BREXIT EFFECTS ON TURKISH ECONOMY AND THE FREE TRADE AGREEMENT CONCLUDED BETWEEN THE UK AND TURKEY

Brexit process, which began with the United Kingdom (“the UK”)’s referendum in 2016 and turned into a transition period with its withdrawal from the European Union on January 30, 2020 officially concluded with the trade agreement signed on December 24, 2020. The trade agreement on which compromised by the UK and the European Union provides that parties can trade tariff-free and quota-free and without any deduction, from 1 January 2021. 

However, with the end of the Brexit transition process conducted between the EU and the UK, it was predicted that there could be stagnation and problems in trade relations between Turkey and the UK, as the UK would no longer be a party to the Customs Union. Nevertheless, the Free Trade Agreement, which was signed between the UK and Turkey in order not to disrupt commercial activities, has entered into force as of January 1, 2021.

 

The Customs Union Agreement between Turkey and the European Union

Trade relations between the UK and Turkey before Brexit were regulated by the Customs Union Agreement adopted between the EU and Turkey in 1995 and entered into force in 1996. Thanks to the customs union, which involves only industrial and processed agricultural products, these products can move freely within the customs area without quantity restrictions and customs duties. In this context, considering that the UK is one of the countries with which Turkey exports the most, it is of great importance for the business community in Turkey to continue trade without customs duties due to the fact that the UK will leave the customs union. 

Pursuant to the customs union agreement, Turkey cannot conclude Free Trade Agreements or similar trade agreements with those countries where the European Union has not signed a trade agreement. Therefore, in order for trade between Turkey and the UK to continue without customs duties, the UK and the EU had to reach an agreement first. For this reason, the trade agreement dated December 24, 2020, agreed on by the UK and the EU, has legally paved the way for the signing of a Free Trade Agreement between Turkey and the United Kingdom.

 

Economic Implications of Brexit on Turkey

The size of the import – export figures between the UK and Turkey has led Turkey to be directly  affected by Brexit. It is statistically known that the UK is one of the countries with the most foreign investment in Turkey. According to the UNCTAD World Investment Report 2020; finance, manufacturing and energy are among the sectors that attract the highest amount of FDI (“Foreign Direct Investment”) in Turkey, accounting for more than 60% of total stocks. 

In terms of stocks in Turkey, 

  • the Netherlands has the lead, accounting for 16.1% of total foreign investment,
  •  followed by the United States at 7.6% and,
  •  the Gulf countries – mostly Qatar – at 7%.

In addition, according to 2020 data, the UK ranks 11th among the countries that Turkey imports and 4th among the countries (By comparison with the 2019 data, the UK which is second in the export rankings, appears to be declined in this field.) that it exports. 

Although in 2019, the trade volume between the two countries decreased by about %12 compared to the previous year and recorded $ 16 billion 297 million, the UK continued to be the sixth largest trading partner of Turkey with a share of %4,4.  In the time range between January and October 2020, the trade volume continued to decrease and it  was recorded by TUIK as 13.5 billion dollars.

  • The main products which Turkey exports to UK are gold, textiles, garments, electrical and non-electrical machinery, motor vehicles and parts, iron and steel products, insulated wires, cables and other electric conductors.
  • The main imports from the UK are diesel and semi-diesel engines, automobiles, tramp iron/steel and their ignors, medicinal and pharmaceutical products to be used in treatements and protection.

As a result of the Brexit process, the customs union relationship between Turkey and the United Kingdom ended on 1 January 2021 due to the fact that the UK left the European Union and remained out of the customs union. This has led to the possibility that about 75% of the Turkish exports to the the UK will become subject to a customs tariff and potentially resulting in a loss close to $3 billion. In addition, there was an average tax of 10% on all automotive and electronics, textiles and ready-to-wear. It has thusly became a current issue that this uncertainty caused by the current atmosphere can lead to a foreign trade deficit.

 

What Does The Free Trade Agreement Signed Between Turkey And The UK Brings?

The above-mentioned uncertainty was removed in consequence of the signing of the Free Trade Agreement between Turkey and the UK, which entered into force on January 1, 2021 and covers all industrial and agricultural products.  Due to this Agreement, the possible financial losses were eliminated and Turkey’s trade relations with the UK will be maintained. Accordingly, there is no risk of loss of rights and lapse of time regarding ongoing commercial activities between the two countries. Indeed, international trade communities have called this agreement a “continuity agreement”.

Scope: The Agreement in question covers, 

  • all industrial goods and,
  •  processed agricultural products 

In this regard, customs duties were granted zero-tariff rates on industrial products with this agreement, and “tariff concessions” rates provided by the Customs Union on agricultural and processed agricultural products continued to be applied on commercial relations in the same way. However, as the Customs Union with the EU, which is still in force, does not contain the service and investment sectors, these sectors are not currently included within the scope of free trade thereof. 

Nevertheless, an official statement issued by the UK’s Department of International Trade declared that the two countries are carrying out a broader study which is planned to cover aforementioned sectors in the agreement. 

Pursuant to the Article 13.2. titled “Review and further negotiations” of the Agreement, it is stipulated that Parties shall commence a review of this Agreement with a view to replacing, modernizing, or expanding within 2 years. However, a more detailed trade agreement planned on current trade issues such as services, agriculture, investments, electronic commerce requires a long negotiation process.

Profits From Turkey’s Point Of View:  The Free Trade Agreement signed between Turkey and the UK has eliminated commercial uncertainties between the two countries after Brexit, and also preserves the gains of the existing Customs Union Agreement This situtation will free exporters from possible additional burden of taxes and sanctions and prevent them from being affected by the conditions of origin on goods. 

If such an agreement had not been reached with the UK by Turkey, trade activities would have continued between the two countries in accordance with the rules of the World Trade Organization, but with customs tariffs. Under favour of the Free Trade Agreement, this stated risk has eliminated. 

Disputes Arising From The Free Trade Agreement: In accordance with the provisions of the Agreement, the “Procedure for Dispute Settlement Mechanism” will be implemented to settle a possible legal dispute between Turkey and the United Kingdom. The Procedure for Dispute Settlement aims to resolve definitively commercial disputes between World Trade Organization (WTO) member states within the shortest possible time frame.

Unless any resolution is achieved as a result of this procedure, WTO remedies will apply. Because the WTO aims to increase the volume of global trade activities within the framework of transparent rules by ensuring the sustainability of international trade and facilitating trade relations between countries.  

Accordingly, the first step in resolving a legal dispute between the member countries would be through a consultation phase. If the Parties come up with an agreed upon solution at this stage, the legal process will not formally begin; if a resolution has not been reached, the Dispute Settlement Body (DSB) established for the settlement of legal disputes in accordance with the principle of commitment to demand will meet to discuss and manage the dispute settlement issues.

A General Overview of the Free Trade Agreement in Turkey-UK relations

A positive mood prevailed among the markets due to the official statements made by both the trade ministries of Turkey and the United Kingdom at the point that came with the Free Trade Agreement. Because Turkey’s signing of a free trade agreement with the UK is also important as a positive message to global markets. After the agreements signed with Japan, Canada, Switzerland and Norway, the UK concluded the largest trade agreement with Turkey. In this way, the inclusion of Turkey’s name along with the world’s leading countries will increase Turkey’s potential to attract foreign investment. 

However, many economic authorities note that despite the negotiations between the UK and Turkey since 2017, the scope of the Free Trade Agreement does not contain major innovations compared to the existing Customs Union Agreement with the EU. In this context, the free trade agreement signed with the UK cannot go beyond the extent of the agreement that already exists with the EU and which Turkey demands to update. Indeed, the scope of the agreement reached between the two countries is very similar to the customs union agreement between Turkey and the EU in terms of its boundaries. Such cases as the lack of full liberalization of agricultural products or non-inclusion of the services sector are also within the framework of the commercial relationship between Turkey and the European Union. 

Although the phrase “agriculture” is frequently used in statements made by the authorities of the two countries, it is stated by some trading experts that this definition creates uncertainty to the detriment of Turkey and does not provide a full customs union. As a matter of fact, only ‘processed agricultural products’ are included in the content of the agreement with the UK, not all agricultural products. But according to economists and exporters ‘ associations, creating a duty-free market for unprocessed agricultural products in Turkey is the main issue. Therefore, there is no doubt that the agreement should be expanded to cover sectors such as services, investments, agricultural products, e-commerce; but the fact that the trade agreement signed with the UK is in parallel with the existing Customs Union with the European Union also limits the development of commercial activities and relations. However, from Turkish economy’s point of view, there is also a disadvantage that the agreement stated a “condition of origin for free trade”.

Nevertheless, it should be noted that during the 2-year period stipulated under the Free Trade Agreement, the boundaries of trade may also be expanded. Thus, in the future, it can be expected that liberalization of agricultural products and trade opportunities in services will also be included in this coverage. 

CONCLUSION: 

The Brexit process continued since 2017, has prompted the United Kingdom, which has been integrated with the European Union for many years, to establish new relations with foreign countries alone, and it led to the transition to new system in many fields such as trade, education, immigration, etc. However, the uncertainty of the process caused to arise serious risk factors, especially from Turkey’s point of view. But at the moment, the achievement of a trade agreement which forms trade relations between the UK and the EU, has paved the way for Turkey’s trade relations with the UK to be regulated under a free trade agreement. 

It is envisaged that the Free Trade Agreement signed between the two countries recently will provide an environment of trust for planned investments between the two countries and that direct and indirect trade activities may increase. But due to this agreement introduces exemptions between the EU and Turkey within the boundaries of the existing Customs Union, it has not yet achieved the desired effect. As a matter of fact, the inclusion of only industrial and processed agricultural products within the scope of the agreement and the exclusion of the service sector constitutes a number of problems. But the fact that trade activities between the two countries will continue without interruption and the provision of customs exemption is received positively by exporters.

On the other hand, there are problems due to the fact that the “Ankara Agreement”, which gives Turkish citizens the right to work and live in the UK, has been repealed and no specific method has yet been offered in its place. In this sense, the points-based immigration system implemented in the UK complicates the conditions of either living and working or studying in the UK.

As a result of official declarations made mutually by the ministries of both countries, both commercial and education, immigration, etc. in social areas, it is envisaged that more inclusive arrangements can be agreed within a 2-year period. Because it is an inevitable fact that trade can be further improved with the arrangement of an extensive and detailed agreement.

 

Nilsu Sertoğlu, Attorney At Law

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