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Assessing the Turkey-EU Customs Union

Shallow and Deep Integration

Karen JacksonBradford Centre for International Development

University of Bradford

Presented at the European Trade Study Group Conference 2007

Abstract

As the negotiations begin towards Turkey becoming a member of the EU it is importantto assess the impact of the existing customs union. This ex-post assessment uses a clearanalytical framework that sheds light on which descriptive statistics are potentiallyuseful to consider the impact of the shallow and deep integration involved in thisexisting regional trade agreement. It is argued that much can be learnt from usingdescriptive statistics intelligently and given their relative ease in calculation, over moresophisticated modelling, this approach towards assessing regional trade agreementscould usefully be applied by policy makers. In terms of the Turkey-EU customs unionthere are a number of indications that both trade creation and trade diversion have takenplace, and it is the inclusion of Turkey in the common agricultural policy that is the oneremaining area of traditional gains for Turkey; whereas continuing the progress of deepintegration may well yield welfare gains through increased foreign direct investment,product variety and intra-industry trade.

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Introduction

As the negotiations begin towards Turkey becoming a member of the European Union(EU) it is important to assess the impact of the existing Customs Union (CU). Thisassessment uses a clear analytical framework that sheds light on which descriptivestatistics are potentially useful to consider the impact of the shallow and deepintegration involved in this existing Regional Trade Agreement (RTA).

There are a number of sophisticated methods that can be used to model the impact ofregional integration, including econometric, Computable Partial Equilibrium andComputable General Equilibrium models. Setting up and analysing the results fromthese models requires considerable technical knowledge. Thus this paper proposes analternative method for analysing the impact of regional integration. It will be argued thatmuch can be learnt from using descriptive statistics intelligently, based on a clearanalytical framework. This approach can be used to make ex-ante predictions as well ascarry out ex-post analyses. Therefore an assessment can be used to indicate to policymakers, or more specifically negotiators, the key issues that they should focus on so thatthe RTA has the best chance of delivering a positive impact.

In the case of the Turkey-EU CU considering ex-post an assessment of the CU willallow us to draw some important conclusions about what should be the focus for thecurrent negotiations so as to be most likely to provide a positive welfare impact forTurkey.

This paper will be split into four major sections. Firstly we will establish the analyticalframework, which will distinguish between shallow and deep integration. This willprovide us with descriptive statistics useful for assessing the impact of an RTA.Secondly we will consider what type of agreement is the Turkey-EU CU, highlightingthe elements of shallow and deep integration involved in this arrangement. Thirdly wewill present an ex-post assessment of the CU informed by shallow and deep integrationindicators. Finally, concluding with a discussion of the main findings from thisassessment and an evaluation of the usefulness of the indicators which have beenexamined.

This paper will draw on research initially funded by the Department for InternationalDevelopment, carried out with David Evans, Michael Gasiorek, Peter Holmes,Leonardo Iacovone, Tomek Iwanow, Sherman Robinson and Jim Rollo on thedevelopment of the Sussex Framework for evaluating RTAs.

The Framework

Shallow integration is usually defined as the elimination of barriers to trade incommodities; whereas deep integration involves additional elements of harmonisingnational policies, and allowing or encouraging international factor mobility (Burfisheret. al., 2004). Given these definitions Table 1 lists the elements of shallow integrationand deep integration. It should be noted that regulatory norms can be considered anelement of both shallow and deep integration.

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Table 1: Elements of Shallow and Deep IntegrationShallow Integration1. Traditional Barriers

(a) Tariffs – Most-Favoured Nation (MFN) and bilateral

(b) Tariff-like measures - e.g. quantitative restrictions and variable levies

(c) Non-tariff barriers

2. Contingent protection – safeguard clauses and anti-dumping

3. Rules of origin

4. Regulatory norms as barriers to trade in commodities

(a) Standards and norms

(b) Product standards

(c) Testing and certification

(d) Process standards

Deep Integration1. Regulatory norms

(a) Standards and norms

(b) Product standards

(c) Testing and certification

(d) Process standards

2. Investment rules

3. Competition policy alignment

4. Rules on subsidies in addition to World Trade Organisation (WTO) rules

5. Services schedules relative to the GATS commitments

6. Rules on movement of natural persons

7. Harmonisation of issues beyond border concerns

8. Change in revenue sharing (in a CU)

9. Institutional framework

10. Political integration/benefits/conditionality

11. Financial budgetary arrangements

Assessing Shallow Integration

Following Viner’s (1950) seminal article on customs unions the Lipsey era sawattention focussed on clarifying the concepts of trade creation and trade diversion, andidentifying situations under which each would be more likely. This leads us to severalrules that can be used to try and identify when an RTA may be welfare enhancing.These rules will now be discussed, as well as indicators and evidence that can be used toinform them:

1. Generally the higher the pre-RTA tariffs and the lower the post-RTA commonexternal tariff (CET) the more likely an RTA will be welfare enhancing. The firstproposition of a higher pre-RTA tariff leading to more trade creation is fairlystraightforward. Similarly it is also fairly intuitive that it is less likely that tradediversion will occur when the common external tariff is low since the externalterms of trade can be left almost unchanged (Vanek, 1965).

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2. RTAs with many union members are more likely to be trade creating rather thantrade diverting. This is a fairly simple notion that a larger number of memberswill mean a larger market that members will have preferential access to and thusenlarged possibility of trade creation. Schiff and Winters (2003) also make thepoint that if an RTA’s joint economy is large this should mean they are moreinfluential in trade negotiations and therefore are more likely to come toagreements that are to their benefit.

3. Makower and Morton (1953) suggested that an RTA will be more likely to bewelfare improving when there are wide differences in relative costs betweenmembers since this means widely different production advantages. Howeverwhen Venables (2003) considers differences in comparative advantage betweenmembers, and the rest of the world (ROW), he claims that countries with‘extreme’ comparative advantage (i.e. the countries which have the comparativeadvantage most different to the ROW) will be more likely to experience tradediversion since its imports will be based on intra-union and not globalcomparative advantage. The ‘intermediate’ country will be importing goodsfrom the ‘extreme’ country, which it has a global comparative advantage inproducing. Hence the countries with ‘intermediate’ comparative advantage willdo better from the RTA than the countries with ‘extreme’ comparativeadvantage. Therefore it would seem that if there are wide differences in relativecosts between members this would indicate the RTA is likely to be welfareimproving for the members with comparative advantage close to the worldaverage.

Indicators:

� Trade weighted tariffs over a suitable time period� Simple average tariffs over a suitable time period� Tariff peaks, where a peak is defined as twice the average, over a suitable time period

The rationale for calculating both trade weighted and simple average tariffs is that thecomparison can allow us to determine whether the tariffs are high on products imported in highor low quantities. This may prove particularly interesting when considering the members of anRTA adopting a CET, since there may be very different patterns of imports for differentcountries. Also, given the opposite bias present in the simple and weighted tariff rates we knowthat the true rate lies somewhere in between these rates. In addition tariff peaks usually suggestprotectionism, possibly hidden in the average rates. When considering these tariff rates andpeaks particular attention should be paid to the differences between intermediate and final goods.

Indicators:� Number of members of the RTA� Population of members� GDP of members

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4. North-North and North-South RTAs are more likely to be welfare enhancingthan South-South. This conclusion follows from the claim by Venables thatcountries with ‘extreme’ comparative advantage will be more likely to

Indicators:

� Balassa (1965) suggested that different patterns of trade reflect different relative costs andnon-price factors between countries, thus revealing their comparative advantage.Therefore he proposed that Revealed Comparative Advantage indices could be calculatedusing:

��

��

��

��

��

��

�

�=

Where,

�� : country i’s exports of commodity j

�� : country i’s total exports

�� : country/region n’s exports of commodity j

�� : country/region n’s total exports

When the RCA is equal to one country i’s share of sector j in its total exports is identicalto country n’s share of sector j in its total exports. However, when the RCA is above onecountry i can be said to be specialised in sector j. Conversely, when the RCA is belowone it is not specialised in sector j.

We should also acknowledge that there are several variants of this RCA index. Thesevariations have been the subject of debate regarding inconsistency between and theoreticalunderpinnings of different measures (Vollrath, 1991). Vollrath surveyed and compared thetheoretical basis of alternative indices concluding that the version of the Balassa indexoutlined above was one of the most satisfying.

� We have noted that differences in costs means differences in production advantages.Therefore a useful indicator to consider is one that estimates the similarities of productionstructures between countries. It is often difficult to obtain detailed data for productionstructures therefore trade data can be used to calculate the Finger-Kreinin index (Fingerand Kreinin, 1979) which provides an overall measure of the similarity of the tradestructure between any pair of countries:

��i min ([Xia��ia], [Xib��ib])

Where, Xia��ia: share of product i in country a’s total exportsXib��ib: share of product i in country’s b’s total exports

The index ranges from 0 when country a exports goods that are completely different tothose exported by country b, to 1 when the composition of both countries’ exports isidentical.

It may also be interesting to identify the large contributing products to the FK index.

� If the data is available it would also obviously be worth considering the differences incosts between countries.

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experience trade diversion. In a South-South RTA the ‘extreme’ country isassumed to have the least skilled labour, and therefore the poorest. Hence thepoorest country will be more likely to experience trade diversion and therefore afall in income. On the other hand the ‘intermediate’ country is more likely togain from trade creation and therefore sees an improvement in its income.Hence a South-South RTA is likely to result in income divergence. This is incontrast to a North-North RTA where the ‘extreme’ country is assumed to havethe most skilled labour, therefore the richest and income convergence is mostlikely to be generated. Schiff and Winters also state one of their rules of thumbfor regionalism to be that North-South dominates South-South for a variety ofreasons including northern partners are more likely to be a better source of trade,increase domestic competition and provide FDI-related technology transfers.

5. A wide overlap of activity between members allows scope for trade creatingspecialisation (Viner, 1950). If two countries produce the same good (protectedby tariffs) and an RTA is formed, the country producing most efficiently wouldcapture the whole market. Whereas, if the goods produced in each country aredifferent, when the RTA is formed each country will capture the market even ifit is not efficient in that form of production.

6. If a high percentage of trade is being carried out with the potential partners theRTA is more likely to be welfare enhancing. When an RTA is formed tariffs areremoved between members. If prior to the RTA you largely trade with futurenon-partners then any shift of trade towards members when the RTA is formedis largely trade diverting. Any trade creation that does take place due toimporting from another member rather than producing yourself requires anoverlap in production. Thus when you trade little with future partners and thereis little overlap in production an RTA is most likely to be trade diverting.Alternatively if you trade largely with future partners and there is overlap inproduction then there is scope for trade creation and it is less likely there will betrade diversion (Lipsey, 1960). This point has been the subject of much debate inthe natural trading blocs literature. Schiff (1996) finds that the smaller thevolume of trade between partners the bigger the welfare gain since the loss intariff revenue is smaller. However this result must assume that the partners arealready fully specialised and the countries are competitive economies. It isinteresting that Schiff and Winters (2003) find empirically that countriesforming an RTA do not tend to already carry out a substantial amount of tradewith each other, but do in fact tend to be in close geographical proximity.

Gasiorek and Winters (2004) further this discussion by considering the likelywelfare impact of the proposed European Partnership Agreement in theCaribbean. They develop a framework concentrating on Caribbean importbehaviour where goods are assumed homogenous and there is no domesticproduction. They consider a variety of scenarios where there is either a sole

Indicator:

� Once again a useful indicator to consider the similarities of production structuresbetween countries is the Finger-Kreinin index.

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supplier to the domestic market, or there is more than one supplier with variouselasticities of supply. This framework allows them to summarise that welfaregains are more likely when either the EU is the sole supplier with a more elasticsupply, the Caribbean Community and Common Market (CARICOM) is the solesupplier, or the market is shared with the EU determining the marginal importprice (i.e. the ROW supply curve is upward sloping and the EU supply curve ishorizontal). On the other hand welfare loses are believed more likely wheneither the ROW is the sole/principle supplier and subject to tariffs, or when themarket is shared between the EU with a more dominant share and the ROWdetermines the marginal import price. Given that it is unlikely that we will haveinformation on who determines the world price we will abstract from thiscomplication and draw the general conclusion that the greater the share of tradefor which the RTA partner is the sole supplier the greater the possibility thatthere will be trade creation. The intuition behind this result is fairly simple; ifthe RTA partner is the sole supplier for a large proportion of imports then thereis only really scope for trade creation. However if the markets are shared and theshare of trade and/or the number of product categories for which the RTApartner is the sole supplier rises then this would suggest trade diversion is takingplace. Admittedly there is the possibility that this rise in the share of trade couldhappen due to trade creation, yet it is less likely that a rise in the number ofproduct categories would rise due to trade creation. Therefore if the market isshared a rise in the RTA partner’s share of trade for which it is the sole suppliercoupled with a rise in the number of product categories covered where the RTApartner is the sole supplier is likely to indicate trade diversion. Conversely if themarket is shared a rise in the RTA partner’s share of trade for which it is thesole supplier coupled with a constant number or decline in the number ofproduct categories covered where the RTA partner is the sole supplier is likelyto indicate trade creation.

Indicators:

• An obvious starting point when you wish to investigate the amount of trade beingcarried out between the potential partners in an RTA is to consider trade shares. Theseshares can be disaggregated by partner and product.

• Anderson and Norheim (1993) pointed out that using intra-regional trade shares toconsider regional trade patterns, in order to carry out an ex-post assessment of an RTA,can be misleading since we can expect larger RTA’s to result in larger intra-bloc tradeshares and lower the extra-bloc trade. The trade intensity (TI) index attempts toovercome this issue by dividing the regional trade share by the region’s share of worldtrade:

��

�

��

�

= =

�

��

� �∗

Where:xtj: the share of the region i's exports towards the region j ,mj: the share of the region j's in world imports (net of country i's trade).qj: the share of region j in world (net of region i's) GDPrj: the relative openness of region j, defined as j's import-to-GDP ratiodivided by the world's (net of region i's) import-to-GDP ratio.

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7. If prior to the formation of an RTA trade is a small proportion of GDP, meaningthat the majority of goods consumed are produced domestically, then anychanges in the pattern of trade after the RTA is formed is most likely a shiftfrom domestic production to importing from members. Hence by definition tradecreation has taken place. Therefore if trade is initially a small share of GDP anRTA can be considered more likely to be welfare improving.

These seven rules will provide a framework to assess the impact of shallow integration.However a shortcoming of these rules, and the theory they are based on, is that they donot provide clear guidance on the impact of non-traditional barriers to trade since theimpact of these non-traditional barriers on prices is unclear. Nevertheless we do knowthat economists regard contingent protection as likely to frustrate the aim of tradeliberalisation. However the retention of some such instruments is often necessary toavoid adjustment costs. Therefore a good agreement may retain scope for use of suchmeasures, but place strict limits on their use and should make them predictable.

On the other hand rules of origin are required in an RTA to prevent imports from thirdcountries being routed through a partner country that has a lower tariff on a particularcommodity or less onerous customs procedures than the home country, called “tradedeflection”. Domestic content rules are designed to prevent this outcome by requiringthird country imports that move across intra RTA borders to have local content rules.This can be achieved by requiring a minimum local content (i.e. “value added”), a tariffjump (i.e. imported inputs and final exported products must appear under a differentcustoms code) or the specification of particular production processes that must beundertaken on any imported goods. In such cases these approaches can replace tariffs on

If trade is not geographically biased then the TI index will be equal to one. However ifregion i’s trade is biased towards region j then the index will have a value in excess ofone, the larger the value meaning more biased trade.

• The TI index does not consider that the pattern of trade of members of an RTA can beinfluenced by the fact that the region is trading more or less with the rest of the worlddue to external trade policy changes. Thus, in order to consider these changes Andersonand Norheim proposed the trade propensity(TP) index:

��

�

��

�

= = ti . Iij

Where:ttj : i's exports to region j's divided by i's GDP,ti : the ratio of i's total exports to i's GDP.

• An analysis similar to that proposed by Gasiorek and Winters (2004) can be used to tryand identify to what extent the RTA partner is the sole supplier in the market, in termsof the number of products and their share of trade. They began by calculating the shareof imports from different sources for each disaggregated product category. Using theseshares the number of product categories for which each supplier has a share of 20-80%,80-90% and over 90% is calculated, as well as the percentage of total trade that thesecategories cover.

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the imports from third countries as the protective instrument. In principle a CU meansthat members have no trade barriers between them and third country goods pay acommon external tariff when they first enter the CU, though in practice this is notalways the case. Rules of origin can frustrate regional trade in a number of ways.Firstly, they introduce a quantitative restriction on the production of goods in the RTAthat use intermediate inputs imported from third countries. Secondly, their complexitycan provide customs officials with an excuse to delay goods that actually have the rightto move freely. Therefore rules of origin can lead to trade diversion if they induce theimportation from higher cost partners in favour of the ROW, or increase domestic sales.Generally speaking rules of origin are less protectionist when they allow ‘Cumulation’,when inputs from other regional partners can be counted as “local” inputs. Rules oforigin are also less protective when the local content percentage required on duty freeimports from third countries is low. Stevens (2006) suggests a local content of 25% orless can be regarded as development friendly, whereas 35% or more is probablyunfriendly.

Finally we turn to an element of both shallow and deep integration. A majorjustification for an RTA is often said to be the ability to deal with regulatory norms thatgovern trade that cannot be easily dealt with multilaterally. Such regulatory norms arecontroversial because they can be used as regulatory barriers to trade, as well as tofacilitate beneficial “deep integration”. A key factor often neglected is the issue oftesting and certification. For example, adoption of EU standards into partner norms willbe of little benefit if there is no mutual recognition of testing and certification. In manycases, “deep integration” requires governmental action to harmonise regulatory normsthough in some cases this can be done by via contracts, proprietary standards and othermeasures that affect the operation of the market. Thus, there is scope for regulatoryintegration that limits regulatory barriers to trade and facilitates beneficial “deepintegration”.

Assessing Deep Integration

Traditional trade theory does not provide sufficient guidance when attempting to assessthe welfare effects of deep integration. Therefore we need to turn to new trade theory,which considers trade-productivity links, imperfect competition and rent-seekingbehaviour (Panagariya, 2000). Yet there is no standard theoretical framework formeasuring the effects of deep integration. Therefore in the absence of such a frameworka discussion of the costs and benefits of deep integration can be focused in the followingareas:

1. Foreign Direct Investment (FDI)

Many countries view increased investment as a key benefit of joining an RTA.Investment, particularly FDI, can be promoted through larger markets, increasedcompetition, improved credibility, internal reforms, increased rates of return to capitaland more efficient financial services; which can be brought about by deeper regionalintegration. Schiff and Winters (2003) admit that there are few empirical studies buttentatively suggest that increased investment is most likely in North-North RTAs, lesslikely in North-South RTAs and least likely in South-South RTAs. In addition they citestrong circumstantial evidence that creating or deepening an RTA can increase FDI.

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FDI is often recognised as a crucial driver of adoption of new technology, influencingfirm-level productivity. It is useful to distinguish three types of knowledge transfer: (1)international technology transfers, (2) horizontal spillovers, and (3) vertical spillovers.Different institutional arrangements are more compatible with the different kinds oftechnology transfer. In particular, deeper integration can be an important trigger ofinternational technology transfers when regulatory burdens are removed andcoordination is facilitated by the RTA. In these cases, we should observe increasedintra-firm trade accompanied by a simultaneous increase of FDI and intra-industry tradein the same sectors. However there is also the possibility of negative effects of increasedFDI when firms exercise monopoly power or generate negative environmentalexternalities. Given this discussion the obvious indicator to start by looking at is FDIflows.

2. Increased product variety

New trade theory suggests two important channels by which deep integration affectseconomic performance - increased product variety and intra-industry trade. Increasedproduct variety and intra-industry trade generate productivity increases and potentiallyincreases in consumer welfare through the more efficient use of resources given existingtechnologies. More specifically increases in product variety can be in terms of bothintermediate and final goods. Deeper integration that expands the menu of intermediateinputs available to firms may drive increases in productivity either because it allowsindividual firms to choose more productive inputs, or because these inputs embodytechnical knowledge that can now incorporated into the production process. The sameargument would apply to imported capital goods, which embody foreign technology. Toexploit these potential gains, foreign and domestic firms can enter into joint ventures orother forms of partnerships allowing for finer segmentation of production processes, aprocess often seen in the development of complex value chains.

Indicators:

• A standard measure of product variety is based on Feenstra et. al.’s (1992) work. The formulathat can be used to calculate the change of product variety between time t and t�� is thefollowing:

=∆

∑∑∑∑

∈−−

∈−−

∈∈−

− �

��

�

��

�

��

�

��

��

��

��

W

W

�

�

�

Where:

� are the set of products available in time t

−� are the set of products available in time t-1

−∩= �� are the set of products available in both time t and t��

�� are the value of imports/exports of product i in time t

−�� −�� are the value of imports/exports of product i in time t-1

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3. Intra-Industry Trade

The second channel by which deep integration affects economic performance is throughintra-industry trade. Intra-industry trade is the “simultaneous imports and exportswithin industries” (Fontagné and Freudenberg, 1997). The importance of intra industrytrade was realised in the 1970s when it was realised that the most dynamic componentsof the growth of trade between OECD countries was intra industry, often within multinational firms. An increase in intra-industry trade due to an RTA may mean a moreefficient use of resources and thus an increase in productivity and possibly welfare.

Interpretation:<0: Products traded in time t-1, but not traded in time t, were of a higher value than those

products traded in time t, but not traded in time t-1.0: Products traded are identical in both period’s t and t-1.>0: Products traded in time t, but not traded in time t-1, were of a higher value than those

products traded in time t-1, but not traded in time t.

• In order to see the emergence of regional value chains we can first use the BEC classification todecompose the total trade into 3 main categories: capital goods, intermediate goods,consumption goods.

Concordance between three main categories and BEC classificationCapital goods:41 Capital goods (except transport equipment)521 Transport equipment, industrialIntermediate goods:111 Food and beverages, primary, mainly for industry121 Food and beverages, processed, mainly for industry2 Industrial supplies31 Fuels and lubricants, primary322 Fuels and lubricants, processed (other than motor spirit)42 Parts and accessories of capital goods (except transport equipment)53 Parts and accessories of transport equipmentConsumption goods:112 Food and beverages, primary, mainly for household consumption122 Food and beverage, processed, mainly for household consumption522 Transport equipment, non-industrial6 Consumer goods not elsewhere specified

To analyse the emergence of “regional value chains” the trends of the exports of intermediategoods over total exports can be evaluated:

�

�

� �

� ��

The results from this will have to be looked jointly with the other indices of product varieties andIIT in order to evaluate the dynamics of economic integration previous to the RTA.

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4. Standards

The variation in standards across countries can lead to increased costs and thus lesstrade. To alleviate this problem countries are being encouraged to align their standardswith international voluntary standards that have been established. Upgrading standardsunilaterally can be considered as the simplest approach, but often difficult to achievesince it can be costly and market access is not necessarily guaranteed. Therefore anumber of countries upgrading their standards in a coordinated manner can be moreattractive. Two main approaches are recognised: cooperative agreement and RTAapproach. It can prove difficult to enforce a cooperative agreement, where as this shouldbe less of an issue in an RTA approach. An RTA approach involves not only upgradingstandards, but also the regional harmonisation of standards. This process of upgrading

Indicators:

Analysis of intra industry trade requires indicators of the extent of two-way trade flows within sectorsfor the study of the underlying products and processes. The available indicators of intra industry tradeare sensitive to the degree of sectoral disaggregation chosen for measurement. A standard measure,the Grubel-Lloyd index (Grubel and Lloyd, 1975) measures the extent to which exports and importsoverlap:

( )( )∑

∑ ∑

=

= =

+

−−+=

�

��

�

�

�

��

�

��

��

Where, ��/��

are the value of exports/imports of product k in industry j.

This indicator will have a value ranging between 0 and 1. The closer to zero the less, and converselythe closer to one the more, intra-industry trade taking place.

Attempts have been made to refine the original G-L measure since it aggregates over rather thandistinguishing between horizontally differentiated (i.e. different varieties) and verticallydifferentiated (i.e. different quality and priced) goods. Therefore it may be worth also attempting toclassify trade into 3 groups: (1) two-way trade horizontally differentiated (i.e. significant overlapbetween export and import values as well as little difference between export and import unit values);(2) two-way trade vertically differentiated (i.e. significant overlap between export and import valuesas well as significant differences between export and import unit values); and (3) one-way trade (i.e.no significant overlap between export and import values):

Classification of intra-industry tradeSimilarity of export and import unit values:

Do export and import unit values differ less than 15%

i.e. ��≤��

��

��

��?

Degree of overlap betweenexport and import values

Does the minority flow representat least 10% of the majority flow

i.e.( )( ) ��

�

�>

��

��

��

��

��?

Yes(Horizontal differentiation)

No(Vertical differentiation)

Yes Two-way trade in similarproducts

Two way trade in verticallydifferentiated products

No One-way tradeSource: Fontagné and Freudenberg

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through an RTA approach can take place either by members doing so all together in onestep, or alternatively there can be a more gradual approach to regionally upgrading tothe international standard. This more gradual approach is more likely where memberscould incur significant costs in order to upgrade to international standards (Aldaz-Carroll, 2006).

The upgrading and regional harmonisation of standards by RTA members can generatepositive externalities to firms by expanding their markets. Alternatively, standardsmeasure may also be an indicator of hidden protection designed to keep foreign suppliesout of a domestic market. Linking standards measures to sectors/product groups, andsurveying any secondary literature on the importance of particular standards/SPSmeasures, will support analysis of potential positive or negative effects.

5. Facilitating institutions

Markets are institutions, and deep integration involves improving the way marketsoperate through creation and/or the extension of facilitating institutions. For example,creating approved standard certification and testing facilities in an RTA for importanttraded sectors is a necessary requirement for facilitating trade. Analysis of the need forand provision of such institutions must be based on detailed sectoral studies.

6. Public/private ownership

In many RTAs, the issue of public/private ownership and privatisation is veryimportant. Where the public sector is involved in direct production, there are oftenmajor issues of poor productive efficiency. Privatisation may or may not be the bestway to deal with productivity issues. Equally, the social benefits to employees (forexample health, housing, education of children and pensions) under public ownershipmay not be easily catered for in a new institutional environment when privatisationtakes place.

Given this discussion we now have some guidance as to the areas where our analysis, interms of shallow and deep integration, can be focused as well as indicators and evidencethat can be considered. Before turning to our assessment of the Turkey-EU CU weshould first give some thought to what type of agreement the CU actually is.

What Type of Agreement is the Turkey-EU Customs Union?

We will begin this section by providing an overview of the economies of the EUmembers and Turkey, allowing us to draw out the key similarities and differences.According to the World Bank (World Development Indicators Database) Turkey isconsidered to be a middle income country, along side a number of the new members ofthe EU - namely the Czech Republic, Estonia, Latvia, Lithuania and Slovakia.Considering Table 2 we can identify that Turkish GDP was growing more rapidly thanany of the EU members in 1996, and more recently is only outperformed by Latvia andLithuania. Despite this growth Turkey, as indicated by its World Bank status, hadamong the lowest GDP per capita in 1996, with only Latvia and Lithuania performingworse, and more recently measures lower that any EU member.

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A second problem faced by Turkey is high inflation, significantly above that of any EUmember both at the time of the Customs Union Decision (CUD) and in 2003. The WTO(2003) notes that Turkey’s high inflation has resulted in widening income inequality aswell as a distortion of savings and investment. From Table 2 we find in 1996 inflationwas exceptionally high. These high rates were such that in 1998 Turkey initiated thefirst of what would be four stabilisation programmes aimed at improving the inflationrate. However it was not until the fourth programme was initiated in 2002 thatsubstantial improvements in the inflation rate took place, thus yielding the morereasonable rate of 21% in 2003, although still over 10 percentage points higher than anyother EU member (Table 2).

More positively Table 2 indicates that Turkey has not experienced unemployment ratesout of line with the EU member states. Although it should be noted that whereas manyEU members have witnessed a decline in unemployment rates between 1996 and 2002for Turkey the opposite is true.

Considerable attention has also been focused on Turkey’s large and rapidly growingpopulation. Turkey has been experiencing a higher growth in population than any EUmember, which is even more notable when you consider that only Germany has a largerpopulation over the period 1996-2003 (Table 2). This growth is in fact so rapid that it isprojected that Turkey will become more populous than Germany in only a few years.

Turkey clearly attracts lower volumes of FDI than the EU average, but then so do anumber of EU members (Table 2). The World Trade Organization (2003) noteseconomic instability, the slow progress towards the privatisation of public enterprises aswell as other barriers to investors (such as frequent changes in tax and accountancyprocedures, heavy documentation requirements, as well as various other procedures andregulations) to be to blame for these low flows into Turkey. However there is potentialfor improvement through various privatisation programmes and new laws (notably theForeign Direct Investment Law No. 4875) that are in the process of being implemented.Table 2 does indicate that there has been a two-fold increase in FDI flows since the CUwas formed, which translates to roughly 50% increase in FDI as a proportion of GDP.Therefore although FDI flows remain low there is some evidence of an improvementsince 1996 and that this may continue when the new measures are implemented.

In terms of trade Turkey does clearly import and export less than the EU average;however it does not stand out as being particularly unusual in this respect since there issignificant deviation between members in terms of openness. Between 1996 and 2003both Turkish imports and exports as a percentage of GDP have risen (Table 2).

Figure 1 shows the consistently large scale of Turkish trade which takes place with theEU. Yet a notable feature of this figure is the drop in the proportion of importsoriginating from the EU between the late 1970s and 1980. This has been shown to bedue to a temporary re-orientation towards the Middle Eastern market, which wasemerging at this time (Taskin and Yeldan, 1996).

15

Tab

le 2

: B

asic

Sta

tist

ics

of T

urke

y an

d th

e E

U m

embe

rs

GD

P (b

illio

ns o

fco

nsta

nt 2

000

US$

)G

DP

gro

wth

(ann

ual %

)G

DP

per

cap

ita

(tho

usan

dsof

con

stan

t 20

00 U

S$)

Infl

atio

n, G

DP

def

lato

r(a

nnua

l %)

Impo

rts

of g

oods

and

serv

ices

(% o

f GD

P)

Exp

orts

of g

oods

and

serv

ices

(% o

f GD

P)

19

9620

0319

9620

0319

9620

0319

9620

0319

9620

0319

9620

03

Aus

tria

169.

8719

5.92

2.00

0.75

21.3

424

.22

1.31

1.96

39.0

150

.27

37.8

951

.80

Bel

gium

201.

8423

3.92

1.18

1.11

19.8

722

.54

1.19

1.74

66.5

479

.64

70.6

182

.17

Cyp

rus

7.47

9.74

1.90

4.00

10.1

212

.65

1.88

4.50

53.1

0..

46.9

3..

Cze

ch R

epub

lic54

.00

59.8

44.

163.

115.

235.

878.

701.

7155

.47

65.0

249

.51

62.8

1

Den

mar

k14

2.09

163.

032.

520.

4327

.00

30.2

62.

482.

1430

.89

36.9

035

.82

43.4

7

Est

onia

4.36

6.55

4.51

5.14

3.08

4.84

24.3

12.

4073

.67

83.0

162

.87

74.9

8

Fin

land

98.9

112

6.26

3.89

1.88

19.3

024

.23

-0.3

40.

7029

.76

29.9

737

.32

37.0

1

Fra

nce

1159

.09

1357

.97

1.10

0.47

19.9

822

.72

1.45

1.52

21.4

224

.57

23.0

825

.81

Ger

man

y17

23.6

618

87.5

60.

77-0

.10

21.0

422

.87

1.02

0.99

24.2

631

.76

25.3

035

.95

Gre

ece

96.8

712

6.31

2.36

4.28

9.05

11.4

57.

383.

5225

.50

28.0

117

.52

19.8

4

Hun

gary

38.8

451

.69

1.32

3.05

3.81

5.10

21.1

77.

8348

.01

..48

.47

..

Icel

and

6.92

8.95

5.22

4.02

25.6

530

.95

1.99

-0.4

136

.53

38.6

437

.18

35.2

7

Ital

y98

8.01

1100

.48

1.09

0.26

17.2

219

.09

5.28

2.95

20.8

924

.85

25.8

225

.38

Lat

via

6.18

9.55

3.79

7.46

2.48

4.12

16.2

4-1

.06

59.4

556

.95

51.3

047

.04

Lit

huan

ia9.

7114

.08

4.68

8.96

2.69

4.08

21.5

51.

3563

.26

59.8

753

.42

53.9

1

Lux

embo

urg

14.4

020

.64

3.34

2.13

34.6

546

.07

2.00

2.13

99.7

712

2.61

111.

1514

0.13

Mal

ta3.

213.

823.

99-1

.75

8.43

9.57

0.85

..10

0.96

..87

.05

..

Net

herl

ands

317.

9037

2.67

3.04

-0.9

020

.49

22.9

71.

17..

52.1

7..

57.9

1..

Pol

and

137.

5117

7.02

6.00

3.75

3.56

4.63

18.7

50.

6525

.84

26.3

524

.29

20.9

6

Por

tuga

l91

.25

107.

403.

54-1

.20

9.07

10.2

83.

03..

36.4

2..

29.8

4..

Slov

enia

16.1

020

.77

3.53

2.52

8.09

10.4

110

.92

0.90

56.7

659

.67

55.7

559

.65

Slov

akia

17.9

122

.83

6.15

4.21

3.33

4.24

4.33

2.57

64.6

479

.54

54.1

278

.04

Spai

n47

6.49

603.

832.

442.

4312

.11

14.6

93.

524.

2023

.37

29.7

423

.89

27.9

4

Swed

en20

6.81

250.

751.

291.

5823

.39

28.0

01.

232.

2831

.33

37.0

637

.92

43.7

2

Uni

ted

Kin

gdom

1266

.69

1527

.27

2.69

2.22

21.7

125

.74

3.35

3.09

29.7

928

.05

29.3

425

.11

Tur

key

175.

7121

0.50

7.01

5.79

2.79

2.98

77.8

421

.29

27.4

730

.98

21.5

227

.65

F

orei

gn d

irec

t inv

estm

ent,

net

infl

ows

(bill

ions

of c

urre

nt U

S$)

For

eign

dir

ect i

nves

tmen

t, ne

tin

flow

s (%

of

GD

P)

Pop

ulat

ion,

tota

l(m

illio

ns)

Pop

ulat

ion

grow

th(a

nnua

l %)

Une

mpl

oym

ent,

tot

al(%

of t

otal

labo

ur fo

rce)

16

19

9620

0319

9620

0319

9620

0319

9620

0319

9620

02

Aus

tria

4.48

7.28

1.94

2.87

7.96

8.09

0.14

0.30

4.10

4.00

Bel

gium

14.0

632

.33

5.21

10.7

110

.16

10.3

80.

200.

429.

606.

90

Cyp

rus

0.43

1.03

4.81

9.00

0.74

0.77

0.82

0.65

3.10

3.30

Cze

ch R

epub

lic1.

442.

512.

352.

8010

.32

10.2

0-0

.15

0.01

3.90

7.30

Den

mar

k0.

771.

180.

420.

565.

265.

390.

650.

246.

804.

30

Est

onia

0.15

0.89

3.23

9.81

1.42

1.35

-1.4

7-0

.37

9.90

10.3

0

Fin

land

1.12

3.44

0.88

2.12

5.13

5.21

0.33

0.25

14.6

09.

00

Fra

nce

21.9

747

.75

1.41

2.72

58.0

359

.76

0.31

0.46

12.1

08.

90

Ger

man

y6.

4311

.27

0.27

0.47

81.9

182

.54

0.33

0.04

8.90

8.60

Gre

ece

1.06

0.72

0.85

0.42

10.7

111

.03

0.70

0.25

9.70

9.60

Hun

gary

2.36

2.51

5.23

3.03

10.1

910

.13

-0.3

5-0

.31

9.90

5.80

Icel

and

0.08

0.35

1.17

3.28

0.27

0.29

0.74

0.35

3.70

4.20

Ital

y3.

5516

.54

0.29

1.13

57.3

857

.65

0.31

-0.0

811

.50

9.00

Lat

via

0.38

0.30

6.84

2.71

2.49

2.32

-0.9

5-0

.73

20.6

012

.00

Lit

huan

ia0.

150.

181.

890.

983.

613.

45-0

.74

-0.4

316

.40

13.8

0

Lux

embo

urg

..92

.73

..34

9.96

0.42

0.45

1.47

1.01

3.30

2.60

Mal

ta..

....

..0.

380.

400.

530.

504.

406.

80

Net

herl

ands

16.6

015

.69

4.03

3.07

15.5

216

.22

0.37

0.48

6.50

3.10

Pol

and

4.50

4.12

2.93

1.97

38.6

238

.20

0.08

-0.0

912

.40

19.9

0

Por

tuga

l1.

700.

971.

520.

6610

.06

10.4

40.

280.

737.

305.

10

Slov

enia

0.17

0.34

0.92

1.21

1.99

2.00

0.05

0.05

7.30

5.90

Slov

akia

0.35

0.57

1.68

1.76

5.37

5.39

0.19

0.20

11.3

018

.60

Spai

n6.

8025

.51

1.11

3.04

39.3

441

.10

0.33

0.45

22.0

011

.40

Swed

en5.

493.

272.

031.

088.

848.

960.

140.

369.

905.

20

Uni

ted

Kin

gdom

27.3

920

.70

2.30

1.15

58.3

559

.33

0.18

0.17

8.20

5.10

Tur

key

0.72

1.56

0.40

0.65

62.8

770

.71

1.82

1.55

6.50

10.6

0

Sour

ce: W

orld

Dev

elop

men

t Ind

icat

ors

2005

, Wor

ld B

ank

17

Figure 1: Share of Turkish Trade with the EU-15

��

��

��

��

��

��

��

��

� ��

��

Source: UN Comtrade

Figure 2: Share of EU-15 Trade with Turkey

��

��

��

��

��

��

��

��

��

��

��

��

� ��

��

��

��

��

��

��

��

� ��

��

Source: UN Comtrade

Turning to Figure 2 we can identify a general decline until the mid-1980s of EUimports originating from the Turkey. This decline can be explained by the risinginflation and sharp real appreciation of the Turkish Lira against both the U.S. dollarand the major EU currencies during this period (Figure 3), since this would haveresulted in Turkish exports becoming less competitive. Yet since 1980 there has been

18

a steady increase in the importance of EU-15 imports from Turkey. Also turning toconsider the share of EU exports destined for Turkey we find more volatility, butnevertheless a general upward trend since 1980.

Figure 3: Turkish Lira Exchange Rates, 1975-2000

8 �6� 'ROODUV SHU 7XUNLVK /LUD %ULWLVK 3RXQGV SHU 7XUNLVK /LUD ,WDOLDQ /LUHV SHU 7XUNLVK /LUD

)UHQFK )UDQFV SHU 7XUNLVK /LUD *HUPDQ 0DUNV SHU 7XUNLVK /LUD

Source: International Financial Statistics, IMF

This brief discussion has established that Turkey is a highly populous countrysuffering from high inflation, while experiencing low GDP per capita and failing toattract substantial inflows of FDI. The EU is Turkey’s main trading partner andTurkey is the EU’s tenth largest trading partner (World Trade Organization, 2003).Therefore given we now have a general picture of the structure of the economies of

19

the members of the CU we can turn to the details of the process towards the formationof the CU and what it entails.

Turkey applied for association of the EEC in July 1959, which led to the signature ofthe Ankara Agreement (the association agreement) in 12 September 1963. Thisagreement came into force on 1 December 1964 and was the beginning of the processtowards the CUD. The Process consisted of three stages: preparatory stage,transitional stage and a final stage. The preparatory stage lasted for 8 years (after beenextended from 5 years), followed by the transitional stage that began on 1 January1973 (after signature of the Additional Protocol on 23 September 1970), concludingwith the final stage in 1995 where it was agreed at the Association Council meetingthat a CU would be created between Turkey and the EU starting on 1 January 1996.

The preparatory stage saw unilateral liberalisation towards Turkey. Then at thebeginning of the transitional stage customs duties and equivalent measures wereremoved on Turkish industrial exports to the EU market, with the exception oftextiles, clothing and some oil products. Also during this transitional stage Turkeywas required to make three main reciprocal concessions: elimination of customsduties towards the EU, adoption of the CCT as well as the elimination of quantitativerestrictions towards the EU. All industrial products and the industrial component ofprocessed agricultural products had tariffs completely removed, along with fish andfishery products being subject to 75% of the MFN rates. This tariff removal tookplace gradually according to a timetable laid out in the Additional Protocol to theAgreement establishing an Association between the EEC and Turkey. This wasorganised by placing products onto one of two lists: 12-year or 22-year. Thoseproducts placed on to the 12-year list were believed to be able to competeinternationally earlier than those on the 22-year list. The 22-year list is published inAnnex 3 of the Additional Protocol. On the other hand the 12-year list is notpublished, but includes all products not contained in the 22-year list. However theroad towards the CUD was not a particularly smooth one as there were lengthyperiods where reductions were suspended. Therefore Table 3 details when the actualreductions in tariffs that took place.

Table 3: Tariff Reductions Implemented12-year List 22-year List

Reduction Rate Total Reduction Reduction Rate Total Reduction1973 10% 10% 5% 5%1976 10% 20% 5% 10%1988 10% 30% 10% 20%1989 10% 40% 10% 30%1990 10% 50% 10% 40%1991 10% 60% 10% 50%1992 10% 70% 10% 60%1993 10% 80% 10% 70%1994 10% 90% 10% 80%1995 10% 100% 20% 100%Source: Togan, 1994, GATT, 1994 and WTO 1998

Agricultural products were not included in the CU, although it has been stated thatTurkey will in time adopt the Common Agricultural Policy. Currently Turkey and theEU are working towards free bilateral trade in their agricultural goods. Nevertheless,the fact that the CU does not as yet cover agricultural products naturally leads to the

20

question as to whether the CU fulfils the WTO requirement of removing restrictionson substantially all trade between members.

In addition to the three main concessions already mentioned Turkey is obliged toadopt all the preferential agreements that the EU forms with third countries. Thereforeit began this process after the CU came into force in 1996. This has led Turkey toprovide EFTA counties, GSP beneficiaries, Economic Cooperation Organisation,Israel and Romania with various tariff preferences. Additionally Turkey has alignedits customs procedures with those of the EU; adopted EU directives regardingtechnical legislation as well as adopting the TRIPS agreement, SPS and competitionpolicies; applies the same rules of origin as the EU with respect to imports from thirdcountries; and adopted new legislation on anti-dumping and countervailing measures1.Several of these policies take the Turkey-EU CU beyond a basic CU. However theEU does still exclude Turkey from some key aspects of the EU’s common market,such as the common agricultural policy and adoption of the Euro, as well as leavingTurkey open to anti-dumping and countervailing measures by the EU.

This discussion should provide the reader with a guide to the economic structure ofTurkey in comparison to the current EU members. In addition the description of theCU indicates that there is both shallow and deep integration involved in this particularRTA. We will now consider a series of descriptive statistics and other evidence thatlead us to an ex-post assessment of the impact of the Turkey-EU CU.

An Ex-post Assessment of the Turkey-EU CU

The following discussion will be split into two main sections, the first focusing onshallow integration and the second deep integration, with the aim to provide an ex-post assessment of the Turkey-EU CU2. It should be borne in mind that although thedecision was reached in 1996 there are some areas where Turkish policies are stillbeing aligned with those of the EU. In addition to these continuing efforts beingdriven by Turkey’s obligations under the CU, further efforts are also being driven bythe desire for successful membership negotiations. This section will aim to assess theimpact of the CU as well as highlighting future areas that could be focused on underTurkey’s continuing CU obligations or membership negotiations in order to provide,or enhance, the positive welfare impact for Turkey.

Shallow Integration

The framework outlined earlier provides us with the basis for this assessment.Therefore the following discussion will be split into several subsections: structure ofprotection, pre-union trade, overlap of economic activity and comparative advantage.

1 The TRIPS agreement is multilateral agreement on intellectual property covering: copyright and related rights; trademarksincluding service marks; geographical indications including appellations of origin; industrial designs; patents including theprotection of new varieties of plants; the layout-designs of integrated circuits; and undisclosed information including tradesecrets and test data.2 Indicators in the following section refer to the EU - this is the EU-15.

21

Structure of Protection

We have already mentioned that generally Turkey has adopted the EU CCT, givenpreferential treatment to imports from the EU and is obliged adopt all the preferentialagreements that the EU forms with third countries. The EU simple average MFN ratewas 7.43% in 1988 (OECD Indicators of Tariff and Non-Tariff Trade Barriers) andcontinued to be moderate thereafter (UNCTAD TRAINS). Most EU preferential tariffreductions with respect to Turkey look place before the 1990s, during the preparatorystage, and unfortunately we don’t have any preferential tariff data to report before1990. Therefore turning to consider the EU preferential tariff rates in 1996 (UNCTADTRAINS) we find only a few agricultural, iron and steel headings with tariffs stillimposed and even these are almost entirely gone by 2000.

On the other hand the Turkish simple average MFN tariff rate in 1988 was a high46.01% (OECD Indicators of Tariff and Non-Tariff Trade Barriers), falling to fairlymoderate levels by 1993 (UNCTAD TRAINS). Turkish preferential tariff reductionswith respect to the EU took place during the transitional stage, and by 1993 thepreferential rates were on average roughly three percentage points below the MFNtariff. Thus the high pre-RTA Turkish MFN tariff and low post-RTA MFN tariff,along with the even lower post-RTA preferential tariff (in comparison to the post-RTA MFN tariff) suggests it to likely that the CU has been welfare enhancing.Considering the Turkish preferential tariff in 2003 it is noteworthy that the averagepreferential tariff was higher than ten years earlier. However the majority of headingshad experienced a removal of tariffs and the average rise was driven by a rise in therates on agricultural products.

Table 4: Number of Tariff Peaks EU Tariff Rates Turkish Tariff Rates Simple Weighted Simple Weighted1990 548 82 - -1991 164 120 - -1992 178 102 - -1993 194 115 223 5541994 213 139 - -1995 394 159 251 6911996 483 155 - -1997 436 157 380 7361998 509 139 - -1999 526 134 460 8832000 561 134 - -2001 1510 904 - -2002 601 247 - -2003 185 578 337 676Source: UNCTAD TRAINSNote: Tariff peaks calculated on the basis of the MFN tariffs and are defined as twicethe simple or weighted average tariff

It is also interesting to that there are a consistently larger number of EU simple MFNtariff peaks than weighted MFN tariff peaks, with the opposite true of Turkish MFNtariff peaks (Table 4). This suggests that EU MFN tariffs are high on products that theEU imports in large quantities, whereas Turkish MFN tariffs are low on products thatTurkey imports in large quantities.

22

Unfortunately we do not have data on Turkish MFN tariffs pre-1993, as it would havebeen interesting to see whether there were a larger number of Turkish simple MFNtariff peaks than weighted MFN tariff peaks in the period before Turkey aligned itsMFN tariff with the CCT. Without this information we can only propose that theTurkish alignment towards the CCT has either negatively impacted on competingdomestic producers that are no longer protected by high import tariffs or positivelyimpacted through lower price of inputs. Yet we can make one firm conclusion, thatthe CU has meant Turkey adopting the CCT while concentrating its imports indifferent areas to that of the EU. Therefore the adoption of the CCT could be a sourceof both positive and negative impact for Turkish welfare. We should be in a positionto make a firmer conclusion on the impact on Turkish producers once we have lookedwhether Turkey imports intermediates or final consumer goods most intensively.

We have also already mentioned that there are exceptions to what is covered by theCU. One of these exceptions is agriculture, thereby explaining the remaining tariffrestrictions on these imports. Agriculture employs over 34% of the Turkish population(WTO, 2003), and therefore it is of considerable importance that the Turkish markethas not being opened up to subsidised European exports. Even if agriculture iseventually covered by the CU, as is often suggested by both the EU and Turkey, it isproposed that the CAP will be applied to Turkey instead of simply opening up itsmarkets. In 2003 the preferential treatment offered to EU still left EU exports ofagricultural products with considerable tariffs (UNCTAD TRAINS). On the otherhand the EU has now completely removed tariffs on all but one agricultural categorywith respect to imports from Turkey (UNCTAD TRAINS). When comparing theseEU preferential rates to the MFN rate, that Turkey would otherwise pay, agriculturalproducts do face among the highest tariff rates charged by the EU. Nevertheless theMFN tariffs levied by the EU are usually much lower than the MFN rates levied byTurkey. Hence it seems that changes in agricultural tariff have not been, as they couldhave, a source welfare loss for Turkey. Instead the issue of applying the CAP toTurkey could have a positive impact and therefore is an issue that requires attentionwhen Turkey negotiates membership.

A second important sector is that of clothing and textiles, which is a very sensitivesector for Turkey with textiles and clothing accounting for almost 40% of totalexports in recent years (Author’s own estimation based on OECD International Tradeby Commodity Statistics). The EU removed tariffs on these products more slowly andtherefore restrictions remained until 1995 (UNCTAD TRAINS). In addition to tariffsTurkish textile and clothing exports also faced quota restrictions (or surveillance incertain years) in the EU market until 1995. The removal of these restrictions is clearlya possible source of trade diversion gains for Turkey against other developingcountries. Although the removal of restrictions on Turkey’s competitors in the EUmarket, in particular China, through the ATC could have limited the welfare gain.

Pre-Union Trade

An analysis of the structure of protection can naturally be followed by an examinationof Turkey’s openness to trade and the importance of various trading partners. Earlierwe discussed that the smaller the initial share of trade relative to GDP and the higherthe percentage of trade between members the more likely the CU will be welfareenhancing.

23

Therefore looking at the initial level of trade as a share of GDP we can identifywhether there is potential for benefits through increases in trade. Figure 4 shows asubstantial rise in Turkish trade as a share of GDP from the levels of the 1970s to thepresent day. Turkey experienced low levels of trade during the 1960s and 70s due tothe inward-oriented development strategy. Hence the liberalisation, which began inthe early 1980s, opened up Turkey to higher levels of trade. Therefore from Figure 1and Figure 4 we find that Turkey traded more after 1980 of which a consistently largeshare over the whole period, 1965-2004, was with the EU. There is also a large rise isTurkish trade from the mid-1990’s. This leads us to believe that there was a rise intrade due to MFN tariff reductions; although there is the possibility was trade creationtaking place. By the end of this section we should be in a position to come to a firmerconclusion.

Figure 4: Turkish Trade (% of GDP)

0

10

20

30

40

50

60

70

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

Year

%

Source: World Development Indicators

Table 5 illustrates (as did Figure 1) that a consistently high share of imports originatefrom the EU-15, with a small fall occurring in the early 1980s. The early 1970s alsosaw a movement away from American imports, and in the late 1970s and early 1980san increase in Middle Eastern imports. In addition Soviet Union and Russian importsbecame increasingly popular from the early 1990s. Similarly Table 6 shows the EU tobe a huge market for Turkish exports. The US was also popular, although the early1980s saw a dip in its share. Apart from the mid-80s the Soviet Union and Russia wasa consistently important export market. Whereas the mid-80s saw a dramatic buttemporary rise in the prominence of the Middle East as an export market for Turkey.Overall both Table 5 and Table 6 show, what was also seen in Figure 1, that Turkeyimported from and exported to the EU before and after the CU. Yet it is important thatbetween 1985 and 1995, the period over which a large amount of the liberalisationtook place, there was a large shift towards Turkey importing from the EU. Thereforealthough Turkey carries out large amounts of trade with the EU before and after theCU, suggesting scope for trade creation, the shift towards the EU due to liberalisationwould suggest trade diversion is actually taking place. Further evidence of this resultcan be found by looking at Table 7, which shows the International Standard Industrial

24

Classification (ISIC) categories in which the EU saw an increase in its import shareover 1985-95 and Turkey also carried out domestic production. In each category whenthe EU import share increased domestic production also increased. This indicator isbased on the simple notion that if trade creation were taking place there would be ashift away from inefficient domestic producers in favour of importing from the moreefficient producers in a member country. Thus we find little indication of tradecreation taking place. Yet the EU as a destination for Turkish exports suggests that thepreferential access has had a significant positive impact on the Turkish economy.

Table 5: Top 5 Countries of Origin for Turkish Imports and Import Shares, 1970-2004

1970 1975 1980 1985

1 EU-15 48.5% EU-15 51.8% EU-15 32.9% EU-15 37.3%

2 United States 19.4% Iraq 10.9% Iraq 15.2% Iran, Islamic Rep. 11.2%

3 Switzerland 5.0% United States 8.9% Iran, Islamic Rep. 10.2% United States 10.1%

4 Soviet Union 4.4% Switzerland 6.0% Libya 9.5% Iraq 10.0%

5 Iraq 3.9% Japan 4.5% United States 5.7% Libya 5.5%

Total 81.2% 82.2% 73.4% 74.1%

1990 1995 2000 2004

1 EU-15 44.4% EU-15 47.2% EU-15 48.9% EU-15 44.4%

2 United States 10.2% United States 10.4% United States 7.2% Russian Federation 9.6%

3 Soviet Union 5.6% Russian Federation 5.8% Russian Federation 7.2% United States 5.0%

4 Japan 5.0% Japan 3.9% Japan 2.9% China 4.8%

5 Iraq 4.7% Saudi Arabia 3.9% China 2.4% Japan 2.9%

Total 69.9% 71.3% 68.6% 66.6%

Source: UN Comtrade

Table 6: Top 5 Destinations for Turkish Exports and Export Shares, 1970-2004 1970 1975 1980 1985

1 EU-15 52.5% EU-15 50.2% EU-15 47.3% EU-15 42.7%

2 United States 9.6% United States 10.5% Soviet Union 5.8% Iran, Islamic Rep. 13.6%

3 Switzerland 7.5% Switzerland 6.8% Iraq 4.6% Iraq 12.1%

4 Soviet Union 5.0% Soviet Union 5.3% United States 4.4% United States 6.4%

5 Lebanon 4.9% Lebanon 4.7% Switzerland 4.3% Saudi Arabia 5.4%

Total 79.4% 77.5% 66.4% 80.1%

1990 1995 2000 2004

1 EU-15 55.4% EU-15 51.3% EU-15 52.5% EU-15 51.7%

2 United States 7.5% United States 7.0% United States 11.2% United States 7.7%

3 Soviet Union 4.1% Russian Federation 5.7% Russian Federation 2.3% Russian Federation 2.9%

4 Iran, Islamic Rep. 3.8% Saudi Arabia 2.2% Israel 2.3% Iraq 2.9%

5 Saudi Arabia 2.6% Romania 1.4% Algeria 1.4% Israel 2.1%

Total 73.4% 67.5% 69.6% 67.3%

Source: UN Comtrade

25

Table 7: Turkish Imports from the EU andDomestic Production

ISIC Rev. 2 Difference in the share ofTurkish imports originatingfrom the EU, 1985-1995

Difference in Share of TurkishOutput 1985-1995

313 53.87 0.09314 23.57 0.05322 12.35 0.39352 3.19 0.29353 31.53 0.21354 42.24 0.02355 10.65 0.08356 1.12 0.12361 4.44 0.04369 7.62 0.14381 9.55 0.16382 4.38 0.21383 20.60 0.20385 4.67 0.03

Source: Author’s own calculations based on UN Comtrade and the UNIDO Industrial Statistics DatabaseNote: The ISIC Rev. 2 headings are listed in the appendix

Earlier we discussed that using intra-regional trade shares to consider trade patternscan be misleading, since we can expect larger RTA’s to result in larger intra-bloctrade shares and lower the extra-bloc trade, and thus we should also consider TIindices. Therefore TI indices by 2-digit SITC Revision 2 category for both Turkishand EU imports and exports have been calculated. This information has then beensummarised in Table 8 by calculating the number of SITC two digit categories withan intensity index exceeding unity. When the TI index exceeds unity it implies a biasof trade towards a particular country. Therefore we find evidence of EU exports beingless biased towards the Turkish market over the whole period (1985-2003), EUimports increasingly originating from Turkey over the period 2000-03, Turkishexports being increasing biased towards the EU market over the entire period andTurkish imports increasing originating from the EU over the period 1990-2000. Thisfinal conclusion concerning the bias of Turkish imports coming from the EU supportsour earlier assertion of trade diversion taking place. In addition the penultimateconclusion concerning the geographic orientation of Turkish exports towards the EUmarket also supports our claim that Turkish preferential access to the EU market hashad a significant positive impact on the Turkish economy.

We can explore this issue in more detail by considering the share of imports byindividual tariff lines and establishing the extent to which these imports aresupplied/destined by/for a sole country or not. Table 9 shows the share of exports andimports for each product category to or from the EU, and for comparison the US. Thenumber of product categories, percentage of product categories out of the totalnumber of categories as well as the percentage of trade covered by these categoriesout of total trade is reported for each market where the share trade for that category is<10%, 10-30%, 30-70%, 70-90% or >90%. We interpret <10% as indicating that theyare not really in the market at all, 10-30% as limited market sharing, 30-70% as ashared market 70-90% as a major supply/destination and >90% a solesupply/destination.

26

Table 8: Number of SITC Two Digit Categories with anIntensity Index Exceeding Unity

EU Export Intensity Turkey Egypt Morocco Tunisia US

1985 56 43 61 57 8

1990 51 37 60 56 3

1995 51 37 59 60 3

2000 47 37 60 58 6

2001 45 32 56 61 6

2002 43 30 53 57 5

2003 45 35 57 56 5

EU Import Intensity Turkey Egypt Morocco Tunisia US

1985 40 39 52 52 6

1990 43 34 51 48 6

1995 47 35 55 47 6

2000 39 38 55 58 7

2001 41 39 57 59 6

2002 44 40 58 58 5

2003 45 34 54 54 6

Turkish Export Intensity EU Egypt Morocco Tunisia US

1985 28 50 60 56 21

1990 31 56 53 50 17

1995 32 55 51 57 18

2000 34 54 48 53 21

2001 34 54 51 50 21

2002 35 52 47 49 16

2003 33 48 49 50 13

Turkish Import Intensity EU Egypt Morocco Tunisia US

1985 51 63 66 66 30

1990 45 57 60 63 21

1995 47 52 56 56 21

2000 50 42 48 47 18

2001 50 44 50 48 17

2002 49 46 46 51 16

2003 46 47 47 47 15

Source: Author’s own calculations based on UN Comtrade data

The EU has been the sole supplier for less and less product categories, whichunsurprisingly account for a lower and lower share of total imports over the years, andthus this provides little suggestion of pure trade creation. However the EU isconsistently a major supplier for around 25% of product categories, accounting foraround 20-25% of trade, which could suggest trade diversion has taken place. For agenerally increasing proportion of categories, a high of 36% in 2003, accounting for17-22% of trade, the EU shares the Turkish market. Therefore it is only for a smallamount of trade, and few products, where the EU has a limited or virtually no marketshare. Comparatively the US is very infrequently the sole or major supplier, but for asmall number of products which form the largest share of total trade the US shares themarket and for the majority of product categories is hardly in the Turkish market atall. The percentage of trade covered by products the US supplies where it is at leastsharing the marketing a limited sense has been generally declining, again indicatingthe possibility of trade diversion.

On the other hand we find that the Turkish products destined for the EU are thosewhere Turkey is less and less the sole supplier, up to a point that most recently almostnot at all. In 2003 for approximately 25% of their exports Turkey is a major supplier,

27

and for 22% of total exports Turkey shares the market. There has been a noteworthyincrease in the percentage of trade covered by products where Turkey shares themarket. However if you consider the number of categories in 1985 we find thatTurkey are most often hardly in the market at all, whereas by 2003 the majority ofproduct categories share the EU market. Products with a limited market share also seean increase over the period. For the majority of products exported to the US marketTurkey has virtually no foothold in the market.

Therefore from this analysis we can conclude that there is little suggestion of tradecreation having taken place but instead the possibility of trade diversion.

Table 9: Share of Turkish Trade, 1985-2003Turkish Imports by Supplier

Country Per Cent Detail 1985 1990 1995 2000 2001 2002 2003

No. of Product Categories 181 156 126 90 86 87 68

Per Cent of Total Number of Product Categories 23.03 19.85 16.03 11.45 10.94 11.07 8.65

>90

Per Cent of Total Trade 8.17 6.40 6.54 7.54 5.21 3.86 3.35



70 - 90




30 - 70




10 - 30




EU

<10




>90




70 - 90




30 - 70




10 - 30




US

<10


28

Turkish Exports by Destination

Country Per Cent Detail 1985 1990 1995 2000 2001 2002 2003



>90




70 - 90




30 - 70




10 - 30




EU

<10




>90




70 - 90




30 - 70




10 - 30




US

<10


Source: Author's calculations based on UN Comtrade dataNote: The product categories used are the SITC Rev. 2 four digit level

Overlap of economic activity

Moving on from assessing the impact of pre-union trade we can now consider theproduction structures of the members. There are several indicators using trade datathat can help us to assess whether there is significant overlap of activity betweenmembers leading to trade creating specialisation. Calculating the Finger-Kreinin (FK)indices can be useful if we believe trade shares to be a reasonable proxy forproduction shares.

29

Table 10: Finger-Kreinin Export Indices1985 Egypt Turkey Tunisia EU Morocco US

Egypt 1

Turkey 0.45 1

Tunisia 0.57 0.38 1

EU 0.41 0.35 0.37 1

Morocco 0.41 0.21 0.49 0.16 1

US 0.39 0.20 0.30 0.54 0.08 1

1990 Egypt Turkey Tunisia EU Morocco US

Egypt 1

Turkey 0.32 1

Tunisia 0.29 0.38 1

EU 0.30 0.29 0.29 1

Morocco 0.26 0.29 0.49 0.17 1

US 0.25 0.20 0.23 0.62 0.12 1


Egypt 1

Turkey 0.42 1

Tunisia 0.37 0.38 1

EU 0.35 0.32 0.26 1

Morocco 0.34 0.31 0.39 0.16 1

US 0.30 0.24 0.21 0.68 0.12 1


Egypt 1

Turkey 0.44 1

Tunisia 0.39 0.39 1

EU 0.37 0.39 0.27 1

Morocco 0.35 0.33 0.57 0.17 1

US 0.34 0.32 0.23 0.70 0.14 1


Egypt 1

Turkey 0.43 1

Tunisia 0.36 0.39 1

EU 0.37 0.41 0.27 1

Morocco 0.34 0.34 0.58 0.18 1

US 0.34 0.33 0.23 0.70 0.14 1


Egypt 1

Turkey 0.41 1

Tunisia 0.32 0.42 1

EU 0.34 0.40 0.28 1

Morocco 0.29 0.33 0.56 0.16 1

US 0.32 0.32 0.24 0.69 0.13 1


Egypt 1

Turkey 0.38 1

Tunisia 0.32 0.40 1

EU 0.34 0.43 0.30 1

Morocco 0.28 0.33 0.54 0.17 1

US 0.31 0.34 0.25 0.70 0.14 1


Note: Calculations are based on SITC Rev. 2 four digit level

30

We will first consider FK export indices in Table 10, including indices for Egypt,Tunisia, Morocco and the US for comparison. The EU-US indices are consistentlyhigh indicating a similarity of production structures and thus trade between thecountries is likely to be beneficial. By comparison the Turkey-EU indices are lower.Nevertheless Turkey-EU indices are consistently higher than those for Turkey-US orTurkey-Morocco. Therefore this suggests that the EU and Turkish productionstructures are not largely overlapping but enough to consider there to be somepossibility of trade creation.

Table 11: Finger-Kreinin Export Indices1995 Egypt Turkey Tunisia EU Morocco US

Egypt 1

Turkey 0.27 1

Tunisia 0.26 0.27 1

EU 0.22 0.24 0.19 1

Morocco 0.23 0.19 0.31 0.11 1

US 0.20 0.16 0.15 0.58 0.07 1


Egypt 1

Turkey 0.23 1

Tunisia 0.24 0.30 1

EU 0.16 0.31 0.22 1

Morocco 0.20 0.23 0.45 0.12 1

US 0.13 0.23 0.18 0.60 0.08 1


Egypt 1

Turkey 0.24 1

Tunisia 0.22 0.29 1

EU 0.17 0.32 0.21 1

Morocco 0.19 0.23 0.45 0.12 1

US 0.14 0.22 0.17 0.61 0.08 1


Egypt 1

Turkey 0.23 1

Tunisia 0.22 0.32 1

EU 0.18 0.32 0.23 1

Morocco 0.19 0.26 0.45 0.14 1

US 0.15 0.22 0.18 0.61 0.10 1


Egypt 1

Turkey 0.22 1

Tunisia 0.19 0.30 1

EU 0.17 0.34 0.23 1

Morocco 0.17 0.25 0.42 0.13 1

US 0.14 0.23 0.19 0.61 0.10 1


Note: Calculations are based on HS six digit level

To test the robustness of these results we have also calculated the FK export indicesusing 6 digit HS data. Using this more disaggregate data the indices, presented inTable 11, essentially illustrate the same conclusions that have been drawn from theresults in Table 10. It is also noteworthy that the Turkey-EU index in both Table 10

31

and Table 11 is rising over time and thus suggesting a convergence of productionstructures and a limited possibility of an increase in vertical specialisation.

Turning now to consider the FK indices for a variety of exporters and Turkishimports. This can give us a summary measure of the extent to which Turkey importssimilar products to that which other countries export and thus, similar to the exportindices, shed light on the likelihood that trade creation has taken place when the CUwas formed between Turkey and the EU. Table 12 suggests significant and increasingoverlap of EU exports and Turkish imports since the index is consistently above 0.5and higher than any of the other exporters’ indices. Therefore it would seem that aswell as the EU being a major supplier of many Turkish imports, the EU exports asubstantial number of products that Turkey imports. Hence the FK indices providesome evidence of potential for trade creating specialisation.

Table 12: Finger-Kreinin - Turkish Imports and a Selection of Exporters

Exports 1985 1990 1995 2000 2001 2002 2003US 0.48 0.57 0.55 0.60 0.59 0.58 0.60Morocco 0.21 0.19 0.14 0.17 0.17 0.15 0.15Tunisia 0.43 0.30 0.23 0.25 0.26 0.26 0.27Egypt 0.51 0.31 0.36 0.41 0.45 0.39 0.42EU 0.58 0.60 0.57 0.69 0.63 0.61 0.63Source: Author’s own calculations based on UN Comtrade data

Note: Calculations are based on SITC Rev. 2 four digit level

Comparative Advantage

The consideration of FK export indices in Table 10 and Table 11 suggested that theEU and Turkish production structures are not largely overlapping. We can furtherconsider the issue of comparative advantage by looking at the summary of the RXAindices provided in Table 13.

Table 13: Count of SITC Rev.2 Two Digit Categories

RXA Turkey-World >1and RXA EU-World>1

RXA Turkey-World >1and RXA EU-World<1

RXA Turkey-World <1and RXA EU-World>1

RXA EU-World>2

RXA Turkey-World>2

1985 13 7 23 1 14

1990 11 11 24 0 12

1995 10 11 22 1 12

2000 13 7 24 0 9

2003 9 7 26 0 7

Source: Author's calculations based on UN Comtrade data

This summary indicates that there are more categories in which either Turkey or theEU has a comparative advantage where the other does not, rather than both having acomparative advantage in the same category. In addition it seems the EU does nothave a substantial comparative advantage in particular category of products. WhereasTurkey has a consistent comparative advantage, globally as well as in its trade withthe EU, in products such as vegetables, fruit, tobacco, textiles and clothing.

32

When considering the RMA indices (contact author for detailed results) we find thatthe EU imports products in fairly similar shares to the global average. WhereasTurkey imports products - including: hides, skins, fur skins, textile fibres, animal oil,vegetable oil, fats, fertilisers, dying/tanning/colouring materials - more heavily thanthe global average. These heavily imported products are clearly intermediates and notfinal consumption goods. Also it is often the case that the Turkey-EU RMA index ishigher than the Turkey-World RMA index.

Generally these indices suggest further evidence of differences in relative costs ofproduction leading Turkey to have a comparative advantage in agricultural, textile andclothing production therefore providing a source for welfare gain.

Deep Integration

During our earlier discussion of what type of agreement the Turkey-EU CU actuallyis we concluded that it consists of not only shallow integration but also elements ofdeep integration. Therefore this section aims to assess the impact of this deepintegration. There are two key areas where one may expect to be able to identify theeffects of deep integration, FDI and intra-industry trade.

We have already established from Table 2 that FDI flows are particularly lowtherefore giving no reason to believe this to have been a channel for positive welfareimpact. Turkey does continue to make moves towards the adoption of EU directivesregarding technical legislation, as well as progress in terms of much neededprivatisation. However these moves are still incomplete and therefore there is noevidence that they are gone far enough to lead to an improvement in Turkish welfare.

Figure 5: Evolution of Turkish Imports by TypeBased on the BEC Classification

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Capital Ratio Intermediates Ratio Consumption Ratio


33

Figure 6: Evolution of Turkish Exports by TypeBased on the BEC Classification

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Capital Ratio Intermediates Ratio Consumption Ratio


Therefore turning to Figure 5 we find an illustration of the evolution of Turkishimports by type. This figure confirms our earlier conclusions that Turkey heavilyimports intermediates. If we assume trade in intermediates is an indication ofproductivity enhancing technical transfer we find limited evidence of this technicaltransfer taking place due to the CU (Figure 5 and Figure 6), since we can only identifya small rise in imports in 2000.

Turning to consider the Grubel-Lloyd index illustrated in Figure 7, which measuresthe overlaps between imports and exports by category, we find at its height the indexonly reaches a value slightly above 0.3, although there is a clear upward trend fromthe late 1980s. Given these low levels of intra-industry trade there appears littlechance that it has led to improvement in productivity. Yet it should be noted that theadvancement of deeper integration between Turkey and the EU does offer thepotential for a continued increase in intra-industry trade and a positive impact onproductivity and thus welfare.

The indicators that have been considered suggest deep integration to be at an earlystage and therefore unlikely to have yielded any significant welfare gains.

34

Figure 7: Grubel-Lloyd Index: Turkey-EU Trade

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003


Conclusions

This paper has presented a clear analytical framework, which has been applied tocarry out an ex-post assessment of the impact of both shallow and deep integrationelements of the Turkey-EU CU. The framework has usefully allowed us to draw outthe following assessment of the impact of the CU in terms of shallow integration:

� The Turkish MFN tariff rate was high and then brought down to much moremoderate levels when aligning to the CCT. This suggests trade creation hastaken place.

� There has been an increase in Turkish imports originating from the EUsuggestive of trade diversion.

� Turkish preferential access to the EU market appears to be a significant sourceof welfare gain for Turkey.

� Turkey and the EU have different patterns of trade – the EU imports a range ofproducts moderately, whereas Turkey imports a fewer products some moreintensively. It was found that Turkey’s alignment toward the CCT has meantthat Turkish MFN tariffs are low on products traded intensely. Although thiscould imply a negative impact on Turkish producers no longer protected byhigh tariffs in fact it appears more likely that producers have gained throughlower cost of inputs. This conclusion is persuasive given our finding that it ismainly intermediate and not final goods are most intensely imported byTurkey. Producers most likely to be positively affected are in the agricultural,textile and clothing sectors where Turkey has a comparative advantage.

� Although Turkish textile and clothing exporters receive preferential treatmentin the EU market the removal of restrictions under the WTO ATC could wellnegate these preferences.

� The inclusion of Turkey in CAP is the one remaining area for traditional tradegains for Turkey.

35

Turning to consider deep integration it is difficult to find evidence of an impact onTurkish welfare. However simply looking at the very low levels of FDI and GDP percapita indicates there could still be significant gains for Turkey from continuing theprocess of deeper integration.

The range of shallow integration indicators calculated often re-enforced and extendedthe conclusions. On the other hand deep integration indicators are somewhat harder tofind. However the indicators discussed in this paper do provide guidance on whetherfurther investigation for the impact of deep integration is warranted. If one were tofind evidence that deep integration had gone sufficiently far to potentially have animpact on welfare it may prove useful to consider appropriate case studies, forexample the examination of a niche market.

Overall this assessment of the Turkey-EU CU has shown that the use of descriptivestatistics to analyse the impact of an RTA can prove to be very informative. Thusgiven the relative ease of calculating these statistics, over more sophisticatedmodelling, it would seem that this approach for assessing RTAs could be usefullyapplied by the policy makers.

36

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Appendix

ISIC Rev. 2, 3 Digit HeadingsCode Headings111 Agriculture and livestock production112 Agricultural services113 Hunting, trapping and game propagation121 Forestry122 Logging130 Fishing210 Coal Mining220 Crude Petroleum and Natural Gas Production230 Metal Ore Mining290 Other Mining313 Beverage industries314 Tobacco manufactures321 Manufacture of textiles322 Manufacture of wearing apparel, except footwear

323 Manufacture of leather and products of leather, leather substitutes and fur, except footwearand wearing apparel

324 Manufacture of footwear, except vulcanized or moulded rubber or plastic footwear331 Manufacture of wood and wood and cork products, except furniture332 Manufacture of furniture and fixtures, except primarily of metal341 Manufacture of paper and paper products342 Printing, publishing and allied industries351 Manufacture of industrial chemicals352 Manufacture of other chemical products353 Petroleum refineries354 Manufacture of miscellaneous products of petroleum and coal355 Manufacture of rubber products356 Manufacture of plastic products not elsewhere classified361 Manufacture of pottery, china and earthenware362 Manufacture of glass and glass products369 Manufacture of other non-metallic mineral products371 Iron and steel basic industries372 Non-ferrous metal basic industries381 Manufacture of fabricated metal products, except machinery and equipment382 Manufacture of machinery except electrical383 Manufacture of electrical machinery apparatus, appliances and supplies384 Manufacture of transport equipment

385 Manufacture of professional and scientific, and measuring and controlling equipment notelsewhere classified, and of photographic and optical goods

390 Other Manufacturing Industries410 Electricity, Gas and Steam420 Water Works and Supply500 Construction610 Wholesale Trade620 Retail Trade631 Restaurants, cafés and other eating and drinking places632 Hotels, rooming houses, camps and other lodging places711 Land transport712 Water transport

39

713 Air transport719 Services allied to transport720 Communication810 Financial Institutions820 Insurance831 Real estate832 Business services except machinery and equipment rental and leasing833 Machinery and equipment rental and leasing910 Public Administration and Defence920 Sanitary and Similar Services931 Education services932 Research and scientific institutes933 Medical, dental, other health and veterinary services934 Welfare institutions935 Business, professional and labour associations939 Other social and related community services941 Motion picture and other entertainment services

942 Libraries, museums, botanical and zoological gardens, and other cultural services notelsewhere classified

949 Amusement and recreational services not elsewhere classified951 Repair services not elsewhere classified952 Laundries, laundry services, and cleaning and dyeing plants953 Domestic services959 Miscellaneous personal services960 International and Other Extra-Territorial Bodies

Source: United Nations Statistics Division

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