Determinants of bilateral trade flows: A structural gravity model approach for Turkey

Considerable progress in Turkey's trade performance since the early 2000s has made it necessary to analyze this process and to enrich it with policies to maximize the contribution of trade performance to Turkish economy. Therefore, besides exploring the core factors affecting trade flows over the period it is also important to represent the outcomes of the trade policies for setting the optimal policies to increase the trade volume. With this regard, the present study investigates the underlying determinants of Turkey's export and imports together with an assessment relative importance of these factors using advanced empirical analysis methods. The study uses the panel data techniques within the Gravity model framework to analyze Turkey's export and import data over the period of 2003-2018. The traditional Gravity model which is widely used in the analysis of international trade is adopted by the study with a relatively new application that is in a stronger 'structural' form. The Poisson pseudo-maximum likelihood estimator is used to estimate the export and import functions together with other estimators which are used for comparative evaluation and robustness checks of the results. General results of the study reveal that Turkey's trade performance is mostly determined by both its own and its partners' economic sizes. Additionally, some geographical factors such as physical distance, border effect, common culture, and landlocked location are among the important factors affecting Turkey's trade performance. International trade agreements are found stimulating Turkey's exports of goods while their impacts on Turkey's imports of goods are statistically insignificant. On the other hand, partner countries' World Trade Organization membership is found to have negative impacts on Turkey's trade of goods. Again, the study finds that the improvements in institutional quality and trade freedom in both Turkey and its trade partners do not have significant effects on Turkey's trade of goods while the real exchange rate is found as one of the determinants of Turkey's trade of goods. Furthermore, there is some evidence revealing the invalidity of the Linder effect and indicating that Turkey's export structure is based on inter-industry trade or vertical intra-industry trade. Overall findings underline the necessity to join global value chains for Turkey in order to achieve its goals about exports. Therefore, there is a need to observe and analyze the specialization structures and import dynamics of partner and competitor countries as well as future directions in products to construct and implement efficient policies.