Effects of Including Agricultural Products in the Customs Union between Turkey and the EU

Abstract

This study analyzes alternative options for future Turkish agricultural policies in the context of agricultural trade relations between Turkey and the EU. Initially, agricultural markets and market policies are compared between Turkey and the EU. It appears that although total producer support expressed as a share in domestic production value is higher in the EU than in Turkey, agricultural prices for most products receive more support in Turkey than in the EU.Secondly, preferences currently in force are reviewed in detail and the significance of the remaining import barriers of the EU applied to imports originating from Turkey is investigated. Turkey established a customs union (CU) with the EU in January 1996. Agricultural trade is not covered by this CU but it is subject to extensive preferential trade rules. In 2001, more than 60 percent of Turkeys agricultural exports to the EU entered the EU market without import barriers. Another 36 percent were subject to reduced tariff rates. Thirdly, the inclusion of all agricultural products in the CU between Turkey and the EU is analyzed quantitatively. To this aim, a partial equilibrium model of the Turkish agricultural sector (TURKSIM) is developed.Three agricultural policy scenarios are analyzed with respect to their effects in the year 2006. First, a status quo scenario with largely unchanged policies provides a reference for comparison with other options. Secondly, a liberalization scenario is defined in which Turkey abolishes all market policies, e.g. tariffs, export subsidies, and coupled premiums. Thirdly, a scenario with agriculture included in the CU with the EU is analyzed.The complete liberalization of the agricultural sector is found to lead to significant static comparative welfare gains compared to the maintenance of current policies under the status quo scenario. For the year 2006 these welfare gains are estimated to amount to about 670 million, about 2.3 percent of projected agricultural production value.It appears that for most products the option of an inclusion of agriculture in the CU with the EU is very similar to the option of complete liberalization of agricultural trade. This is because the EU has, in recent years, liberalized its agricultural markets significantly and is projected to continue to do so for many reasons. The total welfare gain under the CU scenario is about 200 million lower than under the liberalization scenario mainly because of higher sheep meat and milk product prices. Compared to a situation without a customs union, Turkey would gain only about 60 million of export revenue with export prices above world market level for some fruit and vegetables; and would lose about 50 million with import prices above world market level for milk products. Due to the relatively small difference of comparative static welfare effects between the total liberalization of the agricultural sector and the inclusion of agriculture in the CU, other factors, such as the self-binding effect of agriculture in the CU or the price Turkey may have to pay or receive from the EU for such a scenario, may be decisive for the future strategy pursued by the Turkish government.