Free Trade Agreement Signed Between Turkey and the United Kingdom

Free Trade Agreement Signed Between Turkey and the United Kingdom

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Turkey and the United Kingdom (the United Kingdom of Great Britain and Northern Ireland ) (the “UK”) signed the Free Trade Agreement (the “FTA”) on December 29th, 2020 just before the UK exits European Union (the “EU”). The FTA, which came into force as of January 1st, 2021, ensures special trading terms for UK businesses, which can continue to export and import under preferential tariffs, compared with no agreement.

The deal with Turkey is the fifth-biggest free trade agreement the UK has negotiated after deals with Japan, Canada, Switzerland and Norway.

Major wins based on the UK – Turkey Free Trade Agreement:

  • It secures the existing tariff-free flow of goods for the 7,600 UK businesses that exported goods to Turkey in 2019, the businesses without being affected after UK formally leaves the EU;
  • It protects vital UK-Turkey supply chains in the automotive, manufacturing and steel industries (i.e. about a third of the engines built in the UK go to Turkey as one in five new vans sold in Britain come from Turkey);
  • It supports a trading partnership worth £18.6 billion last year;
  • It delivers vital certainty for business and supports thousands of jobs across the UK and Turkey (i.e. there are more than 3000 British companies operating in Turkey and around 7,600 businesses in the UK exporting goods to Turkey); 
  • It lays the groundwork for a more ambitious, dynamic, competitive and progressive UK - Turkey trade relationship in the future (i.e it contains a review clause that requires the two nations to meet within the next two years to expand the content to include services like digital services, and regulations on trade and agriculture).

Not being able to bring into effect, the FTA would result in the reimposition of many tariffs, returning to World Trade Organisation (“WTO”) Most-Favoured-Nation (“MFN”) treatment with Turkey, which would then lead to an increase in duties on some of the exports to, and imports from Turkey. Reverting to Turkey’s current MFN tariff rates and UK’s MFN tariff rates would result in an annual increase in total duties of the UK around £578 million while causing a cost of around £1.8 billion for Turkey due to increased export tariffs.

Turkey’s Position in the International Trade Arena

Turkey has the 17th largest economy in the world, and 6th in the Europe. It is one of the most attractive and dynamic overseas markets for most of the other countries. This rapidly growing economy, with a population of 80 million and a well-educated and young workforce has direct trade routes, a government keen to encourage trade and a strong geographical position linking Europe and Asia.

Turkey is already a member of the EU Customs Union. In 2019, Turkey was the EU’s 5th largest trading partner, export market and provider of imports. 

In addition to the Customs Union and other agreements with the EU, Turkey currently has 20 free trade agreements in force with namely, EFTA, Israel, Macedonia, Bosnia-Herzegovina, Palestine, Tunisia, Morocco, Syria, Egypt, Albania, Georgia, Montenegro, Serbia, Chile, Mauritius, South Korea, Malaysia, Moldova, Faroe Islands and Singapore.

Turkey’s automotive companies are among the world’s largest van, bus and truck manufacturers.

Facts about Turkey – UK Trade

UK plays a critical role in Turkey's economy. According to 2019 data, The UK is Turkey’s 2nd biggest export market and Turkey’s 5th largest investor, with investments in Turkey worth nearly £ 8.5 billion.

Also Turkey is UK’s 19th largest trading partner, accounting for 1.3% of its total trade in goods and services in 2019, which was £18.6 billion. UK’s exports to Turkey were £7.7 billion while imports from Turkey, over the same period, were £10.9 billion.

In 2019, the top goods exported to Turkey were machinery and mechanical appliances as well as precious stones and metals (mainly gold) while top goods imported from Turkey were vehicles other than railway or tramway stock and machinery (including diesel and semi-diesel engines, automobiles) and mechanical appliances.

In 2019, UK Revenue and Customs Authority (HMRC) estimated that around 7,600 VAT registered businesses in the UK exported goods to Turkey and around 10,600 imported goods from Turkey.

Details of the UK – Turkey Free Trade Agreement

Scope of the FTA

The FTA will apply to the United Kingdom of Great Britain and Northern Ireland. In addition, provisions of the FTA will also  apply to the Crown Dependencies (the Bailiwicks of Guernsey and Jersey, and the Isle of Man). The FTA includes a mechanism which will allow for further extension to the Crown Dependencies and Overseas Territories.

Governance

The body responsible for overseeing the operation and implementation of the FTA is the Joint Committee. The Joint Committee, which replicates the one set out under the EU-Turkey Agreement, is comprised of representatives from both parties and able to implement technical amendments efficiently as decisions of the Joint Committee are binding on the parties and are not subject to the Parliamentary scrutiny procedures in the UK’s Constitutional Reform and Governance Act 2010 (the “CRaG Act”).

Differences with the EU-Turkey Customs Union

UK-Turkey FTA

  • Goods will only continue to benefit from tariff preferences if they originate in either Turkey or the UK. However, as shifting from “EU” originating to the UK or “Turkey” originating has implications for goods traded between the UK, the EU and Turkey; in order to provide maximum continuity for business, it has been agreed in the FTA that EU materials can be recognised (i.e. cumulated) in Turkey’s and the UK’s exports to one another. EU processing, except when in relation to textiles, can also be cumulated in Turkey’s and the UK’s exports to one another.
  • Tariff commitments in Sterling
  • Complex agricultural tariffs such as the entry price system and other complex tariffs with an “agricultural component” will not be applied to originating imports from Turkey unless these are also in the UK’s applied MFN schedule.
  • Tariff rate quotas -TRQs- which allow a certain volume of a product to enter the market at a zero or reduced tariff rate, have been resized.
  • A bespoke competition rules & commitments on maintaining measures which prohibit anticompetitive business conduct and ensuring competition laws respect the principles of transparency, non-discrimination and procedural fairness.

Revised dispute settlement mechanism:

  • The period for making the request to establish an arbitration panel has been shortened to 60 days to allow for the prompter resolution of disputes.
  • The FTA introduces compliance requirements to the dispute settlement mechanism. The Party ruled against must adhere to the panel’s ruling and there is now a review mechanism to determine progress towards compliance.
  • The FTA introduces a mechanism for the parties to agree compensation or, where there is no agreement, for the complaining Party to suspend concessions should the responding Party remain non-compliant.

EU-Turkey Customs Union Set Up

  • All goods that are in free circulation in one of the markets can be exported free of duty to the other party, irrespective of where they have been produced.
  • Tariff commitments in Euros
  • Complex tariffs being applied
  • The Parties have a six-month period within which they can request the establishment of an arbitration panel.
  • Arbitration awards are binding, however, there are no detailed provisions on what compliance with the award requires.
  • No allowance expressly for temporary remedies to be applied in the event of non-compliance and as a result have few teeth to enforce the obligations of the losing Party.

Please note that goods covered previously by the EU-Turkey Customs Union will continue to be traded duty-free under this FTA as long as they are considered originating under the Rules of Origin Protocol of the FTA. In addition industrial goods shall be subject to zero-tariff, except for any processed agriculture products which were only partially liberalised under the EU-Turkey Customs Union.

Concluding remarks

The FTA between Turkey and the UK stands as a milestone as it underlines a much more liberalised trade relationship between two countries, and has already created positive reflections in financial markets in Turkey. It is highly possible that the continued regime will accelerate the trade volume between UK and Turkey, thus attracting more foreign investors in Turkey. Prioritised as the 5th country coming after UK’s signing of free trade arrangements with Japan, Canada, Switzerland and Norway, Turkey signalled its importance and potential in the global trade for the coming years.

By Burcu Doner, Founder and Managing Partner, Burcu Doner Law FirmAlliott Global Alliance