London and Ankara are involved in talks on a trade deal that can be quickly put in place if Britain and the EU reach an agreement. Some Ankara politicians may be tempted to breach the terms of the customs union with the EU and reach a trade deal with the UK, even if there is no deal between Britain and the EU. This has already happened with Malaysia, much to the chagrin of the EU, where the EU has not concluded its trade negotiations, but where Turkey has nevertheless advanced and signed an agreement. In such circumstances, an agreement between the UK and Turkey could lead to the total collapse of the EU-Turkey customs union, as there is a significant risk of transshipment of large quantities of British products and intermediate consumption to the EU via Turkey. Such an agreement would create even more tensions between Ankara and Brussels and strengthen the voice of those who advocate a stronger EU stance towards Turkey, including new sanctions and the end of accession negotiations. The UK should think carefully before pursuing a trade deal that would further destabilise the EU`s relations with Turkey and risk being seen by Brussels as a deliberate provocation. Even if the EU and the UNITED Kingdom, and therefore Turkey and the United Kingdom, conclude a free trade agreement that unlocks tariffs and quotas for industrial products, this would lead to a significant deterioration in the terms of trade compared to existing agreements and would pose problems for companies trading between the UK and Turkey. Unlike trade in a customs union, a unit of exported goods must meet specific criteria of origin in order to qualify for duty-free trade under a free trade agreement. The objective is to ensure that exports do not come from elsewhere.

To give a concrete example, EU trade agreements and hence Turkey`s trade agreements often require that at least 60% of the value of an exported car be created locally for it to be eligible for zero tariffs. If a similar threshold were applied to a trade agreement with the United Kingdom, this would create a problem for some Turkish car exporters, who buy only about 50% of their intermediate consumption in Turkey (Chart 1). Ultimately, preventing trade disruptions with Turkey is just another reason why the UK should prioritise a trade deal with the EU before the end of the year. But even if the UK and Turkey manage to reach a free trade agreement, the future of their relations will depend on broader political developments, including the health of Turkey`s relations with the EU and the US. For example, if the EU imposes additional sanctions on Turkey before the end of the transition period, the UK will also have to apply them in accordance with the terms of the withdrawal agreement. While the additional rules on compliance with the original burden cannot be completely repealed, the United Kingdom and Turkey could theoretically take steps to facilitate the qualification of exports for a future free trade agreement. They could, for example, simplify the qualification criteria for the original criteria that may originate and/or agree that inputs from EU-27 sources can be charged on local value-added thresholds, known as “cumulatives”. However, Turkey is bound by the terms of its customs union with the EU, which is to emulate the original criteria applied in the eu-UK free trade agreement in its own trade agreement with Britain.