TTIP And Turkey-EU Relations: Why Should Customs Union Be Revisited? – Analysis

By Mustafa Kutlay*

Turkey and the EU established a customs union in 1995. The tariffs on exports and imports of all industrial products and goods were abolished. The decision was the outcome of long-lasting institutional relations and binding arrangements between the parties. When the decision was made, the economic expectations were high, especially on the Turkish side: the promotion of Turkey’s export capacity, the improvement of Turkish firms’ competitiveness, the transfer of know-how, and so forth can be listed as some of these expectations. However, for Turkey, the customs union had implications well beyond the economic sphere. The political elite at the time perceived the decision as a stepping-stone to complete Turkey’s EU integration process. It was seen as a shortcut to becoming a member “through the EU’s backdoor,” as claimed by then Prime Minister Tansu Çiller.

In retrospect, many studies suggest that the customs union helped the Turkish economy in many ways. First, it contributed to increasing Turkey’s export capacity. Turkey’s total trade volume was significantly expanded from 66.8 billion (1996) to almost 400 billion dollars (2014) in current prices. Although there are many reasons underlying Turkey’s transformation into a more trade-oriented economy, the role of the customs union should be taken as an important variable as well. Second, and related to the first, Turkey increased its competitiveness vis-à-vis the pre-1995 period. The competition law was enacted so as to comply with EU norms and regulations. Turkish industrial firms felt themselves obliged to craft new strategies to survive in an astonishingly competitive environment at the European level.

The decision on the customs union, however, did not provide the “best of all alternative worlds” in Turkey’s trade relations with the EU. In fact, it was a politically incomplete contract and as a result, not surprisingly, it suffered from certain deficiencies. At the time the decision was made, Turkish decision-makers turned a blind eye to these major deficiencies. The precarious areas and weak spots of the agreement gradually surfaced over the years. Having taken stock of its first eighteen years, the time is ripe to reconsider the pros and cons of the decision to join the customs union. I would argue that Turkey should revisit the decision for at least two main reasons.

First argument: Changing trade dynamics

The first argument is related to the changing trade dynamics of the EU and Turkey. On the EU’s side, free trade agreements (FTAs) gained prominence in mid-2000s. Accordingly, the EU embarked on an aggressive path of diplomacy to sign FTAs with third parties all around the world. Turkey, thanks to her decision to join the customs union, had to harmonize her preferential customs regime with those of the EU’s preferential arrangements and autonomous regimes with third countries. This point is clearly underlined in article 16 of the Association Council Decision No 1/95:

With a view to harmonizing its commercial policy with that of the Community, Turkey shall align itself progressively with the preferential customs regime of the Community within five years as from the date of entry into force of this Decision. This alignment will concern both the autonomous regimes and preferential agreements with third countries. To this end, Turkey will take the necessary measures and negotiate agreements on mutually advantageous basis with the countries concerned…

Turkey also accepted to harmonize its legislation with that of the EU’s future FTA agreements. In other words, Turkey agreed to adjust its foreign trade regime according to the changes in EU legislation, including the union’s future agreements with third countries. However, this principal is not reciprocal. Stated somewhat differently, third countries benefit from the Turkish market without any further ado once they sign an FTA with the EU, but Turkey cannot enjoy the same rights vis-à-vis the countries in question. Instead, Turkey tries to launch bilateral dialogue with these countries in order to compete with them on an equal footing. The recent Transatlantic Trade and Investment Partnership (TTIP) negotiations between the EU and the US are an illuminative case in point. Despite Turkey’s persisting demands, the concerns of the Turkish side have not yet been addressed.

The politically asymmetric nature of the customs union decision creates insurmountable bureaucratic, diplomatic, and economic costs for Turkey. Moreover, Turkey witnessed a shift in her trade priorities. During the 1990s, the EU’s share of Turkish foreign trade was around 55 per cent. Over the last decade, this ratio has declined to 39 per cent. In the meantime, Turkey’s trade relations with Asia (including Middle Eastern countries) has increased precipitously from 19 percent to 32 percent. The changing nature of Turkish foreign trade, not surprisingly, necessitates a more flexible framework for Turkey to deepen its relations through free trade agreements and other forms of regional cooperation arrangements. For all these reasons, the “letter and spirit” of the customs union agreement in its current format progressively restricts the scope of Turkey’s foreign trade.

Second argument: Changing political dynamics

The second argument is related to the changing political dynamics in Turkey-EU relations. Joining the customs union was a politically motivated decision from the very beginning. Turkey, whilst acknowledging the potential economic benefits, attributed a heavy dose of political symbolism to the decision. The ultimate aim for Turkey was to become a member to the EU, and it was hoped that the customs union would clear Turkey’s bumpy path to EU membership. It is because of this reason that the decision was first and foremost marketed as a political success in the domestic sphere. There was a functionalist idea behind this political strategy: the customs union was supposed to help convergence between the parties and pave the way for political unification at some point in future.

These expectations, however, did not hold true. After unprecedented progress between 1999 and 2005, Turkey-EU relations plunged into a virtual deadlock. Currently, the relations exist in name but not much in substance. The EU’s domestic political economy challenges, Turkey’s changing priorities, and the recalcitrant problem areas between the parties (such as the Cyprus question) indicate a new trend in bilateral relations, which makes membership an increasingly less likely scenario. Furthermore, the EU is currently in the midst of an institutional metamorphosis. The euro crisis, once again, intensified the old debates regarding “multispeed Europe.” An increasing number of pundits tend to argue that the “monolithic EU” thesis should not be taken as a convenient ideational paradigm anymore in addressing the EU’s ever-increasing institutional problems. It is argued that the EU is gradually heading towards “variable geometry” in which different member states integrate and cooperate at different levels.

If it holds true, this argument has serious implications for Turkey-EU relations. In a multi-centric EU, the concept of “full membership” would inescapably lose its meaning for the EU. In this new equilibrium of institutional relations between the parties, it is also difficult to see why Turkey should continue to bear the costs of the current political asymmetry attached to the customs union. Once combined with the growing economic burdens that stem from the EU’s changing FTA arrangements and Turkey’s exclusion therefrom, the concept of “political asymmetry” becomes intolerable for the Turkish side. Turkish policy-makers seriously underline this point in their statements between 2013 and 2014. For instance, Turkish minister of economy, Nihat Zeybekçi, said, “if Turkey is not in the [TTIP] agreement between the U.S. and EU, Turkey may renounce their custom union agreement with the EU due to the substantial damages suffered.” Mevlüt Cavusoğlu, Turkey’s EU minister at the time, threw full support behind Turkey’s economic bureaucracy: “as the EU negotiation process lingers, the negative impact on the economy grows. It is injustice for the Turkish economy.”

In short, the current form of Turkey’s customs union with the EU is far from being an optimal deal for the parties. Given the changing economic and political dynamics, Turkey feels stuck between a rock and a hard place. On the one hand, she needs to protect institutional links with the EU and preserve the benefits derived from the customs union; on the other hand, she must also attempt to rebalance her changing priorities. Therefore, a realistic and pragmatic revision of the customs union seems to be a necessity, rather than an option, in order to open up new avenues in Turkey-EU cooperation.

*Asst. Prof. Mustafa Kutlay is the Director of Centre for European Studies at the International Strategic Research Organization (USAK). He is also a faculty member at the TOBB University of Economics and Technology.

An earlier version of this op-ed is published in USAK Yearbook of Politics and International Relations, 2013, vol. 6, p. 239.