Customs Union and Competitiveness of Turkish Exports in the EU Market: A Dynamic Shift-Share Analysis

When Turkey signed the Customs Union (CU) agreement with the EU in 1996 there were doubts about the costs and benefits of the CU with regards to Turkey’s foreign trade and industrial production. Theoretically, the CU helps improve efficiency by stimulating productivity gains in the tradable sectors and via technological gains due to spillover effects. It is of utmost interest to examine whether such expectations were materialized for Turkey. This article examines the changes in major Turkish exports destined to the EU market and determinants of competitiveness using dynamic shift-share analysis for the period 1987–2006. In this method, the competitiveness of Turkish products is examined vis-à-vis her competitors in the EU market. The results of the dynamic shift-share analysis show that Turkey’s competitive position has only partially improved. The results demonstrate that Turkey’s competitive position improved in textiles, iron and steel and automotive exports, and deteriorated in technologically more advanced manufacturing exports. The major determinants of this competitive position are found not to be price-related factors but “real” factors, such as productivity. The article concludes that potential benefits from a customs union have not yet materialized for major Turkish exports.