TEPAV
Turkey, April 2014

1. I congratulate the World Bank for an outstanding piece. As a former member of the World Bank Group, I am indeed  very proud of the institution’s  work on this.  I also congratulate the EC for sponsoring this study.

2. It is a terrific study coming at the right time in the history of the relations between the EU and Turkey.

3. Turkey has been a remarkable story over the past 15 years or so.  More than a doubling of GDP per capita from slightly over $4,100 in 1996 to now almost $11,000 in 2013.

4. While the aggregate volume of foreign investment inflows totaled only US$14.6b during the 80-year period from the establishment of the Turkish Republic to 2003, this figure rose to US$123.7b during the last decade. That is, about 8 times the cumulative amount from 1923 to 2003!

5. The customs union, in this regard, has been a major instrument of integration of the Turkish economy into the EU and global markets, offering powerful tools to reform the Turkish economy. Turkish producers of industrial goods are protected by tariffs from external competition to exactly the same extent as EU producers, and they face competition from duty-free imports of industrial goods from world-class pan-European firms. In return, Turkish industrial producers have duty-free market access to the European Economic Area.

6. Trade liberalization achieved through the customs union has thus successfully moved the Turkish economy from a government-controlled regime to a market-based one, and Turkish producers of industrial goods have performed remarkably well.

7. The customs union also offered Turkey the opportunity to establish new institutions, and modernize and upgrade rules and disciplines required for the elimination of technical barriers to trade, and for the implementation of the EU’s competition, industrial property rights, and contingent protectionism policies.

8. My believe is that the Custom’s union was certainly a boon to Turkey although I do not for one moment believe that it is THE reason for Turkey’s success.  When you peel back the onion I am sure we will see that a whole slew of other positive institutional and regulatory changes also contributed to the spurt in recent growth of the Turkish economy.

9. The key question is where Turkey goes from here?

10. I think the World Bank report has identified a host of agendas that both the EU and Turkey can embark on to enhance dialogue further.

11. In this regard, talking rather than ranting is perhaps the best way forward.

12. The customs union has certainly worked but the report is saying that it is clearly running into problems.  The structure of the EU has been changing and the content of the customs union agreement should be revised accordingly. I think many would agree with this.

13. Turkish business, for example, has voiced increasing discomfort with the customs union agreement, maintaining that it doesn’t work in Turkey’s favor, especially because of the FTAs the EU has concluded with third countries that, de facto, because Turkey is not a member of the EU, it will have to accept on the sell side and suffer restrictions on the buy side.

14. For example, the Turkish side is worried because Turkey needs to apply the same tariffs as the EU does to industrial products imported from third countries. And the problem is that Turkey, while having to lower customs duties in accordance with a potential FTA the EU could sign with the US— or the so-called TTIP—can’t benefit from the lowering of the same by the US as it is not a member of the EU. My TEPAV colleagues tell me that a Brookings report says that if Turkey is left out of the TTIP, about 95,000 people might lose their jobs and the overall cost to the economy will be about $20 million.

15. Turkey and its private sector should certainly be against unfair competition from within or outside of the EU.  It is right to make this an issue of importance.

16. More problematic is that Turkey does not seem to be seated at the table when these important FTA discussions are taking place.

17. A second issue I see is in the realm of the so-called non-tariff barriers.

18. Several of the issues I read about in the World Bank report seem to border on NTBs. Visa and transportation issues feature prominently.  I do hope that the parties can sit at the table to tackle such issues as they can make or break future trade growth. From Turkey’s point of view, the practices currently on the EU side just do not seem to be pragmatic.

19. To end, I have just one question to raise to bring the debate to the next level.

20. Lots of Turkey’s primary issues in competitiveness goes beyond just trade agreements.  Many of turkey’s industries are as yet uncompetitive in the global scene.  In Europe, Turkey currently occupies only 1.13 percent of Europe’s imported inputs in manufacturing. Not something to celebrate even though this represents an increasing share over the past decade.

21. If Turkey’s industrial leaders are to have high aspirations, should this not be much higher.  And let alone industrial inputs, can Turkey be moving into the higher value added services end?  In many of today’s industries, services are occupying a larger share of manufacturing value added.  That is, within manufacturing itself, services are playing a critical part.

22. Almost all assessments point in Turkey point to a lack of or a slow down of Turkey’s move towards higher value added industrialization.  I have been puzzled by why a country (17^th largest by GDP) cannot boast of more international brands than it currently has?  Can Turkey move on to high-income status if its global presence is not felt more acutely?

23. My point is simply this.  Trade growth is an output manifestation of fundamental competitiveness.  Customs union or not, Turkey’s real challenge is how it can more quickly move up the value chain.  This calls for supply chain competitiveness.  It calls for escalating firm level competitiveness, skills, and even bigger strides toward creating truly global industries that can match up to the likes of say a, S. Korea.

24. So, I hope that the debate on what next for customs unions does not relegate other important issues.  Customs union is not an end-all.  It is the means to an end.  An end that should manifest itself with strong productivity growth, which in turn translates to heightened competitiveness.

25. Thanks for offering me this opportunity. And, thanks to Martin and his team for this outstanding report. I trust you will have a terrific set of discussions today.