Brexit affects not only the EU, also Turkey

The UK’s decision to leave the European Union directly affects all of UK’s trading partners, including Turkey. Brexit is not only a foreign trade decision. After being a full member since 1973, the UK is now leaving the Union. As such, the political and legal institutions of full membership will also be dismantled. For the UK, this signals the establishment of a new structure independent of the EU. In this article, however, we will try to approach the subject in terms of foreign trade.

The UK to acqu re a “th rd country” status w th Brex t

The UK’s departure from the EU indicates that the UK will be considered as a “third country” by the EU. This means that there will be no differences between goods originating in China and the UK in terms of the customs duties that these goods are subject to. For example, in the case of importing an automobile from the UK with an existing A.TR Movement Certificate, no customs duties are collected. But post-Brexit, a 10 percent customs duty will be applied (if no arrangements are made during negotiations). A similar situation applies to the trade relationship between the EU and the UK.

While the UK is still a member of the EU, it will keep implementing the EU standards until Brexit is finalized. The UK will then implement its own independent foreign trade regime, i.e. drafting a brand new customs law. However, Brexit is not only limited to customs and tariff-related matters. In addition, decisions must be made about how to implement non-tariff barriers (NTBs) on goods of EU origin. NTBs such as implementation of standards, quotas and anti-dumping duties will need to be monitored and regulated by a trade policy independent from the EU.

Tariffs and non-tariff barriers, which will be applied on trade with the EU, will lead to the adoption of new customs duties and add to the workload during customs clearance processes, leading to higher costs for importation into the UK. In order to eliminate higher costs, a report dated August 15, 2017 outlined the UK’s strategies in regards to customs clearance processes. When these strategies are analyzed, it is clear that these fundamental customs problems have been debated for a long time and dominate Britain’s agenda. A few of the strategies are as follows:

Decreasing the risks of customs clearance delays and costs with Authorized Economic Operator (AEO)

Negotiating a scheme for customs cooperation, mutual assistance and data sharing processes that are similar to the current cooperative arrangements

What s the s tuat on between the UK and the EU?

On March 29, 2017, the UK government announced that it is launching a two-year process for a new trading partnership with the EU. This means that the UK is preparing to exit the EU on March 30, 2019. The most important issue here is that the efforts envision establishing a trade partnership or concluding a free trade agreement between UK and EU which will protect the current trade flow in the same manner the Customs Union does.

The aim of these negotiations is to protect the UK-EU trade relations from negative impacts. In order to achieve this, the UK and the EU must apply the same rules of origin and their foreign trade policies must be compatible with each other.

In this context, various scenarios between the UK and the EU are being discussed. The possibility of concluding an FTA or building an extensive trade cooperation stands out among these scenarios. The main difference between these two approaches is whether a common tariff shall be applied to third countries or not. In fact, the customs union is preferable to an FTA since it is possible to apply a common tariff to third countries in the customs union. In this case, the customs union seems to be a better option to maintain the current situation. It is clear that the discussion surrounding the two alternatives will be charged in the coming days.

For instance, the Institute of Directors (IoD), comprised of business people in the UK, published a report proposing a “hybrid” model for business relations with the EU last week. The IoD suggests the creation of a customs union with the EU for industrial products and processed agricultural products, while recommending the conclusion of an FTA for unprocessed agricultural products. The report also states that Turkey could be considered a benchmark in the context of the customs union.

What does t mean for Turkey?

The situation in Turkey is moving forward independently from the Brexit negotiations. As in previous free trade agreements, the EU does not include Turkey in the discussions, even on topics which are of interest to Turkey. For this reason, we need to follow the Brexit issue independently from the EU. In fact, ministries in Turkey and the UK set up a joint working group for this purpose. The Group is expected to hold its second working meeting this month.

The structure we anticipate is one in which the current situation is maintained. A customs union agreement based on a “movement principle” stands out as the most appropriate way to protect the status quo.

As seen from the table, Turkey has a trade surplus with the UK. Turkey’s failure to establish a union that protects the status quo following Brexit will likely produce an adverse effect on Turkey’s exports since Turkey’s goods will be treated as originating from a third country and therefore be subject to both customs tariffs and non-tariff barriers. This situation will impair Turkey’s export standing. For this reason, negotiations with the UK have vital importance for Turkey.

What should be done?

Building a structure different than the existing one might incur serious import costs on the UK. In this context, both the EU and the UK must also negotiate with Turkey. The IoD’s report reveals that the EU will protect local producers while developing an independent trade policy. It would thus be useful to negotiate in a way to protect the exports of Turkey during our participation in such meetings.