Two types of analyses of agricultural market integration between Turkey and the EU can be distinguished. First, studies that assess the possible impacts of Turkish EU membership after the Turkish application for EU membership in 1987 (MANEGOLD 1988, AKDER et al. 1990), and second, more recent studies/papers aimed at assessing the effects of an extension of the CU to cover agricultural products (CAKMAK and KASNAKOGLU 2001, MCCLATCHY 1997, GRETHE 1999).
MANEGOLD does not perform a quantitative analysis of market effects and related welfare effects of a Turkish EU membership, but rather describes possible outcomes qualitatively. The assessment is that Turkey is unable to gain much more from better access to the EU market in view of far-reaching preferential arrangements already in place, but may potentially lose considerably from higher prices for imports of animal products (pp. 60-1). This is supported by later quantitative analysis (GRETHE, p. 68). In addition to the qualitative discussion of potential market effects, MANEGOLD provides an estimate of the budgetary outlays resulting from the CAP applied to Turkey based on Turkish agricultural production and CAP provisions in 1986, which is about €4 billion, compared to a Turkish contribution to the EU budget of €740 million.
AKDER et al. analyze sectoral effects of full EU membership for Turkey quantitatively for the years 1988 and 1995 compared to a situation with Turkey being a nonmember. The analysis is based on a sector model of Turkish agriculture (Turkish European Agricultural Model, or TEAM), an offshoot of the Turkish Agricultural Sector Model (TASM) initiated in a World Bank project in the late 1970s.20 The model covers 66 agricultural products and a high variety of agricultural policies. The supply side is a mathematical programming model using the technique of positive mathematical programming for calibration to the base situation.21 The demand side consists of independent functions of human demand which are linear in income and own prices. The EU and the
20 For a detailed description of the history of the TASM and other models depicting the Turkish agricultural sector, see Beghin (1997).
21 For the basic principles and techniques of positive mathematical programming, see Howitt (1995). For some of the problems involved in implementation and for recent advancements, see Heckelei (2002).
world market are included in the form of import demand and export supply functions with perfectly elastic and inelastic sections. For the 1988 scenarios, the average farm price level, in a situation of full membership, is estimated to be 25 percent above the nonmember level. For 1995, this price differential decreased to 2 percent due to the projected evolution of the CAP and domestic Turkish factors (p. 67). Estimated positive effects on Turkish production are considerable for some products like cotton, tobacco, some cereals, and oilseeds (p. 69) which would not be the case in a CU in agriculture today. This is because today most of EU support is granted in the form of direct payments, which would not apply to Turkey without full membership. Overall welfare effects for Turkey are positive in both EU membership scenarios, as the cost of the CAP in Turkey would be financed from the EU budget. AKDER et al. estimate the cost of the CAP applied to Turkey at €3.1 billion in 1995, and the change in producer surplus, compared to a nonmembership situation, at €4.5 billion (p. 114).
Consumer welfare is projected to be about €6.8 billion above the level without EU membership. This, however, is due to the external assumption that with EU membership, income would increase by 10 percent, which overrides the negative effect due to higher food prices. Other welfare effects which are not reported by AKDER et al., but should be included for an assessment of EU membership, are budgetary savings and revenue forgone by Turkey due to the abolition of many national agricultural policies.
The effects and institutional implications of bringing agriculture in the CU with the EU were analyzed in FAO project TCP/TUR/4552 and are summarized in McClatchy (1997). The quantitative analysis is performed in a partial comparative static approach covering 30 agricultural farm products and selected processed products. The supply, demand, and processing model components were developed and run independently and are linked only if required due to the domestic price formation mechanism.22 The supply side consists of an interdependent and consistent set of constant elasticity functions of area allocation and yield. The demand side consists of single equations being dependent on income and own prices. Processing models assume the processing activity as linearly dependent on the processing margin. The model base period is the average of the years 1993 to 1995 and three policy scenarios are compared for the year 2005: i) no or minimal changes in Turkish agricultural policy, ii) complete abolition of agricultural market policies, and iii) agriculture in the CU with the EU. Model results include domestic prices in Turkey, quantity effects for production, consumption, and trade, as well as welfare calculations which are presented in Table 4.1.
22 An overview of the modelling approach and a detailed description of the supply model can be found in Grethe (1999).
Table 4.1: Comparative Static Effects of Free Trade and a CU on Turkish Agriculture (GRETHE, 1999)
Free trade versus status quo
CU versus status quo
Crop prices (%) -9% -4%
Animal prices (%) -33% -25%
Crop production (%) -3% -1%
Animal production (%) -26% -20%
Crop net trade (mill. $US) -408 +104
Animal net trade (mill. $US) -2,579 -2,336
Producer surplus (mill. $US) -5,069 -3,338
Consumer surplus (mill. $US) +6,225 +3,886
Budgetary effects (mill. $US) -202 -190
Total welfare effects (mill. $US) +954 +358
Sources: GRETHE (1999, pp. 45 ff.); own calculations.
Table 4.1 shows that Turkish agricultural prices with free trade as well as a CU situation are projected to be lower than if base period policies were to be continued. This effect is much stronger for animal products. Accordingly, Turkish production would decrease and imports would increase. Consumers would gain from higher prices and producers would lose with the overall comparative static welfare gain of multilateral trade liberalization being close to
$1 billion US. In case of a CU this would reduce to about $360 million US with about $310 million US of this reduction being due to the terms of trade effect as previously identified in Section 4.1.1.
CAKMAK and KASNAKOGLU (2001) evaluate possible welfare effects of a CU with the EU in agriculture using an update of the TASM. Unfortunately their study is available in Turkish only. The base period for their analysis is 1997 to 1999 and projections are made for the year 2005. A status quo scenario with largely unchanged policies is analyzed next to scenarios of full EU membership (including direct payments) and a CU scenario (without direct payments). Table 4.2 summarizes the changes under the CU scenario compared to the status quo scenario in 2005. Results point in the same direction as GRETHE (1999). The impact of a CU on crop prices and production is projected to be relatively small, whereas animal prices and production decline heavily. Due to the similar base period and projection horizon, core results are discussed and compared to this study in Chapter 9.1.1.
Table 4.2: Comparative Static Effects of a CU on Turkish Agriculture (CAKMAK andKASNAKOGLU, 2001)
CU versus status quo
Crop prices (%) -5.4%
Animal prices (%) -35.4%
Crop production (%) +0.5%
Animal production (%) -31.5%
Crop net trade (mill. US$) +735
Animal net trade (mill. US$) -4,422
Producer surplus (%) -15.9%
Consumer surplus (%) +11.4%
Sources: CAKMAK AND KASNAKOGLU (2001, p. 34); own calculations.
4.3 Institutional Aspects of an Agricultural CU between Turkey and the EU
4.3.1 Harmonization of Agricultural Price Policies and Prices
Along with a CU, agricultural price policies of Turkey and the EU would need to be harmonized because it would be impossible to maintain different levels of institutional prices which exceed transportation cost and quality differences.
This becomes very clear if one tries to imagine the situation of an intervention price in Turkey, far above that in the EU (as is the case currently for wheat) while the world market price is below both support prices. Wheat produced in the EU would be exported to Turkey, to be sold into intervention at the higher price level of the Turkish intervention agency. This process would theoretically end if the EU market price, due to strong Turkish demand, reached the level of Turkey's intervention price. In practice, this process would stop much earlier, due to budget constraints for the Turkish intervention agency and limits to storage and subsidized exports (WTO).
In a CU which includes agriculture, most of the currently applied political trade barriers like tariffs, export subsidies, or the entry price system of the EU would no longer apply to trade between Turkey and the EU. Due to these policy changes Turkish and EU prices would move closer. Price differences, however, could remain due to quality differences, transportation costs, or nontariff barriers like varying product standards. As it is difficult to assess quantitatively which factors add how much to existing price differences between Turkey and the EU, an analysis of the effects of a CU should be based, wherever possible, on the effects of the abolition of market policies instead of assuming equal farmgate or wholesale prices in Turkey and the EU. This approach is followed in the
empirical analysis in this study (see Subchapter 8.6) and the following principles are applied:
• If Turkish institutional prices are above EU institutional prices it is assumed that Turkey has to adjust its institutional prices to the EU level, as it seems not probable that the EU would adjust its CAP in case of a customs union in agriculture.
• It is assumed that a changing im- or export quantity of Turkey to the EU-market normally has no effect on EU prices because the EU is a large country compared to Turkey for most agricultural markets (see Chapter 2).
4.3.2 Harmonization of Other Agricultural Policies
Differences in levels of other support policies like direct payments to producers and input subsidies, could, from a purely technical point of view, continue. But the more these policies have an effect on production, the more they may be considered as problematic for competition reasons.
For example, the direct payments granted to EU beef producers are linked to actual production and therefore distort competition (see Section 2.2.4 above).
The extent to which direct payments for cereals and oilseeds have an effect on production is difficult to assess. Clearly, production of these products and set aside is enhanced compared to nonpremium products like vegetables or potatoes. On the other hand, most alternative products, like vegetables and potatoes, are produced for relatively narrow, mainly domestic markets and it is questionable whether production of these products would increase much in the absence of premiums for cereals and oilseeds. Of course, premiums do also increase the relative advantage of cereals and oilseeds compared to set aside for those farms, which are at the 30 percent set aside limit. In most EU regions however, only few farms have reached this limit.23
Due to the distorting effects of EU direct payments, which are coupled to production, Turkey could of course grant its producers payments at the same level. This, however, would be an extreme burden for the Turkish budget. The cereal and oilseed premiums alone would account for almost €2 billion, close to 7 percent of the Turkish agricultural GDP.24 In addition, Turkey already applies an alternative system of direct payments (see Subchapter 2.3) which is focused
23 In the EU about 10 percent of crop area eligible to receive area payments was devoted to set aside in the marketing year 2000/01.
24 About 31 million t oilseed and cereal production multiplied by the current EU rate of
€63/t.
more on reduction of rural poverty. The problem of distortions of production due to unequal direct payments would be solved for a large part if the current proposals of the European Commission to decouple direct payments completely from actual production were realized (European Commission, 2003).
Another group of policies which distort competition are all kinds of input and credit subsidies which are still applied by Turkey and, in the case of credit subsidies, also by the EU. Input and credit subsidies in Turkey, however, are scheduled to be phased out under the current reform program by 2004. Credit subsidies in the EU are part of the rural development measures and their volume is very heterogeneous among EU member states and regions. Also, other rural development measures summarized as the second pillar of the CAP are applied heterogeneously in EU member states and regions (Subchapter 2.3). In case of a CU there would be no need to harmonize most of these policies between Turkey and the EU. On the contrary it has been argued that the current degree of harmonization of the second pillar within the EU is neither desirable nor efficient (GRETHE, 2002a).
A last policy area in which a high degree of harmonization would be desirable but not necessary for a CU in agriculture, would be the harmonisation of product and, in some cases, process standards. To allow a CU to fully deploy its potential welfare effects the harmonization or mutual recognition of product standards is essential in order to facilitate trade flows. Still, unequal process standards can be justified and efficient under certain conditions; for example, where local environmental goods are concerned. As for standards for the protection of transborder environmental goods or animal welfare standards, a high degree of harmonization would be desirable. If such a harmonization cannot be reached, border policies could be efficient under certain conditions (MEINHEIT, 1995; GRETHE, 2002b; BALKHAUSEN, 2003).
4.3.3 WTO Aspects
Both Turkey and the EU are members of the WTO and have bound their agricultural policies in the Uruguay Round in the areas of market support, export competition, and domestic support. However, policy bindings and reduction commitments were subject to slightly different conditions as Turkey has developing country status in the WTO. Therefore Turkey has not yet fully implemented its Uruguay Round commitments as the implementation period for developing countries ends in 2004, while it ended in 2000 for developed countries.
Due to this membership, WTO requirements for the formation of a CU apply, as laid down in Article XXIV of the GATT and in the Uruguay Round understanding thereof. The main requirements in Article XXIV are:
1. The duties and other barriers which apply to trade of nonmembers of the CU must not be higher or more restrictive than those applied before formation of the CU (Art. XXIV:5(a)).
2. Duties and other trade barriers must be eliminated on "substantially all the trade" between CU members (Art. XXIV:8(a)(i)).
Turkey and the EU notified the WTO of the formation of a customs union in December 1995, and the agreement is still under examination by the WTO Committee on Regional Trade Agreements. As agriculture is still out of the CU, it is questionable whether the requirement of including "substantially all the trade" is being met.25 This question, however, is not relevant to the extension of the CU to cover agriculture, as such an extension would indeed be the final step towards including all trade.
But the harmonization of the Turkish and the EU agricultural tariff schedule would have to fulfill the requirement to not increase tariffs for nonmembers. No rules are laid down in Article XXIV with respect to harmonization of commitments other than tariffs such as TRQs, export subsidies, or domestic support policies, under a CU. This can be explained by the fact that the original Article XXIV was part of the GATT 1947, whereas agricultural policies other than tariffs were bound effectively for the first time in 1994 with the implementation of the results of the Uruguay Round.
One principal question arising from the establishment of a complete CU between Turkey and the EU is whether they would try to negotiate a joint schedule in the WTO or whether each party would keep its own schedule with individual commitments with respect to TRQs, export subsidies, and domestic support. Examples exist for both approaches: the CU between Switzerland and Liechtenstein has a joint schedule whereas member countries of the Southern African CU have individual schedules. The EU enlargement in 1995 was the first time in WTO history that individual agricultural schedules (of the then EU-12, Austria, Sweden, and Finland) where consolidated to a single schedule and the future EU Eastern enlargement will follow this precedent. As the EU is a CU, from the WTO point of view, such an option also seems possible if a full CU is enacted between Turkey and the EU.
With or without a joint schedule, WTO commitments of Turkey and the EU may have implications for the formation of a CU in agriculture. Therefore, Sections 4.1.3.1 to 4.1.3.3 discuss the commitments of Turkey and the EU in the areas of
25 For a detailed analysis of this issue, see Grethe and Tangermann (1999a, pp. 26-35) and Twesten (1999).
market access, export competition, and domestic support and their relevance should agriculture be included in the CU.
4.3.3.1 Market Access
Article XXIV:5(a) states, rather vaguely, that countries forming a CU have to ensure that "...duties and other regulations of commerce...in respect of trade with [WTO] contracting parties not parties to such [customs] union shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such a [customs] union". No specific rules are defined, however, on how "on the whole" or "general incidence" should be conceptualized. The situation was improved by the Uruguay Round interpretation of Article XXIV which states that the "general incidence" of duties shall be calculated as a country- and product quantity or value-weighted average of historically applied tariffs. In addition, rules for compensation are specified if a country forming a CU increases its bound tariff rates. Such compensatory concessions, which are subject to negotiations and could consist, for example, of increased TRQ or reduced tariff rates for other tariff lines, have been of little importance in the 1995 EU enlargement as preaccession tariffs were quite similar (TWESTEN, 1999, p. 11). With Eastern enlargement, however, many more compensatory tariff adjustments will become necessary due to low tariff bindings in many Central European countries (TANGERMANN, 2000, p. 16).
It is assumed that Turkey will fully apply the EU external agricultural tariffs within a CU. This will not cause much problems in the WTO as Turkey's WTO-bound tariffs are above EU-level in most cases and would therefore be lowered in case of a CU. In some cases, however, Turkey's current WTO bindings are below those of the EU with the result that tariff bindings would increase in a CU and compensations could become necessary. Products of CN-chapters 01-24, for which the tariff difference exceeds 5 percentage points, are listed in Table 4.3.
Table 4.3: Agricultural Products for which EU Tariff Bindings in the WTO Exceed those of Turkeya
CN code Product EU binding (2000) Turkish binding (2004) Ex 010290 Breeding cattle (nonpurebred) 10.2 % + €931/t 7.7%
Ex 010410 Breeding sheep (nonpurebred) €805/t 15.6%
Ex 010420 Breeding goats (nonpurebred) €805/t 15.6%
Ex 010511 Breeding poultry (<185 g) €52-152/1,000pcs 11.7%
Ex 010592 Breeding poultry (>185 g) €209-345/t 11.7%
04081180 Egg yolks, dried, other €1,423/t 53.1%
04089180 Bird eggs, not in shell, other €1,374/t 53.1%
0702 Tomatoes, fresh or chilled 8.8% - 14.4% + €298/t 48.6%
Ex 0707 Cucumbers 12.8% - 16% + €378/t 27.9%
Ex 070910 Globe artichokes, 01.11-30.06 10.4% + €229/kg 19.5%
07099070 Courgettes 12.8% + €152/t 19.5%
071410 Manioc €95/t 19.3%
07142090 Sweet potatoes, other €64/t 19.3%
07149011 Arrow root, salep, oth. starches €95/t 19.3%
10061060 Rice in the husk, not for seed €211/t 45%
10062055 Husked (brown) rice €264/t 45%
10063000 Semi- or wholly-milled rice €416/t 45%
10064000 Broken rice €128/t 45%
1509, 1510 Olive oil €1,102 - 1,603/t 31.2 - 46.8%
15220031 Soap stocks €299/t 31.2%
15220039 Residues from fat processing €478/t 31.2%
16025010 Other prep. of bovine animals €3,034/t 121.5%
16029061 Other preparations €3,034/t 121.5%
1701 Sugar €339 - 419/t 135%
20091111, -19 Frozen orange juice 33.6 % + €206/t 58.5%
20091911, -19 Orange juice 33.6 % + €206/t 58.5%
20092091 Grapefruit juice 33.6 % + €206/t 58.5%
20093011 Juice of any other citrus fruit 33.6 % + €206/t 58.5%
20094011 Pineapple juice 33.6 % + €206/t 58.5%
200960 Grape juice 22.4 – 40% + €270 - 1,516/t 58.5%
20097011 Apple juice 30.0 % + €184/t 58.5%
21021031 Bakers' yeast 12.5% + €145 - 492/t 31.5%
21069051 Cheese fondues 8.3% + €783/t 58.5%
22043010 Grape must, in fermentation 32.0% 21.3%
22043091, -99 Grape must, other 22.4 - 40% + €476 - 1,516/t 21.3%
230210–40 Bran, sharp and other residues €44/t / €89/t 13.5%
230210–40 Bran, sharp and other residues €44/t / €89/t 13.5%