Economic Research Forum (ERF)

Liberalising road transport markets between Turkey and Europe

261
The routes that connect Turkey to its most important trading partners in Europe are governed by a system of road transport quotas, which has a significantly negative effect on the country’s exports. This column explores the challenges of liberalising the market for road freight transport services between Turkey and the European Union.

In a nutshell

Quotas imposed by EU members on road transport services between Turkey and Europe increase costs, thereby restricting trade between the two parties.

To increase access to the EU’s road freight transport market, Turkey could pursue a road transport agreement; conclude a broader agreement on services trade liberalisation; or make use of WTO agreements.

In order to achieve the elimination of road transport quotas, Turkey will probably have to adopt and implement the whole EU acquis on road transport.

The European Union (EU) is Turkey’s most important trading partner. While 31% of Turkish exports to the EU by value are carried by road, the share declines to 17% in the case of imports. Since the EU-Turkey customs union established in 1995 applies only to industrial goods, it does not cover trade in road freight transport services between the parties. As a result, there has been little incentive to liberalise trade in such services – and hence this trade is restricted.

Road transport quotas

Road transport services operating between EU members and Turkey are primarily regulated by bilateral intergovernmental agreements between individual EU members and Turkey. A key feature of this trade is the application of a system of quotas, which authorise hauliers in the signatories to conduct transport operations, as long as they hold a permit for the country with which the bilateral accord has been concluded.

As a general rule, permits are exchanged on a reciprocal basis, and the number of permits is set on an annual basis. There are several types of quotas or road transport licences, such as bilateral permits, transit permits, third-country permits, multiple permits and return load permits. For example, to export goods from Turkey to Germany by road, the haulier carrying the freight must have transit permits for all transit countries on the route as well as a bilateral permit for Germany.

Thus, the routes that connect Turkey to its most important trading partners in the EU (such as France, Germany, Italy, Spain and the UK) require road freight operators to pass through the territory of other EU members. This traffic is most concentrated in Bulgaria and Greece, but extends into Austria, the Czech Republic, Hungary, Poland, Slovenia and other EU members. Note that with the exception of Cyprus, Ireland and Malta, all EU members have concluded bilateral road transport agreements with Turkey (World Bank, 2014; Pastori et al; Gross et al, 2018).

Some EU members, such as Bulgaria, Greece and Romania, have both free and payable transit permits. Once free permits are exhausted, hauliers have to use the paid permits. While EU hauliers have access to enough permits to carry goods to and from Turkey, the same is not true for Turkish hauliers. For the latter, the principal issue is that demand for transit permits exceeds the supply provided by some EU members, such as Austria, Hungary, Italy, Romania and Slovenia.

Furthermore, the number of permits determined by EU members, including both bilateral and transit permits, has been stable over time, rather than growing in line with trade flows. Estimates of the trade effects of road transport quotas between the EU and Turkey reveal that both bilateral and transit quotas have a significantly negative effect on Turkish exports (Ülengin, 2015; Çekyay et al, 2017; Togan and Bayar, 2016).

Ways to eliminate road transport quotas between the EU and Turkey

To increase access to the EU’s road freight transport market, Turkey has three alternatives:

  • First, it could reduce the trade costs by signing a road transport agreement.
  • Second, it could conclude a free trade agreement on liberalisation of services trade, which includes road transport services.
  • Third, it could try to make use of Article V of the General Agreement on Tariffs and Trade (GATT) and Article XI of the Trade Facilitation Agreement (TFA), governed by the World Trade Organization (WTO).

Road transport agreements

Liberalisation of road transport services between the EU and Turkey requires that there are no restrictions imposed on the operation of Turkish and EU hauliers between the two parties. Turkish hauliers should be able to carry freight freely between, say, Istanbul and Frankfurt, and also between, say, Frankfurt and Istanbul. Similar conditions should apply for EU hauliers.

Liberalisation further requires that no restrictions are placed on freight transport by a Turkish company between, say, Frankfurt and Hamburg as well as between, say, Frankfurt and Vienna. There should be no restrictions by EU members on ‘road cabotage’ – the national carriage of goods for hire or reward carried out by non-resident hauliers on a temporary basis in a domestic economy. Equally, there should be no restrictions on freight transport by an EU company between, say, Istanbul and Antalya (no restrictions on road cabotage by Turkey).

In the jargon of the WTO’s General Agreement of Trade in Services (GATS), this refers to liberalisation of cross-border supply (Mode 1 of GATS). In addition, liberalisation requires that there should be no restrictions imposed on the establishment of Turkish hauliers in the EU, and no restrictions on the establishment of EU hauliers in Turkey. In the GATS jargon, this refers to liberalisation of commercial presence (Mode 3).

Finally, liberalisation requires that Turkish transport service providers or Turkish employees of Turkish hauliers should be able to move freely for relatively short periods (temporarily) from Turkey to the EU a well as within the EU. Similarly, EU transport service providers or EU employees of EU hauliers should be able to move freely for relatively short periods (temporarily) from the EU to Turkey and within Turkey. In the GATS jargon, this refers to liberalisation of movement of natural persons (Mode 4).

Note that according to the EU acquis on road freight transport, the above requirements are satisfied in the EU among its members with the exception of road cabotage, which is restricted.

Road cabotage is governed by Regulation (EC) 1072/2009, according to which every haulier is entitled to perform up to three cabotage operations within a seven-day period starting from the day after the unloading of the international transport. When the haulier carries out the cabotage operations in different EU members, only one cabotage operation is allowed in a given EU member to be carried out within three days of entering that EU members without cargo. Thus, road transport operations within the EU are not completely free even among members.

The road transport agreement between the EU and Switzerland, which is not a member of the EU, provides for liberalisation of road transport services subject to the restrictions imposed by Regulation (EC) 1072/2009. To achieve this liberalisation, Switzerland essentially had to satisfy two conditions.

According to the provisions laid down in the ‘Treaty on the Functioning of the European Union’, the European Commission has external competence to conclude international agreements in the area of transport, but this competence has to be shared with EU members. In order to sign a bilateral road transport agreement with a non-EU state, the Commission needs to be authorised and empowered by the EU members through the European Council. In the case of Switzerland, such authorisation was given to the Commission.

Furthermore, Switzerland had to harmonise its road freight regulatory framework with that of the EU. In particular it had to implement large number of EU regulations and directives on market access and competition; prices and fiscal conditions; social conditions; technical conditions; and road safety (Togan, 2016). After satisfying these two conditions, Switzerland signed the road transport agreement with the EU in 2002.

Turkey could sign a bilateral road transport agreement with the EU similar to that between the EU and Switzerland as long as it satisfies the two conditions and all parties are willing to sign it. In such a case, the Commission would be authorised and empowered by the EU members through the Council to sign the agreement. Second, Turkey would have to adopt and implement the whole EU acquis on road transport.

A free trade agreement on liberalisation of services trade

The second alternative to liberalising trade in road transport services is to conclude a free trade agreement on services trade. Both parties are aware that the present customs union no longer meets the requirements of twenty-first century trade relations. Updating will include liberalisation of services trade between the EU and Turkey, and it is likely to cover liberalisation of transport services (Togan, 2018).

Adopting and implementing the EU acquis in services that will be included in the free trade agreement will be a daunting task for Turkey, but this approach will definitely liberalise trade in road transport services between the two parties.

WTO agreements

The third alternative for reducing trade costs between the EU and Turkey is to make use of Article V of GATT and Article XI of the TFA. The former determines the concept of traffic in transit and lays down the conditions that a member may impose on goods transported through its territory by another party to a foreign destination.

Accordingly, the main purpose of the provision is to provide for the freedom of transit through the territory of each WTO member for transport to or from the territory of other WTO members. In order to ensure that this freedom is effective, Article V stipulates two essential requirements: not to hinder traffic in transit by imposing unnecessary delays or restrictions or by imposing unreasonable charges; and to accord ‘most-favoured-nation’ treatment to transiting goods of all members.

Article XI of TFA clarifies and improves GATT Article V on freedom of transit. Accordingly, the article associated with the freedom of transit stipulates that WTO members shall not impose non-transport-related fees or seek voluntary restraints on traffic in transit through a binding commitment. It includes various disciplines on inspection and guarantee schemes as mostly binding commitments.

The TFA’s Article XI also forbids disguised restrictions on traffic in transit. Thus, Article V of the GATT 1994 and Article XI of the TFA could serve as useful tools for Turkey to open trade in road transport services between the EU and Turkey, particularly if they are clarified and tested following an effective interpretation by the WTO adjudicating bodies when invoked in a dispute initiated by Turkey or other members of the WTO (Artiran, 2016).

Conclusion

Quotas imposed by EU members on road transport services trade between Turkey and the EU increase trade costs, thereby restricting trade between the two parties. But whichever of the three ways to eliminate the use of road transport quotas that Turkey opts to pursue, it will probably have to adopt and implement the whole EU acquis on road transport.

Further reading

Artıran, P (2016) ‘Road Transport Restrictions, Freedom of Transit and
the Trade Facilitation Agreement: The Case of Turkey’, in Trade Costs and Inclusive Growth: Case Studies presented by WTO Chair-Holders edited by R Teh, M Smeets, M Sadni Jallab and F Chaudhri, World Trade Organization.

Çekyay, B, PT Palut, Ö Kabak, F Ülengin, Ö Özaydın and B Ülengin (2017) ‘Analysis of the Impact of Bilateral and Transit Quotas on Turkey’s International Trade by Road Transport: An Integrated Maximum Flow and Gravity Model Approach’, Research in Transportation Economics.

Gross, D, J Pelkmans, M Akgüç, M Busse and M Disalvo (2018) ‘Strengthening EU-Turkey Economic Relations: Can Services Revitalize the Customs Union’, Centre for European Policy Studies.

Pastori, E, A Sitran, C Rosa, D Bielanska, A Korzhenevych, M Artavia and A Jarvis (2014) ‘Study on the Economic Impact of an Agreement between the EU and the Republic of Turkey’, ICF Consulting.

Togan, S, and G Bayar (2016) ‘Liberalizing Transport Sectors and the Effects of Infrastructure Development’, in The Liberalization of Transportation Services in the EU and Turkey by S Togan, Oxford University Press.

Togan, S (2018) ‘Modernising the EU-Turkey Customs Union’, The Forum ERF Policy Portal.

Ülengin, F, B Çekyay, PT Palut, B Ülengin and Ö Kabak (2015) ‘Effects of Quotas on Turkish Foreign Trade: A Gravity Model’, Transport Policy 38: 1-7.

World Bank (2014) ‘Evaluation of the EU-Turkey Customs Union’.

Most read

Fair competition is needed to empower women economically in the Arab world

The participation rates of women in the labour market in Arab countries are the lowest in the world. This column argues that remedying the under-representation of women in the labour force is a social and economic imperative for the region. There are three dimensions for action to realise the potential of Arab women: amending laws and regulations; instilling fair competition in markets; and promoting the digital economy.

Arab countries are caught in an inequality trap

Conventional wisdom, based mainly on surveyed household income distribution statistics, suggests that inequality is generally low in Arab countries. At the same time, little attention has been devoted to social inequalities, whether in terms of outcomes or opportunities. This column introduces a forthcoming report, which offers a different narrative: based on the largest research project on the subject to date and covering 12 Arab countries, the authors argue that the region is caught in an inequality trap.

Recession without impact: why Lebanese elites delay reform

The survival of Lebanon’s political elites is highly dependent on the wellbeing of the economy. Why then do they delay necessary reform to avoid crisis? This column examines the role of politically connected firms in delaying much-needed economic stabilisation policies.

Competition laws: a key role for economic growth in MENA

Competition policy lacks the attention it deserves in the countries of the Middle East and North Africa (MENA), a region characterised by monopolies and lack of market contestability. As this column explains, there are many questions about the extent of anti-competitive barriers facing new market entrants in the region. What’s more, MENA’s weak overall performance on competition is likely to be hindering economic growth and the path towards structural transformation.

The Egyptian economy is still not creating good jobs

Growth in Egypt has recovered substantially since the downturn following the global financial crisis and the political instability following the 2011 revolution – but what has happened to jobs? This column reports the results on employment conditions from just released data in the 2018 wave of the Egypt Labor Market Panel Survey.

How Egyptian households cope with shocks: new evidence

Managing risks and reducing vulnerability to economic, social, environmental and health shocks enhances the wellbeing of households and encourages investment in human capital. This column explores the nature of shocks experienced by Egyptian households as well as the coping mechanisms that they use. It also examines the relationship between such risks and job formality and health status.

The future of Egypt’s population: opportunities and challenges

Egypt’s potential labour supply depends on the growth and changing composition of its working-age population. This column reports the latest data on labour supply and fertility rates, concluding that the country has a window of opportunity with reduced demographic pressures to try to address longstanding structural challenges for the labour market.

Egypt’s labour market: facts and prospects

An ERF policy conference on the Egyptian labour market in late October 2019 focused on gender and economic vulnerability. This column summarises the key takeaways from the event.

Domestic demand and competition: a new development paradigm for MENA

A lack of competition in domestic and regional markets is holding back development in the Middle East and North Africa. This column argues that the region and the international community must ensure that barriers to market entry and exit are eliminated, and that independent regulatory bodies at the national and regional levels help to promote domestic demand as the main engine for sustainable and inclusive growth.

Gender discrimination in small business lending: evidence from Turkey

Discrimination in access to financial services can prevent women from exploiting their entrepreneurial potential. This column reports on a ‘lab-in-the-field’ experiment to test for the presence of gender discrimination in small business lending in Turkey.