Customs unions and free-trade agreements (FTAs) are the backbone of the modern globalized trade, creating conditions for more profitable exchange of good and developing closer ties between nations. However, there are instances where these trade agreements are asymmetrical, and benefit one of the parties more than the other. The article by Zouheir El-Sahli (2022) discusses one of these asymmetrical agreements that was created between the European Union and Turkey. As a developing nation, this partnership would seemingly be highly beneficial for Turkey but due to the nuances of the agreement it severely impacted its ability to conduct trade outside of the EU. This asymmetrical balance and misalignment of incentives when trade agreements are formed between parties of drastically different power and economic balances warrants deeper exploration.
The article’s discussion focuses on Turkey’s customs union with EU (EU-TUR CU) which came into force in 1996. The customs union stated that Turkey had to adjust external tariffs and industrial standards, as well as the acquis Communautaire, essentially trade legislation, to match that of the European Union. However, the set up of the agreement was that the FTAs that the EU signs with other countries do not extend automatically to Turkey, which has to negotiate its own FTAs. Therefore, any goods entering the EU customs union, including Turkey, from countries with which EU had FTAs, would not be facing tariffs. However, unlike the EU, if Turkey was to export to that country, it would face tariffs. Turkey has been able to negotiate only 22 FTAs, while more than 54 countries, including major exporters have made FTAs exclusively with the EU, as it simply economically does not benefit them to negotiate separately with Turkey, generating the misalignment of incentives.
The author does not offer specific hypotheses but identifies key areas to be addressed. First, they are seeking to investigate Turkey’s trade composition, and then provide an empirical investigation on the effects of the FTAs. Furthermore, there is a suggestion that Turkey may not be fully complying with EU external tariffs to boost trade with third countries, so there is an investigation on that compliance as well as trade diversion effects. The EU-TUR CU applies largely to manufacturing. Turkey is a low-cost producer and imports intermediate and capital goods from countries. Turkey specializes in final goods and a significant proportion of Turkish production is at the last stages of the global supply chain. Empirical analysis suggests that Turkey discourages imports from EU-exclusive FTAs (known as asymmetric FTAs) other than capital goods Turkey needs for production. Estimated effects of Turkish FTAs are exogenous to the country’s trade.
Furthermore, there is no anticipatory effect by FTAs signed by the EU on Turkish exports, and this indicates that Turkey is either diverging from EU external tariffs or the countries are not abusing the preferential access to Turkey’s market. Further analysis demonstrated that Turkey does not consistently comply with the EU external traffic, particularly on EU-exclusive countries and on critical intermediate and final goods. It is well-recognized that Turkey’s weak negotiating position stems from the asymmetric FTAs and EU is unwilling to modernize the CU agreement due to political tensions. The current arrangement poses unfair competition risks due to non-reciprocal access for Turkish firms both domestically and internationally, likely forcing Turkey to implement policies in the country to protect its markets.
Overall, the article covers the issue well, addressing the various components associated with the EU-TU CU and its asymmetric trade. Addressing trade composition, effects of the FTAs, investigating compliance, and investigating trade diversion provide a comprehensive and well-rounded overview. The weakest part of the report is in the trade diversion section, as it provides little explanation on the empirical findings and ultimately what are some of the potential outcomes and risks that are posed to the Turkish economy and firms. The strongest analysis is in the tariff compliance section, as a great analysis is presented discussing how Turkey utilizes tariff manipulation to respond to asymmetric trade. While it is briefly touched upon, it may be beneficial to research how the CU was formed, and why Turkey had agreed to sign it given such unfavorable terms. Furthermore, while it is mentioned that Turkish imports and exports have expanded, a clearer analysis of whether the CU ultimately benefited Turkey in the long-term should be included.
There are some areas for potential future areas of research. It may be viable to investigate if there are or were other countries in the EU customs union and what terms of FTAs they had to abide by. Another area of significance for in-depth research is Turkey’s tariff compliance, and whether that is being penalized, threatened, or largely ignored by the EU which generally promotes strict adherence to its regulations. Finally, there is an exploration on the potential future of this agreement, given that the EU is unlikely to agree to modernization given the current global realities, so it may be interesting to empirically determine if Turkey would benefit leaving the customs union and negotiating its own FTAs given its role as the final stage in global supply chains for manufacturing.
In conclusion, the EU-TU CU is one of the more unique economic trade agreements which creates unparalleled levels of asymmetric trade and misalignment of incentives. Given that globalization and EU itself are built on mutual cooperation and trust, such an unbalanced relationship is challenging for Turkey, forced to rely on essentially illegal techniques such as tariff incompliance to protect domestic firms. In recent years, as nationalism is on the rise and global crises such as COVID-19 and geopolitical conflicts have strained the concept of globalism and free trade, it becomes a question whether Turkey will preserve the status quo or seek a stronger position in global markets.
Reference
El-Sahli, Z. (2022). Asymmetric FTAs and misalignment of incentives: Lessons from the EU-Turkey customs union.