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Twenty Year Old EU-Turkey Customs Union May Get a Facelift

On 21 December 2016, the European Commission announced that it has asked the European Council for a mandate to enter into negotiations with Turkey with a view to modernising the existing EU-Turkey Customs Union.

Currently, trade between the EU and Turkey is governed by the Customs Union that entered into force in 1996, which allows the tariff-free trade in goods. The current agreement does not include agriculture (except for processed products), services, or public procurement.

Hong Kong traders may be aware that the EU is currently Turkey’s largest trading partner – accounting for 41% of its overall trade, as well as two-thirds of its foreign direct investment. Conversely, Turkey is the EU’s fifth largest trading partner, and the EU enjoys a positive annual trade balance of €17 billion. Indeed, the annual bilateral value of the trade in goods between Turkey and the EU now stands at €140 billion – quadruple the value in 1996. 

The Commission has observed that this now 20-year-old agreement “is becoming less and less equipped to deal with the modern day challenges of trade integration.” The first EU-Turkey High Level Economic Dialogue, held in Istanbul and Ankara in April 2016, highlighted the potential for an upgrade. In particular, the Commission has identified two broad dimensions to be targeted by the modernisation.

First, it may be important for Hong Kong companies to note that the scope of the Customs Union will likely be extended to cover the agriculture, services and public procurement markets. As part of this process, the parties will also seek to agree on rules to enhance the business and trade environment, through particular measures concerning transparency, sustainable development, SMEs, energy/raw materials, sanitary-phytosanitary measures, and geographical indications, among others.

Second, the Customs Union will likely be modernised to address structural deficiencies, through the addition of a dispute resolution mechanism, the improvement of information and notification procedures, and by addressing the problems Turkey currently faces with respect to trade with third parties. Specifically, the Customs Union requires Turkey to adopt the EU’s trade policies with respect to third countries, but Turkey has no legal means to convince these countries to sign Free Trade Agreements (FTAs), and thus finds its access to those markets limited. Any liberating modification to such restrictions could lead to possible FTA discussions with a number of third countries (including Hong Kong or mainland China) in the future.

The Commission has further noted that respect for democracy and fundamental rights would be an “essential element” of any modernisation agreement. 

The precise contours of a modernised Customs Union remain to be negotiated. The EU’s Impact Assessment on the issue, published on 21 December 2016, has considered two different potential approaches:

i. a Customs Union modernisation plus an FTA (CU+FTA) in certain additional areas relating to agriculture, public procurement and services; and

ii. a “Deep and Comprehensive” FTA (DCFTA) that would cover these areas and replace the existing Customs Union with respect to industrial goods.

The Assessment concluded that the more ambitious CU+FTA would be both economically and politically preferable, as it would provide greater gains without dismantling the Customs Union – any such dismantling might have a wider negative impact on the EU-Turkey relationship. This is also the option favoured by both the European Commission and Turkish authorities. 

The upgrade of EU-Turkey trade relations represents an important step in the effort made by the EU and Turkey to strengthen their relationship, as expressed in the EU-Turkey Summit in November 2015 and in the EU-Turkey Statement issued in March 2016.

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