APEC, the WTO and Economic Relations Across the Taiwan Strait

Abstract

Economic relations across the Taiwan Strait have developed in an institutional context that, for the commercial protagonists, can best be described as murky and unsettled. Given the importance that increasingly has been placed by economists on sound institutional frameworks that provide transparency, predictability and legal certainty for commercial participants as necessary – if not sufficient – conditions for good economic performance, it is to be expected that cross-Strait economic activity would benefit from improvements in the institutional framework under which it takes place. Accordingly, this paper considers the implications for economic relations between Taiwan and China of the evolution of formal international institutional arrangements within APEC, the foremost regional economic forum to which both are party, and from their expected imminent accession to the World Trade Organization (WTO). There is a potential for a very major expansion of commercial relations across the Taiwan Strait, with very significant gains from trade to be had by both China and Taiwan, from addressing factors that are within the area of trade policy and arrangements alone – direct transportation and other trade-related links, and reduction of trade barriers to levels typical of free trade agreements. For China, the gains would be on the same order of magnitude as those estimated to be obtained from WTO accession – equivalent to an expansion of its trade by about one-third, implying income gains equivalent to about an additional year’s worth of real growth spread over one to two decades. For Taiwan, the gains would be proportionately larger, representing an expansion of trade by more than 50 percent, implying income gains roughly equivalent to two-to-three years’ worth of growth spread over a similar time frame. These gains would be 2 to 3 times larger than the gains Taiwan can expect from WTO accession. Only a small part of this potential expansion of cross-Strait trade would be realized on the basis of WTO entry. The gains from cross-Strait trade stimulated by WTO accession would add on average about half a percentage point to annual GDP growth for each economy over the ensuing couple of decades. By contrast, the present weak momentum in APEC on implementation of its trade liberalization and facilitation agenda means that the benefits for the cross-Strait commercial relationship from APEC’s ongoing programs would not be quantitatively significant. In this regard, the question at the moment is less what APEC can do for China (and by extension for cross-Strait trade) as what China can do for APEC in terms of re-energizing the organization during its year as chair in 2001.

Keywords: China, Taiwan, Cross-Strait relations, APEC, WTO

JEL Classification: F13, F15