# <u>Scenario 1: Aligning Turkey’s agricultural policies with the EU’s trade policies and the CAP</u>

With this as background, scenario 1 contains four component policy changes that are implemented sequentially to bring Turkey’s agricultural trade and domestic policies in line with EU policies: i) EU-Turkey trade in agricultural products becomes duty- and quota-free; ii) Turkey adopts EU tariffs and tariff-rate quotas on agricultural imports from the rest of the world (the EU common external tariff); iii) Turkey adopts the agricultural components of EU free trade agreements and the GSP; and iv) Turkey adopts the Common Agricultural Policy. The key findings from the simulation, given in Table 4, are as follows.

Impacts of widening the EU-Turkey Customs Union to cover food and agricultural trade have positive welfare impacts for Turkey. In all scenarios, real income (economic welfare) increases in Turkey. Welfare gains are highest ($US 843 million) at stage iii, when agriculture is fully included in the Customs Union and Turkey has adopted the agricultural components of EU free trade agreements.

Turkey's adoption of the CAP reduces the welfare gains of trade policy reform because it diverts resources from manufacturing sector to agriculture. Turkish production and exports of agricultural and food products increase at the expense of manufactured goods.<sup>28</sup> Overall, a trade deficit of $US 281 million occurs. Because efficiency gains are lower than those obtained under the trade liberalizing simulations, the overall welfare gains, defined as the sum terms of trade and efficiency gains, decline to $US 500 million.

On average, consumer prices decline since Turkish markets are opened to competition. Prices decline further when Turkey adopts EU free trade and GSP policies. Prices decline the most in the case where CAP-like subsidies are adopted in Turkey since some tariffs are lowered but producers are compensated through alternative instruments that provide equivalent levels of support.

Under all scenarios, average wages for skilled and unskilled labor increase. This, combined with falling consumer prices, means that the further elimination of trade barriers will benefit lower income groups for whom wages comprise a larger share of their income. This effect is largest under the full integration scenario when Turkey domestic agricultural policies are brought in line with the CAP. The returns to capital and natural endowments also increase under all of stages of “deepening”. Under the first three liberalization scenarios, land prices fall as protected crops face new competition. However, land rents increase significantly when CAP policies, which target agricultural producers rather than production, are implemented.

# - <u>Scenario 2: Finalizing non compliant FTAs</u>

Under the existing customs union, Turkey’s imports of industrial products from EU FTA partners are duty free. In some cases, Turkey’s exports of non-agricultural products to these same markets are also duty free. However, for a number of EU FTA partners asymmetries in the tariff schedules create opportunities for trade diversion. This is because industrial goods imported into Turkey from these sources trans-shipped via the EU may enter Turkey duty-free, while Turkey’s industrial goods exported to directly to the same set of countries may not.<sup>29</sup> In this analysis, the CGE model is used to quantify the impacts of these countries extending duty-free access to imports of industrial products from Turkey. The simulations focus on the following ten economies (which are identified in the GTAP database): Mexico, South Africa, Colombia, Peru, Panama, Costa Rica, Guatemala, El Salvador, Honduras, and Nicaragua. Ten different simulations are run (one for each economy) for the analysis.

> 28 Detailed product results are given in Annex Tables 6 and 7. 29 Annex Table 8 shows the disparity of applied rates resulting from the set of piecemeal negotiations.

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