The Impacts of the Trans-Pacific Strategic Economic Partnership Agreement on Taiwanese Economy

The Impacts of the Trans-Pacific Strategic Economic Partnership Agreement on Taiwanese Economy National Cheng Chi University International Business Sheng-Yu, Chien Szu- Yu, Lai Chin-Jung, Wang Meng Hsuan, Lin Hsiao-Fang, Chen 1

Abstract The Trans-Pacific Strategic Economic Partnership Agreement (TPP) is one of the most concrete regional economic integration tracks in Asia-Pacific. Under the APEC framework, TPP s final stage is to combine the ongoing bilateral and multilateral free trade agreements in the region and ASEAN, together to form a Free Trade Area of Asia-Pacific (FTAAP). Since Taiwan s main trading partners, the US and Japan are now both in the agreement, in order to reach further economic expansion, the Taiwanese government had announced its interest in taking part in the TPP. However, the issue still remains in debate as many still question the possible influence Taiwan will be faced with and the ability of the government to overcome the impacts. In this paper we have conducted our own GTAP analysis to find that overall, Taiwan will experience impairments if being excluded from the agreement; on the other hand, we will benefit from the participation as we can enjoy closer linkage and trade liberalization with other members. The impacts on industries, nonetheless, vary from one sector to another. Throughout the study, we take a closer look at the TPP agreement and its relationship with Taiwanese economy, and finally, we try to provide responding measures in face of those possible impacts. 2

Introduction To date, regionalism has become a prominent feature of global economy. The North American Free Trade Agreement (NAFTA) and the European Union (EU) have triggered recent proliferation of free trade agreements and other regional economic cohesion. According to Asian Development Bank, the economic growth of the emerging countries in eastern Asia was to be 8% in 2010, and the International Monetary Fund (IMF) had also forecasted that the economic growth rate of Asia-Pacific as a whole would be higher than that of the world s average by the end of 2014. These facts together, have drawn the attention of countries in Asia-Pacific to strengthen their economic linkage with one another within the region. The Trans-Pacific Strategic Economic Partnership Agreement (TPP), with Brunei, Chile, New Zealand, Singapore, the United States, Australia, Malaysia, Peru, Vietnam, Canada, and Mexico(P11) participating in the negotiation, is recognized as one of the most concrete initiatives so far towards regional economic integration in Asia-Pacific. With the high standard which the agreement proposes, TPP aims to further liberalize the economy in the Asia-Pacific region, and as well deal with emerging trade issues of the 21 st century. As recently backed up by Japan s completion of talks in mid March, 2013, the ongoing TPP is estimated to be the world s largest regional economic integration, playing a critical role in the economics of both Eastern Asia and Asia-Pacific as a whole. In its final stage of integration, TPP is anticipated to transform itself and the current regional integrations such as ASEAN and other FTAs into the Free Trade Area of Asia-Pacific (FTAAP), on an Asia-Pacific level. Since the two largest economies in TPP, namely Japan and the US, are Taiwan s second and third largest trading partners, and APEC members with which Taiwan has 3

close economic relations are also taking part in the agreement, this recently emerging issue surely has a certain relation with Taiwanese economic development. In addition, signing the agreement within the next 10 years is one of the major goals proposed in the Golden Ten-Year project of the Taiwanese government in 2011. Joining the TPP means greater liberalization in regional trade; however, in practice, whether or not Taiwan should join in the agreement has aroused debates among professionals and remains a dilemma for the government. We thus contend that it is without a doubt of central significance that the Taiwanese government takes TPP and the possible influences on Taiwanese economy of joining the negotiations into consideration when promoting international economic expansion. By conducting thorough studies on the TPP agreement, the current status the Taiwanese economy, viewpoints of professionals, and our own GTAP analysis, we expect to accomplish these four objectives: (a) (b) (c) (d) to understand the current status of TPP and Asia-Pacific integration. to understand the significant relation between TPP and Taiwanese economy. to analyze and estimate the influence of joining TPP on Taiwanese economy. to propose responding governmental measures in face of the influence. 4

I. The Trans-Pacific Strategic Economic Partnership Agreement Now that we have a brief look at the background of this issue and the motive for this study, we will begin with an introduction about the TPP, covering its historical development, the core issues concerned, the negotiations, and the positions in the agreement of leading economies in Asia-Pacific. (1) The Development of TPP In end of the 1990s, the Asia Pacific Economic Cooperation (APEC) has attempted to encourage pathfinder initiatives among groups of economies, and one such effort, the 2005 Trans-Pacific Strategic Economic Partnership launched by Brunei, Chile, New Zealand and Singapore (P4), has emerged as the current TPP initiative. The United States, Australia, Malaysia, Peru, Vietnam, Canada, Mexico, and Japan are now participating in the negotiation (P12). Since most of the TPP negotiating parties are simultaneously in the APEC, and there are barely overlapping members as in the ASEAN+3, the TPP, the so-called Asia-Pacific track, has become a new leading power of economic integration in Asia. (2) The Core Issues Concerned In spite of the fact that the TPP has not yet formally announced its complete articles about the agreement, we accorded to the Broad Outlines provided and found that a wide spectrum of issues is included: trade in goods, rules of origin, trade remedies, sanitary and phytosanitary measures, technical barriers to trade, trade in services, intellectual property, government procurement and competition policy. Among other things, it called for reduction by 90 percent of all tariffs between member countries by 1 January 2006, and reduction of all trade tariffs to zero by the year 2015. 5

(3) The Negotiations Once a country announces its interest to join the TPP, it will have to enter into consultations with TPP parties, bilaterally and as a group. In other words, entry to the TPP must be supported by a consensus. The current members will also want to be reassured of the following understandings: (a) the new member will have to accept all provisions under the agreement. (b) the new member will be able to practice the policies. (c) the entry of new members will continue to keep up with the good momentum that the current members have achieved so far. (4) The Positions of Economies in Asia-Pacific In this day and age, economic integration is no longer just about global trade alone. It is for sure that whether or not the integration will work out depends much on how the leading economies in the region are balanced with one another through cohere policies. Since the TPP negotiating parties are targeted in the Asia-Pacific, we will analyze the roles played by certain economies in the region. The United States At the APEC Leaders Economic Meeting in 2011 (P8), along with the US, parties had come to a consensus on the basic outlines of the TPP. US earnest and ambition for promoting and expanding the TPP among Asia-Pacific countries can be seen through these facts: The precedent Secretary of State, Ms. Hillary Clinton, had reaffirmed the significance of Asia to the US, as well as its principles of forming a linkage with the region of Asia-Pacific. In order to assure and remain its great influence over Asia-Pacific as in the past few decades, she contended that they should take actions as keeping friendly cooperation with the ongoing regional multilateral organizations such as ASEAN and APEC, and on the meanwhile, deepening the connection with 6

Asian countries by forming new economic partnership with emerging countries. In addition, the US is feeling the threat of the forming regionalism in East Asia, backed up by the China-led ASEAN+3 and ASEAN+6 from which the US is excluded. Because China had disapproved of the promotion of FTAAP under the structure of APEC to be the only channel of region integration, the US is now working to cover the FTAAP proposals through TPP, in a wider form, and wishes to become the new center of the Asia-Pacific economics. China On Asian developing countries behalf, China strongly disapproves of TPP s tariff reduction policies. China insists that since each country in Asia-Pacific varies significantly in terms of economic development, the cohered tariff reduction policy regulated by the TPP should not be applied to all countries. Take the economic ideology into consideration; we can see that the TPP, founded by most of the APEC members and led mainly by the US, is composed of a majority of capitalist nations, while the excluded Chinese government is socialist. The US-led TPP and China s leading role in ASEAN+3 will serve as balancing mechanism against each other. Japan The discussion of East Asian economic integration is at a standstill with no significant progress, with Japan and China locked in leadership competition. Japan s entry into the talks in March, 2013, recognizes the possibility that China will not join the TPP any time soon. Given the importance of China to Japan, both economically and strategically, Japan has signaled that it will move forward on a bilateral FTA with China at the same time as it moves to join the TPP negotiations. FTAs with South Korea and the EU are also in the works. Moreover, since TPP is already on its actual 7

negotiating stage, Japan recognizes it as a strategic opportunity to launch other moves at economic integration and to occupy the leading position in East Asia. South Korea US officials describe South Korea as a nature candidate for the TPP, given that the US and Korea have the high-standard, one-on-one FTA, the KORUS FTA in place. South Korean officials said they are exhausting related information with the US for review of expected gains and losses and that as South Korea is focusing on continuing to implement the FTA smoothly; it is not in hurry for the TPP. II. The significant relation between TPP and Taiwanese economics With a basic knowledge of the agreement, we now move on to studying the fundamental relationship between TPP and Taiwan through the four aspects as follows: the scale of TPP, the major trading partners of Taiwan, an Asia-Pacific integration level, and finally a Taiwanese economic strategic level. (1) The Scale of TPP As Japan became the new negotiating party of the agreement in 2013, the add-up gross domestic product (GDP) of all members in TPP currently dominates nearly 40 percent of the world s total. On the meanwhile, TPP accounts for 1/3 of the quantum of world trade. Moreover, the GDP of US and Japan alone covers over 90 percent of the TPP s total, which implies the equivalent benefits of participating in the TPP and signing FTAs with the major economies in Asia-Pacific. The scale of TPP therefore ensures its leading role in regional integration in Asia-Pacific. (2) The Major Trading Partners of Taiwan 8

The proportion of Taiwanese exports to the P11 is around 30 percent of total exports, indicating the significant benefits of future tariff reduction. Besides, the dominant economies in TPP, Japan and the US, as mentioned above, are Taiwan s 2 nd and 3 rd major trading partners respectively. Taking part in the agreement means further cooperation with our major trading partners in the region. In addition, since four of the TPP negotiating parties overlap with that of ASEAN, namely Singapore, Brunei, Malaysia, and Vietnam, Taiwan can also benefit from forming a closer linkage with economies in Southeast Asia, reducing the impairments of being excluded from the ASEAN+3 and ASEAN+6 and further isolation in East Asia. (3) An Asia-Pacific Integration Level As mentioned earlier, TPP is considered to be a pathfinder for the proposed FTAAP, an APEC initiative. The ultimate aim of TPP is to transform the several ongoing regional economic agreements and organizations, inclusive of ASEAN+3, ASEAN+6, TPP and certain APEC objectives, to the FTAAP, a broader free trade agreement for Asia-Pacific as a whole. As a member of APEC, whether or not Taiwan will join the TPP will for sure have certain impact on the integration path. (4) A Taiwanese Economic Strategy Level The ASEAN track is another ongoing channel for Asian integration; nevertheless, Taiwan is excluded from the forming of ASEAN+3, as well as ASEAN+6. If the future blue print of Asia-Pacific integration is, as estimated by professionals, to be a combination of the two major tracks, the TPP and the ASEAN, participating in the TPP will also make it easier to blend in to the integration on an Asia-Pacific basis. 9

Literature Review It seems undeniable that the TPP does have a certain significant relation to Taiwanese economic development and that joining the negotiations with the other members is an apparent trend and target of the government. Nevertheless, ever since the issue was brought into discussion, debates have risen among professionals and officials. Here we analyze previous relevant work done concerned the issue and present the estimation of the influence on Taiwanese economy. PROs To begin with, we look at affirmative statements that approve of joining the TPP. In previous chapters we have mentioned that with China becoming a member of ASEAN+3 and ASEAN+6, ASEAN serves as another channel of Asia Integration, and Taiwan could possibly be isolated in the region while other countries are actually connecting with one another more closely. Even though Taiwan is excluded from the ASEAN track, Jun-Rong, Chu, professor of economics in National Central University indicated that if Taiwan aims to undergo a process of industrial transformation, it will have to catch up with advanced countries, and that joining the regional integration led by the US, namely the TPP, will help it keep a close trading linkage with the whole world. The president of Taiwan Institute of Economic Research Division VI, Chia-Yen Yang also said that there is huge opportunity to join TPP with Taiwan's economic potential. Joining the TPP enables Taiwan to cooperate with advanced countries in both economy and technology. Thus we conclude that joining the TPP ensures an inclusion in Asia-Pacific integration and sets off the possible impairments incurred by isolating from the ASEAN track. 10

Apart from viewpoints of domestic professionals, officials from abroad had also expressed their views on the issue. Jun-Ji, the professor of the University of Tokyo, said that TPP is important for Taiwan's international trade relationship. He further emphasized that under the APEC framework, it will be easier and of more opportunity to join the negotiations. The president of US-Taiwan business council, Rupert Hammond-Chambers had as well pointed out that President Ying-Jiou, Ma should be innovating and preparing to apply for TPP right now instead of spending eight years only to preparing itself to be ready to partake in the agreement, emphasizing on speeding up the process. CONs In the contrary, we found the core idea of the negative viewpoints lie not in absolute disapprovals of joining the TPP, but rather in whether Taiwan should start the negotiations this soon, given the possible impairments to certain industrial sectors. While the government envisions joining the TPP within the next 8 years and some professionals are in view of pushing the process, many still doubt the government s ability to overcome all impacts and shocks that may come along if Taiwan starts the process too soon. Kurt Tong, the ambassador of APEC responded to Taiwan s intention to enter into the agreement that Taiwan was not yet well prepared. The director of Taiwan Institute of Economic Research, Jiang-Yan, Yang also insisted that TPP is currently still on its stage of formation, and a competition between the US and China to lead the economics in Asia-Pacific is involved, making the decision more complicated. Furthermore, the private enterprises in the US and Taiwan have been in close trading relationship, so there is actually no urgent need to start off, implying that Taiwan should not rush joining the negotiation. 11

In addition, according to Fu-Cheng, Wu, the deputy director of the international affairs in Taiwan Institute of Economic Research, because TPP is a multilateral negotiation with high standard and high quality, and a wider spectrum of trading issues are included, it will take long-term plans and preparation to conform to this high standard of trade liberalization. We thus understand that the viewpoints of each side imply that it is not in question whether to join or not, but how soon we will be joining the negotiations. Preparation Stage In spite of the fact that there are different views on the appropriate time for Taiwan to join the negotiations, we insist that however soon we will be taking part in the agreement, what is most important is to get well-prepared for all possible impacts coming in the aftermath. According to Lin, Tsu-Chia and Tan, Jin-Yu, researchers from National Policy Foundation, on its stage of preparation to join the TPP, Taiwan should work on these three strategies. Firstly, the government needs to reach an understanding with relative industries before wards. Second, because the agricultural sector will face a substantial market opening, the responding measures are needed. Third, whether or not Taiwan will join the TPP, amendment of regulations concerned trade liberalization of both goods and services is inevitable. Estimated Impacts We referred to reputable estimation done by professionals and found that, on a macroeconomics level, according to the GTAP model applied by Bo-Shiang Hsu, the economic growth of Taiwan will increase by 1.1%, the export will increase by 2.4% and the total welfare will increase 18.5 hundred billion US dollars. In contrast, if TPP continues to form without Taiwan s participation, the economic growth of Taiwan will 12

decrease by 0.2%, the export will decrease by 0.1% and the total welfare will decrease by 5 hundred billion US dollars. In an industrial aspect according to the same estimation above, the top ten sectors which will benefit from joining the TPP, in order, are leather and leather products, sheep's wool and silkworm cocoon, textile, oilseed crop, fiber, tailoring, other manufacturing, chemical rubber and plastic goods, other crop production and other food manufacturing. On the other hand, the top ten sectors mostly impaired are beef products (-7.84%), wheat (-5.98%), dairy products (-5.32%), milk (-5.31%), animal husbandry (-4.09%), meat products (-3.28%), sugar products (-3.05%), sugar cane and beet (-3.01%), other animal products (-2.65%), vegetables, fruits and nuts (-2.32%). In sum, a majority of benefited industries are manufacturing sectors, while all industries substantially impaired are food processing and agricultural sectors. After a complete comprehension about the issues in debate, various viewpoints and the possible outcomes of Taiwan joining the TPP, in the following chapters we will conduct our own GTAP model, interpret the results, and analyze and compare them with earlier predictions. Aside from the above, in the end of the study we present possible responding measures and suggestions in face of the influences. Methodology In order to study the outcome of Taiwan s joining the TPP, we choose Global Trade Analysis Project (GTAP) as our main model. GTAP includes analysis of 129 countries and 57 industries, and the powerful database serves as a great foundation to quantify the impact TPP has on Taiwan. The latest version GTAP 8.0 database is used in our research. Our analysis process can be divided into three parts. Fist, we set up the regions 13

as Taiwan, TPP (P12), China, Korea, EU, and Rest of World. We include all of the 12 current members in the agreement in the region TPP, since we hope to figure out the impact of TPP as a whole, on Taiwanese economy, rather than individual that of those 12 individual countries. On the other hand, we look at Korea and China individually because in terms of industrial structure, Korea is most similar to Taiwan in Asia-Pacific. As for China, according to Bureau of foreign trade, it has the highest trade volume with us, indicating that it is an important trading partner of Taiwan. One trivial limitation of our analysis is that we exclude Brunei from our study due to the lack of information in GTAP s regional classification. However, this does not affect out analysis as Brunei accounts for a relatively small part of the trade volume in TPP. Second, we set the industrial factors as the following seven sectors: Grains and Crops, Meat and Live Stock, Extraction, Food Processing, Textiles and Wearing Apparels, Light Manufacturing, Heavy Manufacturing. At last, we set the shock as the tariffs rate being 0%, which is the ultimate goal of the TPP. We assume zero tariffs among members in TPP, no exceptional items are included. We interpret our results in two aspects: On a macroeconomic level, we look at the change in Welfare, Terms of Trade, GDP Growth Rate, and Export Growth Rate. On an industrial level, we look at individual impact on the chosen 7 sectors as we mentioned above. In each of the two aspects, we compare the impacts with and without Taiwan s participation in the TPP. 14

Data and Result Analysis I. Macroeconomic Aspect 1. Welfare Chart1 [ Reference: GTAP8.0 database (1995-2009) ] To evaluate the welfare, we choose to observe the Equivalent Variation (EV). It measures the amount of money that enables a consumer as well off as they would be after a change, meaning that it is the amount of money that individuals need to be compensated to maintain the same satisfaction if they choose not to join TPP. Regarding to the welfare change after Taiwan join TPP, the welfare of Taiwan will increase about 1929 million. Based on Taiwan s average GDP during the past ten years, the increase in welfare of Taiwan entering TPP is equivalent to raise Taiwan s GDP by 0.5%. Compared to the welfare change after signing Economic Cooperation Framework Agreement (ECFA), which is around 4405 million, joining TPP is winning us approximately half time of the welfare improvement we benefit from 15

ECFA. Given that China has long been our biggest trade partners, the impact of Taiwan s participation in TPP has on equivalent variation is surprisingly slight. However, if Taiwan fails to join in TPP, it is expected lose approximately 280 million, equal to merely 0.073% decrease in Taiwan s GDP, which is rather obscure in contrast to the positive impact of entering into TPP. Based on the results from GTAP 8, it is demonstrated that the original members of the TPP, Singapore, New Zealand, Chile, as well as Brunei, known as P4, had experienced a 163.36 million gain in equivalent variation after the United States entered. In contrast to the previous EV they enjoyed, the entry of the United States had elevated the average EV among P4 to a level that is 64 times more than the previous one. As for the participation of Taiwan, the TPP will gain about 8690 millions in response, indicating mutual benefits brought by the entry of Taiwan. Also, the welfare that TPP enjoyed without Taiwan s participation is 7985 million, which is slightly smaller than the previous 8690 million of welfare change if Taiwan becomes a part of TPP. Taiwan s participation only raises the equivalent variation of TPP members by 0.08%. These figures have demonstrated that TPP members only faintly response to Taiwan s participation. While Taiwan can gain access to a more liberal trade market, it will cause certain harm to both China and South Korea. According to the numbers from our analysis, if Taiwan is included in the agreement, China will experience an approximately 4,437 million welfare losses, equal to 0.06% loss of China s GDP in 2012, and the impact on South Korea s welfare is relatively small, only about 697 million, accounts for 0.06% decrease in South Korea s GDP in 2012. Without Taiwan s participation, both China and South Korea, still, will experience a decline, China will suffer from a loss equal to 0.037% of its GDP in 2012 and South Korea will experience a decline in equivalent variation about the same amount to 0.04% of its GDP in 2012. From the 16

data, the negative impact on Taiwan s closely-linked trade partners, both China and South Korea, is more intense if Taiwan is included in TPP. While no matter Taiwan join in this economic integration or not, the impact is not tremendous. EU, as a prominent economy around the world will lose about 2750 millions and 2162 million with and without Taiwan s participation, accounts for 0.016% and 0.012% of EU s GDP in 2012 respectively. This shows that EU, in which the members have already formed a highly-integrated economy, has the slightest response to Taiwan s entry in TPP. 2. Terms of Trade Chart2 [ Reference: GTAP8.0 database (1995-2009) ] Terms of trade (TOT) measures a country s export prices in relation to its import prices. When TOT rise above 100, there is an improvement in terms of trade, and when TOT fall below 100, terms of trade are said to be worsen. An improvement in terms of trade means that one can purchase more units of imported goods for every 17

unit of exports sold. While a worsening terms of trade allows people to purchase less imported goods for every unit of exports sold. We found that the terms of trade of TPP will increase by 0.18% after Taiwan s participation, while 0.17% improvement will be made if Taiwan doesn t join TPP. This indicates that Taiwan s participation in TPP will not cause crucial influence. The differences in change in terms of trade between two conditions, however, can be quite significant. According to our analysis, we found that a 0.71% improvement in Taiwan s terms of trade will be made if Taiwan joins TPP, and Taiwan s terms of trade will deteriorate if Taiwan is excluded from TPP. Compared to the recent agreement Taiwan signed with China, the Economic Cooperation Framework Agreement, in which Taiwan enjoys a 1.595% improvement on terms of trade, the impact of Taiwan entering TPP is about half of that of ECFA. In sum, taking part in TPP is a quite critical decision. We then look at the impacts on China and South Korea and found respective decrease of 0.11% and 0.05% with Taiwan s participation. The decrease will still exist but will be smaller without Taiwan s participation in the agreement. Overall, countries that are not members of TPP will suffer from damage in their terms of trade due to lack of access to tariffs-free policy. 18

3. GDP Growth Rate Chart3 [ Reference: GTAP8.0 database (1995-2009) ] As for the change in economic growth, we observe the changes in Gross Domestic Product (GDP), it measures the market value of all final goods and services produced within a country in a period of time. The change in the GDP growth rate shows the parallel results as other variables, Taiwan will benefit most, increasing by nearly 1.3% in its GDP. However, if Taiwan does not take part in TPP, we will be faced with a 0.21% decrease. It is estimated that after signing ECFA, Taiwan has gained benefits by enjoying a 0.353% raise in GDP growth. As the statistics indicate, it is more beneficial for Taiwan to join in the TPP. Also, since Taiwan became one of the WTO members, Taiwan has gained benefits by enjoying an annual 4.99% raise in GDP on average from 1992-2005. In contrast to the impact of WTO, the 1.3% increase in GDP which is attributed to Taiwan s entry to TPP is small. In fact, if Taiwan does not participate in TPP, those members in which will enjoy a 0.16% GDP growth on average. 19

In the condition that Taiwan is in the TPP, China will reduce 0.34% of the GDP, and South Korea will be faced with a decline of 0.26%. On the other hand, if Taiwan is not included in the TPP, both China and South Korea will experience a slightly smaller decrease in the change in GDP growth rate. As for the EU, it will experience a slight loss with and without Taiwan. 4. Export Growth Rate Chart4 [ Reference: GTAP8.0 database (1995-2009) ] We study on the change in aggregate exports of each of those countries to get an understanding of the change in export growth rate in each country. Based on our hypothesis, Taiwan can enjoy a 2.33% export growth rate after taking part in TPP. By contrast, Taiwan signing ECFA with China to form a further crossstrait economic linkage will elevate Taiwan s export growth by 5.13%. Besides, if Taiwan does not take part in TPP, it will be encountered with 0.04% harm in its export growth rate. According to the data, the advantage of Taiwan join in TPP is a lot 20

more than the loss that Taiwan has to encounter if it is excluded from TPP. Besides, TPP can enjoy 1.4% growth in export rate in spite of the absence of Taiwan. Surprisingly, China gets a 0.21% decline on exports in response to Taiwan s participation in TPP. From 2008 to 2012, China has enjoyed 4.8% export growth rate per year on average; compared to that, a 0.21% decrease on exports is not influential. However, South Korea remains unaffected after Taiwan joining TPP, and EU will slightly gain a 0.08% improvement after Taiwan joins in the TPP. Table 1: Changes on Macroeconomic Level with Taiwan s Participation Million Welfare Economic growth rate Export Growth Rate Terms of Trade TPP 628.99 0.01% 0.2% 0.01% Taiwan 2257.14 1.54% 2.38% 0.83% Korea -242.95-0.08% -0.02% -0.05% China -1801.93-0.1% -0.14% -0.11% EU -598.7-0.03% 0.01% -0.01% Rest of -731.6-0.05% -0.01% -0.02% World Overall, Taiwan will increase in all of these four aspects we observed, including welfare, economic growth, export growth, as well as terms of trade, and the average influence on member countries of TPP is relatively unapparent; still, all the numbers indicate a positive effect. As for our biggest trading partner China, which is excluded from joining into TPP, it will suffer from a huge decline in all four aspects, especially in welfare and export growth. In contrast to China, the damage caused to South Korea and the EU is smaller. In fact, the influence on South Korea should be even slighter due to the introduction of 21

the KORUS FTA in 2012. According to Gilbert Rozman, the United States is taking the standards of KORUS FTA as a basic template of TPP s future. It is demanded by the United States that KORUS FTA apply the same standard of intellectual property rights (IPR) as members do in the TPP. Since the United States has been the dominant country within the agreement, the close-tied relationship between South Korea and the US undoubtedly compensate for South Korea s absence in TPP. II. Industrial Aspect Table 2 : Change in GDP of Industrial Sectors Sectors / Change in GDP Non-Participation (%) Participation (%) Grains and Crops -0.01-0.05 Meat and Live Stock -0.01-0.05 Extraction 0 0.01 Food Processing -0.01-0.07 Textiles and Wearing Apparels -0.03 0.73 Light Manufacturing -0.05 0.2 Heavy Manufacturing -0.1 0.6 Setting the target tariff rate as zero, which is the ultimate requirement of the TPP, we here make a comparison between the percentage change in GDP of each industrial sector under two conditions: 1. the TPP continues to form without Taiwan s participation, and 2. Taiwan takes part in the TPP with the existing members. We first take a look at the 1st condition. Apparently, all of these 7 sectors will be facing a slight decrease in the GDP, and no particular sector suffers an extra significant impairments. Here we can draw a conclusion that if the TPP members 22

continue to realize further liberalization with each other, Taiwan will possibly encounter overall impairments on an industrial level. Now we move on to the 2nd condition, where Taiwan joins in the agreement and carry out tariff policy consistent with the provisions. We have found an increase in the GDP of Textile and Wearing apparels, and a decrease in that of Grains and Crops and Meat Livestock, together as the agricultural industry. Here we try to compare the results of our GTAP analysis and previous work done by professionals in related fields, then figure out how Taiwan is able to prepare itself to overcome the shocks. The output value of agriculture sector accounts for 1.75% of Taiwan s GDP on average in the past fifteen years. Although the agriculture industry is the most harmed sector, losing 0.05% of GDP in Grains and Crops sector and Meat Livestock sector respectively; viewing Taiwan as a whole economy, the influence reduce to only a loss of 0.175% of annual GDP. Despite of this seemingly slight impact, appropriate measures and policies is still needed to enable those peasants to overcome the changes. We now start with the sector that will benefit most from the elimination of tariffs, namely the textile and wearing apparels. The export volume of textile and wearing apparels to the US accounted for 54.5% of Taiwan s total exports of the sector, making the US the largest export market of this sector. Although the textile and wearing apparel industry has an output value only accounts for 2.08% of Taiwan s GDP, according to WTO, Taiwan is the 7 th biggest export country in the world in 2011. However, as South Korea and Taiwan have long been in competition in the textile industry, after the KORUS FTA was put into effect in 2012, 89.36% of South Korea s textile products belong to the category of immediate elimination of tariffs. According to Industrial Development Bureau, Ministry of Economic Affairs, an estimated 59,570,000 US dollars (accounting for Taiwan s annual export amount to 23

US of 5.9%) are replaced by South Korea. At the same time, the export volume has decreased since 2007, with countries in Southeast Asia and China featuring lower labor costs. Joining the TPP, in effect, equals to eliminating tariffs with the members just as signing a bilateral FTA with each TPP member. Therefore, for textile and wearing apparel sector, this will possibly set off the impairments from the effect of the KORUS FTA on the industry. Owing to the current development of the textile industry and the TPP requirements of 100% cut on tariffs, we can conclude that after joining the TPP, the textile and wearing apparels sector will benefit the most as Taiwan will be competing with South Korea on an equal zero- tariffs basis on textile export into the US. Additionally, zero tariffs may also enhance the competitiveness of the price, as compared to China and countries in Southeast Asia. 24

Conclusion Throughout this paper, we have come to understand the current status of TPP and Asia-Pacific integration, the significant relation between TPP and Taiwanese economics. By analyzing and estimating the influence of joining TPP on Taiwanese economics, we finally move on to the responding policies suggested by professionals, in face of expected shocks coming in the aftermath. Referring to our GTAP analysis, on a macroeconomics basis, Taiwan is certain to benefit from partaking in the TPP. Despite this positive estimated results, the core of the controversy stills lies in the unequal distribution of the estimated economic growth among industrial sectors. It is therefore rather urgent to find out responding measures to protect vulnerable sectors and reduce the shocks. As we have found that the agricultural industry will be most substantially impaired after joining the TPP, we consulted in researches and expect to provide preventions and solutions to related problems. In the TPP negotiation, only a limited number of product categories will be permitted to reserve the tariffs. Based on the current base rate of each industrial sector, all of the limited products with permission to reserve tariffs will belong to the agricultural industry. As illustrated with the table in the previous chapter, sectors with a relatively high base rate will face the largest scale of market opening. Besides high tariff as protection to domestic industries, according to researchers from Chung-Hua Institution of Economic Research, Taiwan WTO Center, Chiao-Xia Du and Chang-Cheng Yeh, boarder measures such as specific tariffs and tariff rate quota (TRQ), and special safeguard (SSG) for sensitive products will also be in excess of the standard set by the TPP. Thus, products to which these measures are applied will have more difficulty adjusting to conform to the standards; however, trade liberalization under TPP does not exactly equals to absolute 25

elimination of all types of protection. The following paragraph provides suggested adjustment of measures in order to reduce the impairment on agricultural industry. Firstly, for high-tariff protection, except for certain product categories under the HS code, tariffs have to be eliminated for the majority of products after the transitional period. Nonetheless, consulting in the KORUS FTA, during the process of tariff cut, seasonal tariffs and reduction-by-year are applied, for which Taiwan can also require at the negotiation stage. Secondly, Taiwan may adopt TRQ on a minority of product categories, only that zero tariffs are required within the quota and that there is obligatory increase in the quota in each year. Finally, the SSG will still be adoptable when unusual change in import quantity or price occurs, so as to reduce the possible shocks on certain products. In addition to reducing shocks on the sectors mentioned in previous paragraphs, we regard these following two tasks equally important in Taiwan s preparation stage. Since we understand that the high standard TPP aims to tackle trade issues in a wider spectrum other than traditional trade issues, it is necessary for the government to embark on the amendment of the status quo concerned these new trade issues such as service trade, intellectual property rights, and environmental protection etc. By doing so, by the time Taiwan starts its talks with TPP members, out internal regulations will have already been adjusted and well-prepared. On the meanwhile, Taiwan needs to be active in understanding each TPP member s extent of trade liberalization, and take them into references in preparing for our own negotiations. Finally, because the entry to the agreement depends much on the approvals of each member, it is without a doubt important to understand each member s position of Taiwan s participation. The analyzed result seems to suggest a positive outcome, and under the current Asia-Pacific regionalism it is also inevitable and necessary for Taiwan to blend in. We contend that it will be beneficial for Taiwan to join the TPP only when the 26

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