03 Apr 2018

Strengthening EU-Turkey Economic Relations

Can services revitalize the customs union?

Daniel Gros / Jacques Pelkmans / Mehtap Akgüç / Matthias Busse / Mattia Di Salvo

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This paper critically examines the potential, methods of implementing, and possible consequences of complementing free goods trade between the European Union and Turkey with services, in a wider sense. It finds that the importance of services in overall Turkish exports has been declining over the last decade and that Turkey’s exports services are largely related to tourism and transport. We also verify the regulatory restrictiveness of services in Turkey and find a mixed picture, with considerable need for reforms in several sectors. Tourism faces few trade barriers. This would leave mainly transport. So far, at least in road transport, many EU member states protect the position of their own trucking industry to some degree. Not only do these restrictions seem incompatible with the very idea of a customs union under EU law, which is based on the principle of free circulation of goods, but it is clear in any event that the restrictions will have to be lifted in a new services agreement. Outside these two sectors, Turkey does not yet seem to possess a strong potential for exports of higher value-added services, although services incorporated in exported goods (due to European value chains) have become important. Raising higher education and skill levels in Turkey would seem to be essential to increase domestic value-added in goods exports and direct and indirect services exports.

Realistic options for a “deep and comprehensive” services agreement with Turkey imply a choice between the CETA model between the EU and Canada (far-reaching but without harmonization) and the DCFTA with Ukraine (with harmonization and later participation in the single services market). These options—but especially the latter— are bound to have major implications for services regulation in Turkey, including more horizontal issues and principles of rules-based governance. But there is also an EU side to examine. EU member states still maintain many (often petty) restrictions in services trade with third countries.  These ought to be addressed.

Services are also linked to FDI, in markets as well as in the design of FTAs, and to free movement of persons, including cross-border services provision, mode 4 in GATS. We find FDI to be quite liberally treated, unlike the movement of persons. Much can be improved on the latter, in particular for Schengen visas linked to business activities, e.g., with conscious efforts toward visa facilitation. However, although FDI has been stimulated by the Customs Union, it is clearly performing below its potential, and this might well be explained (apart from skills) by worsening economic governance (as shown by indicators). A reliable rules-based regime would help inward FDI to recover structurally, which would in turn support a stronger service sector in EU-Turkey relations.

This report is the outcome of the Istanbul Policy Center–Sabanc? University–Stiftung Mercator Initiative, which aims to strengthen the academic, political, and social ties between Turkey and Germany as well as Turkey and Europe. All five authors are researchers at CEPS. The report is published simultaneously by both the Istanbul Policy Center–Sabanc? University and CEPS.