REPUBLIC OF TURKEY

MINISTRY OF CUSTOMS AND TRADE

THE STRUCTURE OF TURKEY’S EXPORT AND THE IMPORTANCE OF INWARD

PROCESS

Çağlayan ASLANİsa EKEN

Ahmet Metin YAVUZ

28 SEPTEMBER 20171

Content

1-) Introduction

2-) Theoretical Approach

3-) Literature Survey and Data Description

4-) Empirical Results

5-) Inward Process Regime

6-) Conclusion

2

1- Introduction

International trade is an important subject.

The aim of this study is that estimating Turkey’s export function by

using VAR model and to explore functionality of inward process regime.

There are two different features of this paper.

3

2-) Theoretical Approach

Regression Equation:

yt= b10 + b11xt + b12wt + b13zt + εt

y is dependent variable whereas x,w and z are independent variables.

𝑏10, 𝑏11, 𝑏12 and 𝑏13 are coefficient of variables.

𝜀𝑡 is error term.

4

VAR Model

A typical VAR model with two variables and one lag;

𝑦𝑡 = 𝑏10 + 𝑏12𝑧𝑡 + 𝛾11𝑦𝑡−1 + 𝛾12𝑧𝑡−1 + 𝜀𝑦𝑡

𝑧𝑡 = 𝑏20 + 𝑏21𝑦𝑡 + 𝛾21𝑦𝑡−1 + 𝛾22𝑧𝑡−1 + 𝜀𝑧𝑡

𝑦𝑡 and 𝑧𝑡 stationary. 𝜀𝑦𝑡 and 𝜀𝑧𝑡 are independent from each other with constant

variance and zero mean

1𝑏21

𝑏121

𝑦𝑡𝑧𝑡

=𝑏10𝑏20

+𝛾11𝛾21

𝛾12𝛾22

𝑦𝑡−1𝑧𝑡−1

+𝜀𝑦𝑡𝜀𝑧𝑡

Variance Decomposition

Impulse Response Function

5

ARCH Model

ℎ𝑡 = ⍺0 + 𝑖=1𝑞⍺𝑖𝜀𝑡−𝑖

2

ℎ𝑡 = ⍺0 + ⍺1εt−12 + ⍺2εt−2

2 +⋯+ ⍺qεt−q2

ARCH (1) Model:

Coefficient Std. Error z-stat. p-value

Constant 0.002939 0.003054 0.962315 0.3359

AR(1) 0.259782 0.075969 3.419597 0.0006

Variance Equation

Constant 0.000582 7.70E-05 7.553142 0.0000

RESID(-1)2 0.273193 0.135457 2.016822 0.0437

R2=0.049969 D.W=1.918533 F=358.4759 (p=0.0000)

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3- Literature Survey

1- Theoretical Literature

2- Empirical Literature

Writer(s) Name of Study Variables Period Method Result of Study

1Saatçioğlu and

Karaca (2004)

The Impact of

Exchange Rate

Uncertainty on

Exports: The Case of

Turkey

1- External Income

2- Relative Price Index

3- Real Exchange Rate

4- Real Exchange Rate Volatility

1981-2001,

Quarterly

Cointegration

Model- Error

Correction

Model

While external income is

the most effective variable

on export of Turkey,

exchange rate volatility has

negative effects.

2Öztürk and

Acaravcı (2006)

The Effects of

Exchange Rate

Volatility on the

Turkish Export: An

Empirical

Investigation

1- External Income

2- Relative Price Index

3- Real Exchange Rate Volatility

1989-2002,

Monthly

Cointegration

Model- Error

Correction

Model

External income has

positive effects on export,

other variables affect export

of Turkey negatively.

3 Davis (2014)

What Impact Does

Exchange Rate

Volatility Have on

World Turkey Trade

Flows?

1- External Income

2- Internal Income

3- Population of Countries

4- Exchange Rate Volatility

5- Being Member of NAFTA or EU

1999-2008,

QuarterlyGravity Model

External income and

exchange rate volatility

increases Turkey's export.

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3-Data Description

LRX: Real Export (Seasonally Adjusted, Million $)

LRM: Real Import (Seasonally Adjusted, Million $)

LDY: Internal Income (Seasonally Adjusted Turkey’s Industrial Production Index with

base of 2010=100)

LEY: External Income (Seasonally Adjusted Industrial Production Index of EU(28)

with base of 2010=100)

LR: Real Effective Exchange Rate (2003=100 based)

V: Real Effective Exchange Rate Uncertainty: It is estimated from first differenced

and logarithmic form of Real Effective Exchange Rate by using ARCH(1) Model

The data for the variables are in logarithmic form and in monthly periods. Data

set covers from 2003:01 to 2016:10.

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4-Empirical Results:Unit Root Tests

Variable Lag Length T Stat. Critical Value Prob.

LRX 1 1.606258 -1.942781 0.9735

ΔLRX 0 -15.38447 -1.942781 0.0000

LRM 3 0.778519 -1.942805 0.8805

ΔLRM 2 -4.864538 -1.942805 0.0000

LDY 1 2.488749 -1.942781 0.9970

ΔLDY 1 -8.542683 -1.942793 0.0000

LEY 4 0.187728 -1.942818 0.7395

ΔLEY 3 -4.135938 -1.942818 0.0001

LR 4 -0.025909 -1.942818 0.6727

ΔLR 3 -7.378541 -1.942818 0.0000

V 6 -0.419428 -1.942869 0.5307

ΔV 5 -9.514038 -1.942869 0.0000

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Variance Decomposition of Real Export

Period LEY LDY V LR LRM LRX

1 2.56730 6.60128 0.09574 0.03066 6.98309 83.72194

2 4.63375 6.87391 2.58854 1.30432 16.59002 68.00946

3 4.67513 9.03593 3.89033 2.75996 22.73167 56.90699

4 6.51662 10.19836 3.58781 3.53057 25.59945 50.56719

5 7.41815 11.36007 4.00687 4.04776 28.48635 44.68080

6 8.01876 12.49824 4.58129 4.73384 30.69694 39.47094

7 8.45647 13.50753 5.23904 5.68226 31.91719 35.19751

8 8.68415 14.45952 5.85234 6.64918 32.72419 31.63061

9 8.77527 15.39278 6.35735 7.53976 33.16090 28.77394

10 8.77537 16.26308 6.81721 8.28986 33.36617 26.48830

11 8.68508 17.08524 7.22236 8.92257 33.42714 24.65761

12 8.53822 17.86259 7.57519 9.44797 33.38603 23.19000

13 8.35603 18.59510 7.87348 9.86871 33.29025 22.01643

14 8.15689 19.28283 8.11914 10.18871 33.17343 21.07899

15 7.95511 19.92301 8.31918 10.41698 33.05484 20.33088

16 7.76133 20.51183 8.47965 10.56614 32.94715 19.73389

17 7.58365 21.04670 8.60546 10.65003 32.85655 19.25761

18 7.42793 21.52543 8.70120 10.68163 32.78599 18.87782

19 7.29784 21.94672 8.77107 10.67304 32.73616 18.57516

20 7.19510 22.31033 8.81908 10.63526 32.70619 18.33403

21 7.11981 22.61711 8.84888 10.57787 32.69447 18.14187

22 7.07074 22.86903 8.86369 10.50879 32.69916 17.98859

23 7.04564 23.06911 8.86631 10.43417 32.71864 17.86614

24 7.04154 23.22112 8.85915 10.35844 32.75164 17.76811

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Impulse Response Functions

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5-Inward Processing Regime

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The inward processing regime is an economically

effective customs regime

It increases competitiveness

It has tax advantages.

Calculating engine is made for this regime.

Inward Processing Regime

Inward Processing RegimeMillion ($)

Import Export Added Value

Impulse Total Change ($) Total ($) Change ($) Change (%) Total Change ($) Total Total 148.712 312.962 164.250

Agriculture, hunting and related service activities 10.523 0 2.092 0 %0,00 3.352 0 1.260 Change ($) 100 224 124

Forestry, logging and related service activities 27 0 1 0 %0,00 2 0 1 Change (%) %0,07 %0,07 %0,08

Fishing, aquaculture and service activities incidental to fishing 50 0 281 0 %0,00 712 0 431

Mining of coal and lignite; extraction of peat 78 0 0 0 %0,00 0 0 0

Mining of metal ores 1.229 0 36 0 %0,00 238 0 203

Other mining and quarrying 126 0 0 0 %0,00 0 0 0

Food products and beverages 8.034 0 14.464 0 %0,00 27.644 0 13.179

Tobacco products 109 0 825 0 %0,00 2.254 0 1.429

Textile 7.060 0 10.238 1 %0,00 28.803 0 18.565

Wearing apparel; dressing and dyeing of fur 491 1 4.104 4 %0,02 17.773 3 13.669

Tanning and dressing of leather; manufacture of luggage, handbags, saddlery, harness and footwear 393 0 461 0 %0,00 1.044 0 583

Wood and of products of wood and cork, except furniture 300 0 625 0 %0,00 1.154 0 529

Paper and paper products 1.122 0 1.479 0 %0,00 3.587 0 2.108

Publishing, printing and reproduction of recorded media 53 0 7 0 %0,00 34 0 27

Coke, refined petroleum products and nuclear fuel 2.596 0 738 0 %0,00 1.085 0 347

Chemicals and chemical products 20.188 0 7.420 0 %0,00 13.872 0 6.453

Rubber and plastics products 2.520 0 8.053 0 %0,00 18.785 0 10.732

Other non-metallic mineral products 605 0 425 0 %0,00 2.428 0 2.003

Manufacture of basic metals 39.151 1 36.172 1 %0,00 52.213 0 16.041

Fabricated metal products, except machinery and equipment 2.456 2 4.761 5 %0,05 9.829 2 5.068

Machinery and equipment n.e.c. 5.855 14 7.363 48 %0,19 25.676 34 18.313

Electrical machinery and apparatus n.e.c. 100 6.494 22 6.113 47 %0,36 13.157 25 7.044

Radio, television and communication equipment and apparatus 5.161 29 5.846 46 %0,51 9.114 16 3.267

Medical, precision and optical instruments, watches and clocks 2.329 0 346 0 %0,07 391 0 45

Motor vehicles, trailers and semi-trailers 17.359 28 28.256 68 %0,10 68.538 40 40.283

Other transport equipment 464 2 1.718 4 %0,11 3.908 2 2.190

Furniture; manufacturing n.e.c. 1.182 0 6.350 0 %0,00 6.935 0 585

Waste and scrap 12.730 0 256 0 %0,00 285 0 29

Recreational, cultural and sporting activities 0 There is no exportation under Inward process regime.

Export = Import + Added Value

INWARD REGIME PROCESS SECTORAL INPUT- OUTPUT CALCULATING ENGINE

Import Import Usage Export Added ValueISIC Rev. 3

Import; 100

Export; 224

Added

Value; 124

0 5 10 15 20 25 30 35 40 45

Agriculture, hunting and related service activities

Forestry, logging and related service activities

Fishing, aquaculture and service activities incidental to fishing

Mining of coal and lignite; extraction of peat

Mining of metal ores

Other mining and quarrying

Food products and beverages

Tobacco products

Textile

Wearing apparel; dressing and dyeing of fur

Tanning and dressing of leather; manufacture of luggage,…

Wood and of products of wood and cork, except furniture

Paper and paper products

Publishing, printing and reproduction of recorded media

Coke, refined petroleum products and nuclear fuel

Chemicals and chemical products

Rubber and plastics products

Other non-metallic mineral products

Manufacture of basic metals

Fabricated metal products, except machinery and equipment

Machinery and equipment n.e.c.

Electrical machinery and apparatus n.e.c.

Radio, television and communication equipment and…

Medical, precision and optical instruments, watches and…

Motor vehicles, trailers and semi-trailers

Other transport equipment

Furniture; manufacturing n.e.c.

Waste and scrap

14

Inward Processing RegimeMillion ($)

Import Export Added Value

Impulse Total Change ($) Total ($) Change ($) Change (%) Total Change ($) Total Total 148.712 312.882 164.170

Agriculture, hunting and related service activities 10.523 0 2.092 0 %0,00 3.352 0 1.260 Change ($) 100 144 44

Forestry, logging and related service activities 27 0 1 0 %0,00 2 0 1 Change (%) %0,07 %0,05 %0,03

Fishing, aquaculture and service activities incidental to fishing 50 0 281 0 %0,00 712 0 431

Mining of coal and lignite; extraction of peat 78 0 0 0 %0,00 0 0 0

Mining of metal ores 1.229 0 36 0 %0,00 238 0 203

Other mining and quarrying 126 0 0 0 %0,00 0 0 0

Food products and beverages 8.034 0 14.464 0 %0,00 27.644 0 13.179

Tobacco products 109 0 825 1 %0,03 2.254 0 1.429

Textile 7.060 0 10.238 0 %0,00 28.802 0 18.564

Wearing apparel; dressing and dyeing of fur 491 0 4.103 0 %0,00 17.770 0 13.666

Tanning and dressing of leather; manufacture of luggage, handbags, saddlery, harness and footwear 393 0 461 0 %0,00 1.044 0 583

Wood and of products of wood and cork, except furniture 300 0 625 0 %0,00 1.154 0 529

Paper and paper products 1.122 0 1.479 0 %0,00 3.587 0 2.108

Publishing, printing and reproduction of recorded media 53 0 7 0 %0,00 34 0 27

Coke, refined petroleum products and nuclear fuel 2.596 0 738 0 %0,00 1.085 0 347

Chemicals and chemical products 20.188 0 7.420 0 %0,00 13.873 0 6.453

Rubber and plastics products 2.520 0 8.053 0 %0,00 18.785 0 10.732

Other non-metallic mineral products 605 0 425 0 %0,00 2.427 0 2.003

Manufacture of basic metals 39.151 98 36.269 142 %0,27 52.354 44 16.085

Fabricated metal products, except machinery and equipment 2.456 0 4.759 0 %0,00 9.824 0 5.066

Machinery and equipment n.e.c. 5.855 0 7.349 0 %0,00 25.628 0 18.279

Electrical machinery and apparatus n.e.c. 6.394 0 6.091 0 %0,00 13.110 0 7.019

Radio, television and communication equipment and apparatus 5.161 0 5.817 0 %0,00 9.068 0 3.251

Medical, precision and optical instruments, watches and clocks 2.329 0 346 0 %0,00 391 0 45

Motor vehicles, trailers and semi-trailers 17.359 0 28.228 0 %0,00 68.470 0 40.243

Other transport equipment 464 0 1.716 0 %0,00 3.904 0 2.187

Furniture; manufacturing n.e.c. 1.182 0 6.350 0 %0,00 6.935 0 585

Waste and scrap 100 12.830 1 257 1 %0,43 286 0 29

Recreational, cultural and sporting activities 0 There is no exportation under Inward process regime.

Export = Import + Added Value

INWARD REGIME PROCESS SECTORAL INPUT- OUTPUT CALCULATING ENGINE

Import Import Usage Export Added ValueISIC Rev. 3 Import;

100

Export; 144

Added

Value; 44

0 5 10 15 20 25 30 35 40 45 50

Agriculture, hunting and related service activities

Forestry, logging and related service activities

Fishing, aquaculture and service activities incidental to fishing

Mining of coal and lignite; extraction of peat

Mining of metal ores

Other mining and quarrying

Food products and beverages

Tobacco products

Textile

Wearing apparel; dressing and dyeing of fur

Tanning and dressing of leather; manufacture of luggage,…

Wood and of products of wood and cork, except furniture

Paper and paper products

Publishing, printing and reproduction of recorded media

Coke, refined petroleum products and nuclear fuel

Chemicals and chemical products

Rubber and plastics products

Other non-metallic mineral products

Manufacture of basic metals

Fabricated metal products, except machinery and equipment

Machinery and equipment n.e.c.

Electrical machinery and apparatus n.e.c.

Radio, television and communication equipment and…

Medical, precision and optical instruments, watches and…

Motor vehicles, trailers and semi-trailers

Other transport equipment

Furniture; manufacturing n.e.c.

Waste and scrap

6- Conclusion

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Export is affected mostly by import and domestic

income

In order to overcome international deficit problem

economic policies would be useless

Imported products spread to other sectors to be

used in production stages.

THANK YOU

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