilateral trade negotiations around the world has led to a general trend of more ambitious bilateral trade deals. And the European Union has followed suit. The bloc started trying to negotiate trade deals with countries of greater economic heft, like the United States and Japan, and an agreement with the latter looks like it may be finalized by the end of 2017. But Turkey has struggled to start talks with the bloc’s new free trade partners; those countries recognize that the unbalanced trade situation that comes from resisting a deal with Turkey would work in their favor. Ankara has responded by creating barriers within the customs union bubble to protect its own market and by implementing new regulatory standards, surveillance measures and safeguards that inhibit the flow of goods — all of which essentially defeat the purpose of the customs union.
Meanwhile, other aspects of the original EU-Turkey deal have begun to look outdated. For instance, the agreement only covers the trade of industrial goods and some agricultural items, leaving out crucial elements such as services, which are becoming ever more important to the global economy. The agreement also does not contain a dispute settlement mechanism, making it hard to resolve issues that have arisen between the two parties. The European Union and Turkey thus began to discuss the idea of an upgrade to the deal in 2015, with both sides motivated to create a more equitable and functional system. The pair proposed an expanded deal that would include services and previously excluded agricultural items, as well as a dispute settlement system. In addition, Turkey would become a part of any new EU trade deals that might emerge, solving its problem with uneven trade relationships.
Turkey Makes a Trade-Off
From a Turkish perspective, the renegotiation might initially seem like a no-brainer. The European Union is Turkey’s largest market and trading partner: The bloc receives 48.5 percent of the nation’s exports and its members represent six of Turkey’s top 10 export destinations (at least until the United Kingdom, which consumes 8.2 percent of Turkey’s exports, makes its Brexit). The opportunity to improve Turkish access to the EU market and solve the free trade agreement problem in one fell swoop holds clear advantages for Ankara.