European Journal of Scientific Research - EuroJournals

360 Veysel Ulusoy and Ahmet Sözen
The crucial coefficient for the present purposes is the one attached to the Custom Union
membership (CU). The negative sign show the trade diversion. 7 The parameter estimate is statistically
significant. The coefficient implies that exports were exp(-8.20) = 0.0274% of what they would have
been if neither country had been in the Custom Union. Further calculation indicates that 60 billion $
export volume would create a 60x0.0274=1.644 billion$ loss in export each year on average. This is a
rather small value, but once one considers the trade creation effects of the membership, loss will be
interpreted accordingly.
The coefficient on NAFTA indicates that when the importing countries are in NAFTA, the
expected trade of Turkey is estimated to be almost 100 percent (since exp(0.69) = 1.993) larger than
otherwise, with a statistically significant coefficient. Scale parameter LMQJ in manufacturing sector
positively affects trade volume. The result suggests that learning effect via scale may further stimulate
trade volume between Turkey and trade partners.
The results implies that, for the time period the paper covers, the Turkish manufacturing
industries experience trade diversion as it is expected from Viner’s (1950) approach stating that the
membership to any trading blocks with industrialized countries in general harms the participating
developing countries in the short-run. The negative sign and its statistical significance of the variable
CU (custom union membership) in Table 1 justify the corresponding trade diversion for the
manufacturing industries.
4. Conclusion Some Policy Implications
In the research summarized here, we have used the gravity model to show that if there is a potential of
trade creation and trade diversion effects of Turkey’s membership to the CU with EU15. From the
estimated parameters, we could not find enough evidence that the membership of Turkey to CU created
new trade volume. In fact the evidence shows an inverse effect where trade has been diverted by this
membership for the first five years. Although, there is no doubt that the Turkey’s CU membership has
further strengthened the Turkey-EU relations towards more integration, it is not wrong to say that
Turkey made a badly negotiated political deal with the EU with regard to the CU membership.
In light of the findings of this research, we believe that Turkey should take certain policy
implementations in order to decrease the shortcomings of the CU membership. First, since it is the EU
only which benefited from the cheap Turkish exports, Turkey should try to revise the trade policy with
the EU in order to balance the mutual benefits of the two parties. Especially, Turkey should pressure
the EU to include the agricultural and service sectors in which Turkey has comparative advantage in
trade. Second, Turkey should internally revise its manufacturing structure in order to be more
competitive in the global markets.
7 This dummy is supposed to have positive coefficient, meaning that countries within a trading block trade more than the
predicted by their scale and distance alone. The positive coefficient can be interpreted as trade creation effect indicating
that both partner countries trades more.