12 th GTAP Conference, “Trade Integration and Sustainable Development: Looking for an Inclusive World”, Economic Commission for Latin America and the Caribbean, Santiago, June 2009 Turkey and the EU: Economic Integration and Labour Migration Scott McDonald (Oxford Brooks University) & Yontem Sonmez (Lancashire Business School, UCLAN) & Karen Thierfelder (US Naval Academy)

2 Outline of the Presentation Turkey – EU Relations Aim Data & the Globe_Mig Global CGE Model Policy Experiments and Model Closures Results Concluding comments

3 Global financial crisis: economies of almost all countries in Europe, in the US, etc affected No slow down in the pace of accession negotiations between the EU and the new candidate countries

4 Turkey – EU Relations 1959: First application to join 1963: Associate member 1987: Applied for full membership Part of common EU Customs Territory since : Candidate country status 2005: Membership negotiations started (Turkish Undersecretariat for Foreign Trade, nd)

5 %s of Total Imports and Exports by Regions EU27ExportsImports Turkey1% NAfrica1% China2%3% Russia2%3% RoME3%2% Japan3% EFTA3%4% Asia5%7% RoW5% NAFTA13%11% IntraEU58%61% TurkeyExportsImports EFTA1%4% NewEU124% RoW4% France6%5% UK7%6% RoME7% Asia4%8% Italy7%8% Russia4%10% NAFTA13%11% RoEU1514% Germany15%12% EU2753%49%

6 Number of skilled and unskilled Turkish labour in Europe Skilled LabourUnskilled Labour Germany63,459706,771 UK10,38018,806 Greece6,62332,139 France5,67592,035 Netherlands4,10088,377 Switzerland2,63131,571 Sweden1,92315,766 Austria1,61662,280 Belgium1,19834,424 Denmark94414,550 Source: GMig2 Database, 2007.

7 Remittances received by Turkey from EU countries, US$ billions 2001 Unskilled LabourSkilled Labour UK France Germany Italy Rest of EU New 12 EU countries Source: GMig2 Database, 2007

8 Aim To study the economic implications of a possible EU membership of Turkey  How?

9 Policy Experiments 1.removal of bilateral import duties on all commodities traded between Turkey and EU27 2.removal of bilateral export taxes ….. 3.removal of both bilateral import and export duties, i.e. FTA scenario 4.FTA plus the imposition of EU’s CET by Turkey on commodity trade with third countries, i.e. CU scenario 5.CU plus agricultural liberalisation 6.CU plus agr. lib. plus endogenous migration

10 Macro Economic Closure FEX -Flexible exchange rate Investment -Investment driven savings Government -Absorption share fixed -Value added tax flexible - fixed internal balance Numeraire -CPI

11 Data Database: GTAP database version 6 & GMig2 data on the number of skilled and unskilled migrant workers & bilateral remittance flows Form of the Database: A SAM representation of the GTAP database (McDonald and Thierfelder, 2004) & Augmenting the GTAP database (McDonald and Sonmez, 2004). Aggregation: 23-sector, 5-factor and 17-region

12 Globe_Mig Global CGE Model Model: GLOBE_Mig global CGE Model (McDonald and Thierfelder, 2009). ‘A Global CGE Model with Endogenous Labour Migration’ Production: 3 level CES –Aggregate intermediaries, value added and labour All factors potentially unemployed –MCP formulation for regime switching Taxes –VAT on household demand

13 RESULTS

14 % Changes in Turkish GDP base US$ bnsFTACU CU&Agr lib CU&Agr lib&mig GDP Exp Private cons Govt cons Investment cons Export Supply Import Demand

15 CU & Agr lib & Migration Scenario Due to the differences in relative wage rates, unskilled and skilled Turkish labour move to EU27 subject to a migration elasticity % Change in Turkish unskilled and skilled labour in EU27 Skilled LUnskilled L Germany France UK Italy Neu Reu Remittances sent back to Turkey increase slightly

16 FTA (%)CU (%) CU & Agri Lib (%) CU & Agri Lib & Migration (%) Turkey Slutsky Approximation EV by Regions on Consumption, US$ billions

17 Tax Replacement, %s Tax Revenue Base US$ billions FTACU CU&Agri Lib CU & Agri Lib &Migration Value Added Sales Factor Use Import Export Household Factor Income Indirect

18 Changes in Trade Shares with CU % Changes in Turkish Imports from EU % Changes in Turkish Imports from ROW

19 Concluding Comments CU scenario has some important trade implications: –EU’s share in total Turkish imports declines with the imposition of the CET as they are replaced by relatively cheaper imports from third countries.

20 Imposition of EU’s CET lowers import tariff rates imposed by Turkey on imports from third countries and causes changes in trade regime of Turkey by removing ‘trade diverting’ distortions The change in trade regime reduces the degree of distortion in Turkish markets

21 Endogenous migration scenario also has some important implications: –Migration of Turkish labour force from Turkey to EU27 has mixed effects; –with a positive effect being generated by increases in remittances and –a negative effect due to the reduction in the supply of labour in Turkey, particularly the skilled labour, which is relatively scarce.