Turkey, UK safeguard $25bn worth of trade in post-Brexit deal

Ankara, Turkey – The post-Brexit trade deal between Turkey and the United Kingdom has safeguarded $25bn worth of business between the nations that find themselves two of the largest economies on the fringes of the European Union.

Turkish President Recep Tayyip Erdogan described it as “the most important trade deal” since Ankara signed a customs union with the EU in 1995, while the UK’s International Trade Secretary Liz Truss said it would lead to a “new, more ambitious deal with Turkey in the near future”.

Ruhsar Pekcan, Turkey’s trade minister, said: “Without a deal, about 75 percent of Turkish exports to the UK would be subject to tariffs, causing the loss of about $2.4bn; this risk is now gone.”

The free trade agreement (FTA) that came into effect on New Year’s Day replicates ties that existed when the UK was still in the EU, which became void after December 31.

It ensures continued tariff-free trade on non-agricultural products between the UK and Turkey.

Because of Ankara’s customs union with the bloc, Britain first had to sign its own deal with Europe before sealing the Turkey treaty.

Gulcin Ozkan, vice dean and professor of finance at King’s College London, said although the deal was “business as usual” it was a “huge relief” for both countries relative to the scenario of a no-deal Brexit and the absence of an FTA between Turkey and the UK.

From the Turkish perspective, the Brexit deal, rather than the FTA, could have greater implications.

“This actually opens up new territory for Turkey in negotiating a renewed and updated customs union with the EU,” said Can Selcuki, general manager of Istanbul Economics Research.

“For the first time, a large country in the periphery of Europe has made a trade deal with the EU and that could provide a model for the future of the Turkey-EU customs union and that provides the most significant partnership going forward.”

Pressing for reform

Turkey has been pressing for reform to its customs union with the EU to reflect the realities of 21st-century trade brought about by developments in information and communication technologies.

However, deteriorating relations between Ankara and the EU have slowed talks. The agreement with the UK, meanwhile, requires negotiations over the next two years to expand the deal to possibly include the agriculture and services sectors.

“When the customs union was signed, some things weren’t important such as e-trade,” said Sedat Aybar, professor of economics at Istanbul Aydin University.

“The FTA with Britain, as a living document, is going to be worked on and include e-trade and services over the next two years as it is upgraded. This will pave the way for the EU to revise the customs union,” Aybar said.

“It’s a very dynamic, exciting and advantageous process.”

Problematic ties

Both the UK and Turkey have had problematic relations with the EU in recent years.

The UK resisted greater political integration within the EU, while Ankara has been angered by criticism of its human rights record and foreign policy.

In favouring a decentralised EU, the UK supported Turkey’s 2005 membership bid, which has been stalled since 2016, while France and Germany sought closer integration between existing members, Ozkan said.

As Paris and Berlin denounced mass arrests in the wake of a 2016 coup attempt in Turkey, London soft-pedalled on confrontation with Ankara.

The UK was the first Western power to send a minister to Turkey after the failed coup, which came less than a month after the Brexit vote.

This approach led to criticism that the UK was ignoring issues such as human rights in favour of its commercial interests.

“It’s a very mercantile approach to foreign relations,” said Soli Ozel, international relations professor at Kadir Has University in Istanbul.

“You can call it either pragmatic or opportunistic but, at any rate, the decade of the 90s is no longer with us. That’s when at least everybody pretended they cared about human rights, rule of law and democracy,” Ozel said.

He added: “Turkey and the UK have been courting one another pretty seriously over the course of the last few years, even before Brexit. It’s part of this Global Britain agenda to actually have good relations with Turkey, which Britain sees as both an important market and also an important strategic partner.”

The countries’ growing closeness was “in some ways ironic, given the prominence of anti-Turkey rhetoric in the leaver’s campaign ahead of the EU referendum in June 2016”, Ozkan added.

The fifth-biggest FTA

The deal is the fifth-biggest FTA the UK has recently negotiated after those with Japan, Canada, Switzerland and Norway.

Turkey, the world’s 19th largest economy, with a gross domestic product (GDP) of $761bn in 2019, is geographically the closest significant, non-EU economy to Britain.

The countries have a trade partnership dating back centuries. In 1581, the Ottomans granted the first preferential agreements, known as capitulations, to English traders but trade between the British Isles and the Ottomans’ predecessor, the Byzantine Empire, dates back to at least the sixth century.

The UK is Turkey’s second-biggest export market after Germany but the EU customs union with Turkey meant the FTA could not be finalised until a Brexit deal was in place, raising fears of hefty tariffs and border delays for Turkish exporters.

Ankara enjoys a significant trade surplus with Britain, exporting goods worth more than double those it imports, according to the Turkey Statistical Institute.

British investments

The UK is also the fifth biggest foreign investor inside Turkey with more than 3,000 British companies operating in the country, including giants such as Unilever, Shell, BP, Vodafone and HSBC. Some 7,600 British firms export to Turkey.

British exports to Turkey are largely made up of motor vehicles and parts, industrial machinery, pharmaceuticals, mechanical appliances, iron and steel.

Turkey’s main exports are white goods, cars, electrical equipment, precious metals and textiles to the UK.

Vitally for London, many of its exports to Turkey are reimported in the form of finished goods.

In the automotive industry, Ford sends parts to Turkey for assembly into the Ford Transit range of light commercial vehicles by Ford-Otosan, its Turkish joint venture. A third of the finished vans are then exported to the UK.

“Given that Ford and Ford-Otosan business constitutes more than 10 per cent of the total trade volume between the UK and Turkey, this trade agreement is extremely significant for us and will help to secure jobs in both countries,” Ford Europe’s President Stuart Rowley said.

According to Ozkan, the Turkey-UK deal offers both countries the chance to “pursue mutually beneficial initiatives, at a time when both countries are facing major economic and political challenges, which may provide additional impetus to both making the best of such opportunities”.