The choice of the United Kingdom’s customs model with the EU post-Brexit is vital. The UK exports around half of its goods to the EU. The need to avoid a hard Irish border in order to maintain peace in the region shows that the issue is broader than economics. However, the UK government is currently locked in a standoff over a decision on the future customs arrangement with the EU. The customs partnership, backed by the Prime Minister, has not (yet) secured support in the cabinet.
The so-called ‘max fac’ (‘maximum facilitation’), a rival plan favoured by hard-Brexiters, relies on technology to keep minimal border-checks. Whatever route is taken in a ‘Brexit means Brexit’ world, it will have to be a customs arrangement/union outside membership of the EU. Leaving substance aside, the concept itself is not novel.
The EU has customs unions with the non-EU countries San Marino, Andorra and, most notably, Turkey. It also has customs facilitation treaties with countries such as Switzerland and Norway, but these treaties do not abolish all border checks on goods.
So, what does a customs union without EU membership look like? We shall look at the largest such customs union: the EU-Turkey Customs Union (EU-Turkey CU).
The EU-Turkey trade relations
Turkey is not a member of the EU but its closer relationship with the EU dates back to the early years of the EU’s foundation. Turkey applied for an association membership of the then European Economic Community (the EEC) in 1959. Four years later it signed an association agreement with the EEC, commonly known as the Ankara Agreement (for more on association agreements, see our explainer), which included setting up the process to create a customs union between Turkey and the EEC.
In 1970 the two signed the Additional Protocol to the Ankara Agreement which removed tariffs and quantitative restrictions on industrial goods in bilateral trade. The EU-Turkey CU was finally established on 1 January 1996 by Decision No 1/95 of the EC-Turkey Association Council (the CU Decision).
The creation of the EU-Turkey CU facilitated trade between the two partners. Turkey is now the EU’s fifth trading partner which amounts to around 4% of total EU foreign trade. The EU is Turkey’s largest market with a share of 40.6% in Turkey’s global trade, a number similar to that of the UK exports in goods and services to the EU. The largest share of EU-Turkey trade in goods is in machinery and transport equipment (around 44%).
A CU and the CU
The EU-Turkey CU is a CU with the CU. Let us explain. The CU is the internal EU Customs Union (the EUCU) between its Member States. It is complete and covers all goods. The EU-Turkey CU is a separate customs union between Turkey and the EUCU.
The EU-Turkey CU removes tariffs and quantitative restrictions (i.e. taxes) in bilateral trade between any and all of the EU Member States and Turkey for the covered goods. It also sets a single external tariff, that is, the EU and Turkey charge the same duties on imports from third countries (i.e. countries other than EU Member States and Turkey).
Unlike the EU’s own Customs Union, the EU-Turkey CU is an incomplete customs union. It covers trade in industrial goods but does not include agricultural products (except certain processed agricultural products), coal and steel products, or public procurement.
Also, like other customs unions, it does not cover services. These are to some extent covered by separate bilateral preferential agreements; and the EU and Turkey are involved in further talks on trade liberalisation. The EU-Turkey CU, together with these bilateral preferential agreements, are referred to as a bilateral preferential trade framework (BPTF).
Both Turkey and the UK will lose duty-free access to each other’s markets post-Brexit since the UK will no longer be part of the EU-Turkey BPTF, unless and until the UK negotiates such access (with the EU or through a separate arrangement with Turkey).
In relation to agricultural products, the preferential agreement is non-reciprocal. That is, the EU has eliminated almost all duties on imports of agricultural and fishery products from Turkey, while most of EU exports to Turkey are subject to non-preferential tariffs. The CU Decision envisages a progressive expansion of the preferential treatment in agricultural products.
An agreement on free trade in services was envisaged in the Ankara Agreement and the Additional Protocol, but the abolition of restrictions has not yet been achieved. Trade in services between the EU and Turkey is based on the General Agreement on Trade in Services (GATS) under the framework of the World Trade Organization, as well as a “standstill” on any new restrictions between the two sides.
Common external tariff
Customs unions not only eliminate trade barriers between their members, but they also set a common external tariff (also known as the ‘Common Customs Tariff’) for imports from other countries. Turkey has an obligation to apply the EU’s external tariff to imports from third countries for products covered by the EU-Turkey CU.
This obligation is strict. Article 14(2) of the CU Decision which establishes the EU-Turkey CU says that under no circumstances may Turkey be authorized to apply a customs tariff which is lower than the common external tariff for any product.
So, Turkey must charge the same external tariff as the EU. Tariff rates differ from one kind of import to another, depending on where the good is produced. For some countries the EU applies preferential treatment (i.e. reduced or zero-rate import duties). Preferential tariffs are applied to goods coming from a number of developing countries. Turkey would have to apply them too.
Preferential tariffs would also apply to countries with which the EU has negotiated free trade agreements (FTAs). For example, the FTA between the EU and Canada (the EU-Canada Comprehensive Economic and Trade Agreement or CETA) eliminates 98% of tariffs in bilateral trade. So Canadian goods entering Turkey directly will be subject to the tariffs laid down in the CETA.
Likewise, Canadian goods entering Turkey indirectly via Greece will have access to Turkish markets without restriction as a result of the EU-Turkey CU. This is because being part of a customs union means that once an import from a third country enters the EU and pays import duties at the first point of entry (i.e. Greece or any of the EU Member States) it could access Turkey’s markets without having to pay any further duties.
Since Turkey is not a member of the EU it cannot participate in the EU’s FTAs as a Member State. Benefits granted through the EU’s FTAs do not automatically apply to Turkey.
Neither does Turkey have a say in the EU’s trade policies. In order for Turkish goods to be able to benefit from preferential access to, say, the Canadian market, it has to negotiate its own agreements with the EU’s partners., That, however, may cause issues. First, even if Turkey wanted to negotiate agreements with the EU FTA partners, there may be delays as it takes years to conclude an FTA.
Second, because those partners already enjoy access to the Turkish market via the EU-Turkey CU, they have little incentive to negotiate an agreement with Turkey. Third, in some cases, third countries refuse to enter free trade agreements with Turkey (as is the case, for example, with Algeria and South Africa). Thus, Turkish producers may be disadvantaged in comparison to EU exporters on the markets of EU’s partners.
If pursued, a customs union option with the EU may pose similar problems for the UK post-Brexit. The UK would have to negotiate FTAs with the EU trading partners and grant them the same preferences (that is, apply the same tariff as that the EU). Third countries, however, could be reluctant to engage in such negotiations since they would anyways have access to UK markets through their FTAs with the EU. The issue would be especially important today when the EU is negotiating a number of ambitious FTAs.
In addition to following the EU’s common external tariff, Turkey is also under an obligation to harmonize as far as possible its laws with the EU’s legal framework in areas of direct relevance to the operation of the CU (Article 47 of the CU Decision).
Areas of direct relevance are listed in Article 54(2) of the CU Decision and include commercial (ie trade) policy and agreements with third countries in relation to industrial products, legislation on the abolition of technical barriers to trade and industrial products, competition policy, intellectual property rights and rules.
Importantly, Turkey is also obliged to adopt the EU’s rules of origin for products covered by the EU-Turkey CU (Article 28 of the CU Decision). Rules of origin determine where the imported product has been produced for the purposes of applying preferential import duties (for more on rules of origin, see our explainer).
The CU Decision provides that its provisions which mirror EU law must be interpreted in conformity with the relevant decisions of the Court of Justice of the European Union (Article 66 of the CU Decision).
While the provision stops short of establishing direct jurisdiction of the ECJ in Turkey (which would be the case if it was in the CU), the ECJ’s interpretative jurisdiction, while limited, is nevertheless established.
Unlike the EU-UK customs question which stems from the UK’s withdrawing from the EU, the EU-Turkey CU is a product of closer integration. It is thus focused on expanding the relationship rather limiting it. At the EU-Turkey high level meeting held in May 2015, the parties agreed to start the process of widening the scope of the EU-Turkey BPTF.
Some suggest that the limited EU-Turkey CU should be replaced by a more comprehensive FTA between the EU and Turkey (or some form of a CU+FTA option). While an FTA could provide full trade liberalization, it would however require the introduction of product origin checks since under an FTA states would be free to apply their own external tariffs on non-signatory countries.
The EU-Turkey CU provides frictionless trade for certain goods, a model which may seem attractive for the UK’s Brexit negotiators. However, some of its features – a common external tariff, regulatory alignment without participation in the decision-making, interpretative jurisdiction of the ECJ – are unlikely to be welcomed by some cabinet members. The question is whether parts of the EU-Turkey CU puzzle could be taken out or added to construct a ‘hybrid’ model which would satisfy both No 10 and Brussels.