The Foreign Affairs Committee debates on the modernisation of the Customs Union with Turkey.

Reports&Opinions

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DRAFT REPORT
on ‘Towards a new trade framework between the European Union and Turkey and the modernisation of the Customs Union’
(2016/2031(INI))
Committee on International Trade
Rapporteur: David Borrelli

CONTENTS

MOTION FOR A EUROPEAN PARLIAMENT RESOLUTION
EXPLANATORY STATEMENT

MOTION FOR A EUROPEAN PARLIAMENT RESOLUTION
on ‘Towards a new trade framework between the European Union and Turkey and the modernisation of the Customs Union’

The European Parliament,

– having regard to the Agreement establishing an association between the EEC and Turkey, signed in Ankara on 12 September 1963, and the protocols thereto,

– having regard to the Additional Protocol to the Ankara agreement of 23 November 1970,

– having regard to Decision 1/95 of the EC-Turkey Association Council,

– having regard to Decision 1/98 of the EC-Turkey Association Council,

– having regard to the World Bank report of 28 March 2014 on the EU-Turkey customs union,

– having regard to the report of the Senior Officials Working Group on the update of the EU-Turkey customs union of 27 April 2015,

– having regard to the opinion of the European Economic and Social Committee on ‘Enhancement of the EU-Turkey bilateral trade relations and the modernisation of the Customs Union’ of 15 December 2016,

– having regard to the working document ‘Towards a new trade framework between the European Union and Turkey and the modernisation of the Customs Union’ presented in the INTA committee on 18 October 2016,

– having regard to the declarations following the summits of EU heads of state and government with Turkey of 29 November 2015 and 18 March 2016,

– having regard to the European Parliament resolution of 24 November 2016 on EU-Turkey relations (2016/2993(RSP)),

– having regard to the European Parliament resolution of 14 April 2016 on the 2015 report on Turkey (2015/2898(RSP)),

– having regard to the 2016 annual report on Turkey, published by the Commission on 9 November 2016 (SWD(2016)0366),

– having regard to the Council conclusions of 18 July 2016 on Turkey,

– having regard to the Commission communication of 8 December 2016 on the Fourth Report on the Progress made in the implementation of the EU-Turkey Statement (COM(2016)0792),

– having regard to the Commission communication of 14 October 2015 entitled ‘Trade for All’ (COM(2015)0497),

– having regard to Articles 3 and 21 of the Treaty on European Union,

– having regard to Articles 207 and 218 of the Treaty on the Functioning of the European Union,

– having regard to Rule 52 of its Rules of Procedure,

–

– having regard to the report of the Committee on International Trade (A8-0000/2017),

A. whereas Turkey is the EU’s fifth trading partner and the EU is Turkey’s main trading partner; whereas the value of trade has increased fourfold since the entry into force of the Customs Union;

B. whereas the Customs Union has shown that it clearly fails to meet the requirements of trade relations between the parties;

C. whereas Turkey has been implementing an ever increasing number of tariff and non-tariff barriers over time;

D. whereas sectors that are currently excluded from the customs union, such as agriculture, services and public procurement, are important;

E. having regard to the will of the parties to expand and improve trade relations and the decision to launch negotiations to modernise the Customs Union and extend its scope;

1 . Addresses, in connection with the trade negotiations between the EU and Turkey, the following recommendations to the Council and the Commission:

a regarding the general background and scope:

(i) while recognising Turkey’s strategic role due to its geographical proximity and to its historical, cultural, political and commercial ties with the EU, the development of a new trade framework has to be an integral, albeit specific, part of the EU’s global policy and, in particular, of the principles and objectives of its external action;

(ii) the strengthening of trade relations between the EU and Turkey should be set against the background of the common will of the parties to share the set of values and principles laid down in the EU’s founding treaties, including the Charter of Fundamental Rights, and to work together to implement them fully and comprehensively;

(iii) with a view to the start of the negotiations, the economic, social, political and legal conditions under which they are to take place and which, in any case, will determine the effects of those negotiations on citizens’ lives, should be specifically and carefully considered;

(iv) the current structure of the Ankara agreement should be considered inadequate in terms of the evolution of the EU’s trade policy, in that: (a) it does not consider specific issues such as sustainable development, protection of social rights and labour, gender equality, protection of food safety and health, SMEs or the protection of foreign investments; (b) it does not take account of the specific role of the European Parliament and of the national parliaments; (c) the provisions concerning the settlement of disputes reflect the political nature of the agreement;

(v) the agreement on the modernisation of the Customs Union and the strengthening of trade relations between the EU and Turkey will have to be applied fully and equally to all Member States;

(vi) the entire negotiating process should be based on the principles of transparency and full access to the proceedings;

b regarding the modernisation of the Customs Union:

(i) a prerequisite for the modernisation of the Customs Union is that Turkey should refrain from adopting any protectionist or restrictive measures, such as the unilateral imposition of customs duties and non-tariff barriers on goods produced in the EU, including goods released for free circulation, or government policies to reduce imports;

(ii) the proper functioning of the Customs Union is closely linked to the harmonisation and alignment of Turkish legislation with the acquis communautaire, in particular with regard to protection of intellectual property, competition and state aid;

(iii) the fight against counterfeiting, piracy, the trade in wild animals and food fraud are important aspects of the Customs Union;

(iv) the harmonisation of customs systems is vital for the development of trade between the EU and Turkey; to that end, the Commission should strengthen customs cooperation and the exchange of information between the Member States and Turkey;

(v) it is important to introduce a dispute settlement mechanism that is able to operate within a framework of impartiality and legal certainty in keeping with the rules and practice of the WTO;

(vi) in order to enable Turkey to become more involved in the decision-making process related to the EU’s trade policy, and provided there is significant progress in terms of convergence and legislative harmonisation, it would be helpful to allow Turkey access as an observer;

(vii) in relation to the negotiation of trade agreements between the EU and third countries in which Turkey does not participate, methods of involvement that respect the sovereignty and negotiating independence of the EU need to be considered;

cregarding a new trade framework:

(i) when major sectors such as agriculture, services and public procurement are included in the new framework for trade relations between the EU and Turkey, it is important that the new structure is defined on the basis of Articles 207 and 218 TFEU;

(ii) the liberalisation of the sectors that are not currently included in the Customs Union should take place in a progressive and binding manner, by measuring its impact on businesses, particularly SMEs, consumers and the environment. To that end, parliamentary institutions, both at EU level and nationally, can play an active role in liaising and holding talks with stakeholders and civil society;

(iii) negotiations should focus on the active promotion of decent work for all and the effective fight against national practices which seek to undermine the social and environmental substance of work for the purpose of promoting domestic production and attracting foreign investment;

(iv) the liberalisation of agricultural products should be conditional upon reform of Turkish legislation on grants and export subsidies in order to avoid distortionary effects on the CAP system. Special consideration should be given to the impact on small-scale farmers regarding those categories of product that are vulnerable to competition;

(v) the lack of harmonisation of plant health rules is a major barrier to trade in agricultural products; removal of that barrier should, however, be contingent upon compliance with the high quality standards applied by the EU, also taking into account the risk of fraud;

(vi) owing to its importance and impact, the services sector should be liberalised on the basis of stringent transparency criteria, full reciprocity, non-discrimination and legislative harmonisation, with the exclusion of audiovisual services and services of general economic interest;

(vii) in areas such as the digital economy, telecommunications, postal services and financial services, attention should be paid to aspects relating to data protection; in the transport sector, the current quota system should be maintained;

(viii) rigorous procedures should be established regarding the entry and residence of professionals;

(ix) the new EU-Turkey trade framework should lay down specific provisions for the protection of investments;

(x) the inclusion of the energy and commodity sectors represents strategic added value in EU-Turkey trade relations, provided that an open, competitive and non-discriminatory economic environment is established;

2. Instructs its President to forward this resolution to the Council and the Commission and the governments of the Member States.

EXPLANATORY STATEMENT

The European Parliament is required to play a decisive role in the EU’s trade policy.

Its duty to express its views on the general framework for trade relations with Turkey and on the need to modernise the Customs Union has become a particularly delicate task, as it has to operate within two constraints: on the one hand, it has to safeguard the specific features of a trade agreement within the EU’s global strategy, as interpreted by the founding Treaties, while on the other, it needs to be fully aware of Turkey’s current specific political and institutional juncture.

These factors have been fully taken into consideration to safeguard Parliament’s ultimate responsibility in terms of decisions relating to EU trade agreements and the subsequent right of Members to be kept constantly and fully informed during all the stages of negotiations, also in view of Parliament’s will to consider Turkey’s accession process to have been halted and to keep channels for dialogue and cooperation open.

There is also an awareness that decisions taken today will have a long-term effect and should therefore be structured in such a way as to enable adjustments to future situations to be made whilst at the same time building solid ground for cooperation between institutions.

It is therefore imperative that the agreements currently in place are actually implemented and the goal of full legislative harmonisation achieved.

Attention has also been paid to the needs of SMEs, respect for the rights of workers and consumers and sustainable growth. Consideration has been given, in addition, to issues relating to intellectual property rights, which will form a significant part of the future economy.

Lastly, this work has been motivated by and based on the will to move the specific sector in question forward whilst at the same time adding value to the entire EU strategy.

It has thus been decided to add value in institutional and political terms by putting forward specific proposals regarding the trade framework and the modernisation of the Customs Union, while strengthening support for the social and political values typical of the EU by recommending progressive, certain and meaningful negotiating tools and content.

WORKING DOCUMENT

FOREWORD

The issue we are dealing with is far from simple: on the one hand, we have to assess the utility of a trade agreement (that is, the EU-Turkey Customs Union), and the potential benefits of strengthening it; on the other, we cannot forget our partner’s specific political and institutional context, in light of recent events.

I believe that our work must be guided by two considerations:

° On the one hand, the specific nature of our work as the INTA Committee, which is sectoral and focused on trade relations;

° On the other hand, the awareness that our action fits within and must collaborate with the more global, strategic approach chosen by the EU for its relations with the rest of the world; and this approach also contains a definite values-based dimension.

We will be able to say that we have fulfilled our task if we can make progress in our own sector while at the same time bringing added value to the totality of the EU’s action.

It will help us in our reflections to consider some strategic dimensions, such as the temporal one. The current Customs Union has influenced our relations for 20 years; the agreement we reach, whatever form it takes, will probably have an equally long-lasting impact. We therefore have to bear in mind that we are working for today, tomorrow and the day after tomorrow as well; this must be clear to us and we must make it clear to all interested parties as well.

Another strategic dimension that constrains us is the spatial one: Turkey is our neighbour, it always has been and the progress of globalisation will bring it ever closer to us.

We are therefore working towards results that will feature increasingly in our own lives and will have an ever greater impact on us, and this requires attention. We are called to assess the big picture, knowing that the effects will be felt in the tiniest details as well: this is the reference scenario.

We probably also need to acquire new language: some of the technical options envisaged facilitate purely commercial aspects but set back the accession procedure; others propose the opposite.

This working document aims first of all to correctly situate the problem, taking into account the duration of the decisions that will be taken, their impact and the routes they will open or close, and also in light of the actors involved.

1. BACKGROUND

Leaving aside History and their shared geography, trade relations between the EU as an institution and Turkey formally date back to 1963.

The real turning point on the bilateral level is in 1995, when Ankara and Brussels decide to launch the Customs Union, which still today constitutes the point of departure for every type of economic and trade relation between the EU and Turkey. This agreement, which is still in force, is considered the precondition for Turkey’s integration into the European market, and has brought the country into the top twenty countries in the world in terms of GDP.

Turkish development of recent years has raced forwards, but is not free of contradictions. Regional instability after the so-called ‘Arab Spring’, on the one hand, and recent internal developments on the other, have created a difficult climate and caused uncertainty among foreign investors. The massive reconfiguration of the political, administrative and judicial apparatus increases fears for the effective maintenance of the rule of law.

Modernisation of the Customs Union takes place at a crucial moment for relations between the European Union and Turkey. The two sides are called on to redefine their trade relations, also in order to avoid the risk of the sole channel that is actually open becoming blocked, with the result of distancing Ankara and Brussels even more at a time when new strategic markets are opening (for example Iran or Central Asia).

In light of this, the Ankara Agreement must be revised with regard to two constraints: it must have an economic and trade foundation, and it must also seriously and practically consider the global political and institutional situation.

2. THE CURRENT FRAMEWORK OF THE CUSTOMS UNION

The legal framework for trade relations between the EU and Turkey is regulated by the Association Agreement of 1963 (the so-called Ankara Agreement), by the Additional Protocol of 1970 and by a series of Decisions (2/76, 1/80, 3/80 and 1/95) adopted by the EU-Turkey Association Council. Decision 1/95 lays the foundations for the rules on trade in goods in the Customs Union. Together these acts were supposed to set out a route that, through the customs union and harmonisation with the four freedoms, was supposed to lead to Turkey’s accession. In December 1999, Turkey was officially recognised as a candidate country, and the relevant negotiations began in 2005.

Over these twenty years, the Customs Union has been an important instrument that has accompanied Turkey’s economic evolution, encouraging the strengthening of the Turkish internal market, export to the EU and import from the EU, progressive alignment with the acquis communautaire, and an increase in choice for Turkish consumers, not to mention the turnover generated through trade exchanges. The different category organisations – both Turkish and European – have reiterated their hopes for a new agreement on the Customs Union. This point of view is also shared by the analyses of the World Bank.

On the basis of the work carried out by the EU and Turkey’s Senior Officials Working Group, the Commission and the Turkish government announced their intention to open negotiations on strengthening bilateral trade relations in May 2015.

Critical aspects of the functioning of the Customs Union

The Rapporteur believes it is important to listen to stakeholders (through the Monitoring Group):

The European Union: FTA (Free Trade Association); FESI (Federation of the European Sporting Goods Industry); UNITEE (New European Business Confederation); EURATEX (European Textile Industries); ESF (European Services Forum); EUROMETAUX; Digital Europe; Spirits Europe; EFPIA (European Federation of Pharmaceutical Industries and Associations), Copa-Cogeca, Coldiretti, Conftrasporti.

Turkey: The Ministry of Economy; The Permanent Representation of Turkey to the EU; TÜSİAD (Turkish Industry and Business Association ); Istanbul Economics; TOBB (Union of Chambers and Commodity Exchange of Turkey); UND (International Transporters Association); TÜRKONFED (Turkish Enterprise and Business Confederation).

In summary, the results indicate a substantial and positive recognition of the benefits brought by the Customs Union in terms of trade and investment opportunities both for European and Turkish businesses, but these are accompanied by a considerable number of causes for concern.

The European perspective:

a) The stiffening of Turkey’s customs position on a whole range of European goods. For example, the Turkish government’s decree 6692/2014 of 2014 imposed a series of duties (from 30 % to 50 %) on shoes originating outside the EU that were imported into the country; this decree creates costs for European businesses estimated at between 30 and 45 million euro. Other data estimate the cost of the duties at EUR 82 million, the cost of the supplementary tests at EUR 1.3 million, the average delay in receiving the results of the tests at 19 days (at a cost of about EUR 2 million), and the proportion of actually non-compliant shoes out of those examined at 27 % (out of only 0.5 %).

b) Too slow progress in aligning Turkish legislation with the acquis communautaire, particularly as regards state aid;

c) The lack of a dispute resolution system;

d) The failure to apply the Ankara Protocol in relation to Cyprus.

The Turkish perspective

a) Inability to participate in the European Union’s decision-making process: Turkey is obliged to align its own customs and trade legislation with European law, without being able to intervene in the decision-making process that precedes it;

b) Asymmetry in free trade agreements between the EU and third countries. The EU currently has 48 FTAs in force, but only 19 of these include Turkey, and this is often said to be due to some third countries being unwilling to negotiate a treaty with Turkey. The application of the so-called Turkey Clause is invoked as necessary, with particular reference to the ongoing negotiations on TTIP;

c) The difficulties in granting visas, in particular for businesses and workers;

d) The use of trade defence instruments.

3. NEGOTIATIONS FOR A NEW STRUCTURE FOR TRADE RELATIONS

An aspect for future negotiations, however, is not only the obsolescence and resentment accumulated in the current legal framework, but also its narrowness in that it excludes areas that are fundamental for trade relations, such as agriculture, services, public procurement, raw materials, regulatory cooperation, sustainable development, SMEs and investment protection. Reflection on these themes cannot be separated from the other open questions, such as workers’ rights and the assessment of the social impacts on the European internal market more generally.

The evolution of the current legal framework can continue in three possible scenarios:

§ Maintain the status quo, that is, the 1995 Customs Union without any changes;

§ Modernise the Customs Union to make it more balanced and operative, and strengthen it at the same time with an agreement to cover the excluded sectors;

§ Replace the Customs Union with a Deep and Comprehensive Free Trade Agreement (DCFTA) in the model of those concluded by the EU in recent years.

The evaluation of the different options and progress in their implementation is a delicate and technical matter. Convergence between the interests and visions of both parties must be found.

Turkey, for example, would be in favour of liberalising services, but less so for agriculture and public procurement. Today, services constitute 70 % of the Turkish economy, but at the same time this is a sector that is burdened with many regulatory barriers. Agriculture presents difficulties for the EU, particularly as regards phytosanitary regulations. Furthermore, complete liberalisation in this area requires paying particular attention to the specificities of Mediterranean European agriculture, for problems of fraud and counterfeiting. Liberalisation of transport quotas, which Turkey has repeatedly requested, risks incentivising social dumping if introduced without harmonisation of current rules.

In this regard, the results of the European Commission’s impact assessment, which will be published with the proposed mandate, will be useful.

Finally, there is the open question on energy; that is, if it is desirable to include a chapter on energy in the negotiations, since Turkey is an important partner for the security and diversification of the EU’s energy supplies.

CONCLUSIONS

Bearing in mind what was said at the start of this working document, we believe it appropriate that the drafting of the Resolution, which is our competence, be done only after having examined the proposed mandate from the Commission, precisely in order to allow us to assess it not only within the scope of our institutional operations (INTA), but also placing it within the global context of EU action.

We will therefore be able to give real added institutional and political value if we can achieve two types of results:

o Formulate concrete, precise and attainable proposals on the specific case of the Customs Union

o Strengthen, at the same time, the support for social values, those of trade unions and the EU’s own rights through progressive and binding negotiation instruments (such as the extension of the scope of competence of the agreements).

Our Committee is faced with a difficult challenge which, if overcome, will allow us to be concretely useful both to the EU and to Turkey.

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DRAFT OPINION
of the Committee on Foreign Affairs
for the Committee on International Trade
on Towards a new trade framework between the EU and Turkey and the modernisation of the Customs Union
(2016/2031(INI))
Rapporteur: Kati Piri

SUGGESTIONS

The Committee on Foreign Affairs calls on the Committee on International Trade, as the committee responsible, to incorporate the following suggestions into its motion for a resolution:

1. Stresses that modernisation of the Customs Union will further strengthen the already strong economic ties between Turkey and the European Union (EU) and will keep Turkey economically anchored to the EU; believes that strengthening trade relations could bring concrete benefits to citizens in Turkey and EU Member States, and also contribute to both sides engaging in a positive reform agenda while mitigating political tensions with Ankara on the deteriorating situation of the rule of law and fundamental freedoms in the country;

2. Notes that the upgrade of the EU-Turkey trade relations forms an essential part of the efforts made by the EU and Turkey to deepen their relations in key areas of joint interest identified at the EU-Turkey Summit of 29 November 2015 and in the EU-Turkey statement of 18 March 2016; states that this is even more important now that the accession talks are stalled despite the significant short- and long-term strategic interests for both the EU as Turkey, such as trade, migration, the fight against terrorism, energy and stability in the neighbourhood;

3. Takes note of Turkey’s recent rapprochement with Russia and the statements of the Turkish Government regarding the country’s possible accession to the Shanghai Cooperation Organisation; reiterates that the EU is Turkey’s main trading partner and that two thirds of the Foreign Direct Investment (FDI) in Turkey comes from EU Member States; emphasises that the Customs Union requires Turkey to align its legislation with the acquis communautaire;

4. Underlines the growing geopolitical and economic challenges facing Turkey as a result of instability in its neighbourhood, terrorism and the aftermath of the coup attempt of 15 July 2016; stresses that while the chaos and instability in the Middle East, the Russian annexation of Crimea and intervention in Ukraine, are adversely affecting Turkey’s foreign trade within its neighbourhood, an upgraded Customs Union can help Turkey to overcome the challenges it faces, and contribute to transforming Turkey into a pillar of stability and an engine of growth for its citizens, if the necessary reforms are made by the government;

5. Welcomes the fact that Turkish regulatory alignment with EU standards resulting from the conclusion of the Customs Union has made the country more competitive; believes that the modernisation of the Customs Union would provide an opportunity for Turkey to revisit its growth model and escape from the ‘middle income (country) trap’; welcomes the fact that the deepening of the Customs Union will have a positive influence on Turkey’s economic governance and strengthen Turkey’s independent regulatory institutions;

6. Calls on the Commission to include political benchmarks in the upgraded Customs Union between Turkey and the EU on human rights and fundamental freedoms.

EXPLANATORY STATEMENT

The European Commission asked the Council for a mandate to launch talks with Turkey to deepen the existing 21-year-old EU-Turkey Customs Union. The Customs Union was negotiated with the understanding that it would be a transitional arrangement to strengthen the Turkish economy while Turkey moved toward full membership of the EU.

While Turkey adopted the EU regulatory standards and was granted preferential access to the EU’s internal market, this economic cooperation increased the competitiveness of Turkish manufactured products. As a result, bilateral trade increased almost six-fold, making Turkey the EU’s sixth-largest trading partner, while the EU became Turkey’s largest.

With the evolution of the economic environment and the significant increase of EU-Turkey trade, the current Customs Union is becoming less and less equipped to deal with the modern day challenges of trade integration.

Turkey was declared an official candidate to join the EU in 1999, and accession talks were started in 2004. After a period of bold democratic reforms, Turkey during the last three years has been backsliding on moving closer to meet the EU’s political criteria. In the European Parliament, there are serious concerns about the state of the rule of law, the freedom of press, and the respect for fundamental rights. The situation further deteriorated in the aftermath of the 15 July coup attempt, resulting in the EP’s call to temporary freeze the accession talks.

The temporary freeze of the accession process is not a permanent state, and the EP said that it will review its position when the state of emergency is lifted in Turkey. For the accession talks to be credible, it speaks for itself that the path to democratic reforms will have to be refound by the Turkish government.

In the meantime, Turkey is a strategic partner for the EU. It is in the EU’s interest to maintain good cooperation with Ankara on trade, migration, energy, foreign policy, and anti-terrorism. The modernisation of the Customs Union could strengthen the bilateral relations and mitigate political tensions on fundamental rights. While political integration is currently stalled, enhancing economic cooperation could be a possible joint step forward. It is however important to include a human rights clause in the upgraded agreement in order to guarantee against any further deterioration of Turkish democracy.