First published by USAK Yearbook of International Politics and Law, Volume: 2, 2009, pp. 117-132. USAK Yearbook is an USAK publication. All rights reserved.

1. Introduction

Trade has always been one of the most important and controversial topics of international economics and politics.[1] After 1980s, especially with the collapse of the Union of Soviet Socialist Republics, many countries all around the world reduced their customs duties spectacularly[2], and liberalized their trade regimes.[3] This development is mainly due to the recent surge of globalization in the sense that the world trade have increased from 38.8% of world GDP in 1980 to 52.1% in 2007. The increasing importance of trade has pushed the states, especially developed ones, to search for alternative ways to compete more effectively at the international economic fora. One of the most important patterns, in this regard, appears as the tendency towards regionalism. Over the last two decades, the world experienced the “strengthening and deepening of regional trade agreements as almost every country in the world has joined some kind of preferential trade agreements.”[4] The secular trend regarding the regional trade agreements is figured out in figure 1.

As a leading trading bloc, the European Union (hereafter, EU) uses regional trade agreements (hereafter, RTAs) as a gateway to enter into the new markets. However, EU’s approach towards RTAs, especially towards free trade agreements (hereafter, FTAs), has not always been the same over the last two decades. Broadly speaking, the EU’s ambitious FTAs policy at the beginning of 1990s has slowed down at the mid-1990s and replaced with multilateral trade negotiations under the umbrella of World Trade Organization (hereafter, WTO). The EU’s wholeheartedly concentration on multilateral trade agreements was resulted in a de facto moratorium on new FTA negotiations.[5] In 1999, the Union declared not to start any more FTAs, yet to conclude the existing ones. Throughout the negotiations under WTO, even under the most stressed conditions, the EU has backed multilateralism. Nevertheless, due to internal and external reasons, the EU has started to re-direct her route toward FTAs with a Communication published in 2006. Now, she is one of the most active FTAs negotiators all around the world in general, and around the South Asia in particular.

Since the EU is the largest trading bloc in the world, she has a complex web of trade relations with more than one hundred countries.[6] Therefore, the shifts in the EU’s trade policy have immediate repercussions and impacts on the economies of her partners. Turkey, as a country that established customs union with the EU[7], is among the most influenced ones in this regard. Moreover, the recent policy shift of the EU is expected to create new challenges for Turkish economy in a number of ways different from the previous agreements. In this framework, the aim of this article is to search for an answer of the following question: Why and how the EU’s changing policy towards FTAs affects Turkish foreign trade? In this context, the second part of the article tracks down the reasons for the recent change in the EU’s foreign trade policy, the third part analyzes possible effects of this shift on Turkish foreign trade, and the final part concludes the article.       

2. The Changing Orientation of the EU’s External Trade Policy

On October 4, 2006, The European Commission issued a Communication that aims to “set out the contribution of trade policy to stimulating growth and creating jobs in Europe.”[8] In this Communication, the new pressures over the European economy are taken at the centre, and the new methods to deal with existing and potential rivals are analyzed. Accordingly, new challenges that the Communication underlines pinpointed as the increasing competition in the world economy and its effects on stimulating growth and creating jobs in the EU; as the intensified economic relations between the Asian countries and the EU’s rivals; and as the diminishing expectations regarding the multilateral negotiations at the Doha Round.      

Having underscored those new challenges, the Commission proposes alternative ways in dealing with them. In this regard, the Communication puts special emphasis on signing new FTAs with particular reference to Southeast Asian nations (ASEAN), South Korea and Mercosur. Moreover, the Commission determines economic criteria as the basis for new FTAs in order to ensure the competitiveness of the European economy by saying,     

“The key economic criteria for new FTA partners should be market potential (economic size and growth) and the levels of protection against EU export interests (tariffs and non-tariff barriers). We should also take account of potential partners' negotiations with EU competitors, the likely impact of this on EU markets and economies, and the risk that the preferential access to EU markets currently enjoyed by our neighbouring and developing countries may be eroded.”[9]

As can be understood from the above quotation, the EU gives the sings of re-vitalising bilateral negotiations and determines the modus operandi of the possible agreements. Albeit the Communication explicitly declares EU’s new FTA approach as the ‘stepping stone, not the stumbling block” before multilateralism[10], it is regarded as a breaking point in the sense that it represents a clear shift away from the exclusive concentration on multilateral talks, which had been the principle after the de facto moratorium in 1999.[11] Yet, what has caused the EU to change her trade policy orientation? What are the basic motives that underpinned the new surge of bilateralism in the Union?        

When the internal and external factors are scrutinized in detail, the recent policy shift of the EU can be explained by four major factors, three of which stem from external and the other from internal reasons.[12]

The first reason for the EU to pursue a more aggressive FTA policy is her diminished expectations from the multilateral trade negotiations after the Cancun Ministerial in 2003. Over the last twenty years, and especially after the successfully launched Uruguay Round, the EU has become the most persistent proponent of multilateral arrangements that compose non-trade items like competition policy, investment, environmental and labour standards – sometimes called as ‘deep trade agenda’ by scholars.[13] The agreements on Trade Related Intellectual Property Rights (TRIPs), General Agreement on Trade in Services, and Trade Related Investment Measures (TRIMs) concluded with the Uruguay Round have encouraged the EU to further her trade policy. As a result, she insisted on the inclusion of the so-called Singapore issues (investment, competition, and transparency in government procurement) to the Doha Development Agenda.[14] However, the 1990s witnessed a ‘double movement’ regarding the international trade affairs in the sense that the broadening multilateral rule-making has paved the way for the developing countries to resist ‘deep trade agenda’ of the EU. In Cancun, they effectively raised their voice by forming successful coalitions via information sharing and avoiding direct conflict among each other.[15] Ultimately, they acted in a co-ordinated way in order to fall of the Singapore issues from the Doha Development Agenda.[16] The deterioration of the EU’s expectations from multilateral negotiations urged her to find ‘subways’ to implement her deep trade agenda. Since the EU has the ability to use the power asymmetry between her and potential partners, the most prominent way for her has turned out to be signing FTAs.      

The second reason for the EU to veer towards FTAs is the changing trade policy of the United States (US).[17] Throughout 1990s, the US saw bilateral trade agreements as a gateway to the multilateral negotiations and tried to use FTAs as the leverage to encourage other states in liberalizing their markets. However, the FTAs were started to be seen as an alternative policy on the way to increase competitive advantage of the US. In other words, the role of the FTAs has changed from building blocks of the multilateral rule-making to the stumbling stones in front of multilateralism. This point is clearly revealed by Stephen Woolcock as follows:

“During the 1990s US policy was to see FTAs as fulfilling a ‘pathfinder role.’ In other words CUSFTA, NAFTA and APEC were seen as a means of showing other countries how to carry the trade agenda forward. As such US trade policy saw FTAs as a bilateral means to the end of multilateral liberalization and rule making. From about 2000 the US interpretation of ‘competitive liberalization’ has been rather one that saw FTAs more as an alternative to multilateral liberalization.” [18] 

The trade policy of the US has always been a significant parameter for the EU in designing her own foreign trade policy orientations. In this regard, the recent policy shift of the US inescapably found its repercussions on the other side of the Atlantic, and the EU clearly underlined the ‘US effect’ in her policy change in the Communication by writing that “where our partners have signed FTAs with other countries that are competitors to the EU, we should seek full parity at least.”[19]

The changing nature of the US foreign trade policy, inter alia, laid the groundwork for the third reason, which is the intensified competition over the Asian markets. During the last ten years, three important developments have occupied the agenda of discussions regarding the East Asia. First one of them is the increasing regionalism among the countries in the region. The dialectic nature of globalization over the 1990s and the Asian Financial Crisis at the wake of the new millennium have urged those countries to put more emphasis on establishing the ‘Asian Way’ of regionalism.[20] By so, these countries have tried to decouple their economies in order not to “be in thrall to Washington or the West when the trouble hits.”[21] The second development, within the context of decoupling, is the rise of China as a new power centre in the world economy. China’s astonishing economic growth is one of the most dramatic changes in world political economy over the last two decades. As she increases her influence as an economic power, China starts to create a new sphere of influence in the region and encourages other states in East Asia to co-operate with her. The emergence of new clusters in East Asia, inescapably, causes changes in the rearrangement of world economic/trade patterns.   The final development regarding East Asia is the proactive approach of the US towards the region. While explaining the reasons of the EU’s foreign trade policy change, I touched upon the US factor. Yet, what has caused the US to shift its loyalty from multilateralism to bilateralism? More specifically, what has forced the US to pursue more active FTAs policy with East Asian countries? In order to understand the paradigm shift in question, it is of vital importance to underline the ‘securitisation’ of the US foreign trade policy in East Asia. As Richard Higgott argues[22], after the 9/11 attacks, US foreign policy making team established a strong link between foreign trade and security, which laid the backdrop for them to pursue security-driven trade links. In this context, bilateral trade agreements with East Asian countries come to the fore for the US not only from economic viewpoint, but also from the security perspective.   

Not surprisingly, these developments have concerned the EU closely and pushed her to pursue alternative policies in order not to lag behind in the ‘scramble to Asia’. In a world that regionalism has become the currency of international trade, and bilateral agreements are seen as the optimal instruments to capture share from the world economy, the EU, also, changed her orientation from multilateralism to FTAs.[23]

The final reason for the EU to pursue a more ambitious FTAs policy is the internal change. The trade policy-making team of the Prodi Commission (2000-2005) and the EU Trade Commissioner at the time, namely Pascal Lamy, were not very willing to circumvent multilateral rule-making, and they concentrated almost exclusively on WTO negotiations. As a matter of fact, they thought that the multilateral negotiations fit better to the ontology of the EU than the ‘hub-and-spoke’ approach, since the latter is too complex and time-consuming to negotiate[24]. On the contrary, Prodi Commission’s successor, Barroso Commission, and its Trade Commissioner Peter Mandelson have acted more prone to conclude FTAs.

In summary, mainly due to the four reasons investigated above, the EU has veered towards more active FTAs policies. Accordingly, she has concentrated on the Asian market with particular reference to South Korea, ASEAN countries and India and started FTA negotiations with them.[25] At this point, there occurs two important problematiqués: One of them is the possible political economy consequences of FTAs to the internal markets of the participatory countries; and the second one is their effects on the third countries that have special relations with the EU. Within the context of this article, the second problematiqué turns out to be the focal point, especially from Turkey’s point of view.

Given that Turkey established a customs union with the EU without being the full member of the Union, she becomes an illuminating case study to reveal such possible effects. In this regard, the following part will examine the question: Why and how the EU’s changing policy towards FTAs affects Turkish economy in general and Turkish foreign trade in particular?             

• Why and how the EU’s Changing Policy towards FTAs Affects Turkey?

Turkey-EU relations have a long history going back to 1963-dated Ankara Agreement, which draws the framework of a Customs Union (hereafter, CU). The details regarding the CU were specified by the Additional Protocol signed in 1973, and after a 22 years long transition phase, the Turkey-EC Association Council decided to kick-off the final stage.[26] As a result, all trade barriers in industrial goods between the EU and Turkey were abolished reciprocally. [27]   

The EU has always been an important trade partner for Turkey throughout the Republican era. However, after the establishment of the CU, Turkey-EU economic relations have entered into a new track from the economic[28] and legal viewpoints[29]. Regarding the economic aspect, Turkey has become more integrated with the world economy by means of European markets; thereby, her trade volume increased from 66.8 billion dollar in 1996 to 277.3 billion dollar in 2007. The CU also increased the importance of the EU market for the Turkish traders in the sense that the share of the EU-27 in Turkey’s overall trade volume reached the plethora of approximately 50 percent (refer to Figure.2)

The importance of the EU for Turkey has gained more gravity after 1999 Helsinki Summit in which Turkey was declared as a formal candidate country and the relations, arguably, reached its climax after 2004 with European Council Summit[30] that announce to open accession negotiations on 3 October 2005.[31] This process helped the Turkish economy to experience historical growth rates and to attract unprecedented foreign direct investment, especially from the EU member countries. Due to Turkey’s deep-seated economic/trade relations with the Union, the change in the trade orientation of the EU has the direct potential to influence Turkish foreign trade per se. Yet, the legal aspects of the CU carry the relationship to a more serious level, which actually creates the main problem for Turkey.       

Regarding the legal aspect, what is important in terms of this article’s context, is the necessity for Turkey to harmonize her preferential customs regime with that of the Community. Moreover, it tied itself to commit to the EU’s preferential arrangements and autonomous regimes with third countries. This point is clearly underlined in the Article 16 Association Council Decision No 1/95:      

“With a view to harmonizing its commercial policy with that of the Community, Turkey shall align itself progressively with the preferential customs regime of the Community within five years as from the date of entry into force of this Decision. This alignment will concern both the autonomous regimes and preferential agreements with third countries. To this end, Turkey will take the necessary measures and negotiate agreements on mutually advantageous basis with the countries concerned. The Association Council shall periodically review the progress made.”

In addition to those static obligations, Turkey accepted to harmonize its preferential regime with that of the EU’s potential FTAs[32] in the future. In other words, the harmonization of Turkish trade policy in line with the developments of the EU’s trade regime has turned out to be a moving target for her.[33] Article 54 Association Council Decision underscores this point by saying that:

“In areas of direct relevance to the operations of the Customs Union…shall be harmonized as far as possible with Community legislation. Areas of direct relevance to the operation of the Customs Union shall be commercial policy and agreements with third countries comprising a commercial dimension for industrial products, legislation on the abolition of technical barriers to trade in industrial products, competition and industrial and intellectual property law and customs legislation.”

Due to the abovementioned legal framework, Turkey automatically becomes the party of the FTAs that the EU signs with third countries and has to open her market to them. The contrariwise, however, is not the case, since Turkey is not a member country to the EU. In other words, the third countries benefit from the Turkish market just because they sign an FTA with the EU, but Turkish businessmen cannot enjoy the same rights against the countries in question. As a result, in order to harmonize its commercial policy with the ever changing policies of the EU, and not to lose its competitive advantage vis-à-vis the third countries that the EU signed FTAs, Turkey has pursued active trade diplomacy. After the EU starts negotiations with one country, Turkey also proposes bilateral agreement to the same one. In this context, Turkey has signed FTAs with Israel, EFTA, Croatia, Macedonia, Bosnia-Herzegovina, Serbia, Montenegro, Palestine, Tunisia, Egypt, Syria etc. in line with the EU’s agreement schedule (refer to Table.1).

In spite of there have been countries that create problems for Turkey in signing FTAs, these countries were either small or uncompetitive ones for the Turkish economy. Turkey has competed with those like Morocco, Tunisia, Egypt or Syria without any difficulty. Yet, it may not be the case for the EU’s new FTAs.

As it was explained in the second part, the EU has concentrated on South Korea, ASEAN countries and India to sign new FTAs. These countries are important export rivals for Turkey especially in terms of electric-electronics appliances, machinery, textile and automobile industry, i.e. the sectors that compose considerable part of Turkey’s foreign trade.[34] A possible agreement between the EU and the countries in question is expected to create twofold challenges for Turkey: one of them is related to the competition in European markets and possible deterioration in Turkey’s competitiveness. At the current situation Turkey exports to the European market without any tariff in industrial goods, whereas those countries are to be applied import duties by the EU –the tariffs rise up to 14 percent in South Korean case.[35] In a possible FTA, this asymmetry would be expected to change in disfavor of Turkish producers. The second challenge for Turkey is related to the possible change in bilateral trade relations that has the potential to create trade deflection. In principle, after a possible FTA, South Korea, ASEAN countries, and India would have the right to export Turkey without any tariff by means of EU markets; on the contrary, Turkey would continue to export to these countries with the existing tariff rates.                 

The above framework, however, is based on the ‘ideal type’ of FTA which foresees the complete abolishment of tariffs in industrial goods and services and assumes all other factors ceteris paribus. Obviously, such a kind of integration is not the most likely scenario from a political economy perspective. In this regard, this article takes two kinds of scenarios into consideration, which are deep integration and loose integration scenarios.       

• Scenario 1: Deep Integration

According to the 2006-dated Communication, the EU desires to conclude ‘WTO-plus’ FTAs with the Asian countries which is composed of many key topics including public procurement, investment, competition and regulation regarding IPR.[36] If such a kind of ambitious rhetoric could be materialized, it would naturally have considerably effects on both sides. For example, according to the impact analysis conducted by the European Commission, if the EU-Korea FTA liberalizes all trade in goods and services it would yield a net gain of 10 billion euros for South Korea, and 4.3 billion euros for the EU.[37] Moreover if one takes the long-term dynamic effects into consideration, it would integrate the two economies via information sharing, technology and knowledge transfer. However, deep integration goes well beyond the economy, and necessitates the political willingness of the parties, which includes ‘sensitive’ issues like human rights, labor standards and functioning democracy as well. If such a kind of deep integration occurs, it would be reasonable to expect trade deflection for Turkish exports, and to consider possible market losses.

• Scenario 2: Loose Integration

There is another scenario for the EU’s FTAs with the Asian countries in the form of “loose integration”. In this kind of integration, the parties suffice with reducing barriers to a limited extent, and do not touch upon the ‘sensitive’ issues in services, agriculture, even in industrial goods. If this happens, the ultimate impact of the FTA would be minuscule. According to a Commission study, a limited integration with the South Korea and EU (full reduction in agricultural goods, 40 percent reduction in agricultural tariffs, and 25 percent in services) would yield in 2.5 billion worth gain for South Korea and 1.2 billion amounted gains for the EU. In the similar vein, a limited EU-ASEAN FTA would just contribute to EU’s GDP by 0.03 percent, and ASEAN GDP by 0.5 percent.[38]       

As a matter of fact, most of the FTAs start with ambitious speeches given by the politicians, yet the conclusions tend to be modest in the sense that, most of the time, a kind of specific agreement is signed between the parties. An illuminating example is brought by Pomfret[39] on the issue: Thailand and Japan negotiated an FTA with the ambitious aim of reducing tariffs to agricultural exports and to car industry, and of providing labor mobility. When the FTA was signed Japan reduced import duty on chickens from 6 percent to 3 percent and allowed the Thai cocks to work in Japan; in return Thailand reduced the tariffs on cars from 80 percent to 60 percent.       

In summary, the result of FTAs may be quite limited and sector specific. It seems to be the case for the EU-Asia negotiations. If this turns out to be the case, their effect on Turkish trade may not be as destructive as it is anticipated at first hand.

4. Conclusion

After 1990s, the world has witnessed a “double movement”. On the one hand, globalization and multilateralism increased astonishingly; on the other hand, the states have adopted new measures in coping with the side-effects of globalization.[40] Trade, as one of the most controversial issues of political economy, turns out to be the platform of the abovementioned tug-of-war. In this regard, as a response to increasing multilateralism; regionalism becomes the currency of international trade affairs, and circumventing multilateralism via signing FTAs popularize. The EU also joined the bandwagon of FTAs by releasing a Communication in 2006. In this perspective, in order not to lag behind in competition and increase her visibility in international trade affairs, she concentrated on East Asian markets.

Since the EU is the most important trading bloc in the world, the change in her trade orientation inescapably affects the third countries that have special relations with the Union. Turkey, as a country that established a customs union without being a member of the EU, is one of the most illuminating cases, in this regard. Possible FTAs between the EU and South Korea, India, and ASEAN countries have the risk to deteriorate Turkish producers’ competitiveness and create trade deflection. In order to be more realistic, however, two scenarios are drawn in this article and it is concluded that in the ‘loose integration’ scenario, which is the most likely one, the negative effects of these agreements to Turkish economy may be less severe than expected.

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