The Implications of China-Taiwan Economic Liberalization Summary of Results from Rosen-Wang PIIE Study Daniel Rosen and Zhi Wang Beyond ECFA Conference INPR Taipei, October 29, 2010 10 East 40 th Street, Suite 3601, New York, NY 10016 Tel: +1.212.532.1158 Fax: +1.212.532.1162 Web: www.rhgroup.net 1
Study Outline Chapter 1 - Current China-Taiwan economic relations Chapter 2 - Scenario definition and bilateral effects of liberalization Chapter 3 - Effects beyond Taiwan and China; in the region, and in light of expanded Asian integration Chapter 4 - Considerations for the United States Chapter 5 - Conclusions 2
Direction of Regional Integration in Asia-Pacific Source: After Hufbauer and Scott (2007), WTO RTA database 3
Assessing the Economic Impact A DCGE Approach 20 Regions - Includes China, Taiwan, Hong Kong, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Thailand, United States of America, Vietnam, Australia & New Zealand, South Asia, EU12, EU15, and Others 32 Sectors - Crops (4), Animals & products (2), Processed Food (3), Forest & fishery products (1), Minerals (2), Manufacturing (13), Services (7) Regional FTA Assumptions - China (4), Japan (6), Korea (3), ASEAN-Australia Baseline Calibration - GTAP 7, EIU, World Bank, ILO Model Design - Dynamic Recursive, Timeline 2005-2020, Six factors of production - Market clearing in commodity and factor markets, endogenous TFP growth - Staggered opening of trade, agriculture protected Shortcomings - Does not account for service sector and investment liberalization - Limited estimate of dynamic effects 4
Adding ECFA to the mix: Model Assumptions Timeline - Early harvest begins in 2011 - Full trade liberalization between 2013 and 2017 - Impacts assessed in 2020 Reduction in barriers to trade - Gradual liberalization over 5 years; 70% reduction in the first year - Service sector and investment liberalization excluded (model limitation) - No trade in currently banned products (model limitation) - Rice, grains, livestock, fruits, vegetables, and non-grain crops excluded from Taiwan s schedule - Rice, grains and livestock excluded from China s schedule (parts of fruits, vegetables and non-grain crops were included in early harvest schedule of China) Early Harvest - Partial liberalization of aggregate sectors to reflect HS 6-digit products in early harvest program - Liberalization spread over two years according to specified schedule based on initial tariffs Source: Author s assumptions 5
Possible Scenarios Regional Agreements ASEAN+1 ASEAN+3 EAFTA China-Taiwan Ac ctions Taiwan status quo Taiwan-PRC "ECFA" (WTO+ liberalization ) Taiwan-China integration ECFA, Taiwan joins ASEAN+1 ECFA, Taiwan joins ASEAN+3 BASELINE Source: Author s assumption 6
Simulation Design Build signed regional FTA into baseline Partner countries Starting year Korea, Singapore 2006 Korea, US 2011 Korea, ASEAN 2007 Japan, Singapore 2007 Japan, Malaysia 2006 Japan, Thailand 2007 Japan, Indonesia 2008 Japan, Philippines 2008 Japan, ASEAN 2008 China, Hong Kong 2004 China, Singapore 2008 China, ASEAN 2005 China, Australia 2005 Australia, ASEAN 2010 Six Policy Scenarios China-Taiwan ECFA with an early harvest program in 2011, and start to extended to all products except agriculture in 2013. Taiwan joins ASEAN+1 in 2013; ASEAN+3 happens in 2013 with no policy response from Taiwan; China-Taiwan ECFA as in 1 above while the region moves to form ASEAN+3 in 2013; Taiwan joins ASEAN+1 in 2013 while the region moves to form ASEAN+3 in 2013; Taiwan joins new formed ASEAN+3 in 2013 7
Change in Taiwanese GDP Over Baseline 2004 $billion Source: Model estimates 8
Change in Chinese Absorption over Baseline 2004 $billion Source: Model estimates 9
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Change in Taiwan's Industrial Output of select Sectors (2020) % ECFA No ECFA, ASEAN+3 ECFA, ASEAN+3 Chemical rubber and plastic products 29.4-1.4 27.5 Textile 27.9-3.6 23.5 Petroleum coal and other mineral products 13.8-1.1 12.5 Motor vehicles and parts 10.9-2.9 4.7 Machinery and equipments 6.5-2.1 4.3 Leather and sporting goods 5.0 0.7 6.1 Other processed food products -1.2-0.1-1.1 Business services -1.5 0.3-1.3 Other light manufactures -6.3 1.9-4.6 Transport equipments -7.4 1.8-5.6 Other grains -8.6 0.4-7.9 Electronic equipments -11.1-0.4-11.2 Source: Model estimates; Note: Sorted by ECFA only column 11
For Taiwan, ECFA is the key % change in 2020 real GDP Source: Model estimates 12
For China, not so much % change in 2020 real GDP Source: Model estimates 13
Modest Impact on US and other regional economies % change in 2020 real GDP (ECFA only scenario) Source: Model estimates 14
Conclusions Different emphases for Taiwan, China, the US Taiwan Taiwan s circumstances are dynamic, region is evolving; standstill is not an option ECFA makes possible greatest external gains from opening, overshadows RTAs/FTAs Just a level playing field for achieving that however, not a preferential arrangement (beware industrial policy s allure) TW gains arise from structural adjustment, not net-exports: avoid no s China GDP gains modest, by real economic benefits possible: don t just pay lip-service Adding to US awakening on Asia trade: openness of Asia s regionalism important United States A prosperous Taiwan is the US objective, and that road goes through China Must demonstrate momentum for US-inclusive regimes, from bilateral to RTA If want to counterbalance the statist/industrial policy allure, must have an alternative 15