Evaluation of the EU-TURKEY - World Bank

1 Report No. 85830-TR Evaluation of the EU-TURKEY Customs UnionMarch 28, 2014 Evaluation of the EU-TURKEY Customs UnionCurrenCy and equivalent unitsCurrenCy equivalents(Exchange Rate Effective February 28, 2014)Currency Unit: Turkish Lira (TL) US$ 1 = TLabbreviations and aCronymsARIPA gricultural Reform Implementation ProjectIAFI nternational Accreditation ForumBSECB lack Sea Economic CooperationICCI nternational Chamber of CommerceBTIB inding Tariff InformationILACI nternational Laboratory Accreditation CooperationCAPC ommon Agricultural PolicyIMMIBI stanbul Minerals and Metals Exporters AssociationCEConformit Europ eneIPRI ntellectual property rightsCENE uropean Committee for StandardizationISOI nternational Organization for StandardizationCENELECE uropean Committee for Electrotechnical StandardizationITFI nternational Transport ForumCETC ommon external tariffMENAM iddle East and North AfricaCGEC omputable General EquilibriumMFNMost favored nationCIPMI nternational Committee on Weights and MeasuresMQSM ultilateral Quota SystemCTCC ommon Transit

2 ConventionNCTSNew Computerised Transit SystemCUCustoms UnionNFRSN ational Farmers Registry SystemCUJCC ustoms union Joint CommitteeNSBsNational Standards BodiesDCFTADeep and Comprehensive Free Trade AgreementNTMsNon-tariff measuresDSMD ispute Settlement MechanismP PAPublic Procurement AuthorityEAEuropean Cooperation for AccreditationPPLP ublic Procurement LawECHAE uropean Chemicals AgencyPTAP referential trade agreementECMTE uropean Conference of Ministers of TransportROOsRules of originECSCE uropean Coal and Steel CommunitySOEsState-Owned EnterprisesECTSE uropean Common Transit SystemSQITS trengthening the Quality Infrastructure of turkey (SQIT)EEAE uropean Economic AreaSTRIS ervices Trade Restrictiveness IndexEECE uropean Economic CommunitySUPQUITS upport to the Quality Infrastructure in TurkeyEFTAE uropean Free Trade AssociationTAREKSRisk-Based Trade Control SystemEMAE uropean Medicines AgencyT B TsTechnical Barriers to TradeE PAEconomic Partnership AgreementTCAT urkish Customs AdministrationETSIE uropean Telecommunications Standards InstituteTDIsTrade Defense InstrumentsEUEuropean UnionTIRT ransports Internationaux RoutiersEURAMETE uropean Association of National Metrology InstitutesTPCT rade Policy CommitteeFDIF oreign direct investmentTSET urkish Standards InstituteFTAFree trade agreementTTIPT ransatlantic Trade and Investment PartnershipGDPG ross Domestic ProductT B TAKS cientific and Technological Research Council GMPGood manufacturing practicesT

3 RKAKT urkish Accreditation AgencyG PAWTO plurilateral Government Procurement AgreementUNECEU nited Nations Economic Commission for EuropeGSPG eneralised System of PreferencesWTOW orld Trade OrganizationGTAPG lobal Trade Analysis ProjectCountry Director:Martin RaiserSector Director:Yvonne TsikataSector Manager:Ivailo V. IzvorskiTask Team Leaders:Ian GillsonFrancis RoweKamer Karakurum-OzdemirWorld BankTable of ContentsExecutive Summary ..iI. Introduction ..1II. Developments in Trade and Investment ..5 Trends in Foreign Direct Investment ..5 Trends in Trade ..7 Firm-Level Analysis ..10 III. The Customs union in a Changing Global Environment ..19 Import Tariffs and Rules of Asymmetries in the FTA process ..24I V. A More Effective Customs union ..31 Technical Regulation and Technical Barriers to Trade.

4 31 Trade Defense Instruments ..40 Trade Facilitation, Customs Modernization and Customs Controls ..46 Road Quotas ..50V. Opportunities for Widening turkey s Trade Relationship with the EU: Potential Impacts and Possible Modalities ..57 Agriculture ..57 Services Trade ..68 Visa Restrictions ..77 Public Procurement ..82VI. Conclusions and Recommendations ..85 Key Recommendations ..85 VII. Bibliography ..87 Annex I: Progress and Process in turkey s Accession to the EU ..91 Annex 2: A Gravity Model for Measuring Trade Creation and Trade Diversion in the EU-TURKEY Customs union ..93 Annex 3: Number of Turkish Firms by Type of Ownership Across Industries ..97 Annex 4: A Short Description of the CGE Framework ..98 Annex 5: Simulations of Changes in Turkish Exports for Tariff Removals from EU-FTA Partners with Unresolved FTAs, by Sector.

5 101 Annex 6: Simulations of Changes in Turkish Exports Resulting Under Levels of Turkish Involvement in the TTIP, by Sector ..102 Annex 7: Number of Turkish Exporting Firms by the Majority Ownership to Each Destination Market ..103 Annex 8: Average Export Value of Turkish Exporting Firms by Majority Ownership to Each Market ..104 Annex 9: Implementing Complex Pieces of EU Regulation: The Examples of Chemicals and Pharmaceuticals ..105 Evaluation of the EU-TURKEY Customs UnionAnnex 10: Assistance to Capacity Building in Turkish Quality Infrastructure ..107 Annex 11: Determinants of turkey and EU Use of TDIs ..108 Annex 12: EU s and turkey s TDIs in Effect and Ongoing Investigations that Potentially Affect Bilateral Trade, 2012-13 ..111 Annex 13: Potential Impacts on Turkish Exporters of EU TDIs Against Third Countries.

6 113 Annex 14: Selected EU Countries with Which turkey has Bilateral Agreements and Number of Permits Exchanged between 2009 and 2012 ..115 Annex 15: turkey Applied MFN Tariffs for Agriculture, 2011 ..117 Annex 16: EU Applied MFN Tariffs for Agriculture, 2011 ..117 Annex 17: Agricultural Export Effects for turkey from a Trade Agreement with the EU in Primary 18: Agricultural Import Effects for turkey from a Trade Agreement with the EU in Primary 19: Total Factor Productivity Growth in Agriculture ..120 Annex 20: Calculating the Sophistication of Services Exports ..121 Annex 21: Gravity Model of Trade in Services ..122 Annex 22: Economic Impacts of Services and Agricultural Trade Liberalization for turkey ..125 Annex 23: Measuring the Tariff Equivalent of Protection on Services Trade.

7 127 Annex 24: Survey on Visa Restrictions Faced by Turkish Businesses ..128 List of FiguresFigure 1: turkey s trade ..8 Figure 2: turkey s trade share of the EU ..8 Figure 3: Composition of turkey s trade with the EU ..9 Figure 4: Product sophistication of turkey s exports ..10 Figure 5: Firm size and propensity to participate in export markets by type of ownership ..13 Figure 6: Number of Turkish firms exporting by destination and ownership ..15 Figure 7: Growth in Turkish exports by destination and firm ownership ..16 Figure 8: Changes in turkey s MFN tariffs, 1993-2009 ..19 Figure 9: Impact of the Customs union on turkey s tax revenues ..20 Figure 10: Effects of finalizing non-compliant FTAs in industrial products for turkey ..26 Figure 11: Simulated welfare effects for turkey from an EU FTA with the US with and without unilateral removal of Turkish tariffs and with and without inclusion of turkey /the EU in the FTA.

8 27 Figure 12: Turkish imports of PVC from EU member states affected by antidumping duties ..43 Figure 13: EU s annual imports subject to 14: Possible road transport routes from turkey to Portugal ..54 Figure 15: Structure of agricultural labor and incomes, 1980-2010 ..58 Figure 16: turkey s agricultural trade ..59 World BankFigure 17: Composition of turkey s agricultural trade ..60 Figure 18: Producer Support Estimates for selected OECD countries ..63 Figure 19: Average applied MFN tariffs for turkey and the EU, 2011 ..64 Figure 20: Simulated effects of deepening the EU-TURKEY trade agreement in primary agriculture ..65 Figure 21: Simulated changes in Turkish trade by destination under a deepened EU-TURKEY trade agreement in primary agriculture ..67 Figure 22: Services value added as share of GDP.

9 68 Figure 23: Trade in services as share of GDP ..69 Figure 24: Growth of turkey s services exports ..70 Figure 25: turkey s services export sophistication ..71 Figure 26: Services Trade Restrictiveness Index vs. GDP, 2008 ..72 Figure 27: Growth of services imports, 2000-12 ..72 Figure 28: turkey s services trade with the EU ..73 Figure 29: Gravity model of turkey s trade with the EU, 2009-11 ..74 Figure 30: Services Trade Restrictiveness Index ..75 Figure 31: Sources of main complaints in the visa process ..79 Figure 32: The impact of visa regulations on business activities ..80 Figure 33: Overall structure of the GTAP model ..98 Figure 34: TDI responsiveness to macroeconomic shocks ..110 Figure 35: EU imports of finished polyester filament apparel fabrics from selected source countries ..113 Figure 36: EU imports of refrigerators from selected source countries.

10 114 Figure 37: Residuals versus fitted values estimated with GDP and fixed effects specification models (2009-11) ..123 Figure 38: Predicted trade estimated with GDP versus fixed effects specification models ..124 Figure 39: Real Turkish GDP in 2018 with respect to 2013: in the baseline and under four bilateral agricultural trade liberalization scenarios with the EU, including services trade liberalization ..126 Figure 40: Distribution of participating firms across provinces by headquarters ..129 Figure 41: Distribution of participating firms by employment ..130 List of TablesTable 1: FDI inflows to turkey by source country ..6 Table 2: FDI inflows to turkey by sector ..7 Table 3: Market reach of Turkish exporters versus comparator countries ..11 Table 4: Geographical destination of new market entries, 2003-10.