international economics thesis

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.

https://www.gtap.agecon.purdue.edu/models/current.asp

https://www.gtap.agecon.purdue.edu/models/cge_gtap_n.asp



https://www.gtap.agecon.purdue.edu/products/rungtap/default.asp

http://www.monash.edu.au/policy/gempack.htm

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.

https://www.gtap.agecon.purdue.edu/databases/default.asp

https://www.gtap.agecon.purdue.edu/models/current.asp

https://www.gtap.agecon.purdue.edu/about/data_models.asp#models

https://www.gtap.agecon.purdue.edu/databases/Utilities/default.asp

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


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


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


Table4.1-5 Changes of welfare

4.2 Simulation Results of China-Korea FTA


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


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


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


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)


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.


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


Table 4.2.3 Changes of qgdp


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


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


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


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


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.


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


Table 4.3.3 Changes of qgdp


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

international economics thesis

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