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WTO Accession, 'Greater China' Free Trade Area and Economic Relations across the Taiwan Straits
Zhi WangEconomic Research Service, U.S. Department of Agriculture
• Growing Economic Interdependence between Taiwan and China
• The numerical model and simulation design• Simulation Results• Impact on Patterns of World Trade • Impact on Trade Flows between China, Taiwan and Their Major
Trade partners• Impact on economic growth and social welfare
• Conclusions and Implications for Cross Strait Economic Relations
Briefing Outline
Growing Economic Interdependence between China and Taiwan
• Indirect trade between China and Taiwan increased from less than $1 billion in 1987 to more than $31 Billion in 2001
• The dependence of Taiwan's exports on China and Hong Kong's market from less than 8 percent in 1987 to 28 percent in 2000
• The actually used direct investment from Taiwan has reached $27.5 billion by the end of June 2001 and account for nearly 40 percent of Taiwan's total overseas investment
• Besides political deadlock, trade between China and Taiwan, evenindirectly from Hong Kong, is still highly regulated today. As the Mach of 2002, there still 23 percent (2335 item) of the 10,238 10-digit HS commodities not permit to be imported from China to Taiwan.
Method of Analysis17-region, 25-sector global CGE model
• Includes China and Taiwan's major trading partners and covers major production and trade activities in the world economy
• Recursive dynamic, solves from 1997 to 2011 annually
• Linked with a macro econometric model to obtain rate of economic growth, balance of trade, gross investment and government spending in each region, then generates the corresponding pattern of sectoral output and trade across the world economy
• Import embodied technology transfer, sector specific TFP
• Version 5 GTAP database is the primary data source
Simulation Design
• A baseline from 1998-2011 is established first as Scenario I (the Uruguay Round Case). It generates a reference growth path of the world economy with the implementation of the Uruguay Round tradeliberalization, but without China and Taiwan's participation. It is a calibrated "benchmark" and serve as a basis of comparison for counterfactual simulation
• The second scenario includes China and Taiwan in the liberalization process (the Accession Case), all other assumptions are keep thesame with Scenario I
• The third scenario assume a free trade area is created among China, Taiwan and Hong Kong after China and Taiwan's WTO Entry (Greater China FTA case).
• The differences between the Accession and FTA Case with the baseline equal our estimates of the impact of China and Taiwan joining the WTO and the impact of a greater China FTA respectively
Simulation Design: China and Taiwan's WTO Offer
• Tariff reduction in both agricultural and manufacturing products (China and Taiwan);
• Elimination of non-tariff barriers in five years (China and Taiwan);
• Agricultural trade liberalization (China and Taiwan). 2 percent growth of the quota each year in the baseline and 5 percent growth each year from 2001-2004 in the accession case and elimination of such import quotas at 2005;
• Opening up of major service sectors (China); • Phase out of MFA quota on textile and clothing.
The Share of China's Normal and ProcessingTrade by Sector, 1998
percent
Hong KongJapanKorea
TaiwanSingapore
CanadaUSA
MexicoW. EuropeAUS/NZL
ASEANS. Asia
CaribbeanOther MFA
South AfricaROW
0 20 40 60 80 100
Imports for processing tradeNormal imports
Grain & oilseedsPlant base fiber
Other cropsLivestock
Meat & dairyProcessed food
Beverage & TobaccoForestry & fishery
EnergyMineralTextile
ClothingLeather & shoe
Other light Paper & woodIntermediatesMotor vehicle
Other transElectronic equipment
Other Machinery0 20 40 60 80 100
Imports for processing tradeNormal imports
Assumed Tariff Reduction inChina and Taiwan
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110
2
4
6
8
10
12
14
16
Perc
ent o
f c.i.
f. va
lue
China-Nominal China-Actual Taiwan
Impact of WTO Entry on China's and Taiwan's Net Trade
2001 - 2011
China
2001 2003 2005 2007 2009 2011
-60
-40
-20
0
20
40
60
80
100
120
Bill
ions
199
7 U
S D
olla
rs
Baseline-Capital Intensive Baseline-Labor Intensive Baseline-Agri.&Food
Accession-Capital Intensive Accession-Labor Intensive Accession-Agri.&Food
Taiwan
2001 2003 2005 2007 2009 2011-10
0
10
20
30
40
Bill
ions
199
7 U
S D
olla
rs
Baseline-Capital Intensive Baseline-Labor Intensive Baseline-Agri.&Food
Accession-Capital Intensive Accession-Labor Intensive Accession-Agri.&Food
Changes in Net Labor Intensive Exports between a WTO with and without China and Taiwan
Billion of 1997 U.S. dollars, 2002-2011
ChinaTaiwan
United StatesWestern Europe
JapanOther OECD
ANICsASEAN
South AsiaMexico
Latin America MFAMideast & Africa MFA
Rest of the world
-50 -25 0 25 50 75 100 125 150 175
Textiles Clothing Leather & shoes Other light mann.
Changes in Net Agricultural Exports Between a WTO with and without China and Taiwan
Billion of 1997 U.S. dollars, 2002-2011
ChinaTaiwan
United StatesCanada
Australia & New ZealWestern Europe
Japan & NICsASEAN
South AsiaMexico & other MFA
ROW
-70 -60 -50 -40 -30 -20 -10 0 10 20 30
Grains Oilseeds Plant fiber Other cropsLivestock Dairy & meats Processed food Beverage & Tobacco
Changes in Net Capital Intensive Exports between a WTO with and without China and Taiwan
Billion of 1997 U.S. dollars, 2002-2011
ChinaTaiwan
United StatesWestern Europe
JapanOther OECD
ANICsASEAN
South AsiaMexico
Latin America MFARest of the world
-60 -40 -20 0 20 40 60
Intermediates Motor vehicle Other Trans Electronics Machinery
China's Processing Exports as Percent of Total Exports by Sector
1998
Grain & oilseedsPlant base fiber
Other cropsLivestock
Meat & dairyProcessed food
Beverage & TobaccoForestry & fishery
EnergyMineralTextile
ClothingLeather & shoe
Other light Paper & woodIntermediatesMotor vehicle
Other transElectronic equipment
Other Machinery
0 20 40 60 80 100
10
46
1632
109
816
4549
7172
5043
7877
9371
WTO Entry Increase Both China and Taiwan's Manufactured Export Share in the World Market
2001-2011China
2001 2003 2005 2007 2009 20110
5
10
15
20
25
30
Perc
ent o
f Wor
ld E
xpor
ts
Capital-baseline Labor-baseline Total-baseline
Capital-accession Labor-accession Total-accession
Taiwan
2001 2003 2005 2007 2009 20112
3
4
5
Baseline Accession Greater China FTA
The Driving Force for China Emerging as a World Manufacturing Center
• Factor endowment• International segmentation of commodity
production processes, which is an important aspect of economic globalization.
• The competition in the global market• Production relocation in Asia• More than $300 billion of FDI flows to China in
recent years
Countries with Abundant Labor Tend to Export Labor Intensive but Import Capital Intensive Manufactures,
1997Capital Intensity
Japan
W. Europe
USA
AUS/NZL
Canada
Korea
Taiwan
Other MFA
Mexico
Caribbean
ASEAN
China
S. Asia
0 40 80 120 160 200Thousand US Dollars per Worker
Net Trade of Labor Intensive Manufactures
-80 -40 0 40 80Billion 1997 US Dollars
TextileApparelLeatherOther
Net Trade of Capital Intensive Manufactures
-50 0 50 100 150 200Billion 1997 US Dollars
IntermediatesMotorOther TansElectronicsOther machinery
Countries with Abundant Land Tend to Export Agricultural Products, 1997
Net Agricultural Trade
-40 -30 -20 -10 0 10 20 30 Billion of 1997 Dollars
Land-intensive Other Dairy & Meat Processed FoodLand Intensity
AUS/NZLCanada
USAOther MFA
MexicoCaribbeanW. Europe
S. AsiaASEAN
ChinaTaiwan
KoreaJapan
Hong KongSingapore
0 1 2 3 4 5 6Hectares per Worker
Three Aspects of China's Comparative Advantage in Engaging Labor-intensive Productions
• China has a much lower labor cost in terms of percent of wage cost in per unit output, not only relative to major developed countries, but also relative to most developing countries
• The size of the labor force in China is very large• This huge labor force is distributed over vast
geographical regions that differ greatly in stages of economic development
Impact of WTO Entry: Increase Taiwan's Exports of Intermediates and Capital Goods to China, Decrease
of Labor Intensive Finished Products to The U.S.2002-2011 accumulated
China
United States
Western Europe
Other OECD
ANIC
ASEAN & S.Asia
ROW
0 20 40 60
64.1
1.0
0.6
0.6
1.6
0.3
0.3
-6.5
-3.4
-1.0
-0.5
-1.8
-0.4
Textile Apparel Leather & shoes Other Light Manuf Wood productsIntermediates Motor vehicle Other Trans Electronics Machinery
Trade Diversion Effect of a Greater China FTA:Taiwan Further Divert its Exports
from Other Countries to China 2002-2011 accumulated
China
United States
Western Europe
Other OECD
ANIC
ASEAN & S.Asia
ROW
0 20 40 60
58.2
0.3
-8.1
-4.7
-3.2
-3.7
-1.6
-0.4
Textile Apparel Leather & shoes Other Light Manuf Wood productsIntermediates Motor vehicle Other Trans Electronics Machinery
Impact of Trade liberalization in China's Exports:Increase China's Labor-intensive Finished products
to Developed Countries, Intermediate and Capital Goods to Developing Countries
2002-2011 accumulated'Greater China' FTA
0 40 80 120 160 200
31.6
175.1
99.0
40.5
17.9
29.4
47.3
23.6
25.7
WTO Accession
Taiwan
United States
Western Europe
Japan
Other OECD
ANICs
ASEAN & S.Asia
Mexico & Other MFA
ROW
0 40 80 120 160 200
12.2
176.3
100.0
41.0
30.6
17.7
23.9
26.3
24.6
Textile Apparel Leather & shoes Other Light Manuf Wood prouctsIntermediates Motor vehicle Other Trans Electronics Machinery
The Redirection of Trade Flows between China, Taiwan and the United States
2001-2011Taiwan's Exports dependence on China and US
2001 2003 2005 2007 2009 2011
20
30
Perc
ent o
f Tai
wan
's T
otal
Exp
orts
To China-baseline To China - WTO To China - FTA
To US - baseline To US - WTO To US - FTA
China Export Dependence on US
2001 2003 2005 2007 2009 201120
30
40
Perc
ent o
f Chi
na's
Tot
al E
xpor
ts
Total-baseline Total - WTO Total - FTA
labor intensive - baseline Labor intensive - WTO Labot intensive - FTA
WTO Entry Increase Taiwan's Export Dependence on China, But Decrease its Dependence on US. Market, Especially in Manufactured Products
2001-2011Taiwan's Exports to China
2001 2003 2005 2007 2009 20110
10
20
30
40
50
60
Perc
ent o
f Tai
wan
's T
otal
Exp
orts
Capital-baseline Labor-baseline Ag & Food-baseline Capital-accession Labor-accession
Ag & food - accession Capital-FTA Labor-FTA Ag & food-FFTA
Taiwan's Exports to The United States
2001 2003 2005 2007 2009 2011
10
20
30
Perc
ent o
f Tai
wan
's T
otal
Exp
orts
Capital-baseline Labor-baseline Ag & Food-baseline Capital-accession Labor-accession
Ag & food - accession Capital-FTA Labor-FTA Ag & food-FFTA
Impact of WTO Entry: Increase of China's Imports of Intermediates and Capital Goods from Asian and
Industrial Countries, and Agricultural Products from Land Abundant Countries
2002-2011 accumulated Taiwan
United States
Western Europe
Japan
Other OECD
ANICs
AS5 & S.Asia
Mexico & Other MFA
ROW
0 20 40 60 80 100
72.2
47.2
53.0
82.4
20.7
105.3
21.9
15.1
14.1
-0.2
-0.1
-0.2
-0.2
Land-intensive Other agriculture Processed food Textile Resource basedIntermediates Motor vehicle Other Trans Electronics Machinery
Impact of WTO Accession: Taiwan imports more agricultural, intermediate and capital intensive goods
from developed countries2002-2011 accumulated
WTO Accession
China
USA
W. Eroupe
Japan
Rest of OECD
Asia NICs
ASIA MFA
Other MFA
ROW
0 10 20
14.5
6.7
17.8
7.6
3.1
5.0
5.2
1.7
1.5
-0.9
-0.1
-0.4
-0.1
Primary Agriculture Processed Agriculture Resource based Labor-intensive IntermediatesMotor vehicle Other Trans Electronics Machinery Services
Greater China FTA
0 10 20
19.5
2.3
2.9
2.6
0.6
2.0
0.8
0.6
0.7
-0.5
-0.8
-0.6
-0
-0.4
-0.7
-0.1
-0.1
Redirection of Trade Flows
• The further increase in NICs’ exports of intermediate and capital goods to China
• The further increase in China’s exports of manufactured finished goods to developed countries and low-end durable manufactured products to developing countries
• The further decline of NICs’ exports of labor-intensive finished goods to developed countries
• The further increase of NICs’ high technology products imports from advanced industrial countries are all the results of such an adjustment process.
• China and Taiwan’s WTO entry will further accelerate this process.
Impact of a 'Greater China' FTA:China Divert its Imports from Other Countries to Taiwan
2002-2011 accumulated
Taiwan
United States
Western Europe
Japan
Other OECD
ANICs
AS5 & S.Asia
Mexico & Other MFA
ROW
-20 -10 0 10 20 30 40
30.6
0.8
0.7
0.3
0.5
0.5
0.4
0.9
0.7
-1.1
-2.0
-3.5
-0.2
-12.4
-1.0
-0.1
-0.6
Land-intensive Other agriculture Processed food Textile Resource basedIntermediates Motor vehicle Other Trans Electronics Machinery
China is the Biggest Gainer in its WTO Accession Taiwan Gains More from Further Integration with China
United States and Rest of the World Also Gain from Liberalization in Chinese Economies
Growth Rate of Real GDP
United StatesWestern Europe
JapanAustralia & New Zeal
CanadaMexicoKorea
SingaporeHong Kong
TaiwanChina
ASEAN South Asia
Latin America MFAMideast & Africa MFA
Low income AfricaRest of the World
-1 0 1 2 3
Percentage point difference from baseline
Real Purchasing Power (EV)
-10 0 10 20 30 40 50 60
Billions of 1997 US Dollars WTO Accession
Chinese FTA
Impact of China and Taiwan's WTO Entry:Changes in International Terms of Trade
United StatesWestern Europe
JapanAustralia & New Zeal
CanadaMexicoKorea
SingaporeHong Kong
TaiwanChina
ASEAN South Asia
Latin America MFAMideast & Africa MFA
Low income AfricaRest of the World
-6 -5 -4 -3 -2 -1 0 1 2 3
Percent change from baseline WTO Accession
Chinese FTA
• The simulation results shown that China will gains the most from its WTO entry. It will emerge as the world largest manufacturing center during its integration into the world economy. Taiwan will become an upstream suppliers for China's massive manufacturing productions.
• The economic dependence of Taiwan on China will further increase and enable China to replace the US as the number one of its export market. A greater China FTA will further reduce the cost of vertical integration among manufacturing industries across the Strait and enhance the efficiency of production factor allocation within the three Chinese economies, thus enable them become a stronger competitor of manufactured goods, especially for labor-intensive products, electronics and low-end capital-intensive products in the world market.
Conclusion
• Taiwan will gain more economically by further integrate its economy with China via greater China FTA or other means after its WTO entry.
• Rest of the world, especially developed countries and Asian newly industrialized economies, as well as resource abundant developing countries would also benefit from further liberalization of Chinese economies. Only developing countries with an endowment and export structure similar to China's, such as South Asia and ASEAN countries may experience keener competition in labor-intensive exports and lower prices for their products.
Conclusion -- continued
Policy Implications
• Economic interdependence between China and Taiwan will further deepen and economic integration of the two economies will accelerate after both of them enter the WTO. This is a continued trend that started in the mid-80s driven by market force and is a part of the production relocation process based on changing comparative advantages in East Asia region. It is also an organic component of economic globalization.
• Therefore, economic integration across the Taiwan Strait is not a policy preference but a fact of life determined by the 'invisible hand' and rooted from the position of China and Taiwan in the dynamic chain of international comparative advantage. No matter what efforts are made by governments on both sides of the Strait, this economic integration process may only be slowed down or accelerated. The future direction of the course is impossible to change by any political will.
• Economic integration is the best strategy to pursue a peaceful and stable Cross Strait relations and provides a win-win prospect for China, Taiwan and the United States.