Turkey and the EU have to expand their trade

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 commercial 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 until 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 USA. 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. That is the recommendation of experts at the Bertelsmann Stiftung, based on a study carried out by the ifo institute at the request of the Bertelsmann Stiftung, published on Friday.

Without a modified 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 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 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.

An alternative that many conservative 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, as the study shows. The imbalance in the trade relations would be eliminated but without a 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 that the study experts propose instead is to enhance the existing agreement. Its 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 Turkish GDP. Agricultural exports to the EU could rise by 95 and exports of services by as much as 430 percent.

Integration of the Turkish agricultural and services sectors with the European customs union also offers commercial opportunities for EU countries. This would give the Turkish government a bargaining chip for correcting its asymmetric trade agreement with the EU. Concretely, 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 a Europe that travels at different speeds. For candidate countries like Turkey, this means that connection to Europe should start in commercial matters," explains Ulrich Schoof, the Bertelsmann Stiftung economics expert. Deeping the customs union would be an important step in the right direction.

Please find the complete study here. For further information also have a look at GED Project's Blog and Twitter-Channel. Our Policy Brief gives a short summary of the study.