The Impact of WTO Accession on Economic Relations between China and Taiwan

1

• The Impact of WTO Accession on Economic Relations
  between China and Taiwan
• Zhi Wang

2
Briefing Outline

• Growing economic interdependence between Taiwan
  and China
• The numerical model and simulation design
• Simulation results
• Impact on patterns of world trade
• Redirection of trade flows and impact on trade
  dependence between China, Taiwan and the United
  States
• Impact on economic growth and social welfare
• Conclusions and implications for cross strait
  economic relations

3
The Rapid Emergence of China as a World Trade
Power

• For more than 30 years Japan has been the
  economic center of Asia. But since the late 80's
  the Chinese Economic Area (CEA), including China,
  Taiwan, and Hong Kong, is emerging as a new
  center.
• In 1990, China's total trade was 115 billion
  dollars, in 2000, it reached 475 billion, doubled
  more than twice in one decade, much faster than
  world trade growth as a whole, which only
  increase 83 percent during the same period.
• Total trade of CEA reached 810 billion in
  1999(after minus 137 billion intra-CEA trade),
  exceeding the total trade of Japan(731 Billion).
  It is also the second largest FDI recipient in
  the world after United States, accounting nearly
  30 percent of world capital inflow.

4
Growth of China Trade vs. World Trade, 1977-2001
4000
3500
3000
2500
1977100
2000
1500
1000
500
0
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
China Merchandise Trade
World Total Trade
5
Chinas Exports and Imports, 1995-2004, Billion
US dollars
6
Share of Processing Trade in Chinas Total Trade,
1995-2004
7
Chinas Exports, 1995-2004, Billion US dollars
8
Chinas Imports, 1995-2004, Billion US dollars
9

• Growing Economic Interdependence
• between China and Taiwan

• Indirect trade between China and Taiwan increased
  from less than 1 billion in 1987 to more than
  40 Billion in 2002
• The dependence of Taiwan's exports on China and
  Hong Kong increased from less than 8 percent in
  1987 to 30 percent in 2002,China surpassed the
  U.S. as Taiwans largest export market
• Taiwan's direct investment in China reached 25.5
  billion by the end of 2002 and accounts for
  nearly half (48.3) of Taiwan's total overseas
  investment
• Trade between China and Taiwan, even indirectly
  through Hong Kong, is still highly regulated. As
  of March 2002, Taiwan still bans 23 percent (2335
  item) of the 10,238 10-digit HS commodities from
  China investment in China also highly regulated

10
The Questions

• Why the observed cross-strait economic
  integration is becoming stronger and stronger
  overtime regardless of the growing political
  tensions ?
• Is it possible that Taiwan could isolate itself
  from this integration trend?
• How will the cross straits trade pattern and
  economic interdependence evolve in next decades?

11
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
• Uses version 5 GTAP database

12
Inter-period Linkage and Recursive Dynamics
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Major Applications of China-WTO Model
1998-2000 Joint research project "The Global and
Domestic Impact of China Joining the WTO" with
Development Research Center at the State Council,
PRC, supported by the Ford Foundation 1999
USITC Publication 3229 "Assessment of Economic
Effects on the United States of China's Accession
to the WTO Assessment of China and Taiwan enter
the WTO on world labor intensive product market
(The World Economy, 1999), on the economic and
trade relation across Taiwan Strait (The
Economics of Transition, 2001), on the pattern of
world trade (Journal of Policy Modeling, 2003)
Estimate the impact of economic integration in
Greater China Economic Area (Pacific Economic
Review, 2000, Journal of Comparative Economics,
2002) Analysis of Asian currency devaluation
(Institute of International Economics, 1998),
APEC trade liberalization (The World Economy,
2002).
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Baseline calibration
There are two TFP parameters in the model one
economy-wide and one sector specific. The
economy-wide TFP is solved endogenously by
setting real GDP growth rate in each region and
major macro variables exogenously. This
economy-wide TFP parameter calculated from
baseline is fixed when alternative scenarios are
simulated, in such case the real GDP growth rate
and the sector specific TFP parameter that links
sector productivity and imports are solve
endogenously.
15

• Simulation Design

• Scenario I baseline from 1998-2011 (the Uruguay
  Round Case). It generates a reference growth
  path of the world economy with the implementation
  of the Uruguay Round trade liberalization, but
  without China and Taiwan's participation. This is
  a calibrated "benchmark" and serves as a basis of
  comparison
• Scenario II China and Taiwan implement their
  WTO market access commitments (the Accession
  Case). All other assumptions are the same as in
  Scenario I
• Scenario III A free trade area is created among
  China, Taiwan and Hong Kong after China and
  Taiwan's WTO Entry (Greater China FTA case)

16
The Share of China's Normal and Processing Trade
by Sector, in percent, 1998
17
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). Two percent
growth of the quota each year in the baseline and
five 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
18
Assumed Tariff Reductions in China and Taiwans
Final WTO Offer
19
Impact of WTO Entry on China and Taiwan's Net
Trade, 2001 - 2011
20
Changes in Net Labor Intensive Exports Between a
WTO with and without China and Taiwan Billion
of 1997 U.S. dollars, 2002-2011
21
Changes in Net Agricultural Exports Between a WTO
with and without China and Taiwan Billion of
1997 U.S. dollars, 2002-2011
22
Changes in Net Capital Intensive Exports Between
a WTO with and without China and TaiwanBillion
of 1997 U.S. dollars, 2002-2011
23
China's Processing Exports as Percent of Total
Exports by Sector, 1998
24
WTO Entry Increase Both China and Taiwan's
Manufactured Export Share in the World Market,
2001-2011
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• Factor endowments
• International segmentation of commodity
  production, an important aspect of economic
  globalization
• More than 300 billion of FDI flows to China in
  recent years (218.6 billion in last five year)
• Competition in the global market
• Production relocation in Asia

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Countries with Abundant Labor Tend to Export
Labor Intensive but Import Capital Intensive
Manufactures, 1997
27
Countries with Abundant Land Tend to Export
Agricultural Products, 1997
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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
29
Average hourly compensation costs of
manufacturing workers, selected economies 2002
30
Redirection of Trade Flows

• Increase in NICs exports of intermediate and
  capital goods to China
• Increase in Chinas exports of manufactured
  finished goods to developed countries and low-end
  durable manufactured products to developing
  countries
• Decline of NICs exports of labor-intensive
  finished goods to developed countries
• Increase of NICs high technology products
  imports from advanced industrial countriesChina
  and Taiwans WTO entry will further accelerate
  this process.

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Impact of WTO Entry on Taiwan's and China's
Exports, 2002-2011 accumulated
12.2
176.3
Taiwan increases
intermediates
100.0
and capital goods
export to China, but
41.0
decreases labor-
China exports more
intensive finished
30.6
finished manufacturing
products to OECD
products to developed
countries
17.7
countries and to rest of the
world. There is no trade
23.9
diversion in China's
manufacturing exports
26.3
24.6
Textile
Apparel
Leather shoes
Other Light Manuf
Wood products
Intermediates
Motor vehicle
Other Trans
Electronics
Machinery
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Impact of WTO Entry on Taiwan's and China's
Imports, 2002-2011 accumulated
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The Redirection of Trade Flows between China,
Taiwan and the United States, 2001-2011
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Impact of a Greater China FTAChina Divert its
Imports from Other Countries to Taiwan, 2002-2011
accumulated
37
Impact of WTO Accession Taiwan Imports More
Agricultural, Intermediate and Capital Intensive
Goods from Developed Countries, 2002-2011
accumulated
38
WTO Entry Increases Taiwan's Export Dependence on
China, But Decreases its Dependence on US.
Market, Especially in Manufactured Products.
2001-2011
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Sources of U.S. Imports of PC Hardware
Components,
1989-2001
80.00
70.00
60.00
50.00
percent ()
40.00
30.00
20.00
10.00
0.00
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
China
Japan, Singapore Taiwan
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China is the Biggest Gainer in WTO Accession
Taiwan Gains More from Further Integration with
China United States and Rest of the World Also
Gain from Liberalization of Chinese Economies
41
Conclusions

• China gains the most from its WTO entry. It
  emerges as the worlds largest manufacturing
  center during its integration into the world
  economy. Taiwan becomes an upstream supplier for
  China's massive manufacturing production.
• The economic dependence of Taiwan on China
  further increases. China replaces the US as
  number one destination of Taiwan's exports. A
  greater China FTA further reduces the cost of
  vertical integration among manufacturing
  industries across the Strait and enhances the
  efficiency of production factor allocation within
  the three Chinese economies, thus enabling them
  to become a stronger competitor in manufactured
  goods, especially labor-intensive products,
  electronics and low-end capital-intensive
  products in the world market.

42
Conclusion -- continued

• Taiwan gains more economically through further
  integration with China via a Greater China FTA
  after its WTO entry.
• Developed countries and Asian newly
  industrialized economies, as well as resource
  abundant developing countries, also benefit from
  further liberalization the 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.

43
Policy Implications

• Economic integration across the Taiwan Strait
  began decades ago is a fact of life determined
  by the invisible hand and rooted in China's and
  Taiwan's international comparative advantage. It
  is a continuation of production relocation based
  on changing comparative advantages in East Asia
  region and also an organic part of economic
  globalization (segmentation of commodity
  production).
• This economic integration process may be slowed
  down or accelerated by government intervention.
  But its future course is impossible to change if
  the world economy is continuously dominated by
  market forces in the new century.