With the imminent accession of both Taiwan and Mainland China into the World Trade Organization (WTO), the loosening of trade regulations across the Taiwan Strait is becoming a critical issue. This is an attempt at using the partial equilibrium model to simulate the impact of deregulating trade across the Taiwan Strait.
The research suggests that, from a Taiwanese perspective, releasing trade regulations across the strait will have a detrimental effect on trade. As there are two existing effects, the trade diversion and trade creation effects, the greater the coefficient of trade creation, then the greater the deficit will be, regardless of the nature of the bilateral trade structure. However, for Taiwan’s overall trade, expansion of its current level of exports would be beneficial since the effect of reductions in customs duty produce a corresponding reduction in semiproduct and raw material costs.
Since individual industries each have their own unique characteristics, they will also experience different impacts. In global trading terms, from a Taiwanese perspective, the processed food, household and electronic goods industries will experience the highest trade deficits, as compared to other industries depicted in the model, once trade is deregulated. In contrast, the information and textiles industries will experience the highest trade surpluses.
The industries that are already faced with government restrictions, will not be the ones that will feel the most serious impact in bilateral trade across the Taiwan Strait, once trade is deregulated. One of the reasons is that those industries are already dealing with the problems created by government restrictions on, for example, investments in Mainland China. Other reasons are: (i) the possibility of underestimation of the coefficient of trade diversion, and (ii) static analysis is made in a dynamic environment, so the point at which the deregulating decision is made, will change the result.
This research finds that, from a Taiwan perspective, the machinery, household electronic goods, and petrochemical industries will experience the highest deficit in trade across the Taiwan Strait, as compared to other industries in the model once trade is deregulated. Other industries affected include the car, steel, processed food, information and construction materials industries, where the impact will, however, be less serious. The impact for the remaining industries will be very slight.
