Estimation of trade creating and diverting effects of Turkey-EC customs union on Turkish automotive industry

Abstract

This study estimates trade creation and diversion effects of the forthcoming Turkey-EC customs union on Turkish Automotive Industry. The study employs a microeconomic-theory-based partial equilibrium approach. The product group included in the analysis is the automobiles with three differentiated goods: domestically produced, imported from member countries and imported from non-member countries. Estimation of demand elasticities to be used in the estimation of trade creation and diversion is performed by using the Asymptotically Full Information Maximum Likelihood method. Then, trade creation and diversion effects are estimated for five scenarios about the entrance date to and conditions of joining the customs union. The study concludes that trade creation and diversion effects lead to welfare improvements for each scenario defined, and joining the customs union reduces the demand for domestically produced automobiles in almost each scenario.