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International Economics Thesis
The Impact of ECFA on Asian Countries:
Assume China-Korea FTA and Japan-Taiwan FTA
Be Signed after ECFA
Jayson Chen, Emma Lu, Peter Huang, Vanessa Chang, Peggy Sung
July, 2012
1.0 Introduction
During the past ten years, the trade liberalization based on bilateral or
multilateral sections have already become an important issue of international
economics. Since Taiwan suffers marginalization from many important multinational
negotiations in East Asia, Taiwan needs to sign FTAs with other Asian trade partners
in order not to be excluded from the world. The Chinese government also mentioned
that they would take the establishment of free trade zone as an important policy in
2011. Among all the free trade agreements, the one which causes the hugest impact on
Taiwan should be ECFA (Economic Cooperation Frame-work Agreement). The ECFA
has already worked since August, 2010.
However, there are still some disadvantages that Taiwanese are worrying about,
such as relying on the mainland China too much and emptying the industries in
Taiwan. So we would like to find out if ECFA is a FTA-plus type arrangement with
the potential to radically alter the nature of cross-Strait economic relations and open
up new possibilities for Taiwan to break out of its geoeconomic encirclement in East
Asia.1 Also, we are interested in figuring out what will Korea and Japan do after
Taiwan signed ECFA with China. According to this, besides ECFA, we set two more
simulations: Korea signs FTA with China and Japan signs FTA with Taiwan.
To realize the advantages and inferiority, we are going to analyze the information
we’ve found by using some statistical and economic models. Moreover, we will
conclude our research with following subjects.
1 CHRISTOPHER M. DENT, Taiwan and the New East Asian Regionalism (Issues & Studies© 45, no. 4
(December 2009): 107-158.), 116
2.0 Literature Review
2.1 China in East Asian economic integration
A central feature of deeper East Asian economic integration has been the
remarkable growth of trade in intermediate goods and components, and China is now
a major element in this process. The location of relatively labor-intensive component
production and assembly within complex, integrated international production chains
has been a growing feature of the international division of labor, especially in East
Asia. (Sharpton 1975, Helleiner 1973, Feenstra 1998, Athukorala 2003)2
2.2 Taiwan in East Asian economic integration
Taiwan has become well integrated into micro-level regionalization processes,
driven largely by the entrepreneurial reach and energy of its dynamic business sector.
Taiwan's firms and industries have played a particularly important role in developing
regionalized international production network (IPN) activities in some of East Asia's
key industry sectors and electronics being the most noteworthy. While much of
Taiwan's transnational business activity is skewed toward mainland China, it still acts
as a key hub in the East Asian region in these sectors. In this sense, Taiwan is well
plugged into the progressively integrating East Asian regional economy. ( Christopher
M. Dent 2009)3
2.3 Cross-strait Relationship
China is one of Taiwan’s biggest export markets and Taiwan to China has the
most trade surplus, so Taiwan should sign ECFA with China in order to get the
positive effect on economics. (Yung-Hung Tien 2010)4
2 2005. Regional Cooperation in East Asia and FTA Strategies, (PACIFIC ECONOMIC PAPERS NO. 344) 6
3 2009. Taiwan and the New East Asian Regionalism (Issues & Studies© 45, NO. 4 107-158) 153
4 Economic Cooperation Framework Agreement in the cross strait 104-250
Table 2.3-1
Comparison between trade surplus of Taiwan and trade surplus from Taiwan to China
Table 2.3-2
Industrial proportion of Taiwanese investment in China (Jan-Sep, 2009)
2.4 Background of GTAP Model
Research institutions and academics have joined the governments in examining
the effects of a trilateral FTA for Northeast Asia. Ko (2000), Lee, J.W. (2002), Abe
(2003), Park (2004), and Lee et al. (2005) have all used the computable general
equilibrium (CGE) model to assess the economic impacts of such an FTA. However,
these prior studies differ in the type of CGE model used, the version of the Global
Trade Analysis Project (GTAP) database used, and the scenarios used to assess the
effects of trade liberalization. ( Young Man Yoon, Chi Gong, Taek-Dong Yeo 2009) 5
2.5 China, Japan and Korea cooperation
Most of FTAs in the world are established among neighboring countries, it is
thus natural to consider bilateral and trilateral FTAs for China, Japan, and Korea,
which are very close to each other historically and geographically.
If Korea, Japan and China form a free trade area with Taiwan being left out,
Taiwan will be in a bad situation. Under the FTA-KC (Korea and China), Korea
would enjoy the greatest benefits in terms of GDP growth and social welfare. This is
consistent with traditional trade theory, which predicts that a small open economy
would benefit more from trade liberalization. (Young Man Yoon, Chi Gong,
Taek-Dong Yeo 2009) 6
2.6 China-Korea FTA
A Korea-China FTA has many implications, such as increasing the trading
volume and potential economic growth. It is obvious that a Korea-China FTA would
provide a new impetus for growth. (Hongshik Lee, Hyejoon Im, Inkoo Lee, Backhoon
Song, Soonchan Park 2005) 7
5 A CGE Analysis of Free Trade Agreements among China, Japan, and Korea, (Journal of Korea Trade Vol. 13, No. 1, February 2009), 46-64 6 A CGE Analysis of Free Trade Agreements among China, Japan, and Korea, (Journal of Korea Trade
Vol. 13, No. 1, February 2009), 62-64 7 Economic Effects of a Korea-China FTA and Policy Implications, 111-124
3.0 Methodology
3.1 Global Trade Analysis Project (GTAP)
GTAP (Global Trade Analysis Project) is a global network of researchers and
policy makers conducting quantitative analysis of international policy issues. GTAP's
goal is to improve the quality of quantitative analysis of global economic issues
within an economy-wide framework. Since GTAP has already widely adopted by
many governments to analyze the impact of establishing new trade policies, hence we
decide to introduce the program into our research to reach a convincible conclusion.
Below is a depiction of the natural progression of how GTAP Network members
get involved and begin using GTAP-related products.
3.1.1 GTAP Model
The standard GTAP Model is a multiregion, multisector and CGE8 (Computable
General Equilibrium) model, with perfect competition and constant returns to scale.
Bilateral trade is handled via the Armington assumption.
3.1.2 RunGTAP
GTAP is formulated and solved using GEMPACK9, a flexible system for solving
AGE10
(Applied General Equilibrium) models. RunGTAP is a visual interface for
various GEMPACK programs and allows users to run simulations interactively in a
Windows system using the GTAP general equilibrium model. No previous knowledge
of the GEMPACK language or programming skills is necessary to use the program.
8 Computable General Equilibrium (CGE): a class of economic models that use actual economic data to estimate how an economy might react to changes in policy, technology or other external factors.
9 GEMPACK : a suite of economic modeling software. It is especially suitable for computable general equilibrium (CGE) models, but can handle a wide range of economic behaviors.
10 Applied General Equilibrium (AGE):The model first establishes the existence of equilibrium through the standard Arrow–Debreu exposition, and then inputs data into all the various sectors, and then apply Scarf’s algorithm (Scarf 1967a, 1967b and Scarf with Hansen 1973) to solve for a price vector that would clear all markets.
Results and complementary information for the analysis are also provided in a
Windows system and can be accessed interactively.
3.1.3 GTAP Data Base
The centerpiece of the GTAP is a global data base describing bilateral trade
patterns, production, consumption and intermediate use of commodities and services.
Pairing the GTAP Model with the GTAP Data Base will allow you to examine the
impact of your own applications. The GTAP Data Base is also used in a number of
other global models.
3.1.4 GTAP Satellite Data and Utilities
It’s an additional data sets and utilities available to licensees of the GTAP Data
Base. Current composition includes data sets on non-CO2 emissions and migration, to
name a few. These satellite databases are often linked to extensions of the GTAP
Model.
4.0 Simulation design and results
Besides predicting the impact of ECFA, we also want to figure out the following
reaction of other countries. For example, Korea actively negotiates FTA with China
due to the threat of ECFA. So in our research, we will design three simulations which
are ECFA, China-Korea FTA and Japan-Taiwan FTA. The China-Korea FTA and
Japan-Taiwan FTA would be based on the situation of ECFA.
Below is the background that how the simulation been designed.
a. Analyzed factors: change in exports and imports, qgdp11
, terms of trade and
welfare.
b. Regions: 1.Taiwan 2.China 3.Japan 4.Korea 5.Vietnam 6.NAFTA 7. EU
8. ASEAN (-Vietnam) 9.Others
c. Productive sectors: 1.paddy rice 2.agriculture 3.light textile 4.petroplastic
5.electronic equipment 6.machinery and equipment 7.other heavy industries
8.service industries 9.extraction and utility 10.others
d. RunGTAP condition : Tariffs = zero
e. Process framework chart:
11
qgdp: substantial changes of GDP
4.1 Simulation Results of China-Korea FTA
The first database we stimulate is the effects of ECFA toward the world. Yet the
following 3 simulations we focus on changes in some specific Asian countries.
4.1.1 Changes of exports
Table 4.1-1shows the volume changes of merchandise exports to the areas. Not
surprisingly we could see that both Taiwan and China got enormously higher in their
exports. And for other areas, almost all of them had decreases in their exports. Japan
and Korea reduced their exports about 4% to 8%. However for Vietnam, which is
different from others that there is a small positive growth. We thought Vietnam is
close to China and Taiwan; in fact Taiwanese and Chinese have invested Vietnam a lot,
which improve the relationship between them and increase a little to the exports of
Vietnam to China, Taiwan, Singapore and Malaysia.
Country/Area Volume of exports (million USD)
Taiwan 5699.42
China 10219.56
Japan -272.19
Vietnam 1.22
Korea -261.13
NAFTA -117.13
EU -162
ASEAN-VIE -27.06
Rest of world -305.75
Table 4.1-1 Changes of exports
4.1.2 Changes of imports
Table4.1-2 shows the volume changes of merchandise imports, Taiwan and
China soar a lot in their imports. As for the other countries, they were all damaged. In
Asian countries, Japan gets hurt the most. And Korea is the second one.
Country/Area Volume of imports (million USD)
Taiwan 9472.77
China 10880.63
Japan -1174.5
Vietnam -96.41
Korea -658.31
NAFTA -1028.25
EU -1350
ASEAN-VIE -424.31
Rest of world -810.5
Table 4.1-2 Changes of imports
4.1.3 Changes of qgdp
The third result we looked at is qgdp, which is one of the factors influencing real
GDP. It’s reasonable to see Taiwan had a positive change; however it didn’t make
sense that China damaged its real GDP. We explain that the calculation in GTAP
model didn’t involve the service industries. That’s way China shows damaged in the
Table4.1-3. In the future China might invest service industries in Taiwan, though
service business from china isn’t open enough yet in Taiwan, the future is highly
expected.
Country/Area Changes of qgdp (%)
Taiwan 16.388
China -1.287
Japan -0.079
Vietnam -4.797
Korea -2.029
NAFTA -0.042
EU -0.139
ASEAN-VIE -0.979
Rest of world -0.092
Table 4.1-3 changes of qgdp
4.1.4 Terms of trade (ToT)
Table 4.1-4 shows the result of terms of trade that Taiwan gets increase,
conversely, China and the other ones decrease their terms of trade. Why after ECFA
China would damage their terms of trade? China is a powerful economy, after signing
FTA, such as ECFA, they would increase their trade volume but damage terms of
trade.
Table 4.1-4 Changes of Terms of Trade
4.1.5 Welfare(EV)
Welfare consists of terms of trade. For China, they lose terms of trade, as a result
make welfare worse. As the below Table4.1-5 shows, except Taiwan, the other
countries/ areas lose their welfare.
Country/Area Changes of welfare
Taiwan 4256.03
China -1972.99
Japan -414.93
Vietnam -67.33
Korea -439.93
NAFTA -424.89
EU -625.13
ASEAN-VIE -325.35
Rest of world -264.63
Table4.1-5 Changes of welfare
4.2 Simulation Results of China-Korea FTA
4.2.1 Changes of exports
For exports, both China and Korea’s exports will increase. China’s exports will
increase over 88 billion US dollar more than Korea’s 54 billion US dollar. And other
countries like Taiwan and Japan’s exports will decrease by the China-Korea FTA.
However, there is an exception, Vietnam, which will profit a little by the China-Korea
FTA. For this interesting result, we have done lots of data mining, and we came out
with the reason. China is Vietnam’s biggest trade partner, and raw materials12
(coal,
oil, rubber and iron ore) is the largest part of the composition of export goods from
Vietnam to China. So, if China exports more products, they will need more raw
materials from Vietnam. That is why Vietnam’s exports will increase after the
China-Korea FTA.
Table 4.2.1 Changes of exports
4.2.2 Changes of imports
For imports, both China and Korea will get a positive impact, too. And all other
regions’ imports will decrease due to the China-Korea FTA. We can also see another
point, which is the “net exports.” For China and Korea, the increase margin of imports
is greater than the increase margin of exports so they will get a negative impact on
their net exports.
12
Ha Thi Hong Van and Do Tien Sam. 1998-2008. “Vietnam-China Trade, FDI and ODA Relations and the Impacts upon Vietnam. ” 1.2.1. The Composition of imports goods from Vietnam to China
Country/Area Changes of exports (million USD)
Taiwan -629.03
China 8831.38
Japan -356.56
Vietnam 6.51
Korea 5423.28
NAFTA -294.75
EU -4.50
ASEAN-VIE -348.88
Rest of world -300.00
Country/Area Changes of imports (million USD)
Taiwan -1083.83
China 10175.13
Japan -1517.94
Vietnam -67.18
Korea 9894.33
NAFTA -1768.50
EU -1078.00
ASEAN-VIE -803
Rest of world -1423.75
Table 4.2.2-1 Changes of imports
China Korea
Change of exports 8831.38 5423.28
Change of imports 10175.13 9894.33
Change of net exports -1343.75 -4471.05
Table 4.2.2-2
Changes of net exports of China and Korea (Unit: million US dollar)
4.2.3 Changes of qgdp
Next, we are going to qgdp, which means real part of the change of GDP. Only
the states parties’ performance will become better, and the amount change of Korea is
greater than China. Furthermore, the percentage change of Korea’s qgdp is better than
China, too.
Country/Area Changes of qgdp (%)
Taiwan -1.5503
China 4.1838
Japan -0.1896
Vietnam -4.2674
Korea 36.8509
NAFTA -0.0544
EU -0.1613
ASEAN-VIE -1.1335
Rest of world -0.3051
Table 4.2.3 Changes of qgdp
4.2.4 Terms of trade (ToT)
For ToT, we get a similar result, only China and Korea’s ToT will increase and
other regions will get hurt. And the positive impact on Korea is more obvious than
China. We are here discussing ToT because it is an important factor of the welfare.
The detailed information could be found in the table below.
Table 4.2.4 Changes of Terms of Trade
4.2.5 Welfare (EV)
Form the above information, we can find that Korea’s economic performances
are better than China due to the FTA, and it made some impact on the welfare.
Korea’s welfare will increase amazingly by over 4966 million US dollars, it’s 5 times
than China. So we can finally know that China-Korea FTA would benefits the states
parties and threaten other countries, especially Taiwan, which has industrial types
similar to Korea.
Table 4.2.5 Changes of welfare
4.3 Simulation Results of Japan-Taiwan FTA
4.3.1 Changes of exports
Table 4.3.1 shows the volume of merchandise exports. In our simulation, the
export volume of Taiwan, Japan and China will increase after signed FTA, especially
the state parties, Taiwan and Japan. Taiwan increases about 4 billion and Japan
increases about 3.6 billion.
Table 4.3.1 Changes of exports
4.3.2 Changes of imports
Table 4.3.2 shows the volume of merchandise imports. Almost every country’s
import volume will increase, especially the states parties, Taiwan and Japan. And only
Korea’s performance will deteriorate. We know that Korea have a trade deficit to
Japan which continually increases. Therefore, when Taiwan and Japan signed FTA,
price of imports from Japan will become relatively higher in Korea than in Taiwan,
because trade barriers between Korea and Japan still exist.
Country/Area Changes of exports (million USD)
Taiwan 4021.78
China 16.88
Japan 3619.94
Vietnam -12.02
Korea -220.3
NAFTA -783.5
EU -567.5
ASEAN-VIE -24.84
Rest of world -533.25
Country/Area Changes of imports (million USD)
Taiwan 3656.48
China 118.56
Japan 1384.19
Vietnam 1.47
Korea -70.88
NAFTA 8.13
EU 264.25
ASEAN-VIE 184.5
Rest of world -28
Table 4.3.2 Changes of imports
4.3.3 Changes of qgdp
In table 4.3.3, we can see that the qgdp of Taiwan, Japan and Vietnam become
positive, while the others are negative. Taiwan’s qgtp grows up about 8%, which is the
highest. The reason why Vietnam’s qgdp become positive is that there is a strong trade
relationship between Vietnam and Taiwan. Taiwan has become the biggest foreign
investment in Vietnam since 1959. So if Taiwan’s qgdp grow up, it would benefit
Vietnam.
Country/Area Changes of qgdp (%)
Taiwan 8.1962
China -0.6485
Japan 0.4669
Vietnam 0.1564
Korea -0.4199
NAFTA -0.0261
EU -0.0897
ASEAN-VIE -0.5968
Rest of world -0.1106
Table 4.3.3 Changes of qgdp
4.3.4 Terms of trade (ToT)
We usually take terms of trade as the index of welfare. Table 4.3-4 shows the percent
changes of ToT. Surprisingly, the result shows that terms of trade of every country
become negative except Japan.
Table 4.3.4 Changes of Terms of Trade
4.3.5 Welfare (EV)
The welfare is not only consisted of terms of trade but also allocation, endowment,
and so on. Actually Taiwan’s and Japan’s welfare are positive in this simulation.
Table 4.3-5 Changes of welfare
5.0 Conclusion
5.1 Comparison
Table 5-1 shows the export, import and welfare changes for the countries under
different simulations. For example, the first column indicates that Taiwan’s exports
will change about 5.7 million after signed ECFA.
Change
(million
USD)
Country
Exports Imports Welfare
ECFA CH-
KO
TW-
JP
ECFA CH-
KO
TW-
JP
ECFA CN-
KR
TW-
JP
Taiwan 5699 -629 4021 9472 -1083 3656 4256 -497 45
China 10219 8831 16 10880 10175 118 -1972 967 -207
Japan -272 -356 3619 -1174 -1517 1384 -414 -552 1496
Korea -261 5423 -220 -658 9894 -71 -439 4966 -132
Vietnam 1 6 -12 -96 -67 1 -67 -57 4
Table 5.1
From the above we simulated, we found some common and special things in
signing FTA.
1. After signing FTA, there are positive effect on export, import, and the welfare for
the state parties.
2. Other countries which are not state parties are negative, or just a tiny positive
effect on export, import, and the welfare.
3. Exception: the welfare in China decreases very much after signing ECFA.
5.2 Countries’ consideration of signing FTA is not only economic aspect but also
political reasons, diplomacy and international relationships. And from our research,
the states parties will benefit from signing FTA. That is why many countries are eager
to sign FTA and negotiate regional integration.
5.3 Research restriction and suggestion
In discussing zero tariffs, the GTAP Model can only analyze primary and
secondary industrial sectors, so we can’t change service tariff in our simulations. If
we consider the service the welfare in China may increase after signing ECFA, and it
might be the reason why China would sign ECFA.
Furthermore, we only take the tariff as shock parameter in our research. The
reason is that if we take many shocks into consideration in a same simulation, the
result would be time-costing and complicated.
Due to time restrict and above restriction, there might be some bias and mistakes
in our research and we would like to improve it in the future.
6.0 References
1. Shu-Tung Chou. 2006.《世界經濟》第 1 期東亞地區貿易自由化的福利影響及
前景展望
2. Fei Li, Han-Min Chiang. 2008. ECFA 對兩岸經濟的影響效果評估—基於 GTAP
模型的類比分析
3. Kun-Min Chen. 2001. GTAP 模型結構
4. Paul Krugman, Maurice Obstfeld. 2010. International Economics: Theory and
Policy 8th
edition
5. Chi-Min Yin. 2011. ECFA and the strategic alliance among Taiwan and Japanese
entrepreneurs: experiences, cases and prospects
6.Feng-Cheng Fu. 2012. 《展望與探索》The Impact of the Trilateral FTA between
Mainland China, Japan and South Korea on Taiwan. 7- 11.
7. Chao-Feng Yang. 2008. The meaning and problems of signing a treaty Free Trade
Agreement between Taiwan and Japan
8. Chien-Chung Chen. 2006. “A Study on the Export Competitiveness of Machinery
Industries-A Comparison among European Union, Japan, Taiwan, Korea, and China.”
Chaoyang University of Technology MA thesis
9. Yung-Hung Tien. 2010. “Economic Cooperation Framework Agreement in the
cross strait.” Tamkang University MA thesis