Challenges for the WTO: EU Trade Policy and Turkey's Alignment

1. THE INTERFACE BETWEEN WORLD TRADING SYSTEM AND GLOBAL ISSUES: CHALLENGES FOR THE WTO, TURKEY AND THE EUROPEAN UNION An expanding trade agenda of the EU and possible implications for Turkey’s trade policy, with special reference to free trade agreements Dr. M. Sait AKMAN Marmara University EU Institute and TEPAV 14 - 15 May 2010, Istanbul

2. Outline Changing nature of EU trade policy (Global Europe strategy) Turkey’s alignment with the EU’s preferential trade regime Free Trade Agreements (FTAs) impact on Turkey? Which criteria for a sustainable relationship between TR-EU in FTA issue What to do in FTA issue?

3. Changing nature of EU trade policy (Global Europe strategy)

4. EU Trade Strategy: Global Europe Lisbon Strategy (2000) to make the EU the most competitive economy in the world (EU growth and job strategy) with a mid-term review in 2005. Complement Lisbon agenda by introducing an external dimension: Global Europe Strategy (2006) • a trade policy complying with the objectives of growth and employment. • a trade policy adopted to the changing global context • Emergence of new powers • Fragmented and globalised production process • Need for innovation and R&D Europe 2020 Strategy (2010) (for smart, sustainable and inclusive growth); and itsnew trade strategy for EU2020, to assess implementation and explore new directions based on priorities announced and considering recent economic and trade policy developments such as the global crisis.

5. Key facts on EU trade EU exports: EU (27) is the leading exporter (16.2% in goods in 2009) Over 2/3rds EU exports are intra-EU (of which 90% is among EU15) North America and Asia are the EU27’s main markets outside Europe, each accounts less than 1/10th EU exports. Africa, Latin America and the Middle East have marginal shares EU imports: EU (27) is the leading importer (17.4% in goods in 2009) The pattern on the import side is very similar to the export side Main difference is trade deficit with Asia (12% imports vs. 7% exports) EU average tariff is low (average bound rate is about 3.5%)

6. Market share in value terms (1995-2005) source: BACI and CEPII, see E. Commission Global Europe

7. EU trade deficit rises since 1995

8. EU tariffs are low in manufacturing goods Textiles and clothing 12 Transport equipment 22 Average Leather, rubber, shoes & travel gds 17 Chemicals and photographic supplies High 23 Electric machinery 14 Non-agricultural articles n.e.s. 14 Mineral products, precious stones 12 Metals 10 Non-electric machinery 10 Wood, pulp, paper and furniture 10 Dairy products 210 Grains 101 Live animals and products thereof 192 Tobacco 75 Coffee and tea, cocoa, sugar, etc. 114 Fruit and vegetables 150 Beverages and spirits 71 Fish and fishery products 26 Oil seeds, fats, oils and their products 76 Other agricultural products 76 Cut flowers and plants 19 0 50 100 150 200 250 Source: WTO’s Trade Policy Review, EU 2007

9. EU exports are destined to less dynamic markets compared to the US and JAP EU has to export to more ‘dynamic markets’

10. EU is competitive in up-market goods EU investment in high-quality goods is key to growth and jobs Intellectual property protection is important for EU firms

11. EU high-tech product exports lose share in total Innovation and high-tech goods are essential for EU competitiveness

12. EU performs well in services exports EU needs liberalisation in ‘trade in services’

13. Asian share is high in EU imports 13 EU needs to export more to Asian markets: (Korea, India, ASEAN...)

14. EU needs a deeper agenda (WTO +) 1. Insufficient market access:services 2. Insufficient protection of EU interests: Intellectual property (TRIPS); Investment (TRIM); technical barriers (TBT) 3. Need for new multilateral regulations (competition): Competition; govn. procurement; 4. Need for new multilateral regulations (market failures): environment; labour standards

15. WTO+ topics in selected EU FTAs source: Source: Horn, Mavroidis and Sapir (2009)

16. EU policy change towards regionalism Lamy argued, in his Trade Policy Assessment document that: “our arguments in favour of a better regulated multilateral world have been less effective. Indeed, arguably as a result, trade policy or the WTO has too often been the sole focus for efforts to strengthen international governance, which risks weakening its legitimacy both internally within the Union, and in the outside world. I don’t believe the WTO can or should remain the sole island of governance in a sea of unregulated globalization.” (European Commission, 2004, p. 5)

17. Differentterms, similarobjective, varyingpaths 17

18. Turkey’s alignment with EU’s preferential trade regime

19. Article 16 ofAssociation 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.”

20. FTAs Turkey had concluded: • Turkey has completed 26 Free Trade Area agreements in conformity with the EU’s FTAs: • 10 of these lapsed due to the accession of these countries in the EU (Poland, Hungary, CzechRep., Slovakia, Slovenia, Estonia, Latvia, Lithuania, Bulgaria, Romania) • 13 of the FTAs are in force(EFTA, Israel, Macedonia, Croatia, Bosnia-H, Palestine, Tunisia, Morocco, Syria, Egypt, Albania, Georgia, Montonegro) • 3 are waiting for ratificiation of the Parliament(Serbia, Chile, Jordan) ‘In all of these agreements, Turkey already achieved the concessions which the EU had secured previously inFTAs with the said countries’

21. CurrentState of the EU andTurkishFTAs EU’s Free Trade Agreements (in force and in the pipeline) Status of Turkey’s FTA EFTAIn force (1992) IsraelIn force (1997) FYROM -Macedonia In force (2000) CroatiaIn force (2003) Bosnia and HerzegovinaIn force (2003) PalestineIn force (2005) TunisiaIn force (2005) MoroccoIn force (2006) SyriaIn force (2007) EgyptIn force (2007) AlbaniaIn force (2008) ChileAgreement signed in 2010 MontenegroAgreement Signed in 2008 SerbiaAgreement Signed in 2009 South AfricaExploratory talks JordanAgreement Signed in 2009 MauritiusNegotiating Lebanon Negotiating Faroe IslandsNegotiating MexicoAttempted to negotiate AlgeriaAttempted to negotiate South KoreaNegotiations to start in April 2010 UkraineExploratory talks IndiaNegotiations started GulfCooperationCouncil Negotiating MERCOSUR (Argentina, Brazil, Paraguay,Uruguay) Negotiating ACP (Africa, Carribeanand Pacific) Attempted to negotiate Central AmericaAttempted to negotiate ANDEAN (Colombia, Peru, Bolivia, Ecuador) (Talks withColombia and Peru are finalized) Attempted to negotiate ASEAN (South East Asia) Attempted to negotiate LibyaNegotiating

22. Turkey’s trade with the FTA partners(as a % of its total trade, 2008) TR import from.. TR Exports to.. TR trade with EFTA 3.10 2.50 2.90 Israel 0.70 1.50 1.00 FYROM -Macedonia>.10 0.20 >.10 Croatia>.10 0.30 0.10 Bosnia and Herz.>.10 0.40 0.20 Palestine>.10 >.10 >.10 Tunisia 0.20 0.60 0.30 Morocco 0.20 0.70 0.40 Syria 0.30 0.80 0.50 Egypt 0.50 1.10 0.70 Albania>.10 0.20 >.10 Georgia 0.30 0.80 0.50 Montenegro>.10 >.10 >.10 Chile 0.20 >.10 0.10 Serbia>.10 >.10 >.10 Jordan >.10 0.30 0.10 TOTAL (appr.) 6.0 9.70 7.0 MEXICO0.20 >.10 0.20 S. KOREA 2.00 0.20 1.30 LEBANON>.10 0.50 0.30 ALGERIA1.60 1.20 1.50 S. AFRICA 0.80 0.90 0.80 TOTAL -potential FTAs (appr.) 4.65 2.90 4.10 SUB-TOTAL (appr.) 10.65 12.60 11.10 Source: IMF (DoTS), 2008

23. Turkey’s preferential trade (as a % of its total trade, 2008)

24. The impact of EU Free Trade Agreements (FTAs) on Turkey: Main arguments

25. EU’s FTA strategy: What impact on Turkey? • Preference erosion for Turkeyin the EU market: Turkey loses its share in EU markets as other partners of the EU secured improved access by means of FTAs. Being Turkey’s most stable and largest export market, the EU’s preferential advantage under the CU is decreasing. - This argument is not convincing against the EU, as the latter canlegitimately claim that it has freedom to regulate its bilateral trade relations with third countries; - nor it is economically rationale from the vintage of competitiveness and free trade

26. EU’s FTA strategy: What impact on Turkey? • FTA partners of the EU have the opportunity to have an easier access to Turkish market: FTAs with the EU allowthem a tariff- free (circumvention) access to Turkey, of FTA partners’ goods, once entering into free circulation within the EU. This will be more visible in indirect imports from more competitive countries like S. Korea, India and ASEAN whose exports may hit several labour and capital intensive sectors. - This argument is correct, but it depends on the potential volume of trade that can be deflected into Turkey via the EU. - the argument must also consider that this is a result of ‘competitiveness problem’ and Turkey must develop an ‘adjustment strategy’.

27. EU’s FTA strategy: What impact on Turkey? • FTA partners do not havethe obligation to negotiatewith Turkey an FTA despite ‘Turkey clause’: These countries with which the EU has FTAs do not reciprocate because Turkish goods cannot have preferential access in their markets via the EU - To counter this argument the EU has added ‘Turkey clause’ in its FTAs. - In practice, Turkey had concluded FTAs with several of these countries, or started negotiations recently like Korea and India. But, not effective in the cases of Mexico or S. Africa). - The argument is more convincing if formulated as such: Reluctant behaviour by third countries cause substantial delay, and disadvantages to Turkey. This must be compensated.

28. EU’s FTA strategy: What impact on Turkey? • Asymmetry effect in trade agreements: A. Turkey is not as forceful as the EU in negotiations - This argument can be invalidated as Turkey already secured many concessions in its first-generation FTAs, that the EU had obtained. - However, this may be more challenging issue in second-generation FTAs B.liberalisation is asymmetrical in FTAs at Turkey’s expense. - Turkey abolished tariffs upon entry into force of the Agreement, while has to wait for progressive dismantling from partners. (Morocco 9 years, Tunisia 9 years, Egypt until 2020 in List 4, Syria 12 years). - However, limited competitiveness of these countries’ industries, this helped Turkey to persuade them conclude FTAs. In the case of Jordan, for example, the non-simultaneous reductions in tariff schedules were included in the Preamble!

29. EU’s FTA strategy: What impact on Turkey? • Turkey enters in FTA markets later than the EU (the latecomer effect): Turkey has to follow the EU to make FTAs, sometimes a couple of years later, hence putting Turkish exporters into a disadvantageous position with regards to EU exporters who has a preferential status in third country markets much before. - This is a convincing argument, as the EU does not allow Turkey to negotiate jointly, or ask for its partner to continue parallel negotiations with Turkey. This argument is commercially sensible in markets where the EU and Turkish exporters have rivalry (e.g. Lebanon, Jordan...)

30. EU’s FTA strategy: What impact on Turkey? • Tariff-revenue loss for Turkey: Circumvention of exports not directly from third countries, but by way of trade deflection via the EU, induce a tariff-revenue loss for Turkey - This argument has a ground, but especially in sectors with tariff peaks and for imports originating from countries that constitute a significant share in Turkish market. - In 2008, the largest-share country in Turkish imports (that has an FTA with the EU) was Algeria (1.6%). TUR mainly imports energy goods with low tariffs. - If the aim is no circumvention, and import via the EU is not especially destined to Turkish market → The side that has the right to collect the customs revenue will be the EU anyway, but not Turkey

31. EU’s FTA strategy: What impact on Turkey? • Preferential agreements shift attention away from the Doha Round and multilateral WTO rules: “Turkey's FTAs makes its trade regime complex and difficult to manage. Future trade agreements could further complicate the trading environment creating a web of incoherent rules and detract from multilateral efforts, given the limited resources available” Turkey TPRM Report (WTO, 2003: 17). - This is a forceful argument. The regional agreements are only second-best and can only be accepted if they do not undermine the WTO and Doha Round. - Turkey may have disadvantages in liberalising trade by means of FTAs, rather than the WTO.

32. Tariffs before and after NAMA Calculation by UFT Economic Research Section based on the formulas and coefficients suggested in the latest Draft on NAMA Modalities (4th Rev.) where the coefficients are assumed to be 8 and 25 for the developed and the developing countries respectively where the formula is (i.e. t1= [a or (x,y or z)]*t0 / [a or (x,y,or z)]+t0 )

33. EU’s FTA strategy: What impact on Turkey? • Turkey cannot have its own FTAs independently of the EU: Turkey cannot negotiate preferential agreements and has to refrain from negotiating with third countries with which the EU has not accorded yet - Legally, this argument is open to challenge. - Is there any specific country with which Turkey desires a preferential link, but cannot make due to EU opposition!

34. EU’s FTA strategy: What impact on Turkey? • EU priorities do not match Turkish trade strategy: EU has its own priorities and normative concerns to reflect in FTAs without taking into account Turkey’s priorities - This is a major argument when one considers that Global Europe strategy is more keen on preserving the interests of European multinationals in third country markets, especially concerning investments, non-tariff barriers, intellectual property rights, competition rules and government procurement as well as other regulatory areas such as environmental and labour standards. - The negotiations do not necessarily reflect Turkish inerests and, nor they may match priority areas in Turkish strategy.

35. Criteria for a sustainable relationship between TR-EU in FTA issue

36. Customs Union Decision 1/95 • Turkey has aligned its trade policy to EU’s past trade policy arrangements • Turkey also pledged to align its policy to EU’s future trade strategy • The future shape of EU’s trade strategy depends on several unforseen developments. Thus, Turkeycurrently is, and in the future will be exposed to anychange and shifts in EU trade strategy. But TR cannot participate in decision-making of EUdirectly. Therefore, it seems that thecurrent state of affairs will only be acceptable in Turkey,if at least some of the following criteria are satisfied:

37. Certainty criterium • If the EU trade strategy is sufficiently clear, transparent and foreseeable for Turkey amidst global challenges and developments: Turkey has the disadvantages because it has little possibility to predict the next EU step. The uncertainty can only be mitigated if Turkey is allowed to participate in decision making, or it is sufficiently consulted and informed by the EU. But consultation mechanism does not work properly and Turkey’s access to detailed information has limitations

38. Compatibility criterium • If the EU trade strategy matches Turkey’s trade policy priorities

39. EU and Turkish Trade Strategies: Are they compatible?

40. WTO criterium • If the EUis committed to, and a firm defender of the WTO, and if multilateral negotiations have the primacy in EU trade strategy The EU gives only a ‘lip service’ to the completion of Doha Round and the WTO asa forum for trade negotiations. Furthermore, ‘many FTAs have adverse effects on the multilateral trading system’ (EU Trade Study Group Report, ECIPE 2010)

41. Hegemony/leadership criterium • If the EU is a ‘normative hegemon’ which has the ability to urge Turkey (and almost all of its spokes) to behave in harmony with the rules and norms it sets out. However, the EU’s normative and hegemonic role to provide stability in the world trading system is problematic see next page

42. Does Global Europe strategy make the EU a ‘normative power’? (1) • The EU is not an angel itself: • Protectionism in CAP • Trade defense instruments (i.e. anti-dumping..) • Standards protectionism! • Enlarged EU dilutes single entity in external action: not all MS are interested in market opening abroad for FDI, services etc. • ‘behind-the-border’ issues and globalisation process makes trade policy politically contentious: not only between the EU- third c., but domestic divison on Singapore issues

43. Does Global Europe strategy make the EU a ‘normative power’? (2) 4.EU competence on many trade-related matters is weak: That puts the E. Commission in difficulty in external negotiations in new areas (energy, investment, services (partly), environment, social clause...) 5.Export of European social and regulatory model (European norms, values, domestic rules...) is in many cases confronted with the WTO jurisdiction: DS rulings against the EU measures)

44. Compensation criterium • If Turkey’s perceived loss is compensated to satisfy Turkey under institutional, procedural and/or financial mechanisms; or if the customs union is extended to areas where Turkey can obtain extra benefits • services • agriculture

45. Agriculture Only ‘processed agricultural products’ are included in CU regime; Expansion of Customs Union regime to agricultural goods would lead to noticeable increase of Turkish agricultural exports into the EU market (by 14% in vegetables; 12.5% in fruits; 38.5% in processed agr.) (Lehmann et.al. 2007); see also Eruygur and Çakmak (2005). Cost of Turkey’s adoption of the CAP must be considered Turkey’s position in Doha Round diverges as it supports G-33 and developing c. position in sensitive goods and SSM; and G-20 and Cairns group position on domestic subsidies.

46. Accession negotiations criterium • If the accession process goes smoothly: • But remember the difficulties in opening chapters; • 8 chapters are suspended (although they are concerned with trade issues) due to Cyprus issue.

47. Political belief criterium • If the EU accession process continues to bepoliticallya prevailing idea in Turkish public (or at least in the policy-making circles) despite all uncertainties. It is visible that this has lost ground among several circles/elites in Turkey which once adhered to EU’s anchoring role or its ‘conditionality’, but became disappointed due to ‘open-endedness’ of the accession process.

48. ‘Turkey now stands between the CU that cannot be rolled back and the full membership that is not conceivable in a foreseeable future’ My intention here is not to frame a pessimistic scenario; but to make a concise analysis of the current case of TR-EU relations, considering the global and domestic factors that may cause a convergency between Turkish and EU trade strategies. It should also be noted that it is not clear even for the EU itself; - how its internal reshuffling affects its external action and its global role - how the new Lisbon Treaty will shift the power among domestic actors (e.g. institutions and others)

49. What to do in FTA issue?

50. What to do in FTAs issue? (1) INSTITUTIONALLY: • A Free Trade Agreement Study Groupunder the CU Joint Committee to be established in order to discuss technically challenging issues. This may help Turkey to recieve regular and comprehensive information about EU’s FTA negotiations. Turkey already offered a trade policy study group and E. Commission welcomed the idea. • An informal sub-committee under Article 133 Committee(under the initiative of trio Presidency) where TR business community and NGOs can express their concern on EU trade agreements.