Brexit could damage Turkey’s trade with the UK

Brexit is happening. Although Britain formally leaves the European Union on Friday, trade with the rest of the 27 nations still in the bloc and Turkey will not change during a transition period until the end of the year, during which time the UK will remain in the EU customs union. Brexit offers Turkey a number of opportunities, but beyond the transition period it could also pose serious economic challenges.

Britain is one of Turkey’s most important trading partners, second only to Germany in bilateral trade volume. According to the Turkish Statistical Institute (TÜİK), Turkey sent $11.2 billion in exports to Britain in 2018.

Turkish officials see Brexit as an opportunity to further strengthen the Turkey-UK trading relationship, as well as bilateral alignment on other regional issues. However, Turkey’s customs union with the EU could complicate matters.

The customs union allows Turkey tariff and quota free trade with the EU on many goods, but it also puts Turkey at a disadvantage when dealing with third party countries that negotiate with 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 those 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 (FTAs).

Turkey can negotiate its own deals with non-EU countries, but these countries have little incentive to negotiate with Turkey because they can already gain preferential access to the Turkish market through trade deals with the much larger EU market.

The customs union was initially agreed in 1995 as a step towards Turkey’s ascension to EU membership. With ascension all but off the table now, the customs union agreement is in serious need of updating.

Last month, Turkish and EU officials discussed modernising the customs union. Those talks have been lethargic, but fixing that agreement’s extensive problems is something Turkish officials have the ability to tackle. Avoiding the most difficult consequences of Brexit, however, is dependent on uncertain developments outside Turkey’s control.

Brexit requires Britain to negotiate new trade deals now that it will no longer be party to the EU’s arrangements, which cover trade with 60 other countries. While still a member of the EU, Britain was only permitted to negotiate with countries that already have trade agreements with the EU. It signed a number of these rollover deals replicating the terms third countries have with the EU, ensuring trade continues as usual with those partners.

After Friday, Britain will be free to begin negotiating new trade deals with countries like the United States that do not have pre-existing agreements with the EU. Turkey, however, does not quite fall into either group.

“The UK cannot remain in a customs union with Turkey unless it is also in a customs union with the EU, which the British government has ruled out,” Sam Lowe, a senior research fellow at the Centre for European Reform, wrote this week.

“The UK can negotiate an FTA with Turkey as long as it also concludes one with the EU, but without a customs union, trade will flow less freely than before,” he said.

Turkey and Britain will be free to negotiate a new trade regime, likely a bilateral FTA, but no new trade pacts can enter into force while the UK remains aligned with the EU during the post-Brexit transition period. Furthermore, a UK-Turkey FTA cannot be implemented until Britain and the EU agree their own FTA first.

Repeated warnings that the 11-month transition period is too short for Britain and the EU to negotiate a new trade arrangement have raised the spectre that the two parties could reach the end of the year without one.

If Britain’s trade negotiations with the EU fail to produce an agreement by the end of 2020, the UK will be forced to operate under World Trade Organisation (WTO) terms, which would present high tariffs and quotas for its trade with the EU. This would be a worst-case scenario for Turkey.

A UN Conference on Trade and Development report last year highlighted that, outside the EU, Turkey’s economy would suffer the most damage in a no-deal scenario, with $2.4 billion in exports wiped out at a time when Turkey desperately needs them to help its economic recovery.

If Britain fails to negotiate a seamless transition with the EU by the end of the year, Turkish exporters in key sectors covered by the EU-Turkey customs union, including textiles and automobiles, are afraid they will lose market share in the UK due to the introduction of tariffs.

The longer it then takes for Britain to conclude negotiations with the EU and Turkey, the harder it will be for Turkish exporters to regain their market share as competitors, particularly from East Asia, snag customers in the interim.

The good news is that Britain has demonstrated some commitment to the problem by setting up bilateral working groups with Turkey. There are significant incentives for Britain and Turkey to begin FTA negotiations promptly to spur a closer alignment on a host of regional issues, but it will take consistent work on both sides. If bilateral effort is insufficient, there is a very real risk of damage to the economic relationship in 2021.