Turkey's Evolving Trade Integration into Pan-European Markets
| Author | Bartlomiej Kminski. Francis Ng. |
| Profession | Department of Government, University of Maryland. Development Research Group -Trade, The World Bank, Washington, D.C. |
| Pages | WPS3908 |
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The experience of countries that have successfully taken advantage of opportunities offered by global markets suggests that at least three critical elements have to be in place: macroeconomic stability, contestable and competitive domestic markets that are open to external competition and well-functioning backbone services. Macroeconomic instabilities destroy business activity. Contestable and competitive markets provide firms with access to cheap inputs and capital equipment that are well endowed in research and development, and force inefficient firms out of business. Backbone services (telecommunications, banking, insurance, transportation, business services, etc.) together with customs, related border clearance regulatory procedures, technical standards regulations and ports' efficiency shape the ease and speed with which goods and services move across national borders and, therefore, are crucial to trade in goods.
Historically, Turkey fails the macroeconomic test, as it has been "on a roller coaster of booms and busts for decades" (Barysch 2005), with the last crisis taking place in 2001. GDP fell 7 percent and inflation soared to 70 percent. Macroeconomic stability appears now to be under control, with inflation in the single-digit range and GDP strongly growing. As for the remaining two ingredients, the Customs Union Agreement with the EU has contributed immensely to the emergence of contestable domestic markets and the combination of measures supported by multilateral financial institutions has contributed to improved efficiency in services sectors (Hoekman and Subidey 2005).
Since all these measures are of relatively recent vintage, one would expect Turkey's performance to be poor in terms of its capacity to take advantage of opportunities offered, in particular, by policy-induced integration into the EU and pan-European markets for industrial products. But, contrary to expectations, this paper, which analyzes Turkey's dynamics and patterns of integration into global markets, provides empirical evidence that this has not been the case. While indeed imports fluctuated following the time pattern of GDP boosts and busts, exports have remained largely impervious to macroeconomic crises for the last two decades. Despite occasional slow-downs, they have largely kept pace with the growth of world exports. More surprisingly, however, they have impressively expanded since around 2000-01.Turkey's share in world exports rose 60 percent from 0.4 percent in 2000 to 0.7 percent in 2004. Turkey's share in EU external imports increased by the same amount. Only Romania, one of the top export performers among Pan-European economies during that period, matched Turkey's export performance in both EU and world markets. The share of EU-8 in world exports rose 30 percent in 2000-04, that is, less than the respective shares of Turkey and Romania.
While the recent export expansion has been both surprising and impressive, its drivers and consequently ensuing mode of integration into global markets are even more astonishing. Turkey's export basket, although still dominated by unskilled labor intensive products, has been moving quickly towards products characterized by a higher level of processing, medium to high technology content and the use of skilled labor. The major force, albeit not the only one, behind this shift has been the entry of Turkish-based firms into 'producer-driven' networks-automotive and information communication technology networks, which are capital- and skilled-laborintensive industries. In consequence, a number of Turkish firms have become part of a new division of labor based on production fragmentation made possible by the combination of information technology and economic liberalization.
Turkey is the only country among EU candidates whose firms appear to participate in division of labor driven by production fragmentation and their scope of involvement is more extensive than that of firms from some new EU members (EU-8). Together with six EU-8 economies (Hungary, Czech Republic, Slovak Republic, Slovenia, Estonia and Poland),
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Turkey-with the share of 'producer-driven' networks in exports of manufactures, excluding chemicals, exceeding 20 percent in 2003 and double-digit growth rates-has been dubbed in a recent World Bank study (WB 2005) as one of the seven "High Performers" among European and Central Asian countries. Turkey's share of 22.5 percent puts it on a par with Slovenia in 'producer-driven' network trade.
The remainder of the paper is organized as follows. The next Section discusses implications of the "Turkish-EU connection" for contestability of domestic markets and conditions faced by Turkish firms in access to foreign markets. Section 3 examines geographical patterns and dynamics of Turkey's trade in goods and services in the context of EU-8 and other EU candidate economies. Section 4 seeks to examine changes in the degree of processing, technology content and factor intensities of Turkish trade with a special emphasis on trade with the EU and other countries from the Pan-European free trade area for industrial products. Section 5 examines trade in 'buyer-driven' chains, (textiles and clothing, footwear and furniture) and the shift towards 'producer-driven' networks (automotive and Information Communication
Technology networks). The last Section concludes.
The pillar defining Turkey's trade policy is preferential relationship, or more precisely the CU (Customs Union) Agreement with the European Union, with enormous implications for both conditions in access of domestic producers to external markets as well as contestability of domestic markets, that is, the extent to which local firms are exposed to competition from imports. The CU Agreement, which went into force on 1 January 1996, has already resulted in Turkey's adoption of the Community's Common Customs Tariff (CCT) for imports of industrial products from the third countries. Turkey has also taken up the EU rules of origin and EU customs procedures (customs valuations, customs declaration, release for free circulation and duty-suspension arrangements). The Agreement has also triggered reforms of technical standards regime and competition policy infrastructure.
The CU Agreement has contributed to a very significant increase in contestability of domestic Turkish markets through infusing predictability, transparency and stability to trade policy as well as by liberalizing market access, i.e., lowering or removal of both tariff and nontariff barrier, for both preferential and MFN suppliers. The extent of liberalization of tariff rates has been very extensive. Consider that MFN applied tariff rates on tradable goods with nonpreferential partners had to be reduced from an average of 22 percent in 1994 to 6.9 percent in 2001, GSP (Generalized System of Preferences) beneficiaries from 22 percent to 2.7 percent, and with the EU's FTA (Free Trade Agreements) partners from 22 percent to 1.34 percent and with the EU from 10.2 percent to 1.34 percent (Togan 1997 and 2000).
Turkey's applied MFN tariff rates for industrial products, the same as those of the EU, represent one of the lowest, if not the lowest, levels of MFN tariff protection among economies at a similar level of economic development. Turkey's both weighted and simple average tariff rates on industrial imports are several times lower than those in other candidate countries. Tariff rates are not only low but they are also predictable and stable. Since they are tied to EU tariffs as well as comprehensive EU commitments under the WTO agreements, they are resistant to domestic pressures for tariff protection.
As far as non-tariff barriers are concerned, technical barriers to trade have significantly declined with Turkey's gradual transition to the EU technical standards regime. Turkey has made large strides to establish a modern, market based regime of technical regulations and standards. The adoption of international and European standards as well as procedures for admitting goods into Turkey not only increase contestability of domestic markets but also create conditions forPage 4improved competitiveness of domestic firms in foreign markets. The CU Agreement and participation in EU trade initiatives has dramatically improved access for Turkish firms not to EU or EFTA markets but also to markets of countries participating in EU Eastern Enlargement project. Turkish producers of industrial goods have had duty-free access to EU markets since 1971, albeit with some exceptions that were removed by 1999...
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