The Trade Effects of the EU–Turkey Customs Union

In the present study we argue that the salient features of both the EU‐15 countries and Turkey are conducive to making the effects of the 1995 EU–Turkey customs union asymmetric among the incumbent EU countries. In order to support our argument we rely on a model in which trade involves the exchange of vertically differentiated products. This model generates the prediction that the more contiguous an incumbent country is to the joining country in terms of technological sophistication, the larger will be the crowding out of this country's exports to the other incumbent countries as a result of the CU expansion. Using a gravity model we estimate the effects of the customs union between Turkey and the EU‐15 by differentiating between exports from (a) lower‐technology EU‐15 countries (we term this group of countries ‘South’) to higher‐technology EU‐15 countries (the ‘North’), (b) North to South, (c) South to Turkey, (d) North to Turkey, and (e) Turkey to EU‐15. Our econometric results indicate that, in contrast to North's exports to the other EU‐15 countries (which have remained intact), the Southern countries’ exports to the other EU‐15 countries have declined as a result of the CU. Moreover, the extra penetration of the Turkish market by the EU‐15 countries has not been more favourable to the Southern group.