Sequencing the Negotiation as a Package
ABSTRACT
The 1995 Customs Union covers industrial goods and leaves services, agriculture and public procurement outside, while obliging Türkiye to align with EU external tariffs without participating in the agreements that set them. This paper argues that three simultaneous developments have raised the cost of that asymmetry, and that modernisation should be negotiated as one package rather than as separate technical files.
1. The relationship as it stands
Bilateral goods trade between Türkiye and the European Union reached a record of more than 217 billion euros in 2025, and Türkiye remained the Union’s fifth largest trading partner. Turkish official figures place total trade turnover at approximately 233 billion dollars, of which the automotive sector — finished vehicles and parts — accounts for roughly 62 billion. The European Union is Türkiye’s largest trading partner, taking about 40 percent of Turkish exports, and its largest source of foreign direct investment.
The governing instrument is Decision 1/95 of the EC–Turkey Association Council, in force since 1996. It establishes free circulation of industrial goods and processed agricultural products, requires Turkish alignment with the Union’s common external tariff and with a substantial body of trade-related legislation, and provides for regulatory harmonisation in technical standards. It has functioned: bilateral trade rose from roughly 33 billion dollars in 1996 to the current level, an increase of several hundred percent.
2. The three structural asymmetries
The instrument’s limitations were tolerable when it was signed and are not now.
Scope. Services, agriculture and public procurement are excluded. Services now constitute the larger share of value added in both economies, and public procurement is where a substantial portion of the European industrial policy budget is spent. Exclusion from these chapters means the agreement covers a shrinking share of the commercial relationship.
Trade policy alignment without participation. Türkiye is obliged to align with the Union’s external tariff schedule but does not participate in negotiating the Union’s free trade agreements with third countries. The practical result is that third-country exporters gain preferential access to the Turkish market through agreements Türkiye did not sign, while Turkish exporters gain no reciprocal access unless they conclude a parallel agreement, which the third country has limited incentive to grant.
Non-tariff friction. Road transport quotas, visa procedures for business travel and customs processing delays generate costs that fall disproportionately on Turkish exporters and that a goods-only agreement does not address.
3. Three developments that raised the cost of asymmetry
Three changes since 2023 have converted a long-standing structural inefficiency into an acute one.
The carbon border mechanism. Its definitive phase began on 1 January 2026, pricing embedded emissions in steel, aluminium, cement, fertilisers, electricity and hydrogen at the EU carbon price, with the first quarterly certificate price set at 75.36 euros per tonne. Türkiye is the Union’s largest steel supplier. The mechanism provides for deduction of carbon costs paid in the country of origin, and Türkiye’s pilot emissions trading system — established under Climate Law No. 7552 of July 2025 — operates with full free allocation, so no deductible price is currently paid. Members of a customs union do not ordinarily impose border carbon charges on one another; that the Union does so here demonstrates the limits of the current arrangement.
European defence industrial funding. The Ankara Declaration of July 2026 reaffirmed the Hague commitment to 5 percent of gross domestic product on defence and security-related spending by 2035 and set out more than 50 billion dollars in new equipment procurement. A substantial portion of European rearmament is financed through European Union instruments that exclude Turkish firms by design, even as NATO’s industrial agenda includes them and Turkish suppliers exhibited at the Alliance’s Defence Industry Forum in Ankara.
Tariff escalation globally. Rising protectionism raises the value of preferential access and the penalty for lacking it, and it increases the frequency with which the Union concludes defensive trade agreements to which Türkiye must align without benefit.
4. The negotiating package
The three files are conventionally handled by different ministries on the Turkish side and different directorates-general on the European side, which produces three separate negotiations in which Türkiye is the demandeur in each. Consolidating them changes the structure.
What Türkiye can offer. Services and public procurement liberalisation are the principal concessions available, and the European Commission has stated publicly that deepening trade in public procurement and services would create significant opportunities for businesses on both sides. Regulatory alignment in areas beyond the current scope, sanctions enforcement cooperation and customs digitalisation are secondary offers with real value to the European side.
What Türkiye should seek. Recognition of a functioning domestic carbon price under the mechanism’s origin-country provision; access to European defence industrial funding instruments or an equivalent associated-country arrangement; a consultation mechanism on third-country trade agreements; and resolution of road transport quotas and business mobility friction.
Modelling of full modernisation has suggested gains in the range of 1.8 to 2.5 percent of Turkish gross domestic product through improved export competitiveness and reduced trade costs, with additional trade volume for the European economy. Such estimates depend heavily on assumed efficiency gains and should be treated as indicative of direction rather than magnitude.
5. Sequencing
The sequencing conclusion is specific and is the operative recommendation of this paper. A domestic carbon price should be activated before recognition is requested.
The reason is that the mechanism cannot accommodate exemptions. It is constructed to equalise carbon costs at the frontier, and any exemption granted without an equivalent domestic price would defeat its purpose and invite legal challenge from EU producers. It can accommodate equivalence. A request framed as ‘exempt Turkish exports’ has no available legal form; a request framed as ‘recognise the price Turkish installations already pay’ has one. Activating partial paid allocation converts the first request into the second, at a fiscal cost that is recovered domestically rather than surrendered to the European certificate market.
6. Constraints and risks
Three constraints bound the strategy. The negotiation has been formally stalled for years and its reopening depends on political conditions in EU member states that are outside Turkish control, so the package should be constructed to be tabled when a window opens rather than to create one. Domestic resistance to services and procurement liberalisation will be significant in protected sectors, and the distributional effects require explicit treatment. And European Union defence funding exclusion may prove the least tractable element, since it rests on membership status rather than on trade law and may require an associated-country instrument that does not yet exist.
7. Conclusion
The Customs Union delivered a large increase in bilateral trade under a design that covered industrial goods and left the rest outside. Three developments — carbon pricing at the frontier, defence industrial funding exclusion, and global tariff escalation — have converted that partial coverage from an inefficiency into a competitive disadvantage in exactly the sectors where Türkiye has scale. The negotiating response is a single package rather than three files, and its first move is domestic: a paid carbon price, which is the only instrument that converts a request for exemption into a claim for equivalence.
SOURCES
Decision 1/95 of the EC–Turkey Association Council establishing the final phase of the Customs Union.
Statement by Commissioner Valdis Dombrovskis following the EU–Türkiye High-Level Economic Dialogue, Istanbul, July 2026 (European External Action Service).
European Commission, EU–Türkiye trade relations; EEAS Customs Union briefing.
Turkish Ministry of Trade statements on Customs Union modernisation and bilateral trade turnover, July 2026.
Regulation (EU) 2023/956 and Regulation (EU) 2025/2083; European Commission CBAM Q&A, 27 May 2026.
Ankara Declaration, 36th NATO Summit, 7–8 July 2026.
INSTITUDE, Modernizing the Turkey–EU Customs Union: Issues and Prospects (scenario modelling of efficiency gains).
Furkan Mahmut Tameroglu