What You Need to Know About Free Trade Agreement Signed between the UK and Turkey

Turkey signed the "Customs Union Agreement" with the European Union and accordingly enacted into law on 31 December 1995. This agreement comprises products - including but not limited to - industrial commodities and processed agricultural goods. On condition that the subjected goods and industrial materials are exempt from tariffs and equivalent taxes, such products of the signing parties can freely move within the customs territory according to the EU-Turkey Custom Union Agreement. On the other hand, with Brexit - which was the UK's long time political goal - the UK has left the European Union and concluded one of the most expansive trade agreements to date within the EU. Subsequently, the Customs Union between Turkey and the UK terminated, effective from 1st January 2021.

This being the case, however, United Kingdom plays a critical role in Turkey's economy. According to 2019 data, the UK ranks second among the list of countries which Turkey exports the most goods to, and ninth in the list of countries from which Turkey imports the most from. The United Kingdom, in addition to being among the leading markets, is a highly valued trade partner in Turkey in many sectors, but especially in automotive, television, household appliances, retail and textiles industries. Based on statistics published by Turkish authorities, the bilateral volume of trade between the UK and Turkey was more than $16.5 billion in 2017), which means that the termination of such an agreement could lead to approximately two three-quarters of the Turkish exports to become subject to a tax burden and resulting in a loss of up to $2.4 billion.

To avoid the above-mentioned risk of losses between two countries, on 29 December 2020, for the first time, the UK signed a historic free trade agreement (the "FTA") with Turkey. The FTA signed between the UK and Turkey came into effect on the first day of January 2021, which similar to the Customs Union Agreement covers industrial and agricultural products. Since then, the requirements for British companies trading with Turkey have changed radically since 1 January 2021.

EXPORT and IMPORT RELATIONS BETWEEN TURKEY and the UK:

The main products which Turkey exports to UK are gold, textiles, garments, electrical and non-electrical machinery, motor vehicles and parts, iron and steel products, insulated wires, cables and other electric conductors.
The main imports from the UK are diesel and semi-diesel engines, automobiles, tramp iron/steel and their ignores, medicinal and pharmaceutical products to be used in treatments and protection.
The total amount of direct investments from UK to Turkey in the period between 2002-2019 was $11,120,000 and $2,969,000 USD for investments from Turkey into the UK during the same period.

WHAT DOES THIS FTA PROVIDE FOR TURKEY:

The parties agreed that as of January 1, 2021, the imports and exports of specified products will not face any additional taxes. Therefore, Turkish exporters will not be financially burdened by Brexit and free trade between the two countries will be protected against all odds.
It covers all industrial goods and processed agricultural products.
Ensuring the inclusion of services and investments, and some of the products covered by the mutual recognition and mutual improvements made in agricultural products will play an important role in Turkey's commercial position and trade relations between the two countries.

DISPUTES BETWEEN CONTRACTING STATES: The Procedure for Dispute Settlement Mechanism

In case of a legal dispute that may arise between Turkey and the United Kingdom, for the settlement of disputes the "Procedure for Dispute Settlement Mechanism" will be implemented. If an agreement cannot be achieved though this route, the World Trade Organization (WTO) procedures will be applicable.
This mechanism of Dispute Settlement Procedure aims to resolve the commercial disputes between the WTO member countries within the shortest possible time frame. The mechanism has achieved significant success dispute resolutions so far.
Before taking any other action, the first step in resolving a legal dispute between the member countries would be through a consultation phase where they have to communicate directly and settle without the involvement of other institutions. If the parties come up with an agreed upon solution, the legal process will not formally begin; however if the parties fail to reach an agreement, the parties will have the option to consult the WTO director-general to mediate for them. If the consultations fail, the plaintiff will have the option to ask for a panel to be appointed. The Dispute Settlement Body to be established for the resolution of legal disputes within the framework of the principle of ultra petita prohibition, will convene to discuss and manage the dispute resolution procedure.
Keeping in mind that WTO aims to remove the barriers to free international trade and implement transparent rules in order to facilitate global trade volume, it is very important that the WTO solutions will be applicable if disputes cannot be resolved using the initial mechanism.

The FTA between Turkey and the UK constructs a milestone achievement especially because of its' "tariff-free" nature. The existing commercial and economic relations will be maintained under the agreement. It is no doubt a very solid and significant step towards strengthening our commercial and bilateral trade relations.

THE IMPORTANCE OF THE FREE TRADE AGREEMENT BETWEEN TURKEY and the UK IN TERMS OF ECONOMIC RELATIONS BETWEEN THE TWO COUNTRIES:

Considering the official declarations made by the trade ministers of both countries and and the fact that the markets in Turkey have already reacted positively to the agreement, I believe that the agreement between the two countries will have positive reflections in the foreseeable future.

Turkey currently has free trade agreements with 21 different countries in force. Yet, the importance of adding the United Kingdom to the list cannot be overstated considering the message this delivers to the global market.

The FTA signed between Turkey and the UK demonstrates that the Brexit process which led to a certain level of Covid19 related uncertainty within 2020 and 2021 will not lead to any disadvantages in the long term trade relationship between Turkey and the UK, nor will it have any negative impacts on the diplomatic relations between the two countries. To the contrary, this agreement being the first FTA after the trade agreement UK signed with the EU following Brexit reveals that the alliance between the UK and Turkey remain intact.

In addition to the above, United Kingdom announced that this agreement comes right after the agreements reached with Japan, Canada, Switzerland and Norway. For Turkey's name to appear with four of the worlds reputable countries constitutes a great source of prestige given that this agreement will further the country's potential to attract foreign investors.

Therefore, in a period in which the whole world struggles with uncertainty and risk allocation issues, to conclude an agreement this fast, bulky and effective with the UK should be seen as an important accomplishment for Turkey.

Considering the fact that the UK-Turkey has grown by seventy per cent during the last decade, and in 2019, before the Covid-19 pandemic, was worth nearly £19bn will now be bolstered by this FTA. There is no doubt that trade will further developed if the parties consequently sign a more detailed additional agreement, yet we may still expect an acceleration in trade volume, continuation of investments, and the emergence of new partnerships between Turkey and the UK throughout 2021.

TO SUM UP:

The TFA is based on arrangements in the EU-Turkey Customs Union and preferential EU agreements with Turkey on coal, steel and agriculture. Both countries have transferred these into the TFA by combining provisions in several distinct EU-Turkey arrangements into one modernized trade agreement. This has created a more straightforward, easily understood agreement, which better reflects modern trading practices.

This agreement is just a first step with both countries wanting to work towards a more comprehensive, ambitious TA which is likely to include, among other sectors, agricultural goods, services, investment and the digital economy.

In light of the above, we are of the opinion that many different sectors of the Turkish economy present real opportunities for British exporters including healthcare, advanced manufacturing, financial services, IT and automotive, and it is anticipated that a second phase of the TFA, proposed in the near future, will play an even more important role in bilateral trade between the two countries. Commercial entities should closely monitor technological developments and integration to other industries such as digital manufacturing, agri-tech, smart cities and renewable energy, which will also be critical trade areas.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.