Since 1963, Turkey is trying to integrate into the European economy. Turkey, first signed the Association Agreement in 1963 and Additional Protocol in 1970, which were the two important steps in order to integrate with European Union. Both of them envisioned a full economic integration agreement in the end, formally known as Customs Union agreement. Turkey did not become ready till 1995 and the Customs Union (CU) was imposed between Turkey and the EU in 1996. In this paper, CU’s impact to the Turkish economy will be discussed and we will be looking at whether Turkey would be better off with the CU or without it.
According to Öniş (Yılmaz, 2010), Turkish political elites went through with signing CU, because it gave Turkey to integrate with European economy without taking the burden of further political and democratic reform. On the one hand, Turkey had an absence of a desire in continuing its reforms; on the other hand, Turkey had the willing to finalize Association Agreement by signing the CU agreement. However, Turkish elites is also motivated to become a full-member to the EU while rationalizing that CU would lead the way to the full accession eventually.
In Turkey, there is a serious complaint towards CU and also crucial discussion going on whether Turkey should leave the CU or not. The notion of the Customs Union agreement is mostly negative and ordinary people are very much critical with the idea of it. Especially our citizens always concentrate on negativity of the CU. So, is it the case? Is Turkey, surrenders to the EU in order to be full-member and do whatever EU want, even if it is an big negative for her?
First of all, according to some scholars and the World Bank report (Yılmaz 2010, WB 2014, Aydın-Düzgit, Tocci 2015), after the CU agreement, productivity in Turkish industries increased as agreement caused a fierce competition among manufacturing sector. Under this competition, Turkish sectors achieved to stay strong and diversify their productions. Turkish industrial production achieved to increase 10.2 % and 15.3 % within the years of 1996 and 1997. Additionally, export-output ratio increased from 21 % in 1995 to 25 % in next three years (Yılmaz, 2010). The productivity we are talking about led a way to production increases in automotive and consumer electronic sector. While total factor productivity growth in electronics rise two-thirds from 1995 to 2001, total factor productivity growth in automotive sector remained slightly small, 30 % from 1995 to 2001 (Yılmaz, 2010). However, the increase in consumer electronics halted after 2001, as the industry started to lose its market space in the EU after the drastic change in the technology. On the other hand, even though automotive sector was seen that it would be negatively affected after the CU agreement, it continued to be productive and increased by 26 % from 2005 to 2008 (Yılmaz, 2010). Main reason for this productivity is the disciplinary effects of the CU agreement and with the help of this discipline, Turkey could compete with the labor-intensive goods from China; especially Chinese goods were dominating the market since China became member of the WTO. As a matter of fact, Turkish manufacturing industry was relying on intermediate goods from East Asia and their access to market have helped higher productivity growth enormously (Yılmaz, 2010).
Second positive effect of the CU can be put as welfare effects. According to the study made by Harrison and colleagues (Yılmaz, 2010), Turkish GDP will continue to grow by an amount to 1-1.5 % and this will happen despite 1.4 % of GDP decrease due to the tariff revenue losses (Yılmaz, 2010). Plus, the “anchor” effect of the CU and rising prestige of Turkey in global economy mostly with the 2000s have helped the risk decline of the country and increase in the FDI’s, which enabled to 7.7 billion USD welfare gain in 1995 (Yılmaz, 2010).
Substantial increase in trade flows between Turkey and the EU is one other reason for a welfare increase, especially for both them. After the CU, imports from the EU were increased immediately while the Turkish exports had to wait for a while. Exports from Turkey were raised after the 2001 crisis, a decline of demand in domestic market and depreciation of the TL led the exporters to direct to the European markets. Export revenues increased by 12.6% in 2001 and further increased after 2002 even though TL has appreciated and domestic demand increased (Yılmaz, 2010). There is also evidence that exports to the EU market increased the productivity, average wage and the employment in the long run (WB, 2014).
The most immediate negative effect of the CU is naturally a decrease in tax revenues. As Turkey lowered tariffs on imports coming from the EU, revenues fell from 2.8 % of total tax revenues in 1995 and nearly 1.1 % in the years between 2001 and 2005 (Yılmaz, 2010). As a matter of fact the losses from the lowering tariffs cannot be seen crucial in Turkey’s economic deterioration, since it is already stated above that despite those losses Turkey’s welfare increased significantly.
There is a serious downside of the CU long apart from the tax revenue losses: asymmetric nature of the CU. Turkey, from her foundation was very much in favor of integrating with Europe in every stage. Economy was one them and this motivation through the Customs Union made Turkey accept the agreement with some negative sides. Turkey accepted EU’s trading regime and could not able to make EU to consider her FTA’s with third countries and their potential aspects on Turkey. One can argue that Turkey can persuade the EU to consider consulting with Turkey before signing or negotiating a FTA with a third party, however, the failure of this led to a disturbance by Turkish side. Even though Turkey signed the CU agreement because CU’s pros are more than its cons and this was the first major step in order to get the full membership to the EU. Turkish negotiators of the CU was well aware of these potential downsides, however, they were very much in trust that Turkey will eventually become a member of the EU and those downsides would only be temporary (Aydın-Düzgit, Tocci, 2015).
Turkey has signed FTAs with 26 countries. 10 of them were candidate countries to the EU and after their membership FDAs were withdrawn. In order to provide competitive nature in the EU and increase world market share, EU adopted a new trade policy which will follow to sign FTAs with emerging economies like, Latin Americans, India, South Korea etc… Signing FTA with India and Korea would be somewhat problematic to Turkey while Turkish sectors can experience pressure for serious competitiveness. As CU does not give Turkey the chance to negotiate in the FTAs between EU and the third parties Turkey stays very much vulnerable (Yılmaz, 2010).
Transatlantic Trade and Investment Partnership (TTIP), which will implement free trade with EU and the US, is maybe more problematic for Turkish economy. According to Yılmaz (Yılmaz, 2015) Turkey will face 2.5 % GDP welfare loss in the long-run (Aydın-Düzgit, Tocci, 2015). Still Turkey’s case would not be bad as Mexico, Canada or even the EU. It is estimated that Canada will face 9.5 % welfare loss while Mexico’s long-run welfare will decrease 7.6 % (Yılmaz, 2015). On the other hand, Central Bank of Turkey conducted a research on if Turkey would not be able to sign an FTA with US, her GDP declines with a maximum half percent along with a half percent decrease in the exports (Yılmaz, 2015). However, in a scenario that Turkey signs an FTA with the US, Turkish GDP will increases 31 billion dollars and 7 % increase of the exports is predicted as well. Since US goods will travel in European market, Turkish exports to the EU will be also affected. It is been said that Turkish sectors like, petrochemicals, automotive, iron and steel, metal products, chemical and plastic materials, machinery and equipment, and textiles will mostly be touched by the TTIP.
Along with the asymmetric nature of the CU, decrease in tax revenues and the psychological burden, CU’s overall effect on Turkish economy is positive (Yılmaz, 2010). Turkey is benefiting from trade flow, mainly from exports and CU has significant effect on welfare. On the one hand, World Bank report states that (WB, 2014) Turkey and the EU should go for a more integrated economy like a wider version of the CU will be beneficial both for Turkey and the EU. Two other sectors, agricultural and service, should also be added to the new wider version of the CU, which will also be beneficial for both economies. On the other hand, Yılmaz (Yılmaz, 2010) believes that since the full-membership of Turkey to the EU is nearly impossible, leaving CU and signing an FTA would be more logical for Turkey’s economy, whereas Euro’s depreciation would cause further competitiveness pressure to the industry and increase in the trade deficit of Turkey. So it is more logical for Turkish political elite to convert the CU to an FTA (Yılmaz, 2010). Yılmaz also claims that TTIP would harm Turkish economy if Turkey could not sign an FTA with the US since Turkish inclusion to the TTIP’s negotiation process is not possible (Yılmaz, 2015). Best option either for Turkey, EU and US is that Turkey to sign an FTA with the US, given the fact that the EU and the US would gain 0.2-0.3 % of their GDP different from the scenario of no FTA between Turkey and US. However, one should re-think about signing an FTA with US, since it is quite certain that US will negotiate to include the service sectors and public procurement. Given the fact that Turkish service sector is lacking competition and only 20 % of the sector is value-added to open up this sector to US firms would not be best interest of Turkey.
Whether Turkey’s economy will be better off with the CU, is a difficult question to answer. As you can see above, there is not one overwhelming approach from the scholars. Apart from the economic front, signing the CU without being a member to the EU, might be felt exploited to the Turkish citizens. Most of the scholars are in the same page that Turkey benefited from the CU so far. However, as the EU changed her free trade policy, the mental burden of signing the CU could be easily turned into a physical one for Turkey. CU agreement forces Turkey to accept unconditionally any FTA of the EU with a third party. On the other hand, if Turkey leaves the CU and signs an FTA with the EU, it might seem as Turkey fully abandons the idea of becoming EU’s full-member. This move would considered as throwing a life-long passion and work to the garbage.
Basri Alp AKINCI
- Aydın-Düzgit, S., Tocci, N. (2015), “Chapter 5: The Economy”, in Turkey and the European Union, Palgrave, pp. 91-113.
- World Bank (2014), “Evaluation of the EU-Turkey Customs Union”, available online at worldbank.org.
- Yılmaz, K. (2010) “Taking Stock: The Customs Union between Turkey and the EU Fifteen Years”, TÜSİAD-Koç University Economic Research Forum, Working Paper 1023, July 2010.
- Yılmaz, K. (2015) “TTIP and EU-Turkish Economic Relations: Deepening the Customs Union”, Global Turkey in Europe, March 2015, available online at http://www.iai.it/sites/default/files/gte_pb_21.pdf.