12th GTAP Conference, “Trade Integration and Sustainable Development: Looking for an Inclusive World”, Economic Commission for Latin America and the

Caribbean, Santiago, June 2009

Turkey and the EU: Economic Integration and Labour Migration

Scott McDonald

(Oxford Brooks University)&

Yontem Sonmez(Lancashire Business School, UCLAN)

&Karen Thierfelder

(US Naval Academy)

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Outline of the Presentation

Turkey – EU RelationsAimData & the Globe_Mig Global CGE Model Policy Experiments and Model ClosuresResultsConcluding comments

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• Global financial crisis: economies of almost all countries in Europe, in the US, etc affected

• No slow down in the pace of accession negotiations between the EU and the new candidate countries

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Turkey – EU Relations

• 1959: First application to join• 1963: Associate member• 1987: Applied for full membership• Part of common EU Customs Territory since

1996• 1999: Candidate country status• 2005: Membership negotiations started (Turkish

Undersecretariat for Foreign Trade, nd)

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%s of Total Imports and Exports by Regions

EU27 Exports Imports

Turkey 1% 1%

NAfrica 1% 1%

China 2% 3%

Russia 2% 3%

RoME 3% 2%

Japan 3% 3%

EFTA 3% 4%

Asia 5% 7%

RoW 5% 5%

NAFTA 13% 11%

IntraEU 58% 61%

Turkey Exports Imports

EFTA 1% 4%

NewEU12 4% 4%

RoW 4% 4%

France 6% 5%

UK 7% 6%

RoME 7% 7%

Asia 4% 8%

Italy 7% 8%

Russia 4% 10%

NAFTA 13% 11%

RoEU15 14% 14%

Germany 15% 12%

EU27 53% 49%

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Number of skilled and unskilled Turkish labour in Europe

Skilled Labour Unskilled Labour

Germany 63,459 706,771

UK 10,380 18,806

Greece 6,623 32,139

France 5,675 92,035

Netherlands 4,100 88,377

Switzerland 2,631 31,571

Sweden 1,923 15,766

Austria 1,616 62,280

Belgium 1,198 34,424

Denmark 944 14,550

Source: GMig2 Database, 2007.

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Remittances received by Turkey from EU countries, US$ billions

2001 Unskilled Labour Skilled Labour

UK 0.02 0.01

France 0.03 0.003

Germany 0.36 0.04

Italy 0.002 0.0004

Rest of EU15 0.12 0.01

New 12 EU countries 0.003 0.001

Source: GMig2 Database, 2007

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Aim

• To study the economic implications of a possible EU membership of Turkey

How?

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Policy Experiments

1. removal of bilateral import duties on all commodities traded between Turkey and EU27

2. removal of bilateral export taxes …..

3. removal of both bilateral import and export duties, i.e. FTA scenario

4. FTA plus the imposition of EU’s CET by Turkey on commodity trade with third countries, i.e. CU scenario

5. CU plus agricultural liberalisation

6. CU plus agr. lib. plus endogenous migration

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Macro Economic Closure

• FEX -Flexible exchange rate

• Investment -Investment driven savings

• Government -Absorption share fixed -Value added tax flexible - fixed internal balance

• Numeraire -CPI

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Data

• Database: GTAP database version 6 & GMig2 data on the number of skilled and unskilled migrant workers & bilateral remittance flows

• Form of the Database: A SAM representation of the GTAP database (McDonald and Thierfelder, 2004) & Augmenting the GTAP database (McDonald and Sonmez, 2004).

• Aggregation: 23-sector, 5-factor and 17-region

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Globe_Mig Global CGE Model

• Model: GLOBE_Mig global CGE Model (McDonald and Thierfelder, 2009). ‘A Global CGE Model with Endogenous Labour Migration’

• Production:• 3 level CES

– Aggregate intermediaries, value added and labour• All factors potentially unemployed

– MCP formulation for regime switching

• Taxes– VAT on household demand

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RESULTS

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% Changes in Turkish GDP

base US$ bns FTA CU

CU&Agr lib

CU&Agr lib&mig

GDP Exp. 147 0.02 -0.03 -0.04 -0.05

Private cons. 99.50 0.01 -0.36 -0.48 -0.49

Govt cons. 21.09 0.11 0.12 0.35 0.34

Investment cons. 24.59 0.30 0.29 0.58 0.57

Export Supply 46.57 0.46 1.61 1.59 1.58

Import Demand 45.19 0.65 1.16 1.19 1.20

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CU & Agr lib & Migration Scenario• Due to the differences in relative wage rates, unskilled

and skilled Turkish labour move to EU27 subject to a migration elasticity

% Change in Turkish unskilled and skilled labour in EU27

  Skilled L Unskilled LGermany 1.60 1.18France 1.59 1.22UK 1.58 1.23Italy 1.59 1.23Neu 1.54 1.19Reu 1.59 1.21

Remittances sent back to Turkey increase slightly

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 FTA (%) CU (%)

CU & Agri Lib (%)

CU & Agri Lib & Migration (%)

Turkey 0.11 -0.27 -0.26 -0.27

Slutsky Approximation EV by Regions on Consumption, US$ billions

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Tax Replacement, %s

Tax RevenueBase

US$ billions FTA CU

CU&Agri Lib

CU & Agri Lib &Migration

Value Added 0 0.27 0.86 1.52 1.52

Sales 9.17 -0.25 -0.46 -0.95 -0.96

Factor Use 1.41 -0.04 -0.27 -42.22 -42.22

Import 0.92 -13.12 -84.36 -84.48 -84.48

Export 0.20 -52.73 -51.90 -52.15 -52.15

Household -15.40 0.01 -0.38 -0.52 -0.53

Factor Income 15.08 0.01 -0.38 -0.58 -0.58

Indirect 9.72 -0.09 -0.23 -0.65 -0.66

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Changes in Trade Shares with CU

UK

France

Germany

Italy

Reu

-3.50 -3.00 -2.50 -2.00 -1.50 -1.00 -0.50 0.00

-3.08%

-2.25%

-2.82%

-3.10%

-2.71%

% Changes in Turkish Imports from EU % Changes in Turkish Imports from ROW

China

Japan

Asia

NAFTA

Russia

N Africa

RoMidEast

Rest

-2.00 0.00 2.00 4.00 6.00 8.00 10.00 12.00

7.40%

1.18%

9.59%

0.72%

3.64%

0.22%

-0.48

0.72%

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Concluding Comments

• CU scenario has some important trade implications:

– EU’s share in total Turkish imports declines with the imposition of the CET as they are replaced by relatively cheaper imports from third countries.

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• Imposition of EU’s CET lowers import tariff rates imposed by Turkey on imports from third countries and causes changes in trade regime of Turkey by removing ‘trade diverting’ distortions

• The change in trade regime reduces the degree of distortion in Turkish markets

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• Endogenous migration scenario also has some important implications:– Migration of Turkish labour force from Turkey to

EU27 has mixed effects;– with a positive effect being generated by

increases in remittances and– a negative effect due to the reduction in the

supply of labour in Turkey, particularly the skilled labour, which is relatively scarce.