Brexit Transition Period: Turkey & UK Trade Relations in the shadow of Customs Union

The United Kingdom formally left the European Union on 31 January 2020, but there is still a lot to negotiate between both sides of the table. As of 1 February 2020, the Brexit Transition Period commenced during which the parties will negotiate the framework of their future relations. The departure process brought with it many economic uncertainties, including question marks over how the relations between the UK and EU and its other major economic partners, including Turkey, will take shape. In this article we will examine UK- Turkey trade relations in the aftermath of Brexit.

The EU has customs unions with non-EU countries San Marino, Andorra and, most notably, Turkey. Turkey is not a member of the EU, but a member of the EU-Turkey Customs Union. On 31 December 1995 Decision No 1/95 of the European Economic Community-Turkey Association Council (“Decision”) was established by the Ankara Agreement (a treaty signed in 1963 providing a framework for the cooperation between Turkey and EU) to implement a customs union between Turkey and the European Union.

It is also important to emphasize that the Customs Union of EU is different from the Turkey-EU Customs Union since the latter only covers trade in manufactured products and processed agricultural goods between Turkey and the EU pursuant to Article 2 of Chapter 1 of the Decision. In exchange, as indicated under Section 1 of the Decision, Turkey is required to align its rules and standards to those of the EU for which Turkey does not have any say or role in the legislative process.

Moreover, the Customs Union also impacts on Turkey’s ability to negotiate free trade agreements with countries outside of the EU. Turkey is required to abide by EU trade policy, which means when the EU signs an agreement reducing trade barriers with a non-EU country these reductions also apply to Turkey. At the same time, because Turkey is not an EU member it does not gain the same preferential access for its exports that the EU gets out of such free trade agreements. Instead, Turkey is required to negotiate a separate trade deal. In other words, as the free trade agreements signed by the EU do not extend to Turkey, the EU’s free trade agreement parties can export to Turkey tariff-free, while maintaining tariffs on Turkish goods, unless they also conclude a separate free trade agreement with Turkey.

In the light of the foregoing, the Customs Union not only eliminated trade barriers, but also set a common external tariff for imports from other countries. Turkey has an obligation to apply the EU’s external tariff to imports from third countries as indicated under Article 14/2 of the Decision which says that under no circumstances may Turkey be authorized to apply a customs tariff which is lower than the common external tariff for any product.

As part of the Customs Union for more than 20 years, Turkey’s trade relations with the UK hold special significance – Turkey’s second largest export destination is the UK with which Turkey enjoys a trade surplus. During the Brexit Transition Period, a new trade agreement will be negotiated between the UK and EU to shape future relations. In parallel, Turkey and Britain will be free to negotiate a new trade regime, likely a bilateral free trade agreement, but a UK-Turkey free trade agreement cannot be implemented until UK and the EU agree their own free trade agreement.

Hence, we are of the opinion that the UK-EU free trade agreement will cover Turkey as well due to the Customs Union and no further negotiations will be required between Turkey and EU. In the contrary case of adopting a separate free trade agreement from EU, the duration of negotiations may be more complicated and longer than expected as the consent of both UK and EU will be required.

The worst-case scenario for Turkey would be negotiations between the UK and EU failing by the end of 2020; the UK will be forced to operate under World Trade Organisation terms, which would present high tariffs and quotas for its trade with the EU. The Ministry of Trade recently indicated “in the case of a no-deal Brexit, trade between Turkey and the U.K., its second-largest market for Turkish goods, could drop by as much as $3 billion”. Hence, beyond any doubt Turkish exporters will lose their market share in the UK due to the introduction of higher tariffs.

As a matter of fact, high level officials both from UK and Turkey indicated their willingness to begin FTA negotiations. However, in case those efforts are not sufficient and/or the Brexit Transition Period is too short for the negotiations, there is a very real risk of damage to the economic relationship between UK and Turkey in the short-term future.

Additionally, as mentioned under para. 2, the Ankara Agreement (“ECAA”) was established with the aim to promote economic relations between Turkey and the European Community allowing Turkish nationals to start a company in the UK in a field related to their expertise, and to apply for permanent residency. The UK became bound by this ECAA when it joined the European Union in 1973 which will cease to have effect in the UK following the expiration of the Brexit Transition Period in 1 January 2021.

As per the official statement of the UK made by Sir Dominick Chilcott, British Ambassador to the Republic of Turkey, the government intends to preserve the rights of those Turkish businesspersons already in the UK whereas the ECAA applications will not be accepted following Brexit, while the extension applications will continue as it is and the new immigration rules are on the way: “There will be no change in terms of the status of the Turkish people who have already relocated to the UK. If they have already benefited from the Ankara Agreement at the time when Brexit happens, there is nothing to worry about.  However, when Britain leaves the EU, this means that we leave the Ankara Agreement too. This is due to the fact that ECAA is an agreement signed between EU and Turkey and we will no longer be the party to this agreement. One of the most important issues of Brexit is control over immigration so we will introduce our new immigration system after Brexit. As these new rules are still being negotiated, the details are still not clear.”