The Impact of Iran-Turkey Trade Agreement on Legal and Illegal Trade

The Iran-Turkey trade agreement in 2015 has widely been under discussion. However, its statistical outcomes are less investigated. This study aims to evaluate the impact of this trade policy on legal and illegal trade between the two countries. We use product-level trade data, from 2011 to 2017. We incorporate the difference-in-difference methodology and control for product-country fixed effects at 6 digits of HS codes. Results indicate that the policy has raised the market shares of preferential Turkish products in Iran. The rise is 10% compared to non-preferential Turkish goods and 35% compared to the same goods exported from other countries. Furthermore, we do not find any robust evidence on the reduction of smuggling, in contrast to what was expected from this agreement.  Finally, we use a logit model to analyze factors which may explain the policymakers’ choice of preferred goods. Results indicate that the odds ratio of being chosen as a preferred product increases, respectively, by 170% and 200 %, if the size of legal and illegal trade increases by 1%. Trade volume is considered as a proxy for terms of trade.  JEL Classification: F1, F13, F14, F15, F53