An analytical approach for foreign trade flows between Turkey and chosen European Union countries: Before and after Customs union

The relationship between Turkey and The European Economic Community(EEC) (then The European Community (EC) and later The European Union (EU))has started with the association agreement signed in Ankara, in 1963. Thefoundations of the Customs Union were laid by an additional protocol which wassigned in 1970 and enacted into law in 1973. Therefore, one of the most crucialtargets of Turkey has been full membership to the EU since 1960s. The CustomsUnion Agreement between the EU and Turkey signed on March 6th, 1995. Turkey'sparticipation into the Customs Union Agreement has been considered as a steptowards its full membership to the EU. An important feature of Turkey-EU CustomsUnion Agreement is that Turkey is the first and the only country to enter into such anadvanced form of economic integration without full membership.The aim of this study is i) to test the effects of Customs Union Agreement onTurkey?s general and sectoral foreign trade with the 11 chosen EU countries(Denmark, Belux -Belgium and Luxembourg-, Netherlands, France, Germany,Greece, Ireland, Italy, Portugal, Spain, and the United Kingdom) and ii)to performdetection of the effective country and strategic sector in Turkey?s sectoral foreigntrade with 11 EU countries by means of country and sector separation (separability).In that direction, data of import and export on the Turkish manufacturing industrybetween 1988-2002 are tested by using panel data method.Import and export portion models are examined under two separate groups:total import and export between Turkey and 11 EU countries are tested in Group Imodels. Those models are taken into consideration under two circumstances: In first,the inseparable model for total import - export, exchange rate and income elasticities;and secondly, the separable model for the 11 EU countries., sectoral manufacturingindustry export and import patterns between Turkey and 11 EU countries are testedin Group II models. These models are applied by adopting three approaches. In thefirst approach, the inseparable model is used for sectoral import-export exchange rateand income elasticities; in the second approach, models expanded with sectoraleffects and in the third approach, models expanded with country effects. Thedifferences among countries and sectors are examined by using dummy variables forseparable country and sectoral models interactively with all other variables.According to the results obtained from the analysis of Group I models, the?Customs Union dummy variables? used in order to reveal the effect of the CustomsUnion has turned out to be statistically significant in export and import models. The?Customs Union dummy variable? has positive sign in both models. This implies anincrease in both imports and exports during pre-Customs Union period. Consideringthe coefficient, it is easy to observe that the increase in imports are greater than theincrease in exports. In general, it is possible to assert that The Customs Union had apositive effect on Turkey?s import increase. From this aspect, The Customs Uniondid not only cause an increase in export and imports, but it also led to behavioralchanges in both.The results from the analysis of Group I models revealed that Germany isfound as the most effective country in Turkey?s sectoral import and export. Thisresult is supported by the fact that Germany has an important share in Turkey?sforeign trade toward EU countries. According to the result of analysis of the modelsexpanded with country effects, Transportation Equipment and Vehicles industry isfound to be the most effective sector in Turkey?s sectoral import and export.eywords: Customs Union, European Union, Panel Data Models.