Economic liberalization and the elimination of trade barriers are crucial for any country that is well integrated in to the world economy and aiming at increasing its trade volume. Such measures are not only prescribed by the IMF and World Bank as the sine quo non of the economic development aspired by the emerging countries but also adopted as part of the Washington consensus that aimed to assist the crisis ridden developing countries to tackle with their economic problems. Within the framework of such economic liberalization measures, emerging economies like Turkey is expected to enhance their competitiveness and free trade agreements are considered one of the chief tools to ensure that economic liberalization provides the intended advantages for the national economy alongside strengthening Turkey’s economic ties with the countries that the agreements are signed.
Free Trade Agreement or Customs Union?
Following the technological and industrial developments and increasing demands, global trade and economy required some alterations. At that point, terms like Customs Union or Free Trade Agreement (FTA) occurred concerning export and import issues of trading countries and serve the purpose to get international trade more efficient. In this context, Customs Union arises as an economic integration model based on the principle of free movement of goods, in which all the contracting parties agree on a common commercial policy and common competition rules. In order to do so, contracting parties shall eliminate existing customs duties and quantity restrictions, measures and also a common customs tariff is imposed to the third countries. In other words, a customs union involves internal free trade and common external tariff.
Free Trade Agreements (FTA) however, are the agreements that enable contracting parties to set up an internal system regarding import and export, in which all customs tariffs and barriers are eliminated or reduced for the contracting parties and contracting parties are not obligated to impose common customs tariffs to the third countries. The rule of origin is the basis of FTAs where the signatories benefit from the preferences conditioned in. Although these agreements have removed many impediments to trade, they have done little to curb the use of one type of barrier—the antidumping tariff. In that case, a government may impose such a tariff on imports from select countries if it determines that the imports are being sold at less than a fair price – or dumped – in domestic markets and that the pricing of these imports is harming, or threatening to harm, domestic producers of the same goods.(1)
Free Trade Agreements of Turkey
Currently, there are 17 FTAs in force; namely, EFTA, Egypt, EU, South Korea, Albania, Bosnia and Herzegovina, Chile, Macedonia, Georgia, Israel, Jordan, Mauritius, Montenegro, Morocco, Palestine, Serbia, Syria, Tunisia. The FTAs with Lebanon and Kosovo shall be in effect after the completion of internal ratification procedures. In addition, Turkey has started FTA negotiations with 13 countries/country blocs; namely Ukraine, Colombia, Ecuador, Malaysia, Moldova, Congo, Ghana, Cameroon, Seychelles, Gulf Cooperation Council, Libya, MERCOSUR and Faroe Islands and Turkey has launched initiatives to start negotiations with 13 countries/country blocs, which are the USA, Canada, Japan, Thailand, India, Indonesia, Vietnam, Peru, Central American Countries, other ACP Countries, Algeria, Mexico and South Africa.
Since 1996 Turkey is involved in EU Customs Union which constitutes the legal basis of Turkey’s FTAs. Accordingly, under the Customs Union, Turkey aligned its trade policy with the EU’s Common Commercial Policy.
Advantages of Free Trade in Turkey
The prominent advantage of FTAs is that the economy of contracting parties gets stronger along with increasing sales of lowered price goods and increasing profits of non reduced prices with free trade. In other words, by removing costly and delaying trade barriers – tariffs, quotas, conditions – consequently trade can be carried out easier and become effective and swift. Ultimately, with FTAs more goods and services can reach consumers at lower prices and increasing their standard of living.
FTAs reduce the dependency of countries which have to stick with in certain markets and provide partner countries to gain fair and equal standards. Accordingly, it improves the competitiveness of contracting states through the establishment of an open and competitive field of play.
FTAs ensuring that Turkish exporters compete at more advantageous or at least equal circumstances with other countries’ exporters and increasing mutual investments and raise the awareness of each other’s economic conditions and commercial potentials by enhancing mutual understanding among business people. Accordingly, Turkey does not adopt the identical content of the FTAs that the EU has signed as it is, therefore, in Turkey’s FTA negotiations, its own priorities regarding industrial and commercial policy are taken into consideration.
Free Trade can be also beneficial to non-industrialised countries through increased purchases of their labour services and materials by other contracting states. Since the countries are not the same in their production capabilities, economic advantages of international trade arise from the fact that countries are not all the same in their production capabilities. They vary from one another because of differences in natural resources, levels of education of their workforces, technical knowledge, and so on.
Although, free trade provides several advantages as a whole, it can cause some disadvantages to some people, especially the shareholders and employees of industries who lose money and jobs when they lose sales to imported goods. When some affected groups wield enough political power, they shall be able to obtain protection against imports under the terms of WTO rules and regulations. Therefore, by the end of the day, despite their sizable economic costs, trade barriers shall remain the same.
Opportunities for Foreign Direct Investors in Turkey
Since the customs tariffs and barriers are eliminated for the contracting parties of an FTA, foreign investors, who invested in Turkey, are also able to trade goods and services to any contracting parties even though foreign investor’s homeland is not a party of the FTA in question. Thus, foreign investors in Turkey can freely reach a market that may not be reached from their homeland by using advantages of FTAs. The substantial factor of the advantages aforementioned is principally based on Foreign Direct Investment Code of Turkey (FDI). Under the terms of the Code, all foreign investors in Turkey shall be subject to equal treatment with domestic investors according to FDI Code, in order to protect their rights and obligations. Moreover, with the FDI Code corporate income tax is reduced from 33% to 20% and there are tax benefits/incentives in Technology Development Zones, Industrial Zones and Free Zones which could include total or partial exemption from Corporate Income Tax, a grant on employer’s social security share, as well as land allocation.
FTAs are significant instruments that bring prosperity by establishing an environment leading to sustainable increase in foreign trade, which can be observed through the statistics. For the period of 2000-2012, while Turkey’s total exports increased by 446%, Turkey’s exports to its FTA partners have increased by 551%. Consequently, Turkey’s exports to its FTA partners, which were around 2, 2 billion dollars in 2000, reached 14, 5 billion dollars in 2012. For the same period, while total imports increased by 340%, imports from our FTA partners has increased by 280%. So, imports from FTA partners, which was around 2, 8 billion dollars in 2000, was recorded as 10, 7 billion dollars in 2012.
FTA partners of Turkey have a share of 9, 5 % in our export markets and a share of 4, 5 % in Turkey’s imports, with a trade surplus of 3, 9 billion dollars. In 2012, Turkey’s FTA exports have increased with Jordan, Egypt and EFTA countries. Additionally, there are 7 FTA partners in Turkey’s top 40 export destinations (Egypt, Israel, Switzerland, Georgia, Morocco, Lebanon and Tunisia).
Following the Customs Union with EU, Turkey becomes a desirable country for foreign investors in terms of production and exportation. A good deal of countries consider Turkey as a production base for electronics, nutriment, chemistry, durable consumer goods considering the geographical position of Turkey and easy access to its neighbour countries via land transportation.
1.GATT Article 6. Thomas Klitgaard&Karen Schiele, Free versus Fair Trade: The Dumping Issue, Current Issues In Economics and Finance, V.4 N.8, 1998