Asymmetric Free Trade Agreements and Misalignment of Incentives: Lessons From the European Union–Turkey Customs Union

Abstract

Under the European Union (EU)–Turkey customs union, the EU can negotiate free trade agreements (FTAs) with third countries without Turkey's involvement. Simultaneously, Turkey is required to apply the same external tariffs and standards and negotiate its own FTAs in line with the EU. This leads to asymmetries and misalignment of incentives in Turkey's trade relationships. This study utilizes the peculiar nature of this arrangement to explore the asymmetric FTAs and their effects on Turkey and the Union. We find no effect of asymmetric FTAs on Turkish trade. This finding can be explained partially by evidence that Turkish compliance with EU tariffs is low for asymmetric FTAs. This is especially the case for the goods category in which Turkey specializes, and the divergence extends to at least 10 years after the EU signs an asymmetric FTA. As customs unions require that external trade policy be symmetric across all members for them to function optimally, this divergence in tariffs between Turkey and the EU needs to be addressed by removing the misalignment of incentives.