Turkey’s EU Trade Prospects Hinge on Rule of Law and Customs Union Reform

A recent report by the Brussels-based Institute for Diplomacy and Economy (InstituDE) emphasizes that Turkey’s economic trajectory and the modernization of its customs union with the European Union (EU) are closely linked to its adherence to democratic principles and legal reforms. The study warns that unresolved governance and judicial issues could hinder Turkey’s economic potential and limit its trade relations with the EU.

Economic Gains at Risk Due to Institutional Weaknesses

The report, titled “Modernizing the Turkey-EU Customs Union: Issues and Prospects,” highlights that updating the agreement could boost Turkey’s GDP by up to 2.5%. However, institutional weaknesses—particularly concerning judicial independence and transparency—pose significant risks. While Turkey has reaped economic benefits from aligning with EU trade policies, persistent systemic issues continue to obstruct progress.

Legal Hurdles: ECtHR Rulings and Investor Confidence

Turkey’s failure to implement European Court of Human Rights (ECtHR) rulings, including high-profile cases such as Kurdish politician Selahattin Demirtaş, businessman Osman Kavala, and teacher Yüksel Yalçınkaya, remains a major obstacle to trade relations. The study argues that compliance with these rulings is critical for restoring trust with European institutions and investors. Additionally, concerns over property rights violations and opaque public procurement practices create regulatory instability, deterring foreign direct investment and delaying customs union negotiations.

Trade Scenarios: The Impact of Modernization

The report presents different economic scenarios based on the level of customs union modernization:

• No Modernization: Turkey’s trade deficit with the EU could widen to €20 billion by 2025 due to increased imports and declining investor confidence.
• Moderate Modernization: A 10% efficiency gain could improve the trade balance by 30%, reducing the deficit to €12.5 billion.
• Full Modernization: With streamlined customs procedures, expanded digital trade, and improved regulatory alignment, the deficit could drop by 50% to €8.5 billion.

For the EU, a modernized customs union could increase trade volume by €20-€25 billion by 2030. However, the report stresses that economic benefits alone will not drive reforms unless Turkey demonstrates a commitment to legal and governance improvements.

Public Procurement Reforms Essential for Investment

Turkey’s public procurement system is identified as an area in urgent need of reform. The report highlights how current practices, perceived as favoring specific companies, deter European investment and create inefficiencies. While Turkey initially aligned its procurement laws with EU standards, subsequent amendments introduced numerous exemptions that undermine competition. The sidelining of the Public Procurement Authority has further eroded regulatory confidence. A modernized customs union could grant Turkey greater access to the EU’s services and public procurement markets, boosting exports and attracting investment in key sectors like technology, finance, and agriculture. Likewise, the EU would benefit from enhanced supply chain resilience and greater access to Turkey’s 86-million-strong consumer market.

Automotive Sector: A Strategic Opportunity

The report also highlights the increasing role of the automotive industry in Turkey-EU trade. In 2024, Turkey’s automotive exports reached $37.21 billion, a 6.3% increase from the previous year. The EU’s new tariffs on Chinese electric vehicles (EVs) have created an opportunity for Turkey to attract more foreign investment in its automotive sector, as Chinese automakers look to bypass trade restrictions by establishing production in Turkey. However, this shift raises policy considerations. While increased investment could boost Turkey’s manufacturing capacity and job market, EU policymakers may scrutinize Turkey’s role in facilitating Chinese market access, potentially leading to regulatory adjustments in the customs union framework.

Macroeconomic Stability and Governance Challenges

Beyond trade, the report warns that Turkey’s economic indicators—including income distribution, public debt, inflation, and unemployment—have worsened in recent years. Although the government has implemented policies to stabilize the economy post-2023 elections, concerns persist over the autonomy of key regulatory institutions like the central bank and financial oversight bodies. Ensuring the independence of these institutions is crucial to attracting long-term foreign investment. To regain investor confidence, Turkey must demonstrate a genuine commitment to economic reforms, independent decision-making mechanisms, and fiscal discipline. Governance shortcomings and legal uncertainties remain significant deterrents.

Agriculture: A Missing Piece in the Customs Union

Agriculture remains outside the customs union framework, restricting Turkey’s export potential. The report notes that Turkey’s agricultural trade surplus with the EU has remained stable, with exports reaching $8.1 billion in 2024. However, inefficiencies, trade barriers, and disparities in subsidy policies prevent further growth. The EU’s Common Agricultural Policy (CAP) continues to be a major barrier to Turkey’s full integration into European agricultural markets. Another challenge is Turkey’s misalignment with EU food safety and phytosanitary standards. Turkish agricultural exports have frequently faced EU rejections due to pesticide residue violations. In 2023, Turkey ranked highest for pesticide-related export rejections, ahead of China and India. Addressing these regulatory gaps is essential for Turkey to maximize its agricultural trade potential.

Policy Recommendations: A Roadmap for Reform

The report proposes several policy measures for both Turkey and the EU:

• For Turkey: Immediate steps to restore judicial independence, implement ECtHR rulings, improve transparency in public procurement, and strengthen anti-corruption efforts. Addressing regulatory inconsistencies in agriculture and aligning trade policies with EU standards are also key priorities.
• For the EU: A phased approach to customs union modernization, prioritizing regulatory alignment and dispute resolution mechanisms to ensure fair competition.

The study concludes that without meaningful governance reforms, Turkey risks missing out on the economic benefits of an upgraded customs union. By addressing these systemic issues, Turkey could unlock new trade opportunities, strengthen investor confidence, and reinforce its economic ties with the EU.