B. Turkey's Trade Relations with the European Communities

1. Association between Turkey and the European Communities, and the GATT/WTO process¹⁶

10. On 12 September 1963, Turkey and the Council and member States of the then European Economic Community ("EEC") signed the Ankara Agreement, ¹⁷ which entered into force on 1 December 1964. The Ankara Agreement formed the basis of the Association (in the sense of Article 228 of the Treaty of Rome) between Turkey and the European Communities envisaging that its objectives would be reached through a customs union which would be established in three progressive stages: preparatory, transitional and final. Article 28 of the Ankara Agreement also left open "the possibility of the accession" of Turkey to the EEC. The Ankara Agreement itself contained the modalities of the preparatory stage of the Association.

11. The terms and conditions for the implementation of the transitional stage were defined in the 1970 Additional Protocol to the Ankara Agreement and in the 1971 Interim Agreement. ¹⁸ The provisions of the Interim Agreement entered into force on 1 September 1971 and the Additional Protocol entered into force on 1 January 1973. These texts provided for an extended transitional period running over 22 years and foresaw the establishment of a customs union by the end of 1995. The Additional Protocol provided for an asymmetrical liberalization of intra-trade, because of the disparity in levels of development between the parties: the European Communities were to abolish all duties and QRs on imports of industrial products from Turkey as from September 1971, while Turkey was to do so over the transitional period, according to a timetable. ¹⁹ The Protocol also contained provisions designed to ensure the alignment of Turkey on EC policies in many areas (commercial policy, standards, competition, state aids, trade in services, etc.).

12. Supplementary Protocols to the Ankara Agreement (and Interim Agreement) were also concluded in 1973 between Turkey and the European Communities, containing adaptation and transition measures following the accession to the European Communities of Denmark, Ireland and the United Kingdom. ²⁰

13. Starting in 1973, Turkey embarked in the gradual alignment of its customs duties to the EC Common Customs Tariff ("CCT"), as scheduled. The implementation of Turkey's obligations arising out of its Association with the European Communities was interrupted during a number of years, due inter alia to the crisis in which the Turkish economy was engulfed following the oil shocks of 1973 and 1979. In 1987, when Turkey requested accession to the European Communities, completion of the customs union was seen as part of a package of measures designed to help Turkey prepare for membership. In 1988, Turkey resumed the reduction of its customs duties and alignment on the CCT.

14. The Ankara Agreement and the subsequent instruments concluded in the context of the Association between Turkey and the European Communities during the 1970s were notified to the GATT Contracting Parties under Article XXIV:7 of GATT 1947. The GATT entrusted three separate working parties with the task of examining the different agreements in light of those provisions. Reports of these working parties were adopted by the GATT Council:

    1. Report of the Working Party on the Ankara Agreement, adopted on 25 March 1965 (BISD 13S/59-64);
    2. Report of the Working Party on the Additional Protocol, adopted on 25 October 1972 (BISD 19S/102-109); and
    3. Report of the Working Party on the Supplementary Protocols, adopted on 21 October 1974 (BISD 21S/108-112).

15. As agreed at a meeting of the Turkey-EC Association Council ("Association Council") held in November 1992, ²¹ negotiations were initiated between the two parties on the modalities for the completion of the customs union, i.e. for the final phase of the Association. These negotiations were conducted from 1993 to 1995.

16. On 6 March 1995, the Association Council took Decision 1/95, to enter into force on 1 January 1996. ²² Decision 1/95 set out the modalities for the final phase of the Association between Turkey and the European Communities. In addition to the elimination of customs duties and alignment on the CCT, it contained provisions for the harmonisation of Turkey's policies and practices in all areas covered by the Association where this was deemed necessary "for the proper functioning of the Customs Union". In accordance with Article 65 of Decision 1/95 the parties were to consider, before entry into force, whether those harmonisation provisions (in particular those contained in Article 12) had been fulfilled. Once this requirement was considered satisfied, at a meeting of the Association Council on 30 October 1995, Decision 1/95 was submitted to the European Parliament for its approval and subsequently formally adopted by the Association Council on 22 December 1995. On 22 December 1995, the Association Council also adopted Decision 2/95, in pursuance of Article 15 of Decision 1/95. Decision 2/95 defined the coverage of products for temporary exception from Turkey's application of the CCT in respect of third countries, and fixed the timetable for their alignment to the CCT (from 1 January 1996 to 1 January 2001).

17. The entry into force of "the final phase of the Customs Union" between Turkey and the European Communities was notified to the WTO on 22 December 1995, under Article XXIV of GATT. ²³ The texts of Decision 1/95 and Decision 2/95 were distributed to Members on 13 February 1996. ²⁴ On 29 January 1996, the CTG adopted standard terms of reference for the examination of the "Customs Union between Turkey and the European Community" ²⁵ ("Turkey-EC customs union"), and referred such examination to the CRTA. ²⁶

18. Turkey and the European Coal and Steel Community ("ECSC") signed an Agreement on 25 July 1996, which entered into force on 1 August 1996. ²⁷ In their joint communication to the WTO, the parties stated that the Agreement was "intended as the complement to the Customs Union in respect of products covered by the European Coal and Steel Community and as a transitional arrangement in respect of such products until � the year 2002".²⁸

19. On 30 October 1996, Turkey and the European Communities submitted preliminary information to the WTO on "the final phase of the Customs Union", in accordance with the Standard Format for Information on Regional Trade Agreements. ²⁹ In a joint communication dated 24 November 1997, ³⁰ Turkey and the European Communities provided, "[t]o assist Members in the examination of the Customs Union, � details of the quantitative limits applied by Turkey in respect of imports of certain textile and clothing products from certain WTO Members", including the levels of such quantitative limits for 1997. ³¹ The CRTA met twice to examine, in the light of the relevant provisions of GATT, the Turkey-EC customs union: on 23 October 1996 and on 1 October 1997. ³² Additional written questions from Members were also replied to by the parties. ³³ To date, the CRTA has not yet finalized its examination.

20. Turkey and the European Communities transmitted copies of their communications to the CRTA, in relation to the quantitative limits applied by Turkey, and to the Textiles Monitoring Body ("TMB"), for information pursuant to Article 3.3 of the ATC. ³⁴ The TMB took note of the information supplied at its meetings held on 11-12 December 1997. and 26-27 May 1998. ³⁵ To date Turkey has notified to the TMB its lists for the first and second stage of integration and advance integration for a product which will be subject to the third stage of integration. ³⁶

    2. Synopsis of recent developments in Turkey-EC trade³⁷

21. The European Communities ³⁸ has traditionally constituted the major single market for Turkish goods and Turkey's major supplier, accounting for around 50 per cent of both Turkey's exports and imports. Exports to the European Communities in 1996 and 1997 expanded at a slower rate than those destined to the rest of the world. Imports from the European Communities increased 37 per cent in 1996 but rose by only 7 per cent in the next year; by contrast, Turkey's imports from the rest of the world grew 9 per cent in 1996 and by 16 per cent in 1997. (See Figure II.2.)

22. In 1997, Turkey's total exports, by broad product categories, ³⁹ were comprised of agricultural products (17 per cent), textiles (10 percent), clothing (27 per cent) and other industrial products (45 per cent). At a more detailed level, main export groups included: edible fruits and nuts (5 per cent), iron and steel (8 per cent) and electrical machinery and equipment (6 per cent). As much as 95 per cent of Turkish total imports in 1997 were made up of industrial products, including 7 per cent accounted for by imports of textiles and clothing. Major sub-groups among the imported industrial products included: fuels, machinery and chemicals.

    Figure II.2 � Turkey's total exports and imports from the European Communities and the rest of the world, 1994-1997

23. By broad product categories, the evolution of Turkey's exports to the European Communities during the period 1994-1997 showed some distinct features, when compared to the corresponding developments in Turkey's exports to non-EC countries. For agricultural products, exports to non-EC countries tended to increase (albeit moderately) over practically the whole period, while exports to the European Communities showed increases only in 1995 and 1997. For textiles and clothing, the growth of exports to the European Communities was steady during the period; exports of these products to non-EC countries rose in 1995 and, after virtually stagnating in 1996, increased again in 1997. Exports of other industrial products to the European Communities, after a sharp increase in 1995, slowed down considerably, while those to non-EC countries were steadily up throughout the period, to a level in 1997 46 per cent higher than in 1994. (See Table II.1.)

    Table II.1: Turkey's exports to the European Communities and to other countries, by broad product categories, 1994-1997

    	Exports to the EC				Exports to other countries
    	1994	1995	1996	1997	1994	1995		1996	1997
    	($ million)				($ million)
    Agricultural products	1,572	1,841	1,729	1,901	2,060	2,132	2,284		2,643
    Textiles and clothing	4,150	5,353	5,665	5,933	2,285	2,967	3,031		3,886
    Other industrial products	2,913	3,885	4,154	4,413	5,126	5,460	6,360		7,468
    Total exports	8,634	11,078	11,549	12,248	9,471	10,558	11,676		13,997
    	(Percentages)				(Percentages)
    Share of "textiles and clothing" in total exports	48.1	48.3	49.1	48.4	24.1	28.1	26.0		27.7

    Source: Government of Turkey.

24. By broad product categories, imports into Turkey of agricultural products from the European Communities declined in both 1996 and 1997, while those from other countries continued to grow, albeit at a slower pace. Imports of textiles and clothing from the European Communities more than trebled between 1994 and 1997; those from other countries recovered from the decline in 1996, to reach in 1997 a level 75 per cent higher than in 1994. (See Table II.2.)

    Table II.2: Turkey's imports from the European Communities and from other countries, by broad product categories, 1994-1997

    	Imports from the EC						Imports from other countries
    	1994	1995	1996		1997		1994		1995	1996	1997
    	($ million)							($ million)
    Agricultural products	457	1,031	959		755		810		1,591	1,903	1,809
    Textiles and clothing	501	828	1,392		1,617		1,136		1,853	1,590	1,994
    Other industrial products	10,172	15,216	21,002		22,713		10,409		15,403	16,995	19,912
    Total imports	10,915	16,861	23,138		24,870		12,355		18,847	20,489	23,715
    	(Percentages)							(Percentages)
    Share of "textiles and clothing" in total imports	4.6	4.9		6.0		6.5		9.2	9.8	7.8	8.4

    Source: Government of Turkey.

    C. Quantitative Limits in Respect of Turkey's Imports of Certain Textile and Clothing Products

    1. Historical background

25. The gradual removal of QRs in major developed countries during the 1950s, in the wake of general liberalization efforts pursued in the GATT, brought about substantial increases in textiles and clothing imports into major developed countries originating in low-cost countries. To alleviate the difficulties caused to their producers, some importing countries convinced exporters of cotton textiles to conclude voluntary export restraint agreements. In an attempt to find a multilateral solution to the problem, in 1960 the GATT CONTRACTING PARTIES recognized the phenomenon of market disruption, thus setting the ground for selective safeguard action in the area of textile and clothing products (as a departure from the requirements of Article XIX of GATT 1947).

26. Thereafter, discriminatory restraints took the form of the 1961 Short-Term Arrangement Regarding International Trade in Cotton Textiles, followed in 1962 by the Long-Term Cotton Textiles Arrangement (1962-1973). The Arrangement Regarding International Trade in Textiles or Multifibre Arrangement ("MFA") entered into force in 1974, extending the coverage of the restrictions on textiles and clothing from cotton products, to include wool and man-made fibre products (and, from 1986, certain vegetable fibre products). ⁴⁰

27. During its 21 years of existence, from 1974 to 1994, the MFA underwent numerous operational changes and adaptations. The restraints under the MFA developed into a complex network of restrictions, bilaterally negotiated (or imposed in the case of unilateral actions) at short intervals, often every year or so. In the last year of its existence, the MFA had 44 participants, six of which (Canada, Norway, the United States and the European Communities, plus Austria and Finland,) applied restraints. Such restraints were used almost exclusively to protect their markets against imports of textiles and clothing from developing countries and, to a lesser extent, from former state-trading countries, also MFA members.

28. After more than three decades of special and increasingly complicated regimes governing international trade in textile and clothing products, seven years of negotiations during the Uruguay Round resulted in the ATC. Through the transitional process embodied in the ATC, by 1 January 2005 the extensive and complex system of bilateral restraints will come to an end and importing countries will no longer be able to discriminate between exporters in applying safeguard measures.

29. Turkey became a member of the MFA, as an exporting country, in 1981. Since 1979, Turkish textile and clothing products were subjected to restraints in the EC market under the provisions of Article 60 of the Additional Protocol to the Ankara Agreement. ⁴¹

30. On 31 December 1994, one day before the ATC came into force, Turkey did not maintain QRs on imports of textile and clothing products. Its exports of certain textile and clothing products were at that time under restraint in the European Communities and other countries' markets under the MFA.

    2. Recent background

31. In accordance with Article 13 of Decision 1/95, as of 1 January 1996, the customs duties applied by Turkey to the industrial goods imported from third countries were harmonized with the CCT and the previous Mass Housing Fund levy of some 20 per cent, collected from industrial goods, was abolished. With respect to imports of textile and clothing products, the MFN tariffs applied by Turkey were thereby reduced from roughly 10 per cent for textiles and 14 per cent for clothing in 1994 (plus the Mass Housing Fund levy) to 9 per cent in 1996. ⁴²

32. Decision 1/95 included specific provisions with respect to trade in textiles and clothing, in particular in Article 12, supplemented by related statements by both parties. Such provisions called for Turkey's adoption of the relevant EC regulations concerning imports of textiles and clothing, in particular Council Regulation 3030/93, which provided for the bilateral agreements with supplier countries to be implemented by a set of EC quantitative limits on certain imports and for a system of import surveillance.

33. Two Decrees issued by Turkey's Council of Ministers laid down the basis for the alignment of Turkish commercial policy in textiles and clothing to that of the European Communities: Decree No. 95/6815 on Surveillance and Safeguard Measures for Imports of Certain Textiles Products, with respect to products from countries with which Turkey concluded bilateral agreements, and Decree No. 95/6816, concerning the Surveillance and Safeguard Measures for Imports of Textile Products Originating in Certain Countries not Covered by Bilateral Agreements, Protocols and other Arrangements, both of which were dated 30 April 1995 and published in the Turkish Official Gazette on 1 June 1995. Both Decrees were published with the respective Regulations for their application, under the authority of the Under-Secretariat for Foreign Trade, the Turkish responsible body for determination and calculation of the quota levels on imports of textile and clothing products.

34. Early in 1995, in its endeavour to complete Decision 1/95 requirements for the "completion of the Customs Union", Turkey sent proposals to the relevant countries (i.e. those whose imports of textiles and clothing were under restraint in the EC market), including India, to reach agreements for the management and distribution of quotas under a double checking system. A standard formula was proposed for calculating the levels of QRs on textile and clothing products to be introduced by Turkey vis-�-vis all third countries concerned.

35. On 31 July 1995, Turkey forwarded to the Indian authorities a draft Memorandum of Understanding on trade in the categories of textile and clothing products on which Turkey intended to introduce QRs. India was invited to enter into negotiations with Turkey, with the participation of the European Communities, to conclude, prior to the completion of the Customs Union, an arrangement covering trade in those products which would be similar to the one already existing between India and the European Communities. India maintained that the intended restrictions were in contravention of Turkey's multilateral obligations and declined to enter into discussions on the conditions proposed by Turkey.

36. Agreements providing for restraints similar to those of the European Communities were negotiated by Turkey with 24 countries (WTO Members and non-Members). As provided for in Article 12 of Decision 1/95, the EC Commission cooperated with the Turkish authorities in the preparation of negotiating positions and generally participated in the negotiations themselves. As from 1 January 1996, unilateral restrictions or surveillance regimes were applied to imports originating in another 28 countries (WTO Members and non-Members), including India, with which Turkey could not reach agreement. These restrictions only affected products whose export to the European Communities was also under restraint.

37. The quantitative limits established by Turkey for 1996 were allocated on a quarterly basis, through Communiqu�s published in the Official Gazette on 19 December 1995, 13 March, 13 June and 25 September 1996. Quantitative limits for 1997 were allocated on a half-year basis, through Communiqu�s published in the Official Gazette on 7 December 1996 and 12 June 1997. Quantitative limits for the year 1998 were allocated through a Communiqu� published in the Official Gazette on 18 December 1997.

    3. Quantitative limits imposed on certain Turkey's imports of textile and clothing products from India

38. Turkey applies QRs, as of 1 January 1996, on imports from India of 19 categories of textile and clothing products. (See the Annex to this report, Appendix 1, for a list of the categories and description of products.)

39. In the case of India, the formula used by Turkey to fix the level of the QRs corresponded to either (i) the arithmetical average of imports into Turkey from India for the category of products during the period 1992-1994; or (ii) an amount based on total EC imports for the category of products in question multiplied by the percentage of the basket exit threshold laid down in the bilateral agreement between the European Communities and India in force in 1994, multiplied by the percentage share of Turkish GDP in EC-15 total GDP (i.e. 2.5 per cent), whichever was the higher. To this amount the corresponding growth rates in force in quota years 1994 and 1995 had been added to arrive at a level for 1996. The specific criteria retained for the calculation of the quantitative limits on imports of textile and clothing products into Turkey from India were as follows:

    (i) average of Turkish imports in 1992-1994, for calculations on product categories 1, 2, 2a, 3a, and 23; and

    (ii) option based on GDP, for calculations on product categories 6, 9, 20, 24 and 29 (because there were no imports into Turkey during 1992-1994); and on product categories 3, 4, 5, 7, 8, 15, 26, 27 and 39 (because its outcome was higher than the alternative calculation based on imports).

40. Actual quantitative limits established for 1996-1998 on textile and clothing products imported from India can be found in the Annex to this report, Appendix 2.

To continue with Statistical analysis of Turkey's imports of textile products under restraint

¹⁶ The official titles of the agreements have changed over time The European Communities is a WTO Member.

¹⁷ GATT document L/2155/Add.1.

¹⁸ GATT document L/3554.

¹⁹ Other agreements concluded at the time by the EC with Mediterranean countries contained similar provisions.

²⁰ GATT document L/3980.

²¹ The Association Council was created by the Ankara Agreement, as the only decision-making body of the Turkey-EC Association.

²² Decision 1/95 is reproduced in WT/REG22/1.

²³ WT/REG22/N/1.

²⁴ WT/REG22/1 and WT/REG22/2, respectively.

²⁵ The terms of reference for the examination are contained in WT/REG22/4. In this Panel report we shall refer to the Turkey-EC customs union without any assessment of the WTO nature of this Article XXIV type of arrangement.

²⁶ G/C/M/8.

²⁷ WT/REG22/1/Add.1.

²⁸ WT/REG22/N/1/Add.1.

²⁹ WT/REG22/5.

³⁰ WT/REG22/7.

³¹ A similar communication was circulated to Members on 28 July 1998, containing the levels of the quantitative limits in 1998 (Document WT/REG22/8).

³² See WT/REG22/M/1 and WT/REG22/M/2 (Notes on the meetings).

³³ WT/REG22/6 and WT/REG22/6/Add.1.

³⁴ G/TMB/N/308 and G/TMB/N/338.

³⁵ See G/TMB/R/38 and G/TMB/R/43, respectively.

³⁶ From the point of view of the TMB, Turkey's status is mixed. While it applies restrictions on imports from certain developing countries, in line with its obligations towards the EC, its own exports to the United States and Canada remain under restraint.

³⁷ Based on trade statistics provided by the Government of Turkey.

³⁸ Throughout this section, trade figures relate to the EC-15.

³⁹ The broad product categories are here defined as follows: agricultural products (Turkish tariff chapters 1 to 23); textiles (50 to 60); clothing (61 to 63); other industrial products (24 to 49 and 64 to 97).

⁴⁰ Operationally, the MFA (like the cotton arrangements) provided rules for the imposition of restraints, either through bilateral agreements or, in cases of market disruption or threat thereof, through unilateral action. Importing countries were also required, with certain exceptions, to allow for an annual growth rate in the restraints.

⁴¹ Notified to the Textiles Surveillance Body under Article 7 of the MFA.

⁴² The average level of protection of those imports in Turkey was 37 per cent in 1993.