Taiwan s Challenge and Opportunity amid the US-China Trade War

Transcription

1 Taiwan s Challenge and Opportunity amid the US-China Trade War 台灣金融研訓院臺灣大學公共經濟研究中心台灣公共議題研究協會 January 4, 2019 Peter C.Y. Chow City University of New York

2 Outline of presentation There are two major empirical studies in this presentation : 1. Analyzing the overlapping products by export similarity index and market shares of export commodities under three round of tariff and its short term effect on Taiwan. 2.CGE-FDI recursive model simulations on U.S. tariffs and China s tariff retaliations on Taiwan s economy. Major findings : 1. Taiwan has a high degree of overlapping export commodities between China and Taiwan in the US. Yet, Taiwan s market share in the US is only 1 to 5% in those products under three round of tariffs imposed by the US. There is a great potential for Taiwan to exploit the U.S. market. 2. Under CGE-FDI recursive model simulations, the short term effect of the trade war on Taiwan is positive in GDP, export and social welfare due to trade diversion effect. The impact on the terms of trade and real wage on skilled and un-skilled labor are all positive.

3 Outline of presentation 3. The trade war is both a challenge and an opportunity for Taiwan if she can exploit its second mover advantage by the frog leaping strategy, similar to what Taiwan and Korea benefitted from the U.S.- Japan s trade war in the 1980 s. 4. The long term effect is less certain; Taiwan s outward FDI, its asymmetric dependency on China s market, the trilateral trade relations as well as the global supply chain are subject to scrutiny. Re-structure of trade-investment strategy under the unilateralism, mercantilism and pragmatisms of the America First trade policy is a must. 5. Beyond the trade war : the geo-economy for Taiwan is to ride or not to ride the U.S.-centric trade group if the poison pill clause from USMCS trade accord to insulate China from market economies is expanded to major industrialized such as EU, Japan and UK.

4 President Trump s tariffs on imports from China In March, 2018, the Commerce Department imposed a 10% tariff on aluminum and 25% of tariff on steel. U.S. import of steel products from China accounts for 2% of total U.S. steel imports, but its imports from Taiwan was 4%. Taiwan is not exempted from the list of countries to be excluded. After that, there are three rounds of tariffs on imports from China, followed by China s retaliations; a.25% on $ 34 billion imports effective on July6 as the first round. b. another $ 16 billion imports targeted at those products Made in China-2025 in the second round. b. In the 3 rd round, a 10% tariffs on $ 200 billions of imports in August, 2018 which will increase to 25% in March, 2019 if no deal is reached.

5 Free trade vs protection in theory and practice : why target at China? Other than trade deficit which account for 40% of total U.S. overall trade deficit, China is considered as a predatory state-led mercantilist by President Trump. It is an unfair trade with the U.S, i.e. the forced technology transfer from US firms, China s government subsidy on stateowned enterprises, its lack of protection of intellectual property rights, forced technology transfer and industrial espionage ; a. China forced US MNCs to engage in joint venture as minority share holders and forced U.S. firms to involuntarily transfer technology to Chinese counterparts. b.china not only violated U.S. intellectual property rights but stole U.S. technology. China s cyber-theft is threatening to the national security of the U.S. P.S.: China has also stolen technology from Taiwan as reported by the WSJ. July 1, 2018 ( Taiwan s Technology Secrets Come Under Assault From China ).

6 U.S. Merchandise Trade Deficits with Selected Asian Countries in % US Trade Deficit with Asian Countries, % 60% Total Asian 50% 40% China 30% 20% 10% ASEAN Japan Taiwan Korea 0% Total Asian Countries China Japan Korea Taiwan ASEAN Source: US Census Bureau Trade in Goods, balance by partner country:

7 Export similarity indexes in the US market Export similarity index (Finger and M. E. Kreinin (1979) is always between 0 and 1; the higher the similarity index, the greater the degree of overlapping exports in the same market (US). If the similarity is one, it means both countries have complete overlapping export in the same market. On the other hand, if it is zero, then the two countries have no overlapping exports in the US market. For overall products in the first round of tariff goods, the similarity index between China and Taiwan is 52.5 %, which is the highest by comparisons with EU, Japan, Korea and other countries. For those products in the second round, the similarity between China and Taiwan is 42%, which is next only to that between China and EU. For the third round products, Taiwan ranks the top with a similarity index of 52.6%. Table 1 also separate imports into three the similarity index categories; capital goods, intermediate goods in the three round of tariffs : for capital goods, the similarity indexes between China and Taiwan is more than 70% in the 2 nd and the 3 rd rounds. For intermediate goods, the similarity between China and Taiwan is more than 60% in the first round and the 3 rd round. For consumption goods, only those products in the second round is the highest at 89%.

8 Table 1 : Similarity Index between China and Selected Trading Partners Export Similarity Index Tariff Round Total Products Reported Total Calculated Total* Taiwan Korea Japan EU28 Canada Mexico 1 (June 15, 2018) 818 $34 billion $33.8 billion (August 7, 2018) 279 $16 billion $14.1 billion (September 17, 2018) 5,745 $200 billion $200 billion *Based on 2017 imports to U.S. Capital Goods Export Similarity Index Tariff Round Taiwan Korea Japan EU28 Canada Mexico Intermediate Goods Export Similarity Index Tariff Round Taiwan Korea Japan EU28 Canada Mexico Consumption Goods Export Similarity Index Tariff Round Taiwan Korea Japan EU28 Canada Mexico Note: Broad Economic Categories as defined by United Nations Trade Statistics office, Statistics Source: International Trade Centre (ITC), ITC calculations based on US Census Bureau Statistics. U.S. Import data, Tariff list provided by Office of the United States Trade Representative.

9 ? Relative market shares of major trading partners in the US High degree of overlapping products is only a necessary, but not sufficient condition for switching import orders, relative market share is needed to provide the opportunity for US importers to substitute Taiwan s commodities. Data from the World Trade Mao show that Taiwan has only 1% of market share in those products under the first round of tariffs, 5% under the second round and 2% under the third round of tariffs. Conclusion : In the short term, it is relative easy for US importers to find alternative imports than to develop import substitutes. Taiwan s export has high overlapping with those from China, yet has only small market share. There is a great opportunity for Taiwan s export to substitute for imports from China.

10 Market Share of Products in Tariff Round 1 (818 Products, Total Import = $471 Billion) Rest of World 9% China 7% Taiwan 1% Japan 5% Mexico 19% Korea 16% Canada 15% EU28 28% China Taiwan Japan Korea EU28 Canada Mexico Rest of World Source: International Trade Centre (ITC), ITC calculations based on US Census Bureau Statistics. U.S. Import data, Tariff list provided by Office of the United States Trade Representative.

11 Market Share of Products in Tariff Round 2 (279 Products, Total Import = $111 Billion) China 13% Rest of World 27% Taiwan 5% Japan 7% Korea 8% Mexico 15% Canada 9% EU28 16% China Taiwan Japan Korea EU28 Canada Mexico Rest of World Source: International Trade Centre (ITC), ITC calculations based on US Census Bureau Statistics. U.S. Import data, Tariff list provided by Office of the United States Trade Representative.

12 Market Share of Products in Tariff Round 3 (5,745 Products, Total Import = $947 Billion) Rest of World 26% China 21% Taiwan 2% Japan 3% Korea 4% Mexico 15% EU28 12% Canada 17% China Taiwan Japan Korea EU28 Canada Mexico Rest of World Source: International Trade Centre (ITC), ITC calculations based on US Census Bureau Statistics. U.S. Import data, Tariff list provided by Office of the United States Trade Representative.

13 The impacts of tariffs on Taishangs in China More than 60% of Taiwan s exports to China are intermediates, parts and components which are re-processed/ assembled in China for exports to the U.S. and OECD markets. The share of China s export to the U.S. by the foreign invested enterprises including Taishang is about 60%. Among them, the 15 of the top 20 firms exporting to the U.S. are owned by Taishangs. Those MNCs in China which destined their final products to the U.S. will be affected by the tariffs. Two types of management model of Taishangs in China in their market orientation; According MOE and Central Bank, there is little impact on Taiwan because most of Taiwan s exports in these two category ( in parts and components) is for China s domestic consumption. But, it was estimated about 25% of Taishangs are exporting to the U.S. The 3 rd round of tariff goods are more on consumption goods. i-phone and lap tops are exempted from the list of U.S. tariffs. ICT product is zero tariffs under the Information Technology Act of the WTO. The collateral damage on Taishangs is beyond the scope of this paper. Yet, the adversary effect on Taishang may provide an opportunity for them to re-evaluate their trade and investment strategy. A de-couple from China in the long term?

14 Is Taiwan a small animal amid two fighting elephants? Popular commentators usually argue that when two big powers are fighting with each other, small countries will be victimized. On the trade war between the two largest trading countries in the world, will Taiwan suffer from the trade war? Lesson from the trade war between the U.S. and Japan (Chow, 2012) found that Taiwan ( as well as Korea) was benefitted from the US-Japan semi-conductor trade war in the 1980 s.

15 Lesson from the U.S.-Japan Trade war : The second mouse gets the cheese In the 1980 s, the U.S.-Japan trade war on semi-conductor industry provided Taiwan (as well as South Korea) with an opportunity to develop its semi-conductor industry to become to become the 3 rd or the 4 th largest manufacture in the world market; the second mover advantage. On DRAM, the production cycles are from 1K to 256K and then from 1 megabyte to 64mbs and more. Both Taiwan and Korea took the second mover advantage by leapfrogging strategy to develop their respective industries; Korea started from 64K and soon jumped to 256K whereas Taiwan started with 1 megabytes in the 1990 s ( Chow, 2012). The second mouse gets the cheese. Of course, past performance may not be replicated. But, Taiwan should catch any opportunity to sustain its development.

16 Computable General Equilibrium ( CGE)-FDI Model simulations This study ( Chow, 2019) adopts a CGE model simulations based GTAP ( 9.0) for 18 sectors and 33 countries ( regions) including Taiwan. The model incorporates the US tariffs and retaliations from EU, Canada and Mexico on the shock from steel and aluminum tariffs. It includes the sequential order of tariffs and counter measures in various rounds of tariffs. Methodology A standard national income and expenditures model which includes domestic consumption, investment, and government spending and trade sector. A breakdown of industry into 18 sectors aggregated from GTAP data base, which include agricultures, manufactures and services. A production function for each sector that includes four factors of production; capital stock, intermediates, skilled and unskilled labor.

17 CGE-FDI Recursive Model A trade sector which links trade flows for each sector of the economy. On the production side, the model evaluates the rate of return (ROR) of capital with the assumption of unitary elasticity of supply of capital. On the demand side, utility maximization is assumed in an aggregate Dobb- Douglas utility functions for private consumption and saving as well as government spending. Household demand responds to the trade shock based on the standard Constant Difference of Elasticities (CDE) demand system under the GTAP model. The trade sector is formulated by an assumption of imperfect substitution across countries (regions) by counting for product differentiation. An assumption of constant elasticity of substitution (CES) was made between import and domestic product. Social welfare is based on Hicksian equivalent variation of the lump sum payment at pre-shock price to make household as well off as in the postshock scenario.

18 Seven scenarios of model simulations PL1P PL2P on cumulated tariffs "Steel Alum shock" PL1P+EU/Canada/Mexican retaliation PL3P PL2P + US 1st tranche: US tariff rise on Chinese $50 billion goods, June18, 2018 PL4P PL3P + China 1st Retaliation: China tariff rise on US $50 billion goods, June18, 2018 PL5P PL4P+ US 2nd tranche: US tariff rise on $200 billion goods from China, Sept18, 2018 PL6P PL5P + China 2nd Retaliation: China tariff rise on US $60 PL7P billion goods, Sept18, 2018 PL6P + US-China partly breakdown: prohibitive non-tariff trade barriers to bilateral trade*

19 Empirical results : International comparisons PL7P scenario is the condition of cumulated tariffs and foreign retaliations and the tariff equivalence of non-tariff trade barriers. From the table on. P.20, one can find that Taiwan benefits from the trade war with an increase of 0.67%, next only to Mexico ( 3.75% ) but is greater than Korea( 0.48 %). In terms of GDP, the effects on Mexico ( 3.75%) is the greatest, followed by Taiwan ( 1.30%), Korea ( 1.20%) and Japan( 0.47%). China s loss is much greater than that of the U.S.( figures on p.22-23). Taiwan s terms of trade, real wage both skilled and unskilled labor are all increased. Its trade balance and social welfare ( Hicksian welfare equivalence) are positively improved. Conclusion : In the short term, the higher the escalated trade war, the greater the benefit for Taiwan s economy.

20 The impact of trade war under the current scenario ( PL7P) Taiwan EU27 Japan Korea Canada Mexico UK GDP value change (%) Total Exports of Goods & Services (% change) Total Imports of Goods & Services (% change) Terms of Trade (% change) Real wage of Unskilled labor (% change) Real wage of skilled labor (% change) Economic Welfare (USD millions) Trade balance (USD millions) GDP value change (USD millions) 3,897 28,402 15,740 12,241 7,382 27,458 5, , , , , , ,622 95,159 52,822 24,328 25,152 60,595 15,736

21 Impact of Tariff on Taiwan Economy : macro aspect in seven scenarios Taiwan Taiwan PL1P PL2P PL3P 10,000 8,000 6,000 4,000 2,000 0 PL4P PL5P PL6P PL7P Economic Welfare (USD millions) Economic Welfare (USD millions) GDP value change (USD millions) GDP value change (USD millions) Trade balance (USD millions) Trade balance (USD millions) Taiwan Taiwan PL1P PL2P PL3P PL4P PL5P PL6P PL7P Total Exports of Goods & Services (% change) Total Exports of Goods & Services (% change) Total Imports of Goods & Services (% change) Total Imports of Goods & Services (% change)

22 Simulation Results: Real GDP %Change PL1P PL2P PL3P PL4P PL5P PL6P PL7P PL8P China USA Taiwan Source: Chow & Xiao, 2018.

23 Simulation Results: Welfare Change (USD millions) PL1P PL2P PL3P PL4P PL5P PL6P PL7P PL8P $10,000 China USA Taiwan $5,000 $0 -$5,000 -$10,000 -$15,000 -$20,000 -$25,000 -$30,000 -$35,000 -$40,000 Note: Chart magnified to emphasize positive values Source: Chow & Xiao, 2018.

24 Simulation Results: Taiwan Macro Effects PL1P PL2P PL3P PL4P PL5P PL6P PL7P PL8P Economic Welfare (USD millions) ,093 3,897 6,667 Economic Welfare (% change) GDP value change (USD millions) ,378 1,454 4,077 7,622 12,872 GDP value change (%) GDP volume (% change) GDP deflator (% change) Consumption (% change) Government Expenditure (% change) Investment (% change) Total Exports of Goods & Services (% change) Total Imports of Goods & Services (% change) Trade balance (USD millions) , Terms of Trade (% change) CPI (% change) Capital Stock (% change) Unskilled labor (% change) Skilled labor (% change) Real wage of Unskilled labor (% change) Real wage of skilled labor (% change) Source: Chow & Xiao, 2018.

25 Sectoral Impacts of PL6P on Taiwan s Export and Import in US$ : Millions $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 -$500 -$1,000 -$1,500 Total Exports by Sector Total Imports by Sector $60 $40 $20 $0 -$20 -$40 -$60

26 Sectoral Impacts of PL7P on Taiwan s Export and Import in US$ : Millions $4,000 $3,000 $2,000 $1,000 $0 -$1,000 -$2,000 Total Exports by Sector Total Imports by Sector $100 $80 $60 $40 $20 $0 -$20 -$40 -$60

27 Qualifications of CGE model simulations This study does not integrate the newly signed trade accord among the US, Mexico and Canada (USMCA) Trade Agreement in its model simulations.. The CGE-FDI foes not incorporate foreign portfolio investment in the model simulations; the effect of trade war on financial market, therefore, foreign portfolio investment is not included in the model. It may underestimate the repercussion of the trade war on China s import from the rest of the world including Taiwan. If the trade war lasts long enough to cause a recession in China s economy, she may well cut its import from many of its trading partners including Taiwan which export about 40% of its total export if Hong Kong is included. Taiwan is vulnerable due to its asymmetric dependency on China s market. The degree of import substitution is underestimated because price elasticity of demand for aggregate product groups is much lower than that of individual product. Meanwhile, product differentiation is usually less significant in intermediates, parts and components than in final consumption goods. Yet, more than 60 % of Taiwan s export to the U.S. is in intermediate goods. Hence, the overall projection of trade growth for Taiwan could be substantially under estimated.

28 Long term effect of the trade war The trade tension between Washington and Beijing, if it lasts long enough, could possibly affect the investment decision of Taiwanese businessmen and possibly relocate their production sites away from China to the U.S., Taiwan and or the third countries. The triangular trade pattern ( Hsiao and Hsiao, 2015, chapter 10), and the existing global supply chain, esp. in the ITC industry will be challenged as well. China is the largest export market for Taiwan. If China s economy run into recession caused by the trade war, it may generate foreign repercussion on Taiwan which depends on China s market for its export. Policy implications from USMCA : The poison pill clause which prohibits any of the signatories to sign any trade pact with non-market economies. If it is fully implemented in future US-EU and US-Japan trade accords, then it may make China vulnerable to many U.S. trading partners including Taiwan. Is it an opportunity for Taiwan to reduce its trade dependency on China or not?

29 Consequent of the Triangular Trade Rest of World 24% Relation: Asymmetric trade 2016 Taiwan Exports by Area dependence on China United States 12% Rest of World 24% 2017 Taiwan Exports by Area United States 12% Europe" 6% China 26% Europe 5% China 28% ASEAN' 18% Hong Kong 14% United States China Hong Kong ASEAN' Europe" Rest of World ASEAN 18% Hong Kong 13% United States China Hong Kong ASEAN Europe Rest of World Note: ASEAN only inclusive of Indonesia, Thailand, Vietnam, Singapore, Malaysia and Philippines. Europe inclusive of Germany, France, UK, Netherlands, Czech Republic Source: International Trade Centre (ITC), figures based on Taiwan Directorate General of Customs Administration, Ministry of Finance.

30 Outward Foreign direct investment 2016 Taiwan Approved Outward Investment by Area United States 2% 2017 Taiwan Approved Outward Investment by Area United States 4% Rest of World 38% China 44% Rest of World 36% China 44% Europe" 4% ASEAN' 10% Hong Kong 2% United States China Hong Kong ASEAN' Europe" Rest of World Europe" 1% ASEAN' 14% Hong Kong 1% United States China Hong Kong ASEAN' Europe" Rest of World Note: ASEAN only inclusive of Indonesia, Thailand, Vietnam, Singapore, Malaysia and Philippines. Europe inclusive of Germany, France, UK, Netherlands, Czech Republic Source: Taiwan Ministry of Economic Affairs Investment Commission Monthly Report July 2018 Tables 13 & 16.

31 Production sites of ICT products $107,036 Million Total $112,096 Million Total Source: Marketing Intelligence, Inc.

32 Long Term Effect of the Trade war Beyond economic interest, there is a long term strategic and security consideration for Taiwan : disruption of offshore production and enhancing ingenious industries at home is a big challenge, neither is to de-globalize Taiwan economy. But, it will shift its offshore production from China back to Taiwan and or to other countries. To what extent will the global supply chain be re-structured? President Tsai s policy is to develop ingenious industries, the Five plus two innovative plan to create more and better paid jobs for Taiwanese people. Another policy is the new Southbound policy to exploit the ASEAN single market, Australia, New Zealand, India and other south Asian countries. Let s re-view the current global supply chain ( p ) and the case study of the value-added in i-phone 7.

33 The typology of foreign value-added Bilateral Relationships Source: WTO Global Value Chain Development Report 2017, p. 51. Author s calculation based on Xiao and others 2017 method and data from Asian Development Bank Inter-Country Input-Output Tables.

34 The typology of GVCs The world seems to have three interconnected production hubs: the US., Asia (China, Japan, Korea and Taiwan, and Europe (especially Germany). The figure shows the important bilateral flows of parts and components, with the countries that are most deeply involved highlighted in Orange. In 2000, US was the core of the Asia Pacific community, with strong connections to Canada, Mexico, Brazil, and Australia. In 2005, the Asia Pacific community separated into two groups: The United States maintained connections only with Canada and Mexico, while China became the new core of the East Asia + ASEAN. In 2011, China became the core of the Asia Pacific community. The relative distance between the European and Asia Pacific communities shortened, reflecting that complex GVCs had developed globally, and more countries joined GVCs through some of the main hubs. In 2015, a recession likely occurred in the complex GVCs networks; in particular, the North American Free Trade Area, East Asia + ASEAN, and Europe were again isolated. This phenomenon is consistent with the decline of complex GVCs. 2020???

35 Trade in components shows three interrelated production hubs Source: WTO Global Value Chain Development Report 2017, p. 7. Diakantoni and others 2017, based on the UN Comtrade database ( Note: Includes the 61 economies in the Organisation for Economic Co-operation and Development World Trade Organization Trade in Value-Added database and their most important bilateral gross trade flows. The color of the nodes (and their export flows) is from blue to red, blue indicating the highest degree of centrality.

36 Who gains from the global supply chain? The case of i-phone 7 Europe $6.56 China $8.46 Korea $16.40 Unidentified $21.81 Taiwan $47.84 Japan $67.70 United States $68.69 $0 $10 $20 $30 $40 $50 $60 $70 $80 Source: Dedrick,Linden and Kraemer, 2018.

37 Linking Taiwan in the Indo-Pacific Security Alliance. The trade war may offer Taiwan an opportunity to restructure its trade and investment nexus policy to reduce the asymmetric trade dependency on China market. Given the systemic risk of trade with and invest in China, the new southbound policy may diversify its trade and investment flows, though it is too early to assess its policy effectiveness. Situated in the middle of the first island chain, Taiwan fits in the Indo-Pacific strategic alliance that the Australia, India, Japan and the U.S. are linked together. Taiwan is inside the Democratic Security Diamond ( Abe, 2012).

38 Conclusion Trade war is a challenge as well as an opportunity for Taiwan s industrial restructuring. The short term effect of U.S. tariffs on imports from China is beneficiary for Taiwan; Taiwan s GDP, trade balance and social welfare are all. The collateral damage on Taishangs could re-direct Taishang s FDI strategy and sites of off-shore production. The triangular trade-investment nexus is vulnerable to the unpredictable trading environment under unilateralism, mercantilism and pragmatism. The disruption of the global supply chain will be subject to be re-structured if the trade war last too long. The challenge ahead is how to map out a grand strategy for long term sustainable development for Taiwan by incorporating economic interest with national security in the Indo-Pacific Strategic Alliance.