The implementation of the customs union (CU) in 1995 was the culmination of thirty-two years of association between the European Union (EU) and Turkey and was expected by Turkey to be the first step in the EU accession process. The CU has been a major instrument of integration for the Turkish economy into both European and global markets. The CU covers trade in just industrial goods (including the industrial components of processed agricultural products) and excludes primary agriculture, services, and public procurement but has proved to be a powerful force of regulatory convergence. The evaluation s objectives are to assess the impacts of the CU and to make forward looking, solution-orientated recommendations for its improvement with an emphasis on the economics behind the various trade irritants and options for dealing with problems related to asymmetries as well as examining the case for widening. The evaluation provides quantitative and qualitative estimates of the effects of the CU and demonstrates that the trade agreement has been highly beneficial for both Turkey and the EU. The evaluation consists of two main parts: (i) an evaluation of the impact of the CU on trade, foreign direct investment (FDI), and more broadly, welfare in Turkey through the effects it has had on trade policy, eliminating the need for rules of origin (ROOs) on preferential trade with the EU and implementing the acquis in areas covered by the CU; and (ii) a review of current limitations of the existing trade arrangement, potential gains in dealing with these as well as modalities for reform. The evaluation has six sections. Section one gives introduction. Section two reviews trade and investment outcomes between the EU and Turkey. Section three examines the effects the CU has had on the trade policy environment for Turkey. Section four provides an overview of EU-Turkey trade relations in terms of Turkey s harmonization with EU regulations and use of trade defense instruments. The fifth section examines the potential impacts of widening the trade arrangement to cover new areas in agriculture and services and makes proposals for the modalities that can be used to include these as part of an agreement including in the context of full accession. Section six presents conclusions and recommendations
