On the trade integration effects of the customs union between Turkey and the EU: master's thesis
In: Economy
Inhaltsangabe:Abstract: This working paper shall investigate the trade integration between Turkey and the EU. The plan of this book is as follows. At first the historical background of the development concerning the trade relations between the two parties is conveyed. This includes the period from first association to implementing a customs union (CU) between Turkey and the European Union (EU) and to deeper integration abolishing barriers of trade until today. Subsequently an evaluation of the influence of the customs union follows in chapter 3 which constitutes the main part of the paper. Hereby the analysis is divided into the short-term static and long-term dynamic effects of the CU with the EU that Turkey entered on 1st January 1996. To analyze the static effects this paper adopts Viner's traditional approach, by comparing the trade creation effects with the trade diversion effects resulting from the removal of trade restrictions for Turkey and the EU as a whole. Thus, the predominant economical theory applied in this paper is the neoclassical customs union theory. This theory was chosen because it still is the predominant and widely recognized theory in analyzing trade data providing a variety of tools. Within the neoclassical theory Ricardo as well as Heckscher-Ohlin play an important role as a tool of analysis. In the relevant passages in the text the most important theoretical principles will be explained with the help of the Turkish example. At the limits of the neoclassical theories the new trade theory is supposed to help out especially where the assumptions of the neoclassical theory limit further analysis. It is the purpose of this paper to analyze the question how the trade liberalization in form of the CU between Turkey and the EU influences the development of Turkish welfare, specialization in different sectors, economies of scale, competitiveness, technological transfer and direct foreign investment. In some parts of the paper the analysis also refers to some effects for the EU, but main emphasis shall clearly be laid upon the effects on the Turkish economy. For the analysis foreign trade data is used which was compiled by the Turkish Undersecretariat of the Prime Ministry for Foreign Trade, the Prime Ministry Undersecretariat of Treasury, the Turkish Statistical Institute and Eurostat. Finding the adequate data created difficulties because of different time spans available and data from different sources being not comparable. This is why the time spans observed are sometimes not optimal. Therefore the analysis concentrates on the development within the last years, because not many studies were written in the 21st century or using data from this period. Thus, where long time spans were not available, the findings from old studies are compared with the new findings based on data from the last years. Especially within chapter 3.3 dealing with the dynamic effects this approach is reasonable since it shows the long term effects of the CU. The last subitem within chapter 3 allows a glance at the possibility of further integration taking monetary integration as an example. Last but not least chapter 4 will summarize the findings of the previous sections which will lead to a final estimation of the effects of the CU on Turkey and the EU.Inhaltsverzeichnis:Table of Contents: LIST OF ABBREVIATIONSIII LIST OF FIGURESIV APPENDICES INDEXV 1.INTRODUCTION1 2.HISTORICAL OVERVIEW ABOUT THE RELATIONS BETWEEN TURKEY AND THE EU2 2.1GENERAL OVERVIEW2 2.2FROM THE ASSOCIATION AGREEMENT UNTIL TODAY THE HISTORY OF THE CU3 2.3FROM PROTECTIONISM TO MORE TRADE LIBERALISATION6 2.4THE ABOLITION OF BARRIERS TO TRADE8 2.4.1Tariff barriers8 2.4.2Non-tariff barriers9 3.THE CUSTOMS UNION AS A FORM OF TRADE INTEGRATION - IMPLICATIONS FOR TURKEY AND THE EU13 3.1GENERAL ANALYSIS13 3.2THE STATIC EFFECTS OF THE CUSTOMS UNION18 3.3DYNAMIC EFFECTS25 3.3.1The specialization effect25 3.3.1.1Inter-industry trade25 3.3.1.1.1Theoretical background Neoclassic25 3.3.1.1.2Turkey's comparative advantage27 3.3.1.2Intra-industry trade32 3.3.2Economies of scale35 3.3.3Competitiveness38 3.3.4Technological transfer40 3.3.5Direct foreign investment44 3.3.5.1Theoretic implementation44 3.3.5.2Direct foreign investment inflows by countries46 3.3.5.3Direct foreign investment volume47 3.3.5.4Direct foreign investment by sectors48 3.3.5.5Prospects50 3.4EXCHANGE RATES EXCURSUS: FREE FLOATING OR PEGGING TO THE EURO52 3.4.1Gains and losses from pegging to the euro52 3.4.2Recommendation55 4.CONCLUSIONS59 BIBLIOGRAPHY62 INTERNET SOURCES67 APPENDICES71Textprobe:Text Sample: Chapter 3.3.4 Technological transfer: According to the theory of catching up underdeveloped countries may close a technology gap by free trade. The more a country's productivity and technology is backward the higher is its growth potential and its growth rates in case of free trade. Trade also causes a technology transfer, and underdeveloped nations may use new technologies without spending a lot on invention. This is also connected with the product cycle hypothesis. The high developed industrial countries are the producers of new products realising export monopolies at the beginning of the product cycle. If the product reaches its maturing stage less developed countries may foster development through imitation. In the standardization period, it is possible to produce with standardised techniques and low-qualified labour, which makes it possible for developing countries to specialise on these goods due to their lower costs of production and low wage rates. This is also often thanks to direct foreign investment (DFI), giving the ability to develop competitive products. Rising commercial contacts between countries causes an accumulation of knowledge. This leads to a catching-up, while producing low technology goods under protection causes falling behind. Producing standardised low-technology goods may end in the so called Heckscher-Ohlin trap. That means that there is no remarkable technical progress because of lacking human capital accumulation in the production. There is no significant technology transfer because DFI is also going into branches with less human capital. Without technical progress the country will fall behind. Low-technology goods in the exporting sector will suffer from rising competition in the world market. Convergence is evoked mainly by the 2 factors technological progress and capital accumulation. Faster implementation of technological innovations can lead to a higher rate of technological change. As an industrializing country, Turkey needs advanced technologies to speed up its industrialization process. There is a natural alliance between the new trade theory, with its emphasis on increasing returns and imperfect competition, and the view that technological change is a key factor driving international specialization. Technological development is normally an increasing returns process carried out in imperfectly competitive industries, and the most important sources of increasing returns in practice probably lie in dynamic economies of learning and research and development. If bigger sales markets and increased competition initiate innovations and growth processes, which excite technologic dynamics, then those positive effects can be carried over to other companies or even to other sectors by spill-over effects, learning effects and income effects. Technological gaps are also explainable with the traditional trade theory. The H–O model would predict that technologically advanced countries have a comparative advantage in technology-intensive goods. Innovation, by increasing the range of products, represents an increase in real world productivity. Technology transfer then since it is allowing a wider range of goods in Turkey, also represents a gain from a global point of view. Innovation as well as technology transfer increase world output. Hereby innovation disproportionately benefits the EU, the more innovative area, while technological transfer supports Turkey. The high protection rates of the Turkish industry before the CU lead to a relatively underdeveloped level of technology in its production. It shall be considered how this situation changed under the CU. The whole level of technology itself is not measurable; however technology-input can be measured with the expenses for education, research and development or the employment of scientists and engineers. The following graphic gives an overview about the employment of research and development (RD) personnel including scientists and technicians. As it can be seen the number of people employed within RD increased significantly during the regarded period. The comparison between Turkey and other chosen countries in Appendix N with respect to the education expenses as a percentage of GDP confirms Turkey's high technology input. In 2002 Turkey spend 7.26% on education being 1.36 percentage points higher than the OECD average. Unfortunately there are no time series evidences available in this matter. Yet, the different factors indicating Turkey's technology input show positive results. Technology-output is measured by the number of patent applications. If this number increases within the time period of the CU it can be interpreted as a positive sign for the catching-up process of Turkey. Alternatively the percentage of innovative firms can give an impression about the technology output. In the following graphic the development during the years 1997-2004 is shown. The percentage of innovative firms increased being a sign on the one hand of more investment in RD and on the other hand of possible spillover effects due to the closer integration with Europe. The overall estimation for Turkey's technology change is a positive one although Turkey still needs to increase its transfer of technology to overcome the shortcomings of their trade balance. Another possibility would be to attract more DFI which is the topic of the next chapter. Direct foreign investment: Positive growth effects can occur when the CU leads to an increase in investments. Reasons like high competition plead for such a positive relation. The CU had influence on the location and volume of real investment which is analysed in more detail in this chapter. Theoretic implementation: "Direct foreign investment is defined as an investment in which the investor acquires a substantial controlling interest in a foreign firm or sets up a subsidiary in a foreign country. DFI involves ownership or control of a business enterprise abroad." Thus the distinctive feature of DFI is that it involves not only a transfer of resources but also the acquisition of control. The subsidiary is part of the same organizational structure. In case of a plant the transfer of resources and production capabilities, and therefore DFI, contribute to the industrial base of the host country Turkey. DFI is one important pillar of convergence theories, in which it is assumed that capital flows into the region with lower wages and higher interest rates. In the "catching up" theory it is the source of technology and know-how because every investment from developed countries will cause a technology transfer, and the production will have external effects via learning-by-doing and spill-over to other industries. Increasing intra-industry trade is a sign of catching up while DFI flows may be an indicator of technology transfer. The growth in investments is one important requirement to catch up with the development level of the EU. There are a lot of factors determining investment decisions, among others: In developing countries there often exists a lack of savings and capital accumulation which is needed to realize additional profitable investments. Hence investment opportunities which promise high profits are realised by foreign entrepreneurs especially if the domestic demand in the invested sector offers good growth prospects. Another advantage is the relatively cheap quality and surplus of the labour force in developing countries. By shifting the assembly industries to these countries they can reduce their costs and increase their ability to compete in the world market. Moreover the geographical position of the country and suitable connections to different foreign markets are a determining factor for choosing the country of investment. In this way Turkey could be used as an export base to the Middle Eastern and Islamic countries. Susanne Voigt, Studium an der Berufsakademie Berlin in der Fachrichtung Bank, Abschluss 2004 als Diplom-Betriebswirtin (BA), Aufbaustudium an der Europa Universität Viadrina in Frankfurt/Oder, Abschluss 2007 als Master of Arts (European Studies).
