Determinants of Turkey's Trade Flows: Gravity Model Approach

Abstract

This paper aims to determine (i) the trade flow equation for Turkey by using the gravity equation, (ii) the role of EU in Turkey's trade and whether the Customs Union of EU that Turkey entered in 1996 made a deviation in Turkey's trade flows. Turkey was a closed economy in late 1970s and has gradually become an open economy in these 30 years. During this period, Turkey followed globalization and regional integration strategies simultaneously. On the one hand, Turkey gradually opened its economy to the rest of the world. On the other hand, in the process of joining the EU, Turkey signed the Customs Union agreement. This makes Turkey a good case study of testing whether the regional integration decision has caused any deviation in the trade flow of the country. In this study, we first develop a gravity model and employ a panel dataset to verify whether it works in explaining Turkey's trade flow Next, we use this equation to test the importance of EU countries in Turkey's trade flow and whether the flow has been subject to deviation after the Customs Union agreement. Our findings suggest that although EU countries have always been important in Turkey's trade flow, Customs Union has not lead to any statistically significant deviation in Turkey's trade flow, hi that respect, the globalization effect has dominated the regional integration effect in the case of Turkey.