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EU-Turkish customs union: How to proceed

Author(s): Gabriel Felbermayr, Rahel Aichele, Erdal Yalcin

New EU trade agreements could adversely affect Turkey as a non-EU member. This column presents new findings of an economic analysis in which different trade policy scenarios are considered. The results point to a clear policy recommendation – Turkey and the EU should mutually deepen their customs union by including the agriculture and service sectors as soon as possible.

From VoxEU:

In May 2015 the Turkish government, together with representatives of the EU, issued a Memorandum of Understanding with the objective of modernising and expanding the existing customs union between the two parties. This objective to expand economic policy relations between the EU and Turkey separately from the stagnating acquis communautaire may at first glance seem surprising, but it represents a possible step toward preventing the impending breakdown in economic and trade relations between the two regions.

While political negotiations on Turkey’s accession to the EU have not made much progress in recent years, bilateral economic relations are developing in a positive way despite the fact that Turkish membership of the customs union is initially restricted to industrial goods and processed agricultural goods. The starting point for this positive economic development was the Association Agreement between Turkey and the former European Economic Community, the so-called Ankara Agreement. Initiated in 1963, it resulted in the signing of the present customs union in 1995, which came into effect a year later in 1996. Turkish industry has therefore been increasingly linked to the European economy since then. Figures 1 and 2 illustrate the strong growth both in exports and in imports in Turkey since 1996. In particular, German companies use the customs union with Turkey to produce intermediate goods cost-effectively in the country and then re-import them for further processing in Germany. It is therefore unsurprising that the majority of foreign direct investment in Turkey comes from German companies.

Figure 1 Turkish exports (USD billions)

Source: OECD STAN and author’s own illustration

Figure 2 Turkish imports (USD billions)

Source: OECD STAN and author’s own illustration

Moreover, Figure 3 presents the composition of annual Turkish exports to the EU by making a distinction between high, mid-high, mid-low, and low technology goods. It becomes very clear that the introduction of the customs union has led to a significant rise in exports to the EU which is categorised as mid-high and mid-low technologies.


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