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Economic implications for Turkey of a customs union with the European Union


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  • Harrison, Glenn W.
  • Rutherford, Thomas F.
  • Tarr, David G.


Turkey and the European Union (EU) have agreed to implement a customs union. This means Turkey will eliminate its tariffs and levies on imports on manufactured products from the EU. Turkey will also apply EU's"common external tariff"on imports from third countries. Turkey will be obligated by 20001 to provide preferential access to its markets to all countries to which the EU grants such access. Since Turkey is both eliminating tariffs on EU imports and reducing tariffs on imports from third countries, it will become a rather open economy in nonagricultural sectors. And since preferential access agreements with third countries will typically be reciprocal, Turkish exporters can expect improved access to those markets. According to the authors, Turkey's biggest gains from the customs union arrangement will come from this improved access to third country markets. Using a comparative static computable general equilibrium model of Turkey, they estimate that Turkey stands to gain between 1 and 1.5 percent of gross domestic product (GDP) annually from the customs union arrangement with the EU, depending on what complementary policies it adopts. They also estimate that lost tariff revenues will amount to 1.4 percent of GDP. For Turkey to avoid worsening its fiscal deficit, it must find ways to reduce expenditures or increase revenues. Its best choice is to reduce expenditures through accelerating privatization of state-owned enterprises which will generate a number of macroeconomic and efficiency benefits in addition to the fiscal benefits. If a value-added tax (VAT) is used as a replacement tax, they estimate that VAT rates must increase 16.2 percent in each sector to compensate for the revenue losses from implementing the full customs union. But uniform application of the VAT would allow the VAT rates to fall while still compensating for the loss from reduced tariffs and would increase the welfare gain from the customs union.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1599.

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Date of creation: 31 May 1996
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Handle: RePEc:wbk:wbrwps:1599

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Keywords: Economic Theory&Research; Environmental Economics&Policies; Trade Policy; Export Competitiveness; Trade Finance and Investment; Trade and Regional Integration; Trade Policy; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Economic Theory&Research; Environmental Economics&Policies;

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  1. Morris Morkre & David Tarr, 1995. "Reforming Hungarian agricultural trade policy: A quantitative evaluation," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 131(1), pages 106-131, March.
  2. Pritchett, Lant & Sethi, Geeta, 1994. "Tariff Rates, Tariff Revenue, and Tariff Reform: Some New Facts," World Bank Economic Review, World Bank Group, vol. 8(1), pages 1-16, January.
  3. Harrison, Glenn W. & Rutherford, Thomas F. & Tarr, David G., 1997. "Economic implications for Turkey of a Customs Union with the European Union," European Economic Review, Elsevier, vol. 41(3-5), pages 861-870, April.
  4. Harrison, Glenn W. & Jones, Richard & Kimbell, Larry J. & Wigle, Randal, 1993. "How robust is applied general equilibrium analysis?," Journal of Policy Modeling, Elsevier, vol. 15(1), pages 99-115, February.
  5. Harrison, Glenn W & Rutherford, Thomas F & Tarr, David G, 1993. "Trade Reform in the Partially Liberalized Economy of Turkey," World Bank Economic Review, World Bank Group, vol. 7(2), pages 191-217, May.
  6. Richard Baldwin, 1989. "The Growth Effects of 1992," NBER Working Papers 3119, National Bureau of Economic Research, Inc.
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