Two turning points in Turkish-British economic relations

Two turning points in Turkish-British economic relations

In the coming days, the economic partnership between Turkey and the U.K. will come to the crossroads of Brexit and the update to the custom union

Turkey-U.K. relations, particularly the economic relations, will be going through key tests in the upcoming days. Two turning points regarding the relations will be the U.K.'s EU membership, which will officially end in March 2019 (Brexit), and the updating of the customs union between Turkey and the EU.

Following the Brexit decision, the potential implications of leaving the European Single Market have emerged as one of the main legal issues occupying the agenda in London. As an EU member state, the U.K. has long been a part of the European Single Market, which allows for the free movement of goods, services, capital and persons. Yet a new legal and economic order will come in following Brexit. Almost concurrently with the repercussions of the Brexit results, Turkey's existing customs union deal with the EU also climbed high up on the agenda. Right at this point, the business world would definitely benefit from an accurate analysis of the two processes.

Data for 2016 indicates that the U.K. is not only the second largest export market for Turkey but also offers special importance for our country as Turkey has the highest foreign trade surplus with the U.K. from among all EU member states. The Brexit process, on the other hand, is of critical importance with regard to the future economic and trade relations of our country with the U.K., since the relationship model to be established between the U.K. and the EU following Brexit will also be decisive in terms of Turkey-U.K. relations.

Turkey's trading of goods with third countries mainly depends on the EU due to the customs union. That is why the way trade relations are reshaped between the U.K., which will become a third country following the Brexit negotiations, and the EU bears importance for Turkey. Following Brexit, the U.K. will have to rearrange its trade relations with the EU in addition to forging new trade relations with those countries that the EU currently has preferential trade agreements with. Considering the trade volume between our country and the U.K., efforts are already launched to make sure a comprehensive free trade agreement takes effect between the parties after Brexit. A working group comprising representatives from both countries has been established to set what type of preferential trade arrangements will be in place following Brexit, with the technical negotiations at the working group currently under way. It is critically important to take measures that will ensure this process comes to an end without any harm to the economic, trade and investment relations between the two countries.

The latest statements by the U.K. government point out that a "hard Brexit" option under which reshaped EU-U.K. trade relations will fall short of the current level is quite probable. In the case of a hard Brexit, Turkey will need to ask for a kind of "concession" during the negotiations for updating the customs union deal to govern its trade relations with the U.K. We should aim to ensure that the free trade agreement to be concluded between Turkey and the U.K. provides for a trade regime that is as liberal as the current one. There is no doubt that Germany and France, the two engines of the EU, will particularly put in some resistance on the matter. They will most likely not adopt a positive attitude toward Turkey's deviating from the EU trade regime and integrating with a market as robust as the U.K.'s. Furthermore, the adoption of such a liberal regime will not be embraced by those that would desire to punish the U.K. and deter any other potential exits from the union following Brexit.

Speaking of the other turning point, it would be worth reminding that a customs union between Turkey and the EU was established in 1996, pursuant to the Ankara Agreement signed between the parties in 1963. This has made Turkey the first country to establish a customs union with the EU without being a full member. The customs union not only eliminated customs duties and ensured integration with the common customs tariff applied by the community to third countries but also introduced an obligation to harmonize with EU legislation and practices in a myriad of areas including but not limited to competition policy, and intellectual and industrial property rights. The dynamism of the customs union contributed positively to the competitiveness and efficiency of the Turkish manufacturing industry, influencing the decisions of foreign investors to invest in Turkey. To this end, trade relations between the EU and Turkey have enjoyed a significant rise in the last two decades.

The structural transformation and the competitive approach introduced by the customs union have led to the diversification of manufacturing portfolio and the production of high-quality products. Turkey's international competitiveness rose and the Turkish economy achieved better integration with the global economy thanks to the technical legislation infrastructure established in our country in line with the EU requirements and the adoption of the EU rules on intellectual property and competition.However, it is also important to note that major practical issues arose from the Turkish-EU customs union, which has been in effect for more than 20 years.

The key problem, to this end, is the obligation to adopt the EU trade regime, to undertake the free trade agreements the EU signs with third countries, along with issues such as Turkey's insufficient participation in the decision-making bodies of the EU as concerns the customs union, the road transport quotas imposed by some member states on commercial vehicles registered in our country, and the technical challenges posed by the application of visa requirements to Turkish businessmen and employees. The third countries that the EU signed free trade agreements with display reluctance in signing similar agreements with our country under the impact of the advantage to enter the market via the EU. This causes the risk of trade diversion.

On the EU's part, it is requested that a more advanced level of liberalization takes place in agriculture, services, investments and public procurement, and the elimination of the problem of settling disputes between the parties. In the report on the "Evaluation of the EU - Turkey Customs Union" by the World Bank, such issues concerning the customs union were mentioned - and the need to update the customs union was underlined. The economic developments and changes in our country and in global trade in recent years entailed a review of the customs union in its current form.

Although Turkish and EU officials reached an agreement in April 2015, on the scope of the customs union update, the European Commission is still expecting to get the relevant power from the EU Council, the political decision-making body of the EU. The process of updating the customs union has lately been paying the bill for the rows between Turkey and some member states, particularly Germany. Despite this unfavorable atmosphere, we believe the work on updating the customs union which will benefit both Turkey and the EU will start in 2018. None of the parties would be willing to miss this opportunity in a period when global trade goes through rapid transformation.

Considering the fact that the key issue for Turkey in the process of updating the customs union are the free trade agreements to be concluded with third countries, the significance of the Brexit process for our country becomes more visible and meaningful. The U.K. will go for a preferential arrangement with the EU out of the existing options: A customs union, a European economic area model, a comprehensive free trade agreement or a model based on the World Trade Organization rules. A close monitoring of this process bears vital importance for the interests of our country.

Since the U.K. will officially leave the EU in March 2019, as required by the EU rules, 2018 will be the year when the future shape of the trade engagement and arrangements between the EU and the U.K. will somehow be revealed. Moreover, Turkey will start negotiating a free trade agreement with the U.K. on one side while holding talks with the EU on updating the customs union deal on the other. The fact that these two negotiation processes will take place concurrently provides a unique opportunity. The Turkish government definitely has the technical infrastructure, experience and human resources to conduct such negotiations but it is undoubtedly critical to include in the process the private sector and professional organizations that would directly be affected by the outcomes of the said processes.

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