Turkey Is In The Critical Junction: Modernize Customs Union With Rule of Law or Else

April 19, 2024
by Mehmet Demirbaş, published on 19 April 2024
Turkey Is In The Critical Junction: Modernize Customs Union With Rule of Law or Else

On April 17, 2024, the Dutch parliament made a significant decision concerning Turkey. It urged the Dutch government to condition negotiations aimed at modernizing the customs union agreement between Turkey and the European Union. This resolution was prompted by Turkey's failure to adhere to the rulings of the European Court of Human Rights regarding Osman Kavala, Selahattin Demirtaş and others. Such actions underscore the mounting pressure within EU member states for Turkey to uphold democratic principles and the rule of law, particularly concerning human rights and judicial autonomy. It is imperative to scrutinize Ankara's customs union agreement amidst the escalating instances of human rights violations that are increasingly impacting Turkey's economic performance.

Background of Turkey’s Customs Union Agreement With the EU

Especially after World War II, Turkey has aligned itself with the axis of democratization within the framework of transatlantic and European institutions. In this context, Turkey initiated its relations with the precursor to the European Union, the European Economic Community (EEC) in 1959. It signed the Ankara Agreement, a association agreement, with the EEC in 1963. With the Additional Protocol signed in 1970, it was decided that Turkey would complete its customs union with the ECC after a transition period. During this transition period, Turkey applied for full membership in the European Community in 1987, and the Customs Union Agreement, known as Decision 1/95 of the Association Council, entered into force on January 1, 1996, eliminating customs duties and equivalent fiscal measures on industrial and processed agricultural products in trade between Turkey and the European Union.  

In the early years of the implementation of the customs union, there was a significant optimistic atmosphere economically and commercially. Turkey was granted candidate status in 1999, and in 2005, negotiations for full membership began. Despite some setbacks, Turkey did not deviate from the path of the European Union within the framework of the EU reform process in the first decade of the 2000s.

The Turkish economy also gained competitive advantages, especially in sectors such as automotive, textiles, apparels, durable consumer goods, and consumer electronics, thanks to the opportunities provided by customs duty-free exports to the large and rich European market. Even Far Eastern automotive brands established automotive factories in Turkey to export to the European market duty-free, and many European-based automotive companies moved their production bases to Turkey or modernized their existing production bases to reduce costs and benefit from skilled Turkish labor.

During this period, Turkey broke export records, and foreign direct investment in Turkey reached record levels along with the EU reform process. Within the context of harmonizing Turkish legislation with EU legislation, significant regulations such as the Competition Law and the Public Procurement Law were implemented in line with EU standards, contributing to the market economy and investment environment in Turkey.

Regression of Turkey’s Democracy

Until 2011, the EU reform process and democratization initiatives, along with export and investment records, had positioned Turkey as an important player in its region and global markets. The Erdogan government, victorious in the 2011 general elections, subsequently slowed down reform processes and even caused many reform packages, especially concerning public procurement legislation, to regress.

The rollback of reforms in public procurement legislation led to more corruption, as revealed with the bribery and corruption operations in 2013. After this period, Erdogan chose to sideline the law and removed judges, prosecutors, and police officers involved in these investigations from their duties, threatening judicial independence.

Following this period of the erosion of the rule of law and judicial independence, Erdogan has further solidified his authoritarian regime after the attempted coup on July 15, 2016. Human rights violations, torture, crimes against humanity, violations of property rights, and many other illegal actions became the subject of international human rights reports, and numerous cases were brought before the European Court of Human Rights.

The weakening of Turkish institutions affected the functioning of the economy as well. Interventions in the daily decisions of Turkey’s Central Bank have become a hallmark of this period. As per the regulations, the Central Bank, which should be independent and whose governors term is five years, saw six changes of governors in the last five years. President Erdogan personally determined monetary policy and interest rates.

All these developments were perceived as negative signals by international investors, and Turkey's depiction on the Financial Action Task Force (FATF) grey list indicated the state of the Turkish economy. Especially in an environment where investors were fleeing Turkey, and with the impact of the Russian sanctions in recent years, it was observed that Turkey has attracted significant dirty capital and illicit money. And as usual "dirty money drives out clean money."

Return to Rational Policies

In this period, the combination of record budget deficits, current account imbalances, and unsustainable public spending, compounded by the Central Bank's efforts to bolster Erdogan's ill-advised financial ventures, has eroded Turkey’s financial stability. Consequently, the Turkish Lira has experienced historic depreciation against global currencies, significantly impacting the purchasing power of Turkish citizens. Besides, President Erdogan has pushed populist policies to the limit before the 2023 presidential elections.

In face of insurmountable challenges in the economy, Erdogan had to appoint Mehmet Simsek, well-known in international financial circles, as the Minister of Finance and Treasury after the election in 2023. In his initial statements, Mehmet Simsek emphasized the urgent need to revert to rational economic policies, drawing attention to the challenges characterized by irrational economic strategies. 

In the 2024 local elections, in an environment where populist policies were not implemented, dissatisfaction with the economic situation among the public increased, and Erdogan lost an election for the first time in his history, falling to the position of the second party.

Although the Customs Union Agreement, in effect since January 1, 1996, has provided a significant boost to the Turkish economy and trade, it is not fully capable of meeting the needs of today's global economy and trade conditions. Especially clauses such as the exclusion of services trade, the exclusion of agricultural products, and the necessity for Turkey to negotiate separate free trade agreements with countries with which the European Union has already signed such agreements have rendered the agreement's applicability challenging. Hence, Turkey has announced its willingness to initiate negotiations aimed at revising the terms of this agreement.

By returning to the rule of law, implementing decisions of the European Court of Human Rights, and guaranteeing investor capital and property rights, Turkey can primarily achieve the modernization of the customs union agreement. This would actually mean a return to rational policies, exactly what Mehmet Şimşek desires, and it would pave the way for a more sustainable, structural economic development for Turkey. Otherwise, the Turkish economy, deprived of its sound economic policies and now a hub for money laundering, may become a new Venezuela, where millions of people have left for the their richer neighbors, in this case the EU countries.    

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