This paper shall investigate the trade integration between Turkey and the EU. The plan of the book is as follows. At first the historical background of the development concerning the trade relations between the two parties is conveyed. This includes the period from first association to implementing a customs union (CU) between Turkey and the European Union (EU) and to deeper integration abolishing barriers of trade until today.

Subsequently an evaluation of the influence of the customs union follows in chapter 3 which constitutes the main part of the paper. Hereby the analysis is divided into the short-term static and long-term dynamic effects of the CU with the EU that Turkey entered on 1st January 1996. To analyze the static effects this paper adopts Viner’s traditional approach, by comparing the trade creation effects with the trade diversion effects resulting from the removal of trade restrictions for Turkey and the EU as a whole. Thus, the predominant economical theory applied in this paper is the neoclassical customs union theory. This theory was chosen because it still is the predominant and widely recognized theory in analyzing trade data providing a variety of tools. Within the neoclassical theory Ricardo as well as Heckscher-Ohlin play an important role as a tool of analysis. In the relevant passages in the text the most important theoretical principles will be explained with the help of the Turkish example. At the limits of the neoclassical theories the new trade theory is supposed to help out especially where the assumptions of the neoclassical theory limit further analysis.

It is the purpose of this paper to analyze the question how the trade liberalization in form of the CU between Turkey and the EU influences the development of Turkish welfare, specialization in different sectors, economies of scale, competitiveness, technological transfer and direct foreign investment. In some parts of the paper the analysis also refers to some effects for the EU, but main emphasis shall clearly be laid upon the effects on the Turkish economy. For the analysis foreign trade data is used which was compiled by the Turkish Undersecretariat of the Prime Ministry for Foreign Trade, the Prime Ministry Undersecretariat of Treasury, the Turkish Statistical Institute and Eurostat. The analysis concentrates on the development within the last years, because not many studies were written in the 21st century or using data from this period. The last subitem within chapter 3 allows a glance at the possibility of further integration taking monetary integration as an example. Last but not least chapter 4 will summarize the findings of the previous sections which will lead to a final estimation of the effects of the CU on Turkey and the EU.

Chapter 3.3.4 Technological transfer

According to the theory of catching up underdeveloped countries may close a technology gap by free trade. The more a country’s productivity and technology is backward the higher is its growth potential and its growth rates in case of free trade. Trade also causes a technology transfer, and underdeveloped nations may use new technologies without spending a lot on invention. This is also connected with the product cycle hypothesis. The high developed industrial countries are the producers of new products realising export monopolies at the beginning of the product cycle. If the product reaches its maturing stage less developed countries may foster development through imitation. In the standardization period, it is possible to produce with standardised techniques and low-qualified labour, which makes it possible for developing countries to specialise on these goods due to their lower costs of production and low wage rates. This is also often thanks to direct foreign investment (DFI), giving the ability to develop competitive products. Rising commercial contacts between countries causes an accumulation of knowledge. This leads to a catching-up, while producing low technology goods under protection causes falling behind. Producing standardised low-technology goods may end in the so called Heckscher-Ohlin trap. That means that there is no remarkable technical progress because of lacking human capital accumulation in the production. There is no significant technology transfer because DFI is also going into branches with less human capital. Without technical progress the country will fall behind. Low-technology goods in the exporting sector will suffer from rising competition in the world market. Convergence is evoked mainly by the 2 factors technological progress and capital accumulation. Faster implementation of technological innovations can lead to a higher rate of technological change. As an industrializing country, Turkey needs advanced technologies to speed up its industrialization process. There is a natural alliance between the new trade theory, with its emphasis on increasing returns and imperfect competition, and the view that technological change is a key factor driving international specialization. Technological development is normally an increasing returns process carried out in imperfectly competitive industries, and the most important sources of increasing returns in practice probably lie in dynamic economies of learning and research and development. If bigger sales markets and increased competition initiate innovations and growth processes, which excite technologic dynamics, then those positive effects can be carried over to other companies or even to other sectors by spill-over effects, learning effects and income effects.Technological gaps are also explainable with the traditional trade theory. The H–O model would predict that technologically advanced countries have a comparative advantage in technology-intensive goods. Innovation, by increasing the range of products, represents an increase in real world productivity. Technology transfer then since it is allowing a wider range of goods in Turkey, also represents a gain from a global point of view. Innovation as well as technology transfer increase world output. Hereby innovation disproportionately benefits the EU, the more innovative area, while technological transfer supports Turkey. The high protection rates of the Turkish industry before the CU lead to a relatively underdeveloped level of technology in its production. It shall be considered how this situation changed under the CU.

The whole level of technology itself is not measurable, however technology-input can be measured with t