The role of agriculture in the Turkey-European Union integration: Implications of extending the customs union
The path to Turkey-EU integration has not been a straightforward one. It has historical, cultural and political as well as economic dimensions. Within this wide spectrum, the purpose of this thesis is to analyze the implications of integrating Turkey's agricultural sector with that of the EU. As the first study to investigate the implications of extending the CU to include agriculture in a multi-sector, multi-region general equilibrium framework, this thesis addresses some of the key issues such as welfare effects, sectoral reallocations, agricultural unskilled labor mobility, revenue replacement and the cost of integration on the EU budget. The results indicate that much of the benefit of agricultural integration for Turkey will be conditional upon the availability of EU budget transfers to cover anticipated production subsidies. As long as EU budget transfers can be ensured, then agricultural integration will be beneficial to Turkey in terms of aggregate welfare. Primary agricultural and food sectors expand in this case, leading to increased employment and export possibilities. However, the implied cost of agricultural integration with full harmonization of protection structure on the EU budget is nontrivial: $9.6 billion (in 1995 $US). When the EU budget transfers are disregarded, then the benefits of agricultural integration vanish. Both unilateral agricultural liberalization by Turkey on a Most Favored Nation Basis and multilateral liberalization by all regions as alternative policy options are more favorable than agricultural integration with the EU in the absence of budget transfers. This thesis also explores the implications of alternative assumptions about unskilled labor mobility and revenue replacement. The results indicate that unskilled labor mobility will be essential in determining the impact of trade policy reforms. As far as the implications of agricultural integration on government finance is concerned, the results indicate that Turkey has to increase value-added taxes by one-quarter in order to compensate for tariff revenue loss due to integration when production subsidies are not covered by the EU. This will negatively affect the projected welfare gains.
Hertel, Purdue University.
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