EU Integration of Turkey at a Crossroads

Tasks

In May 2015 Turkey's government, together with European Union (EU) representatives, announed a declaration of intent that aims to update and deepen the existing customs union between the two parties. This desire to deepen economic policy relations between the EU and Turkey independently of the stagnationg EU acquis is surprising, but represents a potential step away from the threat of a collapse in economic trade relations between the two regions. The EU is by far Turkey's most important trade partner and, conversely, Turkey is the EU's sixth largest trading partner. Turkey has long-term economic relations with Germany in particular. While 9% of Turkish exports go to Germany, German products account for around 10% of all Turkish imports.

This economic integration success, however, has been threatened for some time by institutional weaknesses in the design of the European customs union, which are accompanied, in Turkey's case, by increasingly negative implications for Turkish industry. The EU Commission's focus on signing new regional trade agreements with, for example, the USA (Transatlantic Trade and Investment Partnership, TTIP) or Japan and/or Canada, has highlighted institutional weaknesses in the customs union between the EU and Turkey that has been successful to date.

The aim of this study is firstly to present the institutional framework conditions between the EU and Turkey, taking Europe's new trade policy into consideration, and to work out growing institutional incompatibilities. Building on this, potential economic effects that can be reckoned with if the bilateral economic agreements between the EU and Turkey were not to be adjusted are quantified. The analysis covers not only the potential mid-term effects of a transatlantic trade and investment agreement, but looks also at further trade agreements with third-party states negotiated by the EU that could also have a long-term impact on the Turkish economy and European-Turkish relations.

In other words, this study quantifies the positive economic aspects of deeper economic integration of Turkey within the EU in view of international regionalisation. It also takes into account Turkey's cession of political sovereignty to European institutions that accompanies deeper integration. Normative economic policy integration goals for EU-Turkey relations are derived from their economic-institutional cooperation.

Methods

With the help of a comprehensive, multi-sector trade model encompassing 140 countries, which also takes national and international value creation chains into consideration, the effects of various trade policy shocks (e.g. simple, deep free trade agreements, a customs union) are simulated in general equilibrium. The reduction in the (non-tariff) trade costs that can be expected to arise from a free trade agreement are estimated using a gravity equation.

Data and other Sources

COMTrade, CEPII, GTAP, Bundesbank FDI Data.

Results

The study illustrates that without a modernised EU-Turkey Trade Agreement, Turkey faces the threat of significant foreign trade losses. The estimated potential welfare loss in the medium term, totalling around 0.01% of Turkish GDP, is relatively small, but certain Turkish export sectors can expect substantial losses. The automotive and mechanical engineering sectors could experience declines in trade volume of 10% and 4%, respectively. If further long-term adjustments of the EU’s free trade agreement with third countries are accounted for, welfare losses equivalent to over 1.5% of Turkish GDP are possible.

Policy options: deepening vs. rollback of the customs union

One potential way to balance trade in an increasingly regionalised world is to dissolve the mutual customs union between Turkey and the EU. However, that would be a step backward for Ankara’s economy, as the study shows. The imbalance in trade relations would be eliminated, but without a customs union, the Turkish economy would face losing its privileged access to the European market, which, in turn, would have serious effects. Termination of the current EU-Turkish customs union would lead to a 0.81% decline in Turkish GDP. The effects of a new EU trade agreement would then cause Turkish GDP to fall by another 0.96%; and the EU could also expect some losses in such a scenario too.

A viable solution resulting from the study is to enhance the existing agreement. Its expansion to include agriculture and services may not only offset the negative effects of the asymmetry for Turkey, but may also result in gains for both sides. Expansion of the customs union could lead to a 1.84% increase in Turkish GDP. Agricultural exports to the EU are forecast to rise by 95% and exports of services by as much as 430% over the next decade.

Should the new EU trade agreements be included, the income level in Turkey would continue to increase thanks to higher demand for services in the EU. Expansion of the customs union plus signing the currently planned agreement could generate a 1.95% increase in Turkish GDP. Per capita income would rise by nearly USD 200. If Ankara were to sign its own trade agreements with new partners in the EU, GDP could rise by an additional 2.5%, which would correspond to a nominal increase of USD 18 billion.

Integration of the Turkish agricultural and services sectors with the European customs union also offers economic opportunities for EU countries. This would give the Turkish government a policy space to correcting its asymmetrical trade agreement with the EU. More precisely, the agreement should be formally expanded in relation to 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 also be considered for Turkish companies.

Publications