Turkey's trade liberalization and it's accession to the European Union Customs Union

Contents

List of Tables

1 The Issue

2 Trade Liberalization in Turkey
2.1 The Pre-1980 Period
2.2 The 1980’s Reforms and their Impact on Turkey’s Foreign Trade

3 Turkey and the European Union Customs Union
3.1 Trade Creation or Trade Diversion ?

4 Empirical Observations of Trade Liberalization in Turkey
4.1 Protection Rates
4.2 Import Elasticities

5 Conclusion

References

List of Tables

1 Import Substitution Industrialisation

2 Some Macroeconomic Key Indicators in the 1980’s

3 Some Macroeconomic Key Indicators in the 1990’s

4 The Impact on Output and Exports

5 Import Penetration Ratios

1 The Issue

People living in Turkey might have very well experienced it, people, like the author, looking at Turkey as an independant observer, might not know it too much. Since it’s foundation in 1923, Turkey witnessed turbulent times almost thoroughgoing the 20th Century. Political as well as economical wise. Economically the climax was reached when Turkey felt into international insolvency in 1978. From then on, although attempts were made in earlier years too, large reforms were introduced. In this paper we will look at the Turkey’s trade policy before and after the liberalization reforms of the 1980’s.

Trade liberalization mostly implies less intervention by the government in the traded goods sectors. But whether a less interventionist trade regime results in a less distorted, more open and outward oriented economy will depend on the characteristics of the preand post-reform trade and exchange rate regimes. This paper aims to present a general survey about Turkish trade policy: a bird’s eye view. The author therefore abstains from generating a model and test the impact of the reforms on one single industry. Instead, such regression reults are rather resorted to other studies, in order to generate an appropriate picture of the trade liberalization as a whole without getting stucked into detail too much on the one hand, and without staying out of detail too much on the other hand¹. The first section outlines the economical background of Turkey from the pre-1980-reform period at first and continues with a presentation of the reforms imposed from 1980 onwards. It draws a historical picture as well as it points out the main impacts on the export and import pattern of Turkey’s foreign trade. The following section deals with Turkey’s accession of the Customs Union of the European Union in 1996. There is economical and politacal weight ascribed to the accesion as it is seen to be a major step towards a full membership of the European Union for Turkey. After outdrawing the historical backgrounds of the accesion, we will look at its impact on trade for several sectors, mainly by examining a study done by De Santis in 2001². Another section shows some empirical observations on trade indicators and their change in respect to the liberalization reforms.

2 Trade Liberalization in Turkey

2.1 The Pre-1980 Period

When established in 1923, the Turkish Republic had initially intended to follow relatively liberal economic policies. However, things went different and as a result of the Great Depression in 1929, the government started economic recovery, by promoting a doctrine known as etatism in the early 1930’s³. Turkey’s trade policies were characterised by interventions and protections. After experiencing growth rates of up to 6 percent in Gross Domestic Product in the late 1930’s, growth rates in all sectors declined sharply during the Second World War. Trade policies in the 1950’s again were highly restrictionist⁴, and characterised by constantly changing controls, regulations, and multiple exchange rate regimes. Thus, the trade policy did not reflect any long-term aim or strategy. After 1950 the country suffered economic disruptions about once in a decade with three major crisis before 1980. In each case the reasons were almost similar: inflationary pressures due to aggregate demand shocks, the supply shocks from the oil crises and inconsistent and irrational economic policies.

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Table 1: Stages of Import-Substitution Industrialisation, 1963-80. Source: Pamuk (1984, p.53).

During the 1960’s and 1970’s Turkey followed an import substitution development strategy, Table 1 presents average annual growth rates for different sectors of the economy for this time period⁵. The government insisted on State Economic Enterprises (SEEs) to meet the domestic demand and put barriers to trade and financial flows. Industrialization through import substitution. In accordance with this strategy imports were regulated by annual import programs and a varying mix of trade restrictions such as tariffs, tariff-like taxes and surcharges, import bans, quotas and foreign exchange controls. This led to shortages of parts and raw materials, and resulted in low industrial output and growth. These policies were mainly designed to protect domestic industry from foreign competition and increase government controls over the allocation of resources and production of goods⁶.

During the late 1970’s, inflation was accelerating, unemployment was rising, manufacturing output was significantly declining and labour unrest had reached crisis proportions. Political violence was widespread throughout the country. On top, Turkey felt into international insolvency in 1978.

2.2 The 1980’s Reforms and their Impact on Turkey’s Foreign Trade

On January 24, 1980, the Turkish government announced an economic reform program which was later transformed into a structural adjustment program with extensive institutional changes to reorient the economy towards an export-led growth path under the auspices of the International Monetary Fund (IMF) and the World Bank. This is seen as a turning point in Turkish economic policy. Relying on the theoretical framework for policy options for reducing anti-export bias by Milner (1990), it seems reasonably to suggest that during the 1980’s, the Turkish government, has followed the following policy options: raising export subsidies and lowering the effective protection rates of importable commodities.⁷

The Turkish economy underwent a series of trade reforms by vigorously promoting export policies and more gradually introducing import liberalization policies. As a result the 1980’s have witnessed a fundamental change of the composition of Gross Domestic Product in favour of industry. As Table 2 shows, the industry’s share has considerably risen during the first half of the 1980’s while it stagnated during the second half. One of the major aims of the liberalization program was to bring a lasting solution to the chronic balance of payments problems. Turkey did so by switching the productive capacity of the economy into the sector of tradable commodities. In the short run this requires, the output level of tradable commodities to expand relative to that of non-tradable commodities. Sustaining the export-led growth, in the longer-run, it needs increased fixed capital formation in the traded commodity sector. Some contributers to this topic point out that the favourable export performance of Turkey in the 1980’s seems not to have generated the level of investment in the sector of tradable commodities required for the future growth of the economy⁸.

However, the country’s export earnings have increased considerably. Asikoglu and Uctum (1992), emphasize that through the policy of persistent real depreciation of the Turkish lira, the introduction of new export promotion schemes, and the shift of production from domestic to foreign markets, output recovery was mainly driven

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Table 2: Some Macroeconomic Key Indicators in % in the 1980's. Source: State Planning Organisation (SPO).

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¹ The author wants to emphasize that all statistical regressions are predicated on the authors mentioned at the same time.

² See R.A. De Santis The 1990 Trade Liberalisation Policy of Turkey: An Applied General Equilibrium Assesment, 2001

³ See Federal Research Devision (2004), p.201.

⁴ Except for an initial experiment with a liberal trade policy (1950-53) which can not bee seen as an attempt to pursue on a lasting course towards free trade.

⁵ Like in 1950, due to balance of payments difficulties the government insisted a liberalization period from 1970 to 1973 which again did not sustain.

⁶ See Grothusen (1997), p.362.

⁷ See Milner (1990), pp.92-94.

⁸ See, for example, A ricanli and R odrik (1990).