3 Turkey—with the share of ‘producer-driven’ networks in exports of manufactures, excluding chemicals, exceeding 20 percent in 2003 and double-digit growth rates—has been dubbed in a recent World Bank study (WB 2005) as one of the seven “High Performers” among European and Central Asian countries. Turkey’s share of 22.5 percent puts it on a par with Slovenia in ‘producer-driven’ network trade.

The remainder of the paper is organized as follows. The next Section discusses implications of the “Turkish-EU connection” for contestability of domestic markets and conditions faced by Turkish firms in access to foreign markets. Section 3 examines geographical patterns and dynamics of Turkey’s trade in goods and services in the context of EU-8 and other EU candidate economies. Section 4 seeks to examine changes in the degree of processing, technology content and factor intensities of Turkish trade with a special emphasis on trade with the EU and other countries from the Pan-European free trade area for industrial products. Section 5 examines trade in ‘buyer-driven’ chains, (textiles and clothing, footwear and furniture) and the shift towards ‘producer-driven’ networks (automotive and Information Communication Technology networks). The last Section concludes.

# **2. Contestability of domestic markets and access to external markets**

The pillar defining Turkey’s trade policy is preferential relationship, or more precisely the CU (Customs Union) Agreement with the European Union, with enormous implications for both conditions in access of domestic producers to external markets as well as contestability of domestic markets, that is, the extent to which local firms are exposed to competition from imports. The CU Agreement, which went into force on 1 January 1996, has already resulted in Turkey’s adoption of the Community's Common Customs Tariff (CCT) for imports of industrial products from the third countries. Turkey has also taken up the EU rules of origin and EU customs procedures (customs valuations, customs declaration, release for free circulation and duty-suspension arrangements). The Agreement has also triggered reforms of technical standards regime and competition policy infrastructure.

The CU Agreement has contributed to a very significant increase in contestability of domestic Turkish markets through infusing predictability, transparency and stability to trade policy as well as by liberalizing market access, i.e., lowering or removal of both tariff and nontariff barrier, for both preferential and MFN suppliers. The extent of liberalization of tariff rates has been very extensive. Consider that MFN applied tariff rates on tradable goods with nonpreferential partners had to be reduced from an average of 22 percent in 1994 to 6.9 percent in 2001, GSP (Generalized System of Preferences) beneficiaries from 22 percent to 2.7 percent, and with the EU’s FTA (Free Trade Agreements) partners from 22 percent to 1.34 percent and with the EU from 10.2 percent to 1.34 percent (Togan 1997 and 2000).

Turkey’s applied MFN tariff rates for industrial products, the same as those of the EU, represent one of the lowest, if not the lowest, levels of MFN tariff protection among economies at a similar level of economic development. Turkey’s both weighted and simple average tariff rates on industrial imports are several times lower than those in other candidate countries.

Tariff rates are not only low but they are also predictable and stable. Since they are tied to EU tariffs as well as comprehensive EU commitments under the WTO agreements, they are resistant to domestic pressures for tariff protection.

As far as non-tariff barriers are concerned, technical barriers to trade have significantly declined with Turkey’s gradual transition to the EU technical standards regime. Turkey has made large strides to establish a modern, market based regime of technical regulations and standards. The adoption of international and European standards as well as procedures for admitting goods into Turkey not only increase contestability of domestic markets but also create conditions for