# <u>Third-party trade relationships</u>

The Ankara Agreement and the subsequent work of the Association Council understandably focused on the bilateral trade relations between Turkey and the EU. The trade relationships with third-party countries were to be coordinated in the form of a common external tariff, a process that moved methodically and in a predictable way for nearly four decades. During this time, Turkey’s trade relationships with other countries changed, for the most part, either through EU enlargement, or because of tariff concessions negotiated through a multilateral process under the General Agreement on Tariffs and Trade (GATT). Turkey became a GATT participant in 1951 and, together with the EU, participated in five successful rounds of tariff reductions from 1955 to 1994 (Togan 2005).<sup>25</sup> With the Doha Round stalled, many countries turned to bilateral and regional free trade agreements, including the EU and Turkey. However, where the Customs Union and EU expansion institutions were robust, the rules for coordinating bilateral agreements are not. Under the Customs Union, the EU and Turkey are obligated, in general, to jointly impose a common tariff regime. However, as discussed, this obligation does not fully extend to agriculture. And, as a practical matter, some primary agricultural goods do not circulate freely due to unresolved SPS barriers. The effects of these omissions to the Customs Union had minimal consequences in a world where third-party tariffs are mutually set in a multilateral setting; however, the consequences become harder to track when they occur bilaterally. Even though Turkey is obligated under Decision 1/95 to align its commercial policies with that of the EU, third-party countries that have reached an agreement with one Customs Union partner are not obligated to reach an agreement with the remaining partner. What’s more, even when both Turkey and the EU have successfully concluded a FTA with a common third-party, the terms of the respective FTAs can be different. This introduces the potential for trade diversion and a new set of trade irritants related to rules of origin.

Table 3 shows the third-party free trade agreements concluded or under consideration at the close of 2013. The list shows that Turkey is largely in a state of catching up with agreements already concluded by the EU, leaving Turkish exporters at a disadvantage to competitors from the EU. In addition, exporters that have concluded a FTA with the EU but not Turkey have an incentive to transship goods via the EU to avoid Turkish import duties. In the case of cars, Turkey uses protective measures based on rules of origin to counter trade deflection but this comes at a cost, since it reintroduces costly inspection processes that are generally avoided in a Customs Union.

In the near term, the FTA gap may widen before it closes, as new agreements under consideration include the large economies of Canada, Japan, India and the United States and important trading blocs like Mercosur, and the ASEAN countries are proceeding in an uncoordinated fashion. This is significant since the combination of rules that permit the free circulation of goods within the Customs Union together with a de facto noncommon tariff schedule for third-party countries sets the stage for unintentional diversions in trade flows and additional confrontations over rules of origin. How this will play out for the Customs Union absent Turkey’s accession to the EU is unclear, but we explore some of the welfare implications in a modeling exercise laid out in a latter section.

# **Policy Scenarios**<sup>**26**</sup>

In this section we report on an analysis of several potential pathways for agricultural trade policy for the EU and Turkey. Three policy scenarios are considered. The first scenario estimates the gradual alignment of

> 25 Turkey joined the World Trade Organization when the new organization subsumed the GATT in 1994. 26 This section is based on Tsigas and Sahin (2013)

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