Experts cool on prospects of swift UK-Turkey trade deal

Published 12.02.2020 17:20
Updated 13.02.2020 09:58

As one of the countries with the most to lose from a no-deal Brexit, Turkey will have to wait for the outcome of U.K.-EU trade deal talks before it strikes its own deal, however, analysts warn of possible ugly turn in the U.K.-EU negotiations and tight timeline to ink the deal

Post-Brexit, Turkey will be one of Britain's top destinations for a trade deal, after the European Union and the U.S., but despite the strong bilateral desire to strike a trade pact, experts are cool on the prospects of it happening anytime soon.

The U.K. formally left the EU on Jan. 31, 2020, after 47 years of membership and more than three years after Britons voted to leave in a referendum but will remain in a transition period with the EU until Dec. 31 this year.

During the year, the U.K. will continue to abide by the trade terms set by the EU but will also be free to strike new trade deals.

Earlier this month, the Turkish Trade Ministry said Ankara and London will discuss a free trade deal through existing working groups between the two countries. The focus will be on minimizing friction on imports and exports flowing between the two countries.

Trade Minister Ruhsar Pekcan last week said a British delegation will be arriving in Turkey on Feb. 27 to discuss a post-Brexit trade deal, adding that they will try to formulate their own agreement parallel to the free trade agreement (FTA) the U.K. and EU will make between them.

Cause for optimism

"I believe that an FTA would undoubtedly be beneficial for both sides. The U.K. is Turkey's second-biggest trading partner in Europe after Germany," İpek Özkardeskaya, a senior analyst at Swissquote Bank, told Anadolu Agency (AA) Wednesday.

The trade volume between Turkey and the U.K. in 2018 was $18.5 billion – second only to Germany – with Turkey exporting $11.1 billion to the U.K. and receiving $7.4 billion in imports. This was a 15.7% increase in exports and a 13.7% increase in imports for Turkey compared to the previous year.

Turkey will not want to risk its trade surplus with the U.K. and as such wants to be at the front of the line to strike a trade deal with Britain. With its exports to the U.K increasing, it is one of the countries with the most to lose from a no-deal Brexit.

"A comprehensive agreement could primarily benefit Turkish tourism and consumer staples, while for the U.K., petroleum and mining sectors and carmakers could see the benefits of an FTA," Özkardeskaya added.

Turkey and the U.K. invest extensively in each other at both government and business levels.

British firms invested around $409 million in Turkey in 2018, with Turkish firms investing around $323 million in Britain over the same period. Over the past 10 years, the U.K. poured $7.2 billion in investment into Turkey, and Turkey invested $2.5 billion in the U.K. Over the same period, bilateral trade surged from $9.4 billion to $18.5 billion.

"It appears that the U.K. has got the upper hand," Özkardeskaya said of the upcoming negotiations. "Imports from the U.K. are high-value-added goods, whereas the same is not true in the opposite direction. So Turkey needs to sell more to compensate for its imports, and that undeniably gives Turkey less negotiation power against the majority of its trade partners in Europe."

Desmond Lachman, a resident fellow at the American Enterprise Institute, took a slightly different view.

"When it comes around to the U.K.-Turkish negotiations, Turkey should be in a relatively good position in that the U.K. will be needing free trade agreements. However, there are bound to be a lot of sensitivities, including how agriculture is to be dealt with," he told AA.

Reality check

One obstacle already in sight is the EU customs union, of which Turkey is a part and that the U.K. will leave at the end of the year. A customs union is a free trade area with a common external tariff.

Any Turkey-U.K. free trade deal would only be able to take place following an EU-U.K. free trade deal, as Turkey must stay in line with EU trade policy due to its membership in the customs union, even if it is not a full EU member.

"The fact that Turkey must follow certain guidelines with the EU countries to keep its relations solid could complicate things if the negotiations between the EU and the U.K. take an ugly turn," Özkardeskaya said.

"The main risk here is the EU putting pressure on Turkey regarding its talks with the U.K. Such a scenario would lead to a diplomatic casse-tete as Turkey cannot sacrifice its relations with the EU countries to get a deal with the U.K.," she added.

The U.K. has until the end of 2020 to hammer out a new trade deal with the EU. If they fail, the legal default will be a potentially crippling no-deal Brexit that would leave trade between Britain and the EU starting in 2021 based on World Trade Organization (WTO) terms that would impose import duties and controls.

A no-deal Brexit could endanger Turkey's access to Britain as Turkey's 1995 customs union deal with the EU limits it to cut free trade deals with non-EU countries.

In October, Pekcan warned in the case of a no-deal Brexit, trade between Turkey and the U.K. – its second-largest market for Turkish goods – could drop by as much as $3 billion.

The bigger problem in the view of analysts is the tight timeline the U.K. has imposed on the negotiations with the EU.

"Experience suggests that free trade arrangements are not easily or rapidly negotiated. Indeed, they generally take at least two to three years, and in some cases longer. This makes it highly unlikely that the U.K. will be able to negotiate a free trade deal with Europe by the end 2020. In the case of the EU-Canada free trade deal, it took seven years to negotiate," Lachman said.

"While a member of the EU, the U.K. ran down its trade negotiating capability since such negotiations were done on its behalf by the EU. Now it is seeking a free trade deal with both the EU and the U.S. This means that it will prioritize those two negotiations and leave negotiations with other countries like Turkey for another day. It would also probably want to prioritize free trade agreements with China and India," he said.

"In short, I would not hold my breath for an early U.K.-Turkish free trade deal," he said.

Özkardeskaya agreed, saying: "I think that is one big challenge for both the EU and the U.K. Realistically, I do not believe anything tangible could come out of these trade negotiations any time before the end of 2022, and it will take at least half a decade before we start seeing things getting in shape. Triggering Article 50 took three-and-a-half years, and it was only between two counterparts – the EU and the U.K.

"Imagine now," she said. "It will be between the U.K. and every single one of these EU countries – who will be influencing, manipulating, threatening and pushing each other in all possible directions to find a satisfactory setup for everyone. Good luck."

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