British fans of a customs union after Brexit would do well to take a long, hard look at Turkey.

Twenty-three years after it came into force, the EU's customs union with Turkey is buckling under the strain. Ankara claims that it is getting a raw deal and last year started imposing protective tariffs on a number of imports from the EU. European officials warn that these new duties undermine the whole point of an agreement designed to promote tariff-free trade.

At the heart of Turkish complaints lies a fundamental problem that would also affect Britain: As Brussels inks new trade accords around the globe, goods from those partner countries can enter the EU at reduced or zero tariff rates and then flow on for free into Turkey via the customs union. Turkish companies, however, do not benefit from reciprocal tariff cuts when exporting to those countries because Ankara is not part of the EU trade deals.

"The entire customs union is eroding," said Bahadır Kaleağası, secretary-general of the Turkish business association TÜSIAD, complaining that Turkey has to shoulder the impact of increased competition without being able to reap the benefits of new trade agreements.

Sinan Ülgen, a Turkish researcher at the Carnegie Europe think tank, spoke of an "economic threat" that has become increasingly pressing after the EU signed a flurry of new trade deals with Canada, Japan and Singapore in recent years. "These imports hurt the Turkish economy," he said.

"We need a neutral and transparent dispute settlement system to address a number of unfortunate issues concerning market access under the EU-Turkey customs union" — Sofia Bournou, BusinessEurope lobby

Turkey has reacted by using a specific clause in its customs agreement with the EU — Article 16 — to slap tariffs on a host of imports from EU trading partners, from cars to consumer electronics. Article 16 grants Turkey the right to impose duties on goods originally from trade partners from outside the EU in certain conditions.

These measures have, however, rung alarm bells in Brussels. European industry officials say those duties not only affect direct imports from third countries but also products assembled inside the EU that use certain parts from outside the bloc, severely disturbing trade flows. The underlying concern is that it could also set a bad precedent for future economic relations with Britain.

"[This is] creating serious problems for our businesses," warned Tiziana Beghin, an Italian 5Star Movement lawmaker and the European Parliament's rapporteur for the EU-Turkey deal.

“It is crucial to correctly apply the terms of the current Customs Union,” said a European Commission official.

Tariffs as leverage

One European industry official said that Turkey is using the Article 16 tariffs as leverage to address the negative effect of the EU's trade deals on its custom union partner.

Although Turkey is trying to replicate the EU agreements to also gain market access to partner countries, many states lack incentives for striking a deal with Ankara as their exports already have duty-free access to Turkey.

Critics of a post-Brexit customs union have raised the same concern and have warned that a customs union could undermine British hopes of striking individual trade deals and obtaining lucrative concessions in sectors such as services.

Although British Labour leader Jeremy Corbyn is an advocate of a customs union, Trade Secretary Liam Fox warned Tuesday that agreeing on a permanent customs union with the EU would be a "major disincentive for other countries to negotiate trade agreements" with Britain.

However, there are doubts about whether Britain could follow Turkey's example and use an Article 16-style solution to gain more leverage. In fact, the Turkish clause says that tariffs on third-country goods are only allowed "within five years" after the entry of force of the customs union. Ankara has ignored this time restriction and benefited from the fact that the EU-Turkey customs union has no effective dispute settlement mechanism where Brussels could address the issue.

This problem has not gone unnoticed: "We need a neutral and transparent dispute settlement system to address a number of unfortunate issues concerning market access under the EU-Turkey customs union," said Sofia Bournou from the BusinessEurope lobby.

Peter Holmes from the UK Trade Policy Observatory think tank said that Brussels would likely learn from the troubles with Turkey and seek to avoid such "loopholes" when negotiating a customs agreement with Britain.

A Brexit opportunity

Turkey has called for a modernization of its customs union with Brussels to address "important asymmetries and deficiencies" in the agreement. The Turkish Mission to the EU said in a statement that a "crucial" way to eliminate the "structural problems in the customs union" would be to grant Turkish authorities "effective participation in the EU decision-making mechanisms" on trade policy.

Essentially, the Turks want a place in the room as observers as the EU carves out its relations with major partners. Turkey's hope is that by participating in ongoing EU trade negotiations, Ankara could better exert pressure on partner countries to also negotiate a separate agreement with Turkey.

Brussels, however, has repeatedly rejected such demands. "Trade negotiations cover sensitive information of EU manufacturing and services sectors which could be misused by Turkey," said EU rapporteur Beghin.

"If this is being offered to the United Kingdom, I think Turkey — and rightfully so — would ask for the same possibilities" — Pinar Artiran, a chair of the WTO

Ankara hopes that Brexit could shift the balance: The prospect of the U.K. also joining a customs union with the EU is "seen as an opportunity," said Carnegie's Ülgen. That would be a chance to link up with London to force the EU to grant the customs union partners a greater say. "The economic weight of the U.K. will make this question much more politically expedient to resolve," Ülgen said.

As an EU member, the U.K. currently benefits from access to the EU's trade policy committee, where it is involved in sensitive discussions on trade talks and can make its own demands. Diplomats in Brussels say they expect London to push strongly to keep its access if it stays in a customs union with the EU.

"If this is being offered to the United Kingdom, I think Turkey — and rightfully so — would ask for the same possibilities," Pinar Artiran, a chair of the World Trade Organization, told the British parliament's Brexit committee earlier this month.

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