The Effects of Customs Union Over Turkey's Trade

10.08.2010

THE EFFECTS OF CUSTOMS UNION OVER TURKEY`S TRADE

Furkan AYCAN

Department of Economics, Istanbul Technical University, State University of New York

[email protected]

We use micro data for Turkey to understand the effects of the Customs Union

Agreement on the trade volume and the efficiency between Turkey and the European Union. It

is found that the Customs Union Agreement has a significant effect on increasing the trade

positively. The previous studies have also shown that Turkey`s foreign trade has been

positively affected by the Customs Union Agreement.

Research topic: Customs Union and its effect on Turkish trade

Research question: Has European Customs Union Agreement affected Turkish import and

export?

Research hypothesis: European Customs Union Agreement has been beneficial for Turkish

trade so far, since after that the import and export of Turkey have substantially improved.

I. INTRODUCTION

There have been endless and numerous discussions about the advantages and the

disadvantages of the membership of Turkey to the Customs Union, which was established in

1995, and came into action in January 1996. Evidence from empirical studies that are done

mailto:[email protected]

about this query are mixed though. In this study, I will attempt to investigate this issue in a

formal way, questioning how the international trade of Turkey got affected by the Customs

Union Agreement.

“The most basic description of a customs union is an association of states in which

goods can move as freely as they would within the boundaries of its component units, and

which adopts a common policy with regard to products coming from outside that association.

In this definition the word “customs” is omitted, since it is often mistakenly held that a

customs union is achieved as soon as all customs duties have been removed as between the

partners, and a common external tariff is established and applied throughout the association.”

(The Trade and Customs Law of the European Union, Lasok)1.

“A more comprehensive definition of the customs union would be an agreement under

which one or more countries undertake (a) to remove all barriers to trade amongst themselves,

i.e. customs duties, charges with equivalent effect, import quotas, measures producing the

same effect as import restrictions, etc.; (b) to faciliate the free movement of goods by

harmonizing their national customs formalities; and (c) to apply the same treatment to

products originating from outside the union by instituting a common external customs tariff,

which shall be applied and interpreted in a uniform way by each member state.”2 (The Trade

and Customs Law of the European Union, Lasok). As described above, customs union is

about bringing benefits to member countries through faciliated and increased trade. There are

different types and forms of customs union, but they all have been formed in order to serve as

a catalysor for the international trade. Customs union, in other words, remove the barriers and

the obstacles that prevent or make things harder for the countries in the process of

international trade.

1 Lasok, The Trade and Customs Law of the European Union2 Alexandro Berndt (1999)

II. LITERATURE REVIEW

The effect of customs union on trade can be evaluated under three concepts: trade

creation, trade diversion or trade expansion. “Trade creation will occur when there is a shift

from a higher cost to a lower cost producer”. As Alexandra Berndt(1999) mentions in her

study, one of the effects of customs union can be trade creation. This means that the

production will be directed to somewhere else; hence that area or piece of land will have a

chance to attract some activity. Since the production costs are lower, the investors and the

owners will prefer moving the production to those places. Another outcome of customs union,

trade diversion occurs when “imports from the efficient or cheap world producer are replaced

with imports from a less efficient and higher cost partner country. That country’s product can

be sold more cheaply in the home country than the world’s products, because the customs

union imposes a protective tariff on the imports from the other countries, while leaving the

imports of the partner country tariff free”. The last effect is the trade expansion, which

basically is the enlargement in the trade of that country. Trade expansion will occur when the

lower market price in a country affects the total domestic demand. To be more precise, it can

be said that if the decrease in the prices in a country directly effects the demand inside the

conutry, there will be trade expansion.

In year 1963, the Ankara Treaty was signed, which marks the beginning of the official

relationship between EU (then called as European Economic Community) and Turkey. Then,

another agreement was signed in year 1970, which involves the desired schedule that Turkey

is expected to follow for the next 22 years in order to meet the requirements of becoming a

member of the Customs Union. This agreement was put into effect roughly 3 years after it

was signed by both sides, so the membership to the Customs Union was expected to be

achieved in the year 1995, according to the schedule of the European Union, which involed 15

European countries by then. In 1995, Turkey’s case was brought into the discussion in the

European Parliament. The Europeans have found Turkey’s progress more than enough and

finalized their decision by granting Turkey the membership to the Customs Union. There

were both positive and negative responds to that. It was bad for the producers that could not

take the competition and had to shut down the production facilities or factories. However the

export firms which have advantage were happy about this step. Although the Customs Union

agreement is basically an alliance in international level, which is about the removal of some

barriers and adjustment of the rules in order to increase the accessibility of both sides in terms

of trade; it meant more than this for Turkey. The Customs Union agreement was considered to

be a huge and important step and also a big advantage for Turkey towards the objective of full

membership to the European Union. In other words, it is not about only earning bureucratic

and economic benefits out of this agreement or increasing the wealth in Turkey, but it is also

expected to make Turkey a more secure and trustworthy country which has been an obstacle

for the capital inflows that are hugely demanded by the Turkish economy.3

European Union and Turkey already have well-integrated economies as far as a large

part of the trade in goods is concerned. 40,16% of Turkey's export is to the European Union

countries. Also the 45,13% of Turkey's imports are from the EU countries. 42% of Turkey's

trade is dealth with EU.4

The Customs Union agreement was a guarantee in other words, of the free circulation

of industrial goods and some agricultural products. It was basically the allowance of the goods

to travel between two sides, withouth being subject to the customs restrictions. The

application of quotas were banned in the Customs Union with the European Union. Also,

voluntary restraint agreements which are about the trade in textiles were cancelled after this

3 CUSTOMS UNION4 TUIK (2009)

agreement. In the process of Turkey’s integration to the European trading system and the

Customs Union agreement, some commercial and competition policies had to be fixed and

adjusted with those of the European Union. In addition to these, the sides have agreed on the

protection of the property rights. It can easily be argued that the Customs Union would not be

able to function properly unless intellectual properties are protected by both sides. Also it was

a must for the Turkish legislation to be harmonised with the European Union legislation. The

adoption of this legislation includes copyright and related rights, patents, trademarks,

counterfeit goods, protection of geographical indications and industrial designs.5

Customs Union theory has been defined as a branch of the tariff theory that deals with

the effects of geographical discrimination6. This definition means that the Customs Union

involves the privileged trading agreements that suggest no duty between the members of the

union, on the imports of goods and services; as well as a common external tariff. As we all

know, Turkey have been attempting to implement trade liberalization policies as a part of its

development strategy in the 1980’s. Back in those years, just like all the other countries,

Turkey had many trade reforms, quitting the fixed exchange rate regime being one of them.

Together with the Customs Union Agreement, Turkey’s custom duties and quantitative

restrictions on the trade with the 15 members countries of the European Union were all

eliminated. Moreover, with the acceptance of the common custom tariff structure, the primary

steps were taken for Turkey to embrace the trade agreements that are between the European

Union and the other countries. As it was said before, the agreement did not involve

agricultural goods until Turkey adjusted its policies to the Common Agricultural Policy. As a

result of this, a free circulation of agricultural products will also be possible. Agriculture is

projected to be included in the agreement and it is constantly being subject to negotiations and

discussions by the both sides. The mutual objective seems to be the creation of a free trade

5 Togan (2000)6 Lipsey (1970), Chacholiades (1978)

area. It is possible to say that both Turkey and the European Union are putting effort in order

to expand the Customs Union in order to cover the uninvolved areas such as services and

public procurement. Also an important part of this agreement is the commitment of both the

European Union and Turkey, to extend and strengthen the Customs Union. After the

agreement upon the membership of Turkey to the Customs Union, the first achievement was

the free trade area that was established between the two sides for the products that are covered

by the European Coal and Steel Community7. A decision of the Association Council of the

European Coal and Steel Community includes trade in agricultural products.

The integration of the Customs Union, have boosted the momentum of Turkey’s trade

expansion to the majority of the world and provided a basis for future regional settlements

that will shape the international trade of Turkey. With the contribution of the changes that

occured as a result of the Customs Union, total volume of Turkey’s foreign trade have

substantially increased its share in the GDP. Right before the Customs Union Agreement in

the year 1995, the share of the volume of Turkey’s foreign trade in the GDP was 30,6%; and

in the year 2008, it has increased to 45%.8

Theoretically, assuming the optimum use of the resources, the highest level of welfare

will be gained when the free trade conditions are developed. However Customs Union begins

with the removal of the trade barriers between the member countries and then implementing

and following a common tariff against the third countries. With this function, Customs Union

is a privileged free trade for the member countries.9

As a result of the initial research about the subject, it can be said that there are both

positive and negative effects. It has been observed that Turkey’s trade has been positively

7 European Coal and Steel Community was a six nation international organization serving to unify Western Europe during the Cold War and create the foundation for the modern-day developments of the European Union.8 Undersecretariat of the Prime Ministryfor Foreign Trade9 Hitris (2003)

affected as a result of the Customs Union Agreement. However, it can also be argued that

some sectors have been negatively affected by the Customs Union Agreement. These sectors

are mainly inward-oriented which produce for the domestic market and after the agreement

coming into action, they became unable to face the competition and were forced to shut down.

It is observed that export in these sectors have substantially decreased. In contrast to that,

some sectors got influenced positively by the effects of the Customs Union Agreement. The

production and the export of these sectors have improved. The automotive industry can be

given as a suitable example to this situation. As Sakıncı argued in his study, the automotive

sector have been positively affected by the Customs Union.10 His econometric findings show

that the industry have been significantly expanded and the export volume have substantially

increased. Ozkale have estimated Turkey’s import demand function with the help of random

effects model by using panel data method. It is estimated that Customs Union have trade-

attractive and creative effects for the main import goods. In the sectoral analysis, it is

observed that some sectors have been positively affected while some of them haven’t got

affected at all.11

Adam and Moutos argued in their study that before the Customs Union Agreement

came into effect, Turkey had a major change in its development policy and strategy. The

change was from import substitution to export oriented policies, that resulted in a significant

decrease in protectionist means.12 With the acception of the agreement, the technical barriers,

which were concluded as big obstacles for trade, have been removed. This removal is

expected to have a positive effect over the Turkey’s trade. Turkey agreed to adopt some basic

mechanisms of the European Union such as standardization, quality and accreditation. In

addition to these, there were objectives to harmonize the regulations and the policies that

10 Sakinci (2008)11 Ozkale (2006)12 Adam and Moutos (2008)

relate to the economic areas such as industrial and intellectual property rights, competition

rules, state aid, the Custom code and administrative cooperation. So, it is not right to conclude

the Customs Union Agreement as a change in tariff and some other structures. It is better to

conclude as series of changes that are likely to have an accumulated effect on total trade level.

According to the study of Harrison, the most beneficial effect of Customs Union for

Turkey is the accessibility of the third country markets. Turkey’s annual national income is

predicted to increase by %1 – 1,5 after the market accessibility as a result of the Customs

Union, especially together with the application of the common trade strategy with the

European Union.13 Besides that, a study by Mercenier and Yeldan states the adverse effects of

the Customs Union. This study proposes that the Customs Union would lead to revenue losses

for the government sector and in GDP, unless the trade reforms are increased and the barriers

should be removed.14 According to their argument, only the private sector would benefit from

the Customs Union Agreement.

In a research made by Halıcıoğlu , the static effects of the Customs Union over the

Turkish economy have been examined with partial equilibrium analysis. In order to do this,

the effects that lead to expansion or deflection of trade have been estimated, and also how

these criterias would be affected if Turkey would be a member of another trade block. As a

result of these queries, it is mentioned that the Customs Union has been concluded as the

second best advancement after the application of free trade. In addition to this, it is calculated

that the public welfare will increase by %1.28 of the national income.15

Neyaptı, Taskin, Ungor also attempted to investigate the effects of the Customs Union

over Turkey’s foreign trade, with the help of some demand functions. Positive effects have

13 Harrison (1996)14 Mercenier and Yeldan (1997)15 Halicioglu (1997)

been spotted between the change in Turkey’s national income and its export, as well as the

change in those countries, who trade with Turkey, and their import. This study argues that the

Customs Union have increased the international trade with the member countries of the

European Union, and also caused a shift over Turkey’s international trade, from the other

countries to European countries.16

After the establishment and the implementation of the Customs Union Agreement, it is

possible to observe a regular increase in Turkey’s export to the European and the other

country markets.17 Especially the stability in Turkey’s export to the members of the European

Union is very much influenced by the agreement, which eventually led to being Turkey’s

most important trade partner in both export and import, with a total share of approximately

%50 in year 2008.18 According to the data retrieved from the Undersecretariat of the Prime

Ministry for Foreign Trade, it is possible to see the improvement in the economic relations

between Turkey and the European Union have improved after 1996.

Table 1. Turkey’s Import, Export with EU and Foreign Trade Balance between years 1986-

2009 19

Year Export to EU % Import from EU %Foreign Trade

Balance

1986 3.559.877.414 47,7 5.292.286.043 47,6 -1.732.408.6291987 5.269.864.476 51,7 6.482.212.691 45,7 -1.212.348.2141988 5.618.035.617 48,1 6.730.823.649 46,9 -1.112.788.0321989 5.887.187.454 50,6 6.965.576.667 44,1 -1.078.389.2131990 7.485.235.977 57,7 10.597.223.264 47,5 -3.111.987.2871991 7.783.847.323 57,2 10.675.417.637 50,7 -2.891.570.313

16 Neyapti, Taskin, Ungor (2003)17 Table 118 Undersecretariat of the Prime Ministry for Foreign Trade19 TUIK

1992 8.476.903.180 54.2 11.514.283.674 49,5 -3.037.380.4941993 8.272.435.340 49,5 14.913.448.845 47,1 -6.641.013.5051994 9.389.059.708 47,7 11.643.572.907 46,9 -2.254.513.1991995 12.206.750.905 51,2 18.024.576.670 47,2 -5.817.825.7651996 12.563.345.043 54,1 24.320.638.975 55,7 -11.757.293.9321997 13.434.739.089 51,1 26.118.946.745 53,8 -12.684.207.6561998 14.809.293.454 54,9 25.282.203.966 55,1 -10.472.910.5121999 15.424.237.952 58 22.529.938.162 55,4 -7.105.700.2102000 15.664.420.819 56,4 28.526.901.881 52,3 -12.862.481.0622001 17.545.566.762 56 19.823.456.927 47,9 -2.277.890.1652002 20.415.033.653 56,6 25.688.833.237 49,8 -5.273.799.5842003 27.393.761.936 58 35.140.138.607 50,7 -7.746.376.6712004 36.580.858.822 57.9 48.102.743.561 49,3 -11.521.884.7392005 41.364.961.905 56,3 52.695.793.113 45,1 -11.330.831.2082006 47.934.745.690 56 59.400.921.807 42,5 -11.466.176.1172007 60.398.501.706 56,3 68.611.562.248 40,3 -8.213.060.5422008 63.390.418.598 48 74.802.379.555 37,1 -11.411.960.9572009 46.984.603.509 45,13 56.594.498.702 40,16 -9.609.895.193

*All currencies are in $. **The data for year 2009 is temporary.

Nowak-Lehmann have investigated Turkeys export to European Union countries over

16 kinds of goods, between years 1988-2002, by using the panel data method. Gravity model

have been used for the econometric analysis and national income, real exchange rate and

logistic costs have been used as independant variables. As a result of the analysis over those

16 kinds of goods, it is observed that import is very responsive to the changes in the exchange

rate, therefore price competitiveness. The direct effect of logistic costs over import can be

observed on some sectors such as food, plastic, clothing; while in steel or machinary sector,

this effect have not been noticed. As a result, Nowak-Lehmann argues that Customs Union

have a decent influence on Turkey’s import however this effect is not that strong.20

Turker concludes that the Customs Union Agreement have negatively affected

Turkey’s foreign trade. In the article it is stated that there is an improvement in Turkish price

20 Nowak-Lehmann (2007)

competitiveness, which can be expresed as the increase in the Turkish real effective exchange

rate as well, led to an important loss for Turkish export in almost every sector. As the real

effective exchange rate rises, the prices of the Turkish export goods will increase accordingly;

which will clearly decrease the demand for those goods and therefore decrease export.

According to the estimations and simulations in the article, strengthening and expanding the

Customs Union between Turkey and the European Union, especially on products that have

not been included so far such as vegetables and fruit, would cause a significant decrease in

export levels in the sectors that are based on agriculture.21

One another argument about the Customs Union’s negative effect is the CO2

emission. Theoretically it is said that there are effects like trade diversion, creation etc;

however this is also important. The increased industrial production have negative effects on

the environment. Turkey's CO2 emission has been rapidly increasing after year 1960. Those

were the years when Turkey had a huge approach in industrial revolution. In year 2006,

Turkey's CO2 emission happened to be more than 73.487.000 metric tons of carbon.22

Therefore, Customs Union also has bad effects on the environment and wildlife.

III. METHODOLOGY

The purpose of this research is to detect the relationship of Customs Union agreement

and the foreign trade of the member countries. Time series for variables have been analyzed

from 1991 to 2008. The following model has been used to test the effects and the relationships

between the imports and exports of Turkey, from and to a member of the European Union,

Italy.

21 Turker (2009)22 Carbon Dioxide Information Analysis Center (2006)

= (1)

Trade flow between the countries, their gross domestic products and the populations

has been used as variables in the model. In the model above, Turkey is the country that is

noted by i, and Italy is the country that is noted by j. E stands for the trade flow between

Turkey and Italy, stands for Turkey`s GDP, while stands for Italy`s GDP; and

exactly the same for both countries in population.

IV. ANALYSIS

In this research, the effects of customs union establishment over Turkey`s foreign

trade is inspected. The equation is estimated for 18 years for the period 1991-2008. Annual

data is used and Turkey and Italy have been chosen as the countries. All the data that have

been used are in real numbers. (GDP is measured in current US $). The data for the total trade

flow between Turkey and Italy have been calculated by computing the import and export data

that are retrieved from the official database of Turkish Statistical Institute. The data for the

other variables within the model, population and GDP, have been retrieved from the global

database of the Worldbank.

Table 2. Gross Domestic Products and the Populations of Turkey and Italy between years

1991 – 2008. (Worldbank Database)

Turkey ItalyYear GDP Population GDP Population1991 150,745,663,956 57,079,244 1,195,264,710,473 56,758,6501992 159,151,088,054 58,090,246 1,265,800,157,109 56,797,6501993 179,516,943,480 59,117,506 1,020,989,417,989 56,832,7501994 129,856,636,902 60,157,394 1,053,924,231,508 56,844,6501995 169,708,262,935 61,206,099 1,126,041,483,419 56,846,1001996 181,497,850,354 62,264,906 1,259,602,961,476 56,862,800

1997 189,622,430,818 63,331,833 1,192,322,078,217 56,893,8001998 269,008,498,886 64,395,635 1,217,086,539,534 56,910,9501999 248,960,827,387 65,441,666 1,200,821,542,723 56,921,5502000 267,208,617,821 66,459,578 1,097,343,836,374 56,948,6002001 196,035,681,952 67,444,118 1,117,358,478,747 56,980,7002002 232,744,583,130 68,398,135 1,218,921,230,943 57,157,4002003 304,594,330,513 69,329,456 1,507,171,218,962 57,604,6502004 393,037,537,488 70,250,173 1,727,750,434,567 58,175,3002005 483,992,046,378 71,169,037 1,777,738,216,640 58,607,0502006 529,931,851,529 72,087,928 1,863,476,728,140 58,941,4992007 647,846,286,237 73,003,736 2,114,468,274,390 59,375,2892008 734,852,541,212 73,914,260 2,303,079,233,012 59,832,179

Trade flow has been taken as the endogenous variable, as it can be explained by the

other variables within the model, while the gross domestic products and the populations are

the exogenous variables. Turkey`s imports and exports with Italy are added up together for

each year.

First of all, according to the model all the data should be expressed in logarithms, so

they have all been converted and symbolized with `ln` right before each variable. The model

used through this research requires all variables to be tested for the existence of unit root. This

is exclusively required for the main variable of the equation, the trade flow between Turkey

and Italy. All the variables within the model have been tested for unit root. Phillips-Perron

Unit Root Test has been conducted on every single variable one by one. The probability of the

variables have failed to be lower than 0,05 in current form, so I had to take the differences of

each to get a sensible and appropriate result, which succeeded. At the first level of difference,

Phillip-Perron test resulted successfully on all the variables in the model, which means the

probabilities are below 0,05.

Table 3. Phillip-Perron Unit Root Tests

Variables In levels 1st differences

Lag Test statistic Probability Lag Test statistic ProbabilityLNTRADE 0 0.053565 0.9515 1 -3,984,057 0.0089LNGDP1 0 0.303438 0.971 1 -4.488071 0,0034LNPOP1 0 -10.66379 0 1 0.09837 0.9549LNGDP2 0 0.573476 0.9841 1 -2.988151 0.0575LNPOP2 0 2.961479 1 1 -0.793951 0.7934

*Critical value: - 3,0655*In Table 3 all unit root tests were carried out using regressions including constant and trend.

It can be observed in Table 3 clearly that the probabilities of the variables in the

equation have values lower than 0.05 when we take their 1st differences. As the most basic

forms of the variables (LNTRADE etc.) have failed to provide enough significance for the

test, the differences of each variable are taken. Then these new variables (DLNTRADE etc.)

have been subjected to the Phillip-Perron test once again, and the results were explanatory and

useful. The test statistic values and the probability of the new variables can be observed in

Table 3. The results of Table 3 argue that, in these time series, the null hypothesis of a unit

root can not be rejected at a 5% significant level for the given variables. In other words, none

of the variables seem to be stationary. Then, the differences of all the variables are taken into

consideration and the results are different than they used to be. As the time series got

converted into first differences, they seem to become stationary.

As the unit root tests were complete, the variables have been entered into the VAR

equation. The only endogenous variable was the trade flow in the VAR estimation. The result

of the Vector Autoregression Estimates are give in Table 4.

Table 4. Vector Autoregression Estimates

VAR Estimation

DLNTRADE DLNTRADE(-1) DLNTRADE(-2) C DLNGDPTR DLNPOPTR DLNGDPITA DLNPOPITAProbability -0.066555 -0.292146 -0.404607 0.513172 29.87122 0.070801 18.89243

Standard error -0.32011 -0.33918 -0.87731 -0.30586 -54.0255 -0.88709 -35.3463

t-statistic [-0.20791] [-0.86134][-

0.46119] [ 1.67780] [ 0.55291] [ 0.07981] [ 0.53449]

R-squared 0.505934Adj. R-squared 0.135385

After conducting the Vector Autoregression Estimates, it is possible to observe that

the adjusted R-squared, 0.1353, is reasonable. In this estimation, the varible DLNTRADE is

taken as the only endogenous variable, while the rest of the variables are exogenous.

Equation 2 and equation 3 below show the steps during the regression of the model. In

equation 3, the coefficients, standard errors and the t-statistic values can be observed.

= (2)

= -0.234109+0.465812 +3.454636 +0.174915 +3.128273 (3)

(0.6213) (0.1922) (0.1922) (0.4369) (0.2825) [-0.3768] [2.4228] [1.3766] [0.4369] [0.2825]

R squared: 0.4150Adjusted R-squared: 0.2800

As seen above, the R squared of the main equation is estimated to be 0.4150, which is

very reasonable. The adjusted R-squared is also pretty low, 0.28. This means the equation is

significant and accurate in terms of explaining the endogenous variable, which is the total

trade flow between Turkey and Italy.

V. CONCLUSION

According to the data that has been inspected in this research, it is possible to argue

that the customs union agreement seems to be having positive effects for both EU and Turkey,

in terms of foreign trade. As it can be interpreted from Table 1, the trade volume between

Turkey and EU has been significantly increasing over time. Especially after 1996, which is

the year that customs union agreement was signed, there is a rapid increase in the trade

volume between turkey and EU. However, this increasing trend over time might be explained

with other factors as well. It is pretty normal that the population and GDP of a country will

increase at a steady rate, however after 1996; the rate of growth in trade volume between two

sides is subject to a significant increase.

The main argument of this research is to point out the effects of customs union over

Turkey`s foreign trade. To relate the argument to this discussion, it is possible to argue that

the null hypothesis can be accepted. As the regression results show, the increase in Turkey`s

GDP is a major factor that influences the trade volume between a European Union member

country and Turkey. To speak numerically, it can be argued that 1 unit of increase in Turkey`s

GDP will cause the total trade flow between Turkey and Italy to increase by 0.4658 units.

Since the null hypothesis is verified, the main objective has been successfully achieved by this

research. Besides that, the R squared of the main equation is reasonable and can be considered

as `low`, which is 0.41. Also the GDP of Turkey is important and significant within the

model. The rest of the coefficients have not been found to be as significant as Turkey`s GDP,

over the total trade flow between Turkey and Italy. Therefore, it is possible to argue that

Italy`s GDP, population etc. might have insignificant effects on the total trade flow between

Turkey and Italy, as a European Union member, however; it is not really right to explain the

changes in the trade flow with those coefficients.

As said above, Turkey`s GDP is found to be effective and explanatory over Turkey`s

foreign trade. According to that, one can argue that, the more Turkey`s GDP is, the more trade

Turkey will do with European countries. As they do more trade with Europe, the Customs

Union`s benefits will increase more for both sides; and trade improves.

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VII. APPENDIX

Phillips Perron, 1st difference test on ln(GDPturkey)Null Hypothesis: D(LGDP1) has a unit rootExogenous: ConstantBandwidth: 0 (Newey-West using Bartlett kernel)

Adj. t-Stat Prob.*Phillips-Perron test statistic -4.488071 0.0034Test critical values: 1% level -3.920350

5% level -3.06558510% level -2.673459

*MacKinnon (1996) one-sided p-values.Warning: Probabilities and critical values calculated for 20 observations and may not be accurate for a sample size of 16

Residual variance (no correction) 0.033570HAC corrected variance (Bartlett kernel) 0.033570

Phillips-Perron Test EquationDependent Variable: D(LGDP1,2)Method: Least SquaresDate: 08/03/10 Time: 11:29Sample(adjusted): 1993 2008Included observations: 16 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob. D(LGDP1(-1)) -1.179497 0.262807 -4.488071 0.0005

C 0.111971 0.054511 2.054101 0.0591R-squared 0.589957 Mean dependent var 0.004485Adjusted R-squared 0.560669 S.D. dependent var 0.295513S.E. of regression 0.195872 Akaike info criterion -0.306240Sum squared resid 0.537123 Schwarz criterion -0.209666Log likelihood 4.449916 F-statistic 20.14278Durbin-Watson stat 1.963932 Prob(F-statistic) 0.000511

Phillips Perron test, 1st difference on ln(GDPitaly)Null Hypothesis: D(LGDP2) has a unit rootExogenous: ConstantBandwidth: 0 (Newey-West using Bartlett kernel)


5% level -3.06558510% level -2.673459



Phillips-Perron Test EquationDependent Variable: D(LGDP2,2)Method: Least SquaresDate: 08/03/10 Time: 11:31Sample(adjusted): 1993 2008

Included observations: 16 after adjusting endpointsVariable Coefficient Std. Error t-Statistic Prob.

D(LGDP2(-1)) -0.785344 0.262819 -2.988151 0.0098C 0.029756 0.027073 1.099086 0.2903

R-squared 0.389421 Mean dependent var 0.001757Adjusted R-squared 0.345808 S.D. dependent var 0.125616S.E. of regression 0.101601 Akaike info criterion -1.619065Sum squared resid 0.144518 Schwarz criterion -1.522492Log likelihood 14.95252 F-statistic 8.929049Durbin-Watson stat 1.421718 Prob(F-statistic) 0.009778

Phillips Perron test on ln(POPturkey)Null Hypothesis: LPOP1 has a unit rootExogenous: ConstantBandwidth: 2 (Newey-West using Bartlett kernel)


5% level -3.05216910% level -2.666593


Residual variance (no correction) 2.06E-07HAC corrected variance (Bartlett kernel) 4.68E-07

Phillips-Perron Test EquationDependent Variable: D(LPOP1)Method: Least SquaresDate: 08/03/10 Time: 11:31Sample(adjusted): 1992 2008Included observations: 17 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob. LPOP1(-1) -0.024816 0.001545 -16.06142 0.0000

C 0.461661 0.027797 16.60824 0.0000R-squared 0.945049 Mean dependent var 0.015204Adjusted R-squared 0.941385 S.D. dependent var 0.001996S.E. of regression 0.000483 Akaike info criterion -12.32190Sum squared resid 3.50E-06 Schwarz criterion -12.22388Log likelihood 106.7362 F-statistic 257.9693Durbin-Watson stat 0.262716 Prob(F-statistic) 0.000000

Phillip Perron test, 2nd difference on Dln(POPitaly)Null Hypothesis: D(DLPOP2,2) has a unit rootExogenous: ConstantBandwidth: 13 (Newey-West using Bartlett kernel)


5% level -3.09889610% level -2.690439


Residual variance (no correction) 3.69E-06HAC corrected variance (Bartlett kernel) 4.36E-07

Phillips-Perron Test EquationDependent Variable: D(DLPOP2,3)Method: Least SquaresDate: 08/03/10 Time: 11:34Sample(adjusted): 1995 2008Included observations: 14 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob. D(DLPOP2(-1),2) -0.889320 0.291947 -3.046170 0.0102

C 3.94E-05 0.000556 0.070938 0.9446R-squared 0.436068 Mean dependent var -6.93E-05Adjusted R-squared 0.389073 S.D. dependent var 0.002654S.E. of regression 0.002075 Akaike info criterion -9.386538Sum squared resid 5.16E-05 Schwarz criterion -9.295244Log likelihood 67.70577 F-statistic 9.279154Durbin-Watson stat 1.786429 Prob(F-statistic) 0.010157

Phillip Perron test, 1st difference on ln(TRADE)Null Hypothesis: D(LTRADE) has a unit rootExogenous: ConstantBandwidth: 1 (Newey-West using Bartlett kernel)


5% level -3.06558510% level -2.673459



Phillips-Perron Test EquationDependent Variable: D(LTRADE,2)Method: Least SquaresDate: 08/03/10 Time: 11:35Sample(adjusted): 1993 2008Included observations: 16 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob. D(LTRADE(-1)) -1.050913 0.263773 -3.984161 0.0014

C 0.123566 0.049837 2.479376 0.0265R-squared 0.531358 Mean dependent var 0.003790Adjusted R-squared 0.497883 S.D. dependent var 0.224380S.E. of regression 0.158996 Akaike info criterion -0.723405Sum squared resid 0.353917 Schwarz criterion -0.626831Log likelihood 7.787237 F-statistic 15.87354Durbin-Watson stat 1.979482 Prob(F-statistic) 0.001358

EquationDependent Variable: DLNTRADEMethod: Least Squares

Date: 08/04/10 Time: 09:44Sample(adjusted): 1992 2008Included observations: 17 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob. DLNGDPTR 0.465812 0.192261 2.422815 0.0307DLNPOPTR 3.454636 2.509451 1.376650 0.1919DLNGDPITA 0.174915 0.400299 0.436962 0.6693DLNPOPITA 3.128273 11.07112 0.282562 0.7820

R-squared 0.415020 Mean dependent var 0.111754Adjusted R-squared 0.280025 S.D. dependent var 0.150972S.E. of regression 0.128102 Akaike info criterion -1.069663Sum squared resid 0.213330 Schwarz criterion -0.873613Log likelihood 13.09213 Durbin-Watson stat 1.552459

The Effects of Customs Union Over Turkey's Trade

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