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Eighth Report Contents

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Scrutiny of international agreements: Free Trade Agreement with Turkey, Air Services Agreement with Iceland, and Headquarters Agreement with the Square Kilometre Array Observatory

Chapter 1: Agreement reported for the special attention of the House

Free Trade Agreement, done at Ankara on 29 December 2020, between the United Kingdom of Great Britain and Northern Ireland and the Republic of Turkey (with Exchange of Letters) (CP 372, 2021)2

1.The Free Trade Agreement between the UK and Turkey (the UK-Turkey Agreement) was laid on 24 February 2021, and the scrutiny period is scheduled to end on 15 April 2021. It was considered by the Committee on 24 March 2021.

2.The UK-Turkey Agreement seeks to preserve, as far as possible, the trade relationship the UK and Turkey had while the UK was a member of the EU. The EU-Turkey trade relationship is governed by a set of agreements and legal instruments, which the Explanatory Memorandum collectively calls ‘the EU-Turkey Arrangement’. These include the EU-Turkey Customs Union,3 the Preferential Agreement on Agriculture,4 and the Preferential Agreement on Coal and Steel.5 Turkey’s close trading relationship with the EU has meant that existing arrangements could not be fully transitioned. For example, the Customs Union agreement had to be recast as a standard free trade agreement between the UK and Turkey, resulting in the introduction of new rules of origin requirements, as set out in paragraphs 9 to 16.

3.The UK-Turkey Agreement has been provisionally applied since 1 January, pending the completion of full ratification procedures by the Parties. The Agreement will enter into force once diplomatic notes have been exchanged confirming that all legal requirements have been completed.

4.In line with the underlying EU-Turkey Arrangement, it focuses on trade in goods. It is therefore not a comprehensive free trade agreement: it does not cover services trade, investment, substantive public procurement provisions, or digital trade.

5.It is important to note that the UK-Turkey Agreement is not intended to be permanent, but contains a review clause committing the Parties to begin a review no later than two years after it enters into force. The aim is to develop an enhanced agreement, with the review covering, among other things, trade in services, agricultural goods, investment, subsidies, labour issues, anti-corruption, sustainable development6 and climate change. The Joint Committee set up under the Agreement (see paragraph 42) is responsible for identifying barriers to an enhanced agreement and setting timescales for their resolution.7

6.While reflecting the EU Arrangements, substantial areas that would usually be covered in a comprehensive free trade agreement are excluded from the UK-Turkey Agreement. Instead, a review is set to start within two years to enhance the Agreement. Given the scope of the areas subject to this review, we call on the Government to undertake an early public consultation on proposals for an enhanced agreement, and to publish its negotiating objectives. We identify throughout this report a number of areas to be considered for inclusion.

The UK’s trading relationship with Turkey

7.An overview of UK-Turkey trade is provided in Box 1.

Box 1: UK trade with Turkey

Turkey is the UK’s 19th largest trading partner, accounting for 1.3% of total UK trade. In 2019 trade in goods and services between the UK and Turkey was worth £18.6 billion. Trade in goods The UK imports more goods than it exports, with £7.7 billion worth of exports, compared to £10.9 billion of imports in 2019. Top goods exports to Turkey include machinery and mechanical appliances, precious stones and metals, iron and steel, and vehicles. Top goods imports include vehicles, machinery and mechanical appliances, electrical machinery and equipment, and articles of apparel and clothing.8 Trade in services In 2019, the UK imported £1.9 billion in services and exported £1.6 billion in services to Turkey. Top services exports to Turkey include travel, transportation, and other business services. Top services imports include travel, other business services, and financial services.9 Neither the UK-Turkey Agreement, nor the EU-Turkey Arrangement, covers services.10

Tariffs and customs

8.Most of the tariff preferences found in the EU-Turkey Arrangement have been replicated, with only minor exceptions. The UK-Turkey Agreement replicates existing tariff preferences for goods covered by the Agriculture Agreement and the Coal and Steel Agreement, with minor changes. On agricultural goods, the Parliamentary Report published alongside the Agreement notes that the UK has agreed not to roll over complex agricultural tariffs, such as the entry price system,11 to imports from Turkey. The multiple tariff schedules under the EU-Turkey Arrangement have been consolidated into a single tariff schedule in the UK-Turkey Agreement.12 Turkey also applies unilateral preferences to the EU on a significant number of tariff lines and has committed to apply these preferences to the UK.13

9.While most tariff preferences under the EU-Turkey Arrangement have been replicated, the UK-Turkey Agreement contains one substantial difference: it does not roll over the EU-Turkey Customs Union.14 Instead, it follows a typical free trade agreement model, introducing new rules of origin requirements on industrial goods traded between the UK and Turkey.

10.The Agreement contains provisions to facilitate customs procedures, and the Parliamentary Report explains that “HM Government has worked closely with Turkey to ensure that customs processes are as simple, clear, and predictable as possible, and that any changes do not affect current trade flows”.15 Nonetheless, the departure of the UK from the EU-Turkey Customs Union means businesses have had to familiarise themselves with new rules of origin requirements. There will also be an administrative cost attached to the completion of new customs paperwork. The Parliamentary Report acknowledges that this could have “substantive impacts on trade in goods that were previously traded within the Customs Union”.16

11.It is difficult at this early stage to assess how effective the new customs and trade facilitation processes will be in minimising the administrative and operational costs on UK businesses trading with Turkey. As MakeUK17 told us in its written evidence:

“It will be important for key sectors such as automotive and textiles supply chain operators to receive confirmation and adapt to the necessary changes in administration and business operations. As a consequence of the agreement, it is important to ensure that there is as seamless a transition as possible from the customs environment under the EU-Turkey customs union to the bilateral UK-Turkey free trade agreement.”18

12.Some sectors will be more affected than others, and MakeUK said that the sectors most vulnerable to the changes were processed foodstuffs, materials, textiles, advanced manufacturing, manufacturing and electronics, chemicals, and the automotive sector. MakeUK indicated that the increased complexity of the new arrangements could result in businesses losing out, stating: “There is the potential impact for complications arising from the Rules of Origin provisions for UK and Turkey business and [that] could quickly lead to the loss of preferential tariffs being placed on bilateral business.” MakeUK highlighted that the new arrangements will impose additional burdens on UK firms, such as having to identify the complete economic origins across supply chains and understand transformation requirements to meet cumulation thresholds. It indicated that the bilateral cumulation provisions are helpful for some sectors, but noted that if businesses fail to meet cumulation requirements, they will be vulnerable to the imposition of high tariffs.19

13.The Society of Motor Manufacturers and Traders (SMMT) told us that several UK automotive businesses have reported significant challenges and increased burdens since the Agreement was provisionally applied. In particular, Turkish importers are being asked to pay import tariffs or provide financial guarantees on UK automotive imports until the Agreement is fully ratified, to be reimbursed by the Turkish authorities following ratification. SMMT indicated that this would have an immediate impact on the competitiveness of UK exports.20

14.UK automotive exporters have also faced additional burdens related to origin certificates. SMMT explained that pending ratification, Turkish authorities are no longer accepting one origin declaration for multiple shipments, increasing the paperwork that UK exporters must complete. SMMT noted that it was unclear whether exporters were in fact required to sign each individual origin declaration, and recommended that the UK Government collaborate closely with Turkish authorities to minimise the burden on exporters.21

15.Despite these problems, on 16 March 2021 Ford announced that its Dagenham Plant would manufacture and supply diesel engines for assembly in Turkey, highlighting the UK-Turkey Agreement as “extremely significant”.22

16.Some UK businesses are likely to face new burdens and costs now that the UK is no longer a member of the EU-Turkey customs union. We call on the Government to provide an assessment of the impact and additional costs this shift in the UK-Turkey relationship will have on UK businesses and supply chains. While we welcome the guidance provided by the Government on how to import from and export to Turkey,23 we recommend the Government provide support to help smaller firms navigate the new requirements for UK-Turkish trade.

Extended cumulation and PEM Convention

17.The Agreement temporarily introduces an extended cumulation of origin, allowing both Parties to recognise content from the EU and other countries in the pan-Euro-Mediterranean preferential rules of origin (the PEM Convention) 24 as originating in the UK or Turkey in exports to one another. The Agreement also allows EU processing to be cumulated, with the exception of textiles processing.25

18.The extended cumulation of origin, however, does not apply to UK or Turkish content in goods exported to the EU. This is because the UK-EU Trade and Cooperation Agreement (TCA) does not provide for UK content to be recognised as EU content in trade with common trade partners, nor does it allow for the cumulation of third-party content in trade between the UK and EU.26

19.SMMT explained that automotive supply chains are highly integrated across the UK, Turkey and the EU, with Turkish assembly plants importing a steady supply of UK engines, which are used in passenger cars and commercial vehicles that are then shipped from Turkey to the EU and also back to the UK.27 The new arrangements will thus present a significant challenge:28 for example, UK businesses that import Turkish vehicles to be customised into wheelchair-accessible vans and subsequently export them to the EU are now likely to face EU tariffs.

20.The UK and Turkey agreed temporarily to incorporate the revised pan-Euro-Mediterranean preferential rules of origin (the PEM Convention) as a stop gap measure after the end of the transition period.29 But because the EU and Turkey are in a customs union, Turkey is required to apply the EU’s preferential tariff rules with common trade partners. This means that the rules of origin in the UK-Turkey Agreement will eventually need to align with those set out in the UK-EU Trade and Cooperation Agreement (TCA). The Parliamentary Report indicates that the relevant parts of the Rules of Origin Protocol will be replaced by the equivalent parts in the TCA.30

21.There are some differences between the temporary rules of origin under the UK-Turkey Agreement and under the TCA, and it is unclear how these discrepancies will be resolved. Most notably, the rules of origin provisions in the UK-Turkey Agreement extend cumulation to all PEM members, but the TCA does not. If the rules of origin in the UK-Turkey Agreement are to be directly replaced with the equivalent elements in the TCA, cumulation will no longer be extended to PEM members. The SMMT indicated that this may cause significant disruption to some supply chains. It added that the rules for electric vehicles and lithium-ion batteries are different under the revised PEM and the TCA, causing further uncertainty for the UK automotive sector.31

22.We call on the Government to explain how differences between the revised PEM rules and the TCA Rules of Origin will be resolved, and to set out the timelines for the negotiations on the updated Rules of Origin Protocol. We also call on the Government to provide comprehensive and detailed guidance on any new arrangements that will arise out of the updated Rules of Origin Protocol.

Tariff rate quotas

23.Tariff rate quotas have been re-sized to reflect the fact that the UK is a smaller market for imports and exports than the EU. The new quotas were calculated based on a historical usage data and trade flow data. We note that the effect of the re-sized TRQs is—as yet—unknown, given that the Agreement has only just been concluded and TRQ usage data is not yet available.

Technical barriers to trade

24.The Agreement does not replicate the EU-Turkey arrangements on removing technical barriers to trade (TBT) and, instead, reverts to WTO rules. This reflects Turkey’s obligations to harmonise with EU law for most goods to allow for frictionless trade, and the lack of comparable provisions in the UK-EU Trade and Cooperation Agreement (TCA). The Parliamentary Report notes that it is not currently possible to assess the potential impacts of reverting to WTO rules on TBT.

25.Article 4.4 of the Agreement contains a specific review clause on TBT provisions that requires the UK and Turkey to commence a review of TBT provisions within three months of full entry into force of the UK-EU TCA. The review will be held with a view to replacing, modernising or expanding the provisions, giving consideration to replicating and incorporating the arrangements on the mutual recognition of conformity assessment results contained in the TCA.32

26.The UK Trade Policy Observatory (UKTPO) at the University of Sussex pointed out that because the TCA “contained little by way of mutual recognition of conformity assessment, there appears to be little scope for improvements”, even after the review on TBT is held.33 MakeUK also noted that the lack of provisions in the TCA on the mutual recognition of conformity assessments34 has a consequential impact on the UK’s trade with Turkey: “There will be increased costs from new design, test, certification, and administration costs to cater for this new double regulation between the UK and EU, and therefore for firms in Turkey and UK.”35 It further noted that any potential future UK divergence from EU technical regulations and product standards “would have implications for the UK-Turkey accord, in particular the supply chain certainty and cost basis for manufacturing”.36

27.The UK-Turkey Agreement reverts to WTO arrangements for addressing technical barriers to trade. This is a necessary consequence of Turkey’s alignment with the EU and the lack of mutual recognition of conformity assessments in the UK-EU TCA. We heard that this will result in significant costs for some UK businesses trading with Turkey and that it will affect supply chains.

28.Continued cooperation between the UK and the EU on technical barriers to trade is thus critical for the UK-Turkey trade relationship. While continuing to seek mutual recognition of conformity assessment, the Government must engage with businesses and regulatory authorities to identify areas where regulatory cooperation can be improved, and seek agreement to empower specific regulatory authorities from the UK and the EU to recognise standards set by, and products approved by, both Parties.

Competition, subsidies and trade remedies

29.The Agreement does not replicate the EU-Turkey Arrangement on competition policy and subsidies, and instead reverts to WTO commitments. The Parliamentary Report explains that this is because the EU-Turkey Arrangement requires competition rules to be interpreted with specific reference to EU law and “requires Turkey to adopt the EU state aid rules, which would not be appropriate for this Agreement”.37

30.The competition chapter is short and does not provide enforcement mechanisms, committing the Parties only to cooperate and coordinate. Article 7.2 commits each country’s competition authorities to the “notification, consultation and exchange of non-confidential information, in the enforcement of their respective competition law to fulfil the objectives of this Agreement”.38

31.The Agreement does not contain a chapter on subsidies or state aid. As members of the WTO both the UK and Turkey are, however, subject to the WTO’s Anti-subsidy and Countervailing Measures Agreement.39 This means that disputes on subsidies could be referred (by member states, but not by businesses or individuals) to the WTO. Subsidies are identified as an area subject to review no later than two years after the Agreement enters into force.40

32.We call on the Government to explain why it did not seek to include a process of notification for subsidies, under which the Parties would notify each other at regular intervals of the subsidies granted and the names of the recipients. Such a mechanism was included in the UK-Japan Comprehensive Economic Partnership Agreement.

Government procurement

33.The government procurement provisions in the Agreement and the EU-Turkey Arrangement are minimal and broadly aligned. Turkey is not a signatory to the WTO Agreement on Government Procurement (GPA), and while procurement is one of the chapters in Turkey’s accession negotiations with the EU, the chapter has not been opened because Turkey still has to fulfil criteria set out by the EU.41 This explains why the Agreement appears to lack ambition on government procurement. It simply provides that the Parties must consult on the mutual opening of their respective government procurement markets, “using the GPA as a framework for future dialogue”.42 Government procurement therefore represents a further area for making progress in the future review of the Agreement.

Dispute settlement

34.The Agreement carries over the dispute settlement mechanism from the EU-Turkey Arrangement, with some changes to improve efficiency and compliance. For example, the time for the establishment of an arbitration panel has been reduced from six months to 60 days to allow for a swifter resolution of disputes.43

35.Where the arbitration panel finds that a Party has failed to carry out its obligations under the Agreement and has not complied with the arbitration ruling, Article 12.10 of the Agreement introduces a mechanism for temporary remedies to be applied. This allows the Parties to agree temporary compensation or an alternative arrangement. Where the Party subject to complaints remains non-compliant, concessions or obligations in which there is a dispute may be suspended by the other Party.44 This is a new mechanism, which does not exist under the EU-Turkey Arrangement, therefore the consequences of this mechanism and how it will operate in practice are, as yet, unclear.45

Human rights and workers’ rights

36.The Agreement does not include provisions on human rights and workers’ rights. The Explanatory Memorandum (EM) explains that the Agreement “covers trade in goods only, in accordance with the technical replication of existing provisions within the EU-Turkey Arrangement, which does not have human rights provisions”. The EM states, “we regularly raise human rights issues with Turkey at all levels”, but does not provide further details on how the UK has engaged with Turkey on this issue.

37.Several civil society organisations have raised concerns about human rights and workers’ rights issues in Turkey,46 and the TUC and Unite have called for the suspension of the Agreement.47 Unite, in its written evidence, stated:

“Over 160,000 judges, teachers, police, and civil servants have been suspended or dismissed, together with about 77,000 formally arrested… The agreement contains no enforceable commitments for Turkey to respect labour rights. This means it will not be possible to use the UK-Turkey agreement to stop the government of Turkey abusing the rights of unions and workers and committing widespread human rights abuses.”48

38.The Joint Committee on Human Rights (JCHR) examined human rights in Turkey as part of its inquiry into human rights and business in 2017. It specifically looked at human rights and workers’ rights abuses in Turkey’s garment and textiles sector, highlighting child labour, refugee labour, and hostility towards trade union membership as issues of concern.49 Syrian refugees were found to be particularly at risk of exploitation by unscrupulous factory owners. The JCHR also referenced reports of a factory owner sacking unionised workers and offering other unionised workers a pay rise in exchange for quitting their unions.

39.The absence of provisions on human rights in the Agreement contrasts with the Secretary of State’s vision of “values-driven free trade”, set out in a speech last year: “In control of our trading future, we will work with like-minded democracies to support freedom, human rights and the environment while boosting enterprise by lowering barriers to trade.”50 Lord Grimstone of Boscobel, Minister of State for Investment, made a related point during the passage of the Trade Bill, emphasising that “trade does not have to come at the expense of human rights”.51 The absence of human rights provisions in the Turkey Agreement also contrasts with the high priority given to the “essential elements” of the UK-EU TCA, including “the shared values and principles of democracy, the rule of law, and respect for human rights”, failure to uphold which by one Party could lead the other to suspend or terminate the TCA in whole or in part.52

40.The review clause (see paragraph 5) specifically identifies labour issues and sustainable development as an area to be included in the review. This could therefore present an opportunity for the UK to push for the introduction of human rights provisions, and related workers’ rights, in the future.53

41.We regret the absence of any reference to human rights and workers’ rights in the Agreement and call on the Government to explain how it proposes to uphold its vision of ‘values-driven free trade’ in respect of the UK-Turkey relationship. We urge the Government to make use of the review clause in the Agreement to argue for the future introduction of provisions on human rights and workers’ rights.

Governance and amendments

42.The Agreement establishes a Joint Committee to make decisions and recommendations regarding the implementation and operation of the Agreement. Decisions of the Joint Committee are made by consensus and are binding. The Joint Committee also has responsibility for supervising and coordinating the work of any sub-committees, and can recommend the establishment of a sub-committee on intellectual, industrial and commercial property rights.54

43.The Parties can agree amendments to the Agreement. In certain circumstances and in respect of specific Annexes and Protocols, changes can be made by the Joint Committee. The EM confirms that, in the UK, amendments that are subject to a formal exchange of notes to confirm completion of internal procedures would engage the parliamentary scrutiny process set out in the Constitutional Reform and Governance Act 2010. It also states that amendments made by the Joint Committee to specific Annexes or Protocols would not engage CRAG.

44.The Foreign, Commonwealth and Development Office has committed to tabling proposals about the identification and notification of all amendments, including those that will be subject to CRAG, and we look forward to receiving these in due course.

Consultation and territorial scope

45.The Agreement only extends to the United Kingdom, with the exception of the customs provisions, which also apply to the Crown Dependencies. The EM notes that the Agreement includes a mechanism to extend the Agreement to the Crown Dependencies and Overseas Territories, and that DIT is currently working with them to identify when, and in which areas, such an extension would be desirable.55

46.Regarding consultation, the EM indicates that as for the other Overseas Territories, the Agreement does not apply to Gibraltar, and that the authorities in Gibraltar were consulted to ensure they were content with this approach.

47.The EM confirms that text of the Agreement, once stable, was shared with the Devolved Administrations, the Crown Dependencies and Gibraltar.

48.We approached the Devolved Administrations for comment, and at the time of publication of this report we had received a response from Welsh Government officials, who confirmed that they were kept updated on progress via “official sensitive reports” and verbal updates. They told us that Turkish steel was a key import for the automotive manufacturing sector in Wales and that they had raised this with the Chief Negotiator, who was able to explain the Government’s approach to the negotiations. They also confirmed that draft legal text was shared once an agreement in principle had been reached.

49.We welcome the Government’s confirmation that Gibraltar was content with the Agreement. We repeat our previous recommendation that the Government’s EM should include information about any significant issues of concern raised by the Devolved Administrations (and others), or alternatively confirm that no significant concerns have been expressed.

Conclusion

50.We draw the Free Trade Agreement between the UK and Turkey to the special attention of the House on the grounds that:

(a)It is politically important; and

(b)It differs significantly from the precursor agreements between the EU and Turkey.

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