At their November 28th, 2011 summit, the EU and the U.S. decided to establish the High-Level Working Group on Jobs and Growth with the task of identifying policies and measures to increase trade and investment. In order to increase trade and investment in the relations between these two regions, the Working Group settled on creating a comprehensive agreement including bilateral trade, investment, and regulatory issues. It was thus that on February 13th, 2013, the two global actors decided to create the Transatlantic Trade and Investment Partnership (TTIP). There’s substantial controversy over whether the agreement will be a game-changer or not. The partnership negotiations, which started in July, completed its third round on December 20th, 2013.
The TTIP being planned between the EU and the U.S. is also closely related to Turkey and is not just a technical adjustment. It is a struggle to protect the supremacy of the Western Bloc against new rising powers.
The TTIP aims to eliminate all trade tariffs, and reduce non-tariff barriers including agriculture. Additional targets are facilitating access to and expansion in the market, strengthening intellectual property protections, and restricting subsidies to government business enterprises, among others. In this respect, the TTIP is far beyond being a simple free trade agreement. According to the European Commission, it is estimated that the annual economic benefit would be €119 billion for the EU and €95 billion for the U.S.
The U.S., meanwhile, is conducting negotiations for the Trans-Pacific Partnership (TPP). Although the negotiations would be very tough, it is possible to foresee a harmonization of these agreements at one point. In this context, a bloc that would determine the new norms in the rule of international trade system might be constituted. The TTIP and the TPP could draw 63 percent of global economic output into a single market. Thus, the U.S. could accomplish through bilateral agreements what it failed to achieve in the Doha Round.
The missing link: Turkey
The negotiations between the EU and the U.S. are of close concern to Turkey because it’s been part of the Turkey-EU Customs Union (CU) since 1995. The CU forced Turkey to adapt its trade policy according to that of the EU. It required Turkey to eliminate the customs duties, quantitative restrictions, all charges having equal impact on customs duties, and all measures having an equal impact on quantitative restrictions in the industrial goods trade with the EU. Moreover, Turkey had to adopt the common customs tariff of the EU against third-country imports by 1 January 1996 and adopt the free trade agreements the EU has signed and will sign with third countries. That is, though Turkey cannot enter the markets of third countries under the same conditions it is not an EU member, it must automatically open its market to third countries. At the moment, Turkey has a free trade agreement with 18 countries in line with the EU’s agreement schedule, while the EU has signed 28 free trade agreements. In this context, the TTIP would cause further imbalance, and to Turkey’s detriment. For 46 percent of Turkey’s total foreign trade is with the EU and the U.S., 76 percent of foreign direct investment in Turkey is coming from the transatlantic bloc, and its foreign direct investment is going to that same bloc.
If the TTIP happens, according to the CU Decision, the U.S. will enter the Turkish market duty free through European markets. In contrast, Turkey’s exports will pay U.S. tariffs. This is an asymmetric issue for Turkey, with negative effects that may exacerbate the Turkish trade deficit.
The two empirical data-based TTIP scenarios (“deep liberalization” and “tariff elimination”) drawn up by CESifo Group, a research group in Europe, and Turkey’s Central Bank confirm this. In the CESifo Group study, the TTIP will have significant negative impacts on the Turkish economy. In the “deep liberalization” case, as Turkey’s real per capita GDP decreases by 2.5 percent, the unemployment rate is expected to increase by 0.38 percent. In the of “tariff liberalization” scenario, real per capita GDP suffers a 0.3 percent drop and unemployment is expected to increase 0.1 percent. Further, if the “deep liberalization” takes place, real wages are expected to decrease by 1.94 percent. In “tariff liberalization” real wages decrease by 0.51 percent.
According to the Central Bank’s study, in “tariff liberalization”, the GDP of Turkey falls by 0.132 percent while exports go down by 0.114 percent. Furthermore, it clearly says that as the level of integration increases, so do the more negative impacts on the Turkish economy. Thus, in “deep liberalization”, the GDP loss could be 0.561 percent and there may be an even higher loss in exports—0.450 percent.
In both these TTIP scenarios the Turkish economy would be damaged more or less in every respect. For example, in the absence of a free trade agreement between Turkey and the EU but continued barriers to Turkish goods , Turkish goods would be less competitive than EU goods in the U.S. market. In addition, the removal of similar barriers to products originating in the EU will lead to unfair competition for Turkey vis-à-vis EU members. As Langhammer argues, a significant point is that a transatlantic free trade agreement will decrease the value of bilateral agreements with third countries, i.e. with Turkey, or “the signatories of the Cotonou Agreement (post-Lomé)”, since Europe’s competitiveness in the U.S. market would increase.
Rethinking the Customs Union
The TTIP negotiations include major challenges for Turkey. Also, being included in TTIP does not mean that the asymmetry resulting from the CU will disappear. Therefore, the Customs Union Decision should be revised to find a permanent solution of the problem. At this point, Turkey has two options.
The first option, as stated by former Economy Minister Zafer Cağlayan, is converting the CU into a free trade agreement. However, Turkey has opened up its economy thanks to the CU and its trade volume grew from $67 billion to $389 billion between the years of 1996 and 2012. Besides the introduction of Competition Act, the CU has significantly contributed to the competitiveness of Turkish economy. Therefore, the rationality of the first option is controversial. Also, it is possible to say that such an option would damage EU-Turkey relations.
The second option is that Turkey might revise the Customs Union. In other words, in order to mitigate the negative effects of TTIP, Turkey and the EU might make a change in the legislation of the CU. For instance, the 16th and 54th articles that require Turkey to adapt its trade policy to the EU’s may be changed. Thus, the politically asymmetric issue can be eliminated. Nevertheless, it is not an easy issue. In order to revise the CU, Turkish decision-makers would be required to expend considerable effort, the issue would have to be elucidated with empirical evidence, and the transatlantic bloc would need to be convinced about the significance of the TTIP for Turkey.
As a result, the TTIP will be a challenging process for Turkey. Besides, revising the CU without damaging its relationship with the EU, Turkey should manage to get itself included in the TTIP.