LIVING IN SIN: Legal Integration Under the EC-Turkey Customs Union

II. Decision 1/95: Substantive Harmonisation Requirements

A. Introduction

The new Decision is concerned entirely with the free movement of goods and related issues. It does not even mention free movement of persons or of services, establishment, or capital movements. These issues are still covered by the existing Agreements or Decisions with Turkey.²⁸

A central feature of Decision 1/95 is Turkey's obligation to adopt legislation, to reach agreements, and to apply Treaty articles equivalent to provisions adopted by the EC. This is bolstered by the requirement to interpret any provisions of the Decision worded identically to the EC Treaty in the same way that the Court of Justice has interpreted the EC Treaty.²⁹ To ensure the free movement of goods, the parties had to abolish tariffs, quotas, and measures of equivalent effect to either, and also adopt subsidiary provisions on discriminatory taxation and intellectual property law - all of which mirror primary or secondary EC law. To implement the customs union, they had to agree and implement identical customs legislation and commercial policy. To make certain that neither the market nor the customs union became distorted, they had to agree a common competition and state aid rules system and the mechanisms to operate it. Finally, to avoid distortions resulting from divergent amendments to legislation or from divergent judicial interpretation, they had to develop an institutional structure to monitor continued legal integration.

B. Industrial Goods

Decision 1/95 completes the abolition of all quotas and tariffs on industrial goods between the parties and provides for free circulation, effectively copying Articles 9, 10, 12, 16, 30, 34 and 36 of the EC Treaty.³⁰ Turkey has five years to adopt EC standards on goods, under a mechanism to be adopted by the Association Council within a year. In the intervening five years, the EC must accept Turkish goods certified to meet EC requirements, and Turkey must accept EC goods made to EC requirements unless it invokes the protection of health, life, and property.³¹ The wording of this clause is clear enough to confer direct effect within the EC.

C. Agricultural Goods

The parties must drop all industrial components of the tariffs on processed agriculture, and Turkey is further obliged to harmonise with EC policy: it must adopt the EC's Most-Favoured Nation (MFN) industrial components on processed food imported from third countries.³² Free movement for other agricultural products will await Turkish adoption of the CAP, which is difficult to envision at present.³³

Turkey has one obligation not matched by the EC: it must allow free entry of EC foodstuffs meeting EC standards, in the same manner that it allows industrial goods meeting EC conformity. However, it is not clear whether Turkey must invoke the requisite consultation procedure when it bars such products to protect health and safety.³⁴ Turkey is not required to harmonise with EC agricultural standards, and indeed the Decision does not even refer to veterinary and phyto-sanitary standards.³⁵

D. Common Commercial Policy

Of course, a customs union requires not just abolition of tariffs and quotas between the parties, but a common trade policy. As noted above, Turkey has met its obligations to charge the Common Customs Tariff on industrial goods (except for ECSC products) on an MFN basis from third countries--except for EFTA members, for which it has already adopted the EC's preferential policy. However, full adoption of EC trade policy is deferred for five years. In the meantime, Turkey may still exclude 5% of its 1967 imports from the requirement to charge the Common External Tariff, and must adopt the EC's autonomous tariff preferences and negotiate preferential agreements with third states matching the EC's over this period.³⁶ This includes the adoption of trade restrictions on textiles and clothing.³⁷

Along with the requirement to conclude equivalent agreements, Turkey also has to apply identical trade defence and customs legislation to that of the EC.³⁸ The parties are encouraged to adopt joint trade defence actions, but are not compelled to do so.³⁹ Although the 1970 Protocol specified that the parties would reach agreement on a system for harmonising commercial policy,⁴⁰ the Decision contains no such provision. Its institutions deal solely with cooperation on EC legislation.

E. Possible Abolition of Trade Defences

Turkey is given a further incentive to adopt EC legislation: the EC might drop anti-dumping, anti-subsidy, and `trade barrier' actions against Turkey, 'provided that Turkey has implemented competition, state aids control and other relevant parts of the acquis communautaire which are related to the internal market'.⁴¹ This was the quid pro quo of abolition of trade defence measures under the EEA,⁴² although unfortunately the Decision provides only for a review of trade defence actions, rather than automatic suspension once the Association Council determines that the conditions are met.

F. Intellectual Property

Turkey is obliged to adopt a detailed list of EC legislation and international conventions on intellectual property rights (IPRs) and implement most rules of the TRIPs (Trade-Related Intellectual Property Rights) agreement within three years.⁴³ The Annex explicitly provides that it will not affect national rules on exhaustion of IPRs - a derogation from the requirement that the Decision must be interpreted in the same way as the EC Treaty.⁴⁴

G. Competition and State Aid

Like many of the EC's other trading partners, Turkey is obliged to adopt the EC's competition and state aid rules. The EC now has three separate systems for 'external' application of these rules, each dealing differently with five central questions: (i) which law is to be followed (always the EC's, although possibly with exceptions or transitional derogations); (ii) which authority has jurisdiction; (iii) how the policy and legislation is to be enforced; (iv) how application of the law and policy are to remain consistent; and (v) how disputes over consistency, jurisdiction, interpretation or enforcement must be settled.⁴⁵

The EEA adopted EC competition and state aids law without derogation (except for the exclusion of basic agriculture and fisheries products), including all legislation, Decisions, block exemptions, state aid frameworks and guidelines, and prior case law. It precludes parallel jurisdiction over competition law by adopting combined percentage of activity and de minimis tests to ascertain which authority should deal with a case.⁴⁶ An EFTA Surveillance Authority and EFTA Court were established, with powers over competition and state aid that match the EC Commission and Courts' powers.

The Europe Agreements (and now the new Euro-Mediterranean Agreements with Tunisia and Morocco)⁴⁷ state that restrictive practices, abuses of dominant positions, and distortions caused by state aid are 'incompatible' with the proper functioning of the Agreements to the extent that they affect trade.⁴⁸ Such practices will be 'assessed on the basis of criteria arising from application of the rules of Articles 85, 86 and 92' EC, and the parties must inform each other of state aids they are granting. The associates were thus initially not explicitly required to adopt EC legislation, case law, and policy, although (as discussed in Section 3.4, infra) they risked a trade defence measure if they did not.⁴⁹

Each Association Council has three years to adopt implementing rules (and to ensure that the 'principles' of Article 90 EC are upheld), and in the meantime each party will apply the GATT Subsidies Code to assess state aid granted by the other. Yet simultaneously, aid granted by associates must be 'assessed' (for five years, capable of renewal) as if the associates were underdeveloped areas within the meaning of Article 92(3)(a) EC. Since the GATT Subsidies Code is quite differently structured from Article 92 EC, this might give rise to problems of interpretation.⁵⁰

The Association Councils have now agreed virtually identical implementing rules under five of the Europe Agreements, although the rules leave many issues unresolved.⁵¹ The rules also ignore state aids⁵² and public undertakings, and provide for overlapping competence of the Commission and the associates' national authorities in competition cases, albeit with the possibility of requesting the other authority to take action and a right of each associate's authority to comment when affected by operation of the EC's Merger Regulation. They also establish that the EC's block exemptions must be applied in each of the associates, which was only implicit in the parent Agreements. In the long term, the Commission believes that a variant of the EFTA Surveillance Authority might possibly be established in Eastern Europe, but such a development seems some time away. For the time being, it would like the associates' national 'surveillance authorities' to assess state aids pursuant to the EC's rules and procedures.⁵³

In contrast, Turkey's harmonisation obligations are far more explicit.⁵⁴ Before entry into force of the Decision, it had to establish a competition law implementing Arts. 85 and 86 EC, and adapt textile aids to the EC state aids rules. It has a year to adopt EC block exemption regulations and the principles of Article 90 EC (including secondary legislation and case law). Finally, Turkey has two years to apply EC state aid rules to the remainder of its industry.⁵⁵

Under the 1970 Protocol, Turkey had been classed as a 'developing area' under Article 92(3)(a) EC. Aid was considered automatically compatible with the Association if it did not 'alter the conditions of trade to an extent inconsistent with the mutual interests' of the parties.⁵⁶ This did not stop the EC from implementing an anti-subsidy action against Turkish exports, when the Commission and Council believed that trade was indeed so altered.⁵⁷

Decision 1/95 has amended implementation of the EC Treaty's state aid rules to allow for a partial continuation of the previous derogation. First of all, aid to Turkey's less developed regions (rather than all of Turkey) is still automatically compatible with the customs union (in the sense of Article 92(2) EC), albeit for only a five year period which cannot be renewed and only to the extent that this does not 'adversely affect trading conditions between the Community and Turkey' contrary to the common interest.⁵⁸ Secondly, aid may be granted (in the sense of Article 92(3) EC) to promote development of poor areas of the customs union indefinitely and to assist in Turkey's structural adjustment for five years (which may be extended).⁵⁹ The latter clause is unique to the Decision, but the former clause incorporates Article 92(3)(a) EC again, albeit now without automatically approving all such aid (bar that affecting trade) or specifying that all of Turkey is considered poor relative to the EC. However, Article 92(3)(a) EC refers to areas which are poor relative to the EC average,⁶⁰ rather than a Member State average, a definition which would still allow aid to be granted to all of Turkey for the foreseeable future. Poorer parts of Member States (and thus of Turkey) can still receive aid under Article 92(3)(c) EC, also incorporated into the Decision.⁶¹

The implementing rules should be adopted within two years, but in the meantime each competition authority shall deal separately with disputes that affect both parties and state aids should be assessed in light of the GATT Subsidies Code - although the dispute settlement rules for state aids might have already settled the issue. Each party may request the other to review anti-competitive activities undertaken on its territory. There are also general information and consultation obligations. Decision 1/95 aims for a more intense level of integration then do the Europe Agreements (to date) but there are several problems with both the design of future harmonisation and the method of dispute settlement (discussed infra, Sections III. C and D).

28 Proposals to expand services and establishment had been blocked in 1986. They were to be included in the customs union but several Member States blocked it (Agence Europe, 15 Feb. 1995).

29 Art. 66, Decision, Art. 6 EEA; see discussion in Section 3.3 and exception for intellectual property in Section 2.6, infra. It could be argued that other applications of Art. 30 EC now apply to Turkish goods, notably the Cassis de Dijon rule, but in Opinion 1/91, [1991] ECR I-6097, the ECJ stated that notwithstanding Art. 6 EEA, it might not interpret similar provisions identically. There is no EEA jurisprudence from the ECJ or the Court of First Instance (CFI) yet to test this question. See Cremona, 'The "Dynamic and Homogeneous" EEA: Byzantine Structures and Variable Geometry', 19 EL Rev. (1994) 905. The judgement of the CFI in Case T-185/94, Geotronics v. Commission (26 Oct. 1995, not yet reported) did not decide the point, but it is on appeal (Case C-395/95 P, OJ (1996) C 46/8).

30 Arts. 3-7. However, there is still a safeguard clause (Art. 63), continued unchanged from the 1970 Protocol.

31 Arts. 7-11. Compare with the Eastern Europe White Paper (supra, note 3), obliging the associates to adopt the EC's product standards without a guarantee that the EC would accept their certification. See Section 3.2, infra, on the interim consultation procedure. Turkey is an associate member of CEN and CENELEC (EC standards organisations), has standards agreements with several Member States, and meets international standards on 80% of its exports (Trade Policy Review: Turkey '94 1:60).

32 Arts. 17-23. The agricultural component of tariffs on processed food remains unaffected. This is charged on the value of the processed food before processing, and is a post-Uruguay Round replacement for the EC's variable levies. Turkey has one to three years to introduce some of its reductions (see Annex 6).

33 Turkey has adopted the CAP for some fruit and vegetables: see Trade Policy Review: Turkey '94, 1:5.

34 Art. 10(4) refers to Arts. 10(1) and 10(2), not to Art. 10(3) on consultations; but exercise of Art. 10(3) is a component of Art. 10(2).

35 The Commission had proposed an agricultural standards agreement with its 1990 proposals (supra, note 23).

36 Arts. 15 and 16; Trade Policy Review: Turkey '94 1:33 (EFTA-Turkey agreement).

37 Art. 12(2). Turkey's implementing measures have not been published.

38 Respectively Arts. 12 and 28.

39 Arts. 45-46.

40 See note 17, supra.

41 Art. 44(1). It is not clear which other parts of the acquis are deemed to be relevant. According to Commission staff, there is no date pencilled in for examination of abolition, but the author submits that the trade weapons should be dropped as soon as Turkey has fully adopted the EC's state aids and competition policy (scheduled for two years' time at the latest: see Section 2.6, infra).

42 See Art. 26 EEA and 'An Ever Closer Waiting Room', supra note 3, at 193-202.

43 Annex 8. Unlike the Eastern European states, Turkey is not obliged to accede to the European Patent Convention.

44 Annex 8, Art. 10(2); this was precisely the issue in Case 270/80, Polydor v. Harlequin Record Shops, [1982] ECR 329.

45 Points (iv) and (v) will be discussed in Sections III. B, C, and D, infra, along with similar issues relating to the entire customs union.

46 Arts. 53-64 and 108-110 EEA. See Blanchet, et. al., The Agreement on a European Economic Area (EEA) (1994), 151-244. State aid did not need a jurisdiction rule, as it is simply supervised by the authority overseeing the state granting the benefits.

47 Art. 65, EC-Poland Europe Agreement (OJ (1994) L 348). The system in the Euro- Mediterranean agreements (Tunisia, COM (95) 235, 31 May 1995; Morocco, COM (95) 740, 20 Dec. 1995) differs in detail from that in the Europe Agreements (time limits to adopt implementing measures, special restructuring funds, treatment of Article 90 EC) but follows the same model. The new EC-Israel competition rules (see Interim Agreement, OJ (1996) L 71) are similar, but lack any reference to the EC Treaty.

48 Basic agriculture and fish are again excluded from the state aid rules, but restrictive practices affecting such products will be assessed according to the EC Treaty and secondary legislation.

49 However, they do have a separate obligation to harmonise with EC competition law (EC-Poland, Arts. 68-69). State aid rules are not mentioned, but the Commission is expecting that the associates will harmonise them ('Follow-up to Strategy Paper' on Eastern Europe (COM (94) 361, 27 July 1994), 6-7).

50 Heinz, 'Rules on State Aids with Hungary in the Europe Agreement', ECLR (1995) 2:116.

51 In force with Czech Republic: OJ (1996) L 31/21; proposed for Poland, Hungary, the Slovak Republic, and Bulgaria: SEC (94) 1685, 18 Oct. 1994; COM (94) 639, 15 Dec. 1994; COM (95) 156, 18 May 1995; COM (95) 528, 22 Nov. 1995. See van den Bossche, `The Competition Provisions in the Europe Agreements: A Comparative and Critical Analysis', Third Ghent Colloquium on Relations Between the European Union and Central and Eastern Europe, 7-8 March 1996 (to be published).

52 Reportedly the Commission had drafted implementing rules for state aids by early 1996 (not yet published).

53 'Follow-up to Strategy Paper', supra note 48, 6-7.

54 Arts. 32-43 of Decision.

55 The competition and state aid obligations do not apply to basic agriculture and fisheries, services and ECSC products, as these are outside the scope of the Decision. However, the proposed ECSC-Turkey agreement (supra note 26) contains similar competition and state aid provisions (Arts. 7-12).

56 Art. 42(3), 1970 Protocol. Note that aid actually pursuant to Art. 92(3)(a) EC (or Art. 61(3)(a) EEA) is not automatically compatible with the Treaty, but subject to the approval of the Commission or EFTA Surveillance Authority.

57 Commission Reg. 1432/91, OJ (1991) L 137/8; Council Reg. 2833/91, OJ (1991) L 272/2; undertaking at OJ (1991) L 272/92.

58 Art. 34(2)(d). Art. 34(2)(a) to (c) repeats the automatic exemptions of Arts. 92(2)(a) to (c) EC (aid for consumers, natural disasters, and German division).

59 Arts. 34(3)(a) and 34(3)(c). Art. 34(3)(b) and (d)-(f) incorporates the remainder of Art. 92(3) EC (including items of common European interest, regional and sectoral aid, cultural aid, and approved new categories).

60 Case 730/79, Philip Morris Holland v. Commission, [1980] ECR 2671.

61 Art. 34(3)(d). This clause also allows aid to 'certain economic activities'.

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