The structural transformation of bilateral trade relations between Germany and Turkey

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Karagöz Özenç F. , Tuncer Terregrossa N.

European Trade Study Group Conference, Bern, Switzerland, 12 - 14 September 2019, pp.1-20

  • Publication Type: Conference Paper / Full Text
  • City: Bern
  • Country: Switzerland
  • Page Numbers: pp.1-20


The present study demonstrates that there is a structural change in the bilateral trade relationship between Germany and Turkey, and the key to understanding this change lies in the growing importance of production-sharing in which Turkish firms become increasingly integrated in global production chains, and German firms establish assembly bases and production platforms for outsourcing activities. Production sharing gives rise to the emergence of new forms of trade such as parts and components (P&C) trade and vertical intra-industry trade (VIIT). Germany specializes in medium technology sectors such as motor vehicles and machinery and so far has been able to adapt to the changing conditions in the global economy by transforming its production and trade patterns through shifting certain segments of the production processes to low-cost locations and focusing on R&D. The study focuses on commodity groups in which production sharing is expanding globally, as well as between Germany and Turkey. These commodity groups are classified under HS84-92. Following the methodology in Fontagné & Freudenberg (1997), the study assesses the relative importance of one-way trade and intra-industry trade in bilateral flows between Germany and Turkey. This methodology also enables us to measure and classify intra industry trade flows as horizontal (HIIT) and vertical (VIIT) and lower quality VIIT and higher quality VIIT. Our calculations at the 6 digit HS classification of trade data reveals that Germany’s final good exports are mainly one-way whereas Turkey’s final good exports mostly follow a one-way trade pattern or low quality VIIT. We also find that there is a marked rise in P&C trade, and that VIIT is the dominant trade type in this category. German P&C exports are either high quality VIIT or one-way. Conversely, Turkey’s P&C exports are mainly VIIT of low quality products. Among the sectors analysed in the study, the motor vehicles industry is by far the largest category in both final goods and P&C. Moreover, trade is concentrated in a few commodities in this sector. Ranking HS 84-92 product categories in terms of volume shows that the top 20 products Germany imported from Turkey accounted for 64% of the total. The top 20 products Germany exported to Turkey account for 46% of the total; although the total number of traded products was 1,029 in 2013. It is also possible to make inferences on the nature of production sharing in this sector. Turkey exports specific parts of engines to Germany, where they are processed, and then engines and other high value added parts (such as gear boxes and drive axles) are exported to Turkey. Based on the findings of the study, one can conclude that the structural change in Turkish exports to Germany from low technology-labour intensive sectors like textiles and leather to medium technology sectors like machinery and motor vehicles is realized by specialisation in the low price-low unit value segments of these sectors.