19 level in 2002. In 2003, the value of imports exceeded by 21 percent the 2000 level mainly due to the surge in imports of trucks and tractors. But it rose 89 percent in 2004, with the value of exports also increasing 39 percent. The crisis also affected imports of automobile parts<sup>4</sup> . Since this had no impact on exports automobiles and parts, which boomed in 2001-04, the contraction was short-termed mainly due to the falling domestic demand triggered by the crisis in 2001.

Third, the expansion in exports of more processed goods took place in highly demanding and competitive Pan-European markets. Traditional industrial inputs accounted for a larger share in ROW-oriented exports (14 percent) than in pan-European exports (11 percent) in 2004. On the other hand, the aggregate share of machinery and automobiles and parts in Pan-Europeandestined exports of 35 percent up from 30 percent a year earlier was below that of 21 percent up from 19 percent in 2003 in ROW exports. The difference is almost exclusively due to much larger Pan-European-oriented exports of automobiles and parts indicating Turkey’s participation in EUcentered automotive networks. Pan-European countries took 79 percent of Turkey’s exports of automobiles and parts and 66 percent of exports of machinery—these compare favorably with the share of Pan-European area of 60 percent in total Turkish exports.

The compositions of imports by end-use from Pan-European countries and ROW indicates Turkey’s growing integration into Pan-European markets based on trade in more processed industrial products. Imports from the Pan-European free trade area for industrial products are much more processed, with fuels, agricultural foods and feeds and industrial raw materials accounting for 10 percent. In contrast, this share in Turkey’s imports from ROW is more than four times as large.<sup>5</sup> Moreover, the gap appears to be growing. But ROW suppliers seem to have retained their competitive edge in Turkey’s markets for machinery and capital equipment excluding transportation.<sup>6</sup> The falling share of machinery in Turkey’s total imports suggests weaker investment activity than in the past, which, in turn, may undermine future export growth. The value of their imports was in 2003 merely eight percent above the level in 2000. But they strongly rebounded in 2004 increasing 46 percent, and stood at 158 of their 2000 level. Furthermore, the share of machinery increased in 2004 and accounted on average for one-fourth of total imports in 200004—still a respectable level by international standards.<sup>7</sup>

# **B** **_._** _‘Technology content’ of Turkey’s trade with the EU and competitiveness_

In order to assess the ‘technology content’ of Turkey’s trade with the EU, we use a simple taxonomy developed by Landesman and Stehrer (2003). It distinguishes among three categories of activities and assign to each of them products identified in trade statistics in terms of two-digit Standard International Trade Classification (SITC. Rev. 3). These categories are low technology and unskilled labor intensive activities, medium to high technology activities and resource intensive activities. The latter cover either extraction of mineral resources or unprocessed agricultural products. Low and labor intensive group includes textiles and clothing, wood products, most chemicals, tires, etc. The medium to high technology group includes machinery and equipment, transport equipment, electrical and optical equipment, pharmaceuticals, etc.

4 The contraction in imports of parts was smaller—they fell 41 percent in 2001; in 2002, they were 26 percent below the 2000 level and 20 percent above in 2003.

5 Between 1990 and 2003 it varied between 43 percent in 2003 and 48 percent in 1990.

6 Their share in Turkey’s imports of these products has been stable at around 30 percent since 1985.

7 This is roughly line with the share of machinery in imports of EU-8 economies but above that for Bulgaria, which was around 20 percent on average in 200-03.