Impending Vote on European-Turkish Customs Union Will Shape History

By James M. Dorsey

The European Parliament vote this fall on ratification of a customs union agreement between Turkey and the European Union is likely to shape history. At stake in its decision on whether or not to acknowledge Turkey as a European power are both political stability at the crossroads between Europe, Asia and the Middle East, and vast economic opportunities.

Right now Turkey's stock is low with the parliament, whose members virtually unanimously condemned Turkish Prime Minister Tansu Ciller's government in early April for its incursion into northern Iraq. The European Parliament vowed then to reject the customs union agreement scheduled to come into effect next year unless Turkey improved its human rights record by this fall.

"Fundamentalism is only going to be a threat if Turkey is left out of Europe."

"Success will require vigorous action not only by the Turkish government but also certainly by the [Turkish] Grand National Assembly to pass the economic legislation and the constitutional and legal changes needed to ensure approval of our ambitious joint project by the European Parliament," said European Commissioner Hans vanden Broek.

"The European Parliament will be asked, in the early autumn, to give its assent to the customs union. But Parliament's assent will only be forthcoming if its members feel that Turkey and the Union are committed to the same fundamental values," van den Broek said.

The council's 34 member states also approved a resolution asking its governing committee of ministers to suspend Turkey unless it showed significant progress toward a withdrawal from Iraq prior to a June 26 European Union summit.

At the same time, Turkey's relations with some of its individual NATO allies deteriorated further over the Kurdish issue, with Ankara announcing it would stop all new military purchases from the Netherlands. The Turkish boycott followed the Dutch government's decision to permit a Kurdish parliament-in-exile to be set up in The Hague. The Dutch government says its law does not prohibit exiled Kurds from meeting as long as their activities are not linked to terrorism.

Turkey's protest was largely symbolic since the Netherlands, along with Germany and Norway, already had declared they would suspend new arms sales to Turkey because of its offensive into northern Iraq. Turkish officials said, however, that the ban did not cover equipment Turkey already had ordered from the Netherlands. Two Dutch companies are supplying Turkey with casings for grenades and electronics for radar.

Formal rejection of Turkey by European institutions next fall might turn the country inward, strengthening the Islamist Rafah (Welfare) Party in advance of Turkish general elections scheduled for next year. Rafah promises to take Turkey out of Europe if it comes to power.

"Fundamentalism is only going to be a threat if Turkey is left out of Europe," says Turkish Prime Minister Tansu Ciller. "Turkey is not in need of Europe. In fact, I think Europe is more in need of Turkey."

In reality, both Turkey and Europe have important stakes in using the customs union as a political, social and economic link between Turkey and the West. This bond is all the more important now that Turkey's other major Western tie—NATO—is less relevant following the collapse of the Soviet Union.

In economic terms, Mrs. Ciller's assessment that Europe needs Turkey makes sense. Turkey is a market of 60 million people that serves as a gateway to the newly independent republics of the former Soviet Union. The customs union initially will benefit European more than Turkish companies.

Acknowledging this, Bulent Eczacibasi, vice chairman of the Eczacibasi Group, one of Turkey's largest economic conglomerates, says that "The political side of the customs union is the important aspect."

The EU's van den Broek puts trade between Turkey and the EU at some 20 billion European currency units ($22 billion) a year. The country is among the EU's top 10 trading partners and nearly half of Turkey's exports go to the 15-nation bloc.

With Turkish goods already entering Europe duty free, Cigdem Tuzun of Turkey's Foreign Economic Relations Board (DEIK) says "the immediate beneficiary in 1996 is Europe because Turkey will be eliminating customs duties and quantative restrictions."

Phasing Out Trade Obstacles

Some trade obstacles will be phased out only gradually. Turkey's automotive, pharmaceutical and petroleum industries will retain their protective barriers for a period of five years. Similarly, the EU will continue to restrict access of Turkish agricultural products and services.

Restrictions notwithstanding, these sectors already are attracting foreign interest. With Turkish demand for automobiles expected to rise from some 300,000 this year to a million by the turn of the century, foreign car producers are seeking joint ventures with Turkey. Toyota opened a $400 million production plant in cooperation with Haci Omer Sabanci Holding AS last year. Mazda announced plans to establish its own plant in the next two years.

As a result, competitiveness will be reinforced. Turkish companies will be forced to trim waste and invest more. Turkish industries like textiles, glass and ceramics that utilize domestic raw materials and cheap labor already are strong exporters, but they will do even better with the fall of customs barriers.

Turkey's largest exporter, the textile industry, is expected to be an immediate beneficiary of the customs union. "We are a strong industry and we are already competitive, so we have always been the strongest supporters of the customs union," says Emine Acilan, an official with the Union of Textile Exporters.

Some analysts predict that the dropping of quotas could boost Turkish textile exports by $800 million a year to almost $5 billion, or nearly a third of all Turkish exports. However, the textile industry will have to invest up to $3 billion in the next five years to ensure that it can compete on quality and design rather than marginal advantage. "Turkey cannot sustain the slice of the market it now appeals to," explains Cem Duna, Turkish ambassador to the EU. "There will always be countries that can undercut Turkey."

CEO Duncan Blake of Merko AS, a major Turkish exporter of processed fruits and vegetables and the world's second largest tomato paste trader, describes the expected impact of the customs union on his share of the domestic market as minimal. "European producers can't sell profitably in Turkey if they have to add freight which I can deduct," Mr. Blake says.

As a result, few analysts expect imports from Europe to skyrocket suddenly. "Even without customs being charged, it is not clear to me how consumer goods produced with expensive British, German or French labor will compete in the Turkish market where local companies produce very good products in the same areas, be it foodstuffs or washing machines," says David Edgerly, general manager of Alliance Capital Management (Turkey) Ltd.

Still grappling with vast structural problems that last year provoked a severe economic and financial crisis, however, Turkey is ill-equipped to handle some effects of the customs union. "The government," says DEIK's Mrs. Tuzun, "has eight months to get its macro-economic house in order. If it doesn't, the customs union will aggravate Turkey's problems."

In fact, the loss of some $2.9 billion in annual customs duties as a result of the customs union threatens to increase Turkey's public deficit, already pushed dangerously high by the cost of the April-May military incursion into northern Iraq. In addition, Turkey's long-awaited privatization program, which was expected to raise more than $20 billion by the end of 1996, has virtually ground to a halt. "Decreased public revenues will increase inflation," which already has passed the 150 percent mark, Mrs. Tuzun warns.

A Competitive Disadvantage

While interest rates have dropped considerably this year, the government's failure to resolve macro-economic imbalances puts Turkish companies at a competitive disadvantage. "It's not possible to compete with the current cost of finance," says Husamettin Kavi, chairman of the Istanbul Chamber of Industry.

The customs union therefore is likely to increase the number of companies seeking to circumvent the high cost of credit by issuing public offerings on the Istanbul Stock Exchange. Already 40 companies are waiting to go public.

Turmoil in international financial markets as a result of the fall of the dollar is likely to make Turkey an even more attractive manufacturing base. "Germany has become outpriced with the rise of the DM," says an Istanbul-based Western banker. "The same is true of Japan. Turkey is the logical choice."

For the European Parliament, however, the main customs union issue is the curtailment of freedom of expression by article 8 of Turkey's anti-terror law. It has led to the imprisonment of several journalists and effectively prohibits debate on the issue of Turkey's Kurdish population of more than 10 million people.

"We're expecting amendments of 21 articles of the constitution and a substantial rewriting of article 8," says EU Ambassador Michael Lake. He quotes deputies as saying the Turkish parliament may complete the changes by the end of June. Others are less sanguine.

Says Oral Calislar, a prominent newspaper columnist who was sentenced to two years in prison for publishing interviews with exiled Kurdish leaders: "I'm not at all hopeful of Ciller persuading parliament to lift article 8 of the anti-terrorism law. Members of her own party have proved time and again to be against that. It will be interesting to see a Ciller who has promised democratization to America trying to get it past her own party."

James M. Dorsey is a free-lance journalist based in Istanbul.