Assessment and Determination of Bilateral Trade Capacity between Iran and Turkey

1. Introduction

Foreign or international trade is an important success factor that helped developed countries to achieve rapid economic growth. Nowadays, world is moving fast towards globalization, therefore, foreign trade expansion is necessary for sustainable development.

Foreign trade is important for Iran’s single-product economy that is facing sanctions and experiencing many difficulties in exporting its commodities. Therefore, Turkey’s market has special importance for Iran. Turkey’s large population, per capita income rising, high economic growth rate, geographical proximity to Iran, and political independence in international relations are among the factors that attract Iran’s interests in this country’s market (Fahimifard, 2013).

Moreover, Turkey lacks oil reserves and other energy sources whereas Iran is rich in natural resources of energy. Therefore, the similarities in demand and differences in supply side of their economies increase the potential for trade and regional integration. This potential can be economically beneficial for them and other countries in the region and can guarantee the peace and stability in terms of politics and security.

To promote Iran and Turkey trading volume, it is necessary to know how much the maximum export capacity of Iran to Turkey is, and how much of this capacity has actually been deployed or realized. The next question is what the bases of Iran’s export development to Turkey are, and which goods have the main priority for the development of trading between the two countries. So, the aim of this research is to estimate the maximum export capacity of Iran to Turkey and to determine the commodities with highest export capacity.

This study is organized in five sections. After presenting problem statement in introduction, Section 2 deals with examining and analyzing various models used to determine export potential and trading capacity. After that, the general model is introduced and used as research methodology in Section 3. Research findings are summarized and given in Section 4. Finally, the conclusions and recommendations derived from research results and analyzes are presented in Section 5.

2. Literature Review

Considering the role of international trade in economic development, it is very important to calculate trade potential among countries. A considerable part of world trade research has calculated the maximum possible levels of exports and imports among countries. Various models have been employed in calculating trade potential with the gravity model, the RCA index, the cosine index, and the general model being the most important ones. The models were investigated separately, as well as the characteristics and the efficiency of each one, to answer the questions of this research.

The Gravity Model: This model has been widely used in world trade research in recent years. Sologa and Vinters (1999) used it to study factors influencing trade potential between North and Latin American countries and emphasized the importance of geographical distance and gross national product in increasing trade among them.

Martinez-Zarzoso and Nowak-Lehmann (2003) employed the extended gravity model:

Here, X_ij is the variable of trade relations between two countries, GDP_j and GDP_i are their gross domestic products and N_j and N_i their population indices, U_ij is the error variable, and A_ij is the abstract variable that takes into account contiguity of and trade, economic, and cultural cooperation between them (Martinez-Zarzoso & Nowak-Lehmann, 2003).

Molle (2001) employed the gravity model and emphasized the effect of preferential agreements as an abstract variable in determining trade potential between countries.

Tayebi and Azarbaijani (2001) used the gravity model to determine trade potential between Iran and Ukraine. Employing the Linder Hypothesis, they stressed the importance of the extent of similarities between the two economies as a factor stimulating trade between them:

In this equation, it is expected that a2 and a3 will be positive and a4 and a5 negative.

Gul and Yasin (2011) used the gravity model to estimate Pakistan’s trade potential. They employed the information on 42 countries for the 1981-2005 period to estimate Pakistan’s potential for foreign trade with various countries in the world.

Khan and Khan (2013) estimated Pakistan’s trade potential for the 1990-2010 period based on the gravity model. They noticed that GDP and GDP per capita influenced Pakistan’s trade potential as positive factors, whereas geographical distance and cultural similarities affected it as negative factors. Based on the information for 2010, Pakistan had the highest potential for trade with Japan, Turkey, Malaysia, India, and Iran.

A study by Nasiri and Hassani (2013) estimated Iran’s potential for trade with 161 trading partner countries and showed that Iran had strong potential to export commodities to 94 countries.

The Gravity Model has been more frequently used for estimating trade potential, but it does not provide any information on the types of commodities that can be exported. Rather, it identifies factors that influence trade between countries based on the researchers’ presuppositions (Silva & Tenreyro, 2006).

The RCA index: Balassa was the first to use this index for in the following form for evaluating a country’s export potential (Nasiri & Naseri, 2009):

=

Here, the numerator represents the share country j has of international trade in commodity i and the denominator is the share country j has of the total world trade. If the value of the fraction is higher than 1, it indicates that country j enjoys revealed comparative advantage in exporting commodity i.

Using this equation for every country allows us to prepare a list of commodities having RCA. In comparing two countries, the less similar the lists of the commodities having RCA in the two countries are, the greater trade potential and the more numerous trade opportunities between them will be. 

The International Trade Center (2001) used the information for the period 1990-2000 to extract the RCA of various countries in the world for 12 commodity groups. ITC research is one of the reference sources for determining the RCA of each country for trade in these 12 commodities.

Soori and Tashkini (2012) employed Balassa’s formula to study the RCA index for NAFTA members in trading in agricultural commodities in 1996-1998.

Mehdipour Tamali (2005) used the RCA index to determine Iran’s potential for trade with member countries of the Organization of Islamic Cooperation (OIC). Based on results obtained for 1997-2001 period, the estimated potential for Iranian exports of non-oil commodities to member countries of the IOC was $400 million and the potential for Iranian imports from these countries was $1000 million. However, only $204 million and $409 million of this potential (50% and 40% of the export and import potential, respectively) were realized.  

The RCA index specifies a list of commodities with export potential but does not quantitatively determine the superiority of the commodities in relation to each other.

The Cosine Index: The Cosine Index can be used to determine the degree of trade complementarities between two countries through using the degree of similarity between the exports of one country to the imports of the other. This index was first introduced in the book Mathematical Economics written by Allen in 1957. He used the cosine index to explain the degree of similarity of exports and imports of two countries as follows (Anderson & Yotov, 2010):

 =

k = 1, 2, 3..., n

Here, i, j, and k represent the exporting country, the importing country, and the number of the commodity group,  the volume of commodity k exported from country i to other countries, and  the volume of commodity k imported by country j.

These two vectors can be compared by determining the angle between them in the n dimensional commodity space. A small angle indicates that the export composition of country i to all destinations is similar to the import composition of country j from all origins, whereas a large angle shows that the export structure of country i is not similar to or compatible with the import structure of country j. The cosine of the angle between the two commodity vectors is usually measured.

Identical export composition of country i with import composition of country j indicates complete complementarities. Lack of any similarities between the composition of exports by country i and the composition of imports by country j demonstrates that the e and m vectors are orthogonal (Cos ij=0) and there is no trade complementarities between them. The cosine values for the two vectors can vary between the critical values of 0 and 1.  

The cosine index indicates the expected mutual trade flow intensity from the exporting country i and the importing country j. This criterion reveals nothing about the actual trade potential. In other words, two countries may be completely similar in trade but it is not clear if any trade has actually taken place between them. Put it differently, the comparison of similarities does not explain the reason for its occurrence but rather indicates a behavior that may happen between two countries.

The General Model: In this method, a table is drawn up presenting the export items of country I and the import items of country T in the first column based on one of the international classification codes. The second column shows the export volume of each item from country I and the third column the import volume of the same commodity by country T. In the fourth column, the lowest value for the numbers in each row is presented between the second and third columns representing the highest trade potential between the two countries for each commodity. The sum of the numbers in the fourth column indicates the highest potential of country I to export commodities to country T. It is not possible, nor logical, to allocate the entire export potential to a single country. Therefore, based on this methodology, about 30% of the highest potential of country I for exporting commodities to country T can be considered its ‘export potential’ (Abedin, Rahmani & Mahammadsaeid, 2016).

An important issue in trade negotiations for policy makers is a list of commodities with high export potential to the country that is the party in the negotiations. However, the previously mentioned models can only present the total bilateral trade potential and do not provide information on the export potentials of the various commodities. In the General Model, we can present a list of commodities with high potential for being exported from country I to country T together with the level of this potential for each commodity.

The highest potential of country I for exporting commodity K to country T is obtained from the following equation (Tash, Jajri & Tash, 2012):

The total potential that country I has for exporting commodities to country T can be determined by adding up the figures related to the potential for exporting the commodities with the various commodity codes (K=1, 2, 3... n):

A =  =

A similar process in the reverse direction must be carried out to calculate the potential of country I for imports from country T.

Methodology

In this section, the General Model was used to estimate the potential for exporting Iranian commodities to Turkey. The data for 2002-2009 period were used since this time interval encompasses normal and crisis-free years. This period was also suitable as the related trade data were available from various sources. It is not possible to obtain information on Iranian trade during the recent years for political and economic reasons. As for stability in various markets, especially in the foreign exchange market, the period 2002-2009 period was very appropriate. Table 1 shows Iran’s potential in exporting goods to Turkey in this period.

Table 1. Iran’s Potential for Exporting Commodities to Turkey (in $ Million)

The total value of the potential Iranian exports to Turkey (A) in commodity groups with six-digit HS codes was obtained from the following equation (Taghavi et al., 2012):

 = Min ( )

Here, I, T, and W represent Iran Turkey, and the world, respectively,  is the potential for Iranian exports to Turkey for the commodity group K,   is Iranian exports of the commodity group K to the world,  is Turkish imports of the commodity group K form the world.

A = PO =

Using this index for the study years, it was possible to calculate the actual and potential volume of Iranian exports to Turkey. Based on the table, the values of potential Iranian exports to Turkey for 2002 and 2009 were $1,517 million and $6,634 million, respectively. The highest Iranian potential for exports to Turkey during the study period was that of 2008 with $9,338 million.

Based on the HS system for classifying goods, the number of commodities exported from Iran and imported by Turkey was shown by using the B index. This index indicated the diversity of the commodities Iran exported to Turkey. In the best-case scenario, Iran could export 3,329 kinds of commodities to Turkey (Ω).

The total value of Turkish imports from the world (for commodities that Iran had the potential to export to Turkey) was calculated using Equation C:

C =

Based on index C, the total value of the 2,414 types of commodities that Turkey imported from the world in 2002 (and Iran had the potential to export them to Turkey in 2002) was $32,557 million.

Equation D was employed to calculate the total value of Iranian exports to the world (for commodities that Iran had the potential to export to Turkey):

D =  =

Based on Equation D, the total value of the 2,414 commodities that Iran exported to the world in 2002 (and Iran had the potential to export them to Turkey in 2002) was $3,074 million. This index increased to $18,059 million in 2008.

The value of Iranian exports to Turkey was obtained from Equation F. It was $399 million in 2009 and reached its highest level ($669 million) in 2008.

F =  =

Index M was used to calculate the value of unrealized export potential. In other words, this index indicates to what extent Iran did not utilize its potential for exports to Turkey. The value of this index in 2008 was $8,670 million.

M = POTNE = A-F

Iran’s share of exports to Turkey from its potential exports to this country was obtained from Equation N. Based on this index, in the best-case scenario, Iran utilized 8.91% of its potential to export goods to Turkey.

N = SPO =

Index K was employed to calculate the share of total Iranian exports to the world that Turkey imported. In 2009, Turkey’s share of the total Iranian exports to the world was 3.4 percent.

K =

The potential share that the total Iranian exports had of the Turkish market was calculated by using index L. The value of this index in 2009 was about 53.6%. This means that, in the best-case scenario Turkey’s imports from Iran could account for 53.6% of the total Iranian exports.

L = SXPOTNE =

Index P was employed to calculate Iran’s share of the Turkish market (or Iran’s share of the total Turkish imports). The value of this index for 2009 was about 0.37%.

P = S =

The highest potential share Iran had of the total Turkish imports was calculated using Equation Q. In 2009, this share was 6.08%. However, Iran’s actual share of the total Turkish imports was 0.37%.

Q= SMPO =

The average Turkish import tariff is presented in column R. The average Turkish tariff on the traded commodity groups in 2009 was 8.23%, which was high compared to the average Turkish import tariff.

Table 1 indicates the situation of potential Iranian exports to Turkey. Based on the average for the 8-year study period, Iran had the potential to export 3,024 types of commodities to Turkey. On average, Iran had the potential to export commodities worth $5,132 million dollars to Turkey, but only 5.9% (or $324.5 million) of this potential was realized. If Iran used its total potential for exporting goods to Turkey, its share of the Turkish market would rise from 0.32 to 5.37%.

Table 2. Iran’s Potential for Exporting Commodities to Turkey based on Value Index (in $ Million)

Table 3. Iran’s Export Potential to Turkey based on 21 Commodity Groups with HS Codes (in $ Million)