International Journal of Contemporary Economics and Administrative Sciences ISSN: 1925 – 4423 Volume: 2, Issue: 2, Year: 2012, pp. 117- 129 Effects of the Customs Union on Comparative Advantage of Turkish Manufacturing Industry Hacer Simay KARAALP 1 Received: March 2012, Accepted: May 2012 Abstract The aim of this study is to analyze the effects of the customs union (CU) on the comparative advantage of the Turkish manufacturing industry for the period 1988 to 2008. The revealed comparative advantage is analyzed with respect to twelve old European Union countries (EU) and the enlarged EU with the inclusion of new member states. In this study, both the effects of the CU and the enlargement process of the EU are analyzed using the panel data estimation method covering 45 cross-section units by taking into account that domestic factors of Turkey’s comparative advantage, real effective exchange rates, and a manufacturing sector wage index. The results show that the CU and wages has created a positive effect on Turkey’s comparative advantage. However, real exchange rates created negative effects for the comparative advantage of Turkish industry due to the appreciation of the Turkish Lira throughout the time period. Keywords: Comparative advantage, Customs Union, Turkey, European Union, Panel data estimation JEL Codes: F14, F15, C23 1. Introduction Turkey’s relations with the European Union (EU) started in 1959, soon after the establishment of the European Economic Community (EEC). Since the 1980 trade liberalization and the signing of the customs union, Turkey has liberalized its foreign trade regime. Reducing restrictive trade barriers such as tariffs and various customs duties are an essential part of this agreement. Turkey is unique in that it has a CU with the EU even though it is not a full member of this organization. CU with the EU is also a fundamental instrument for Turkey to 1 Asst.Prof.Dr., Faculty of Economics and Administrative Sciences, Department of Labor Economics and Industrial Relations, Pamukkale University, Denizli, Turkey, skaraalp@pau.edu.tr