Brexit affects not only the EU, also Turkey

Dünya Executive - - BUSINESS BY LAW - PARTNER, EY SERCAN BAHADIR, [email protected]

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.

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