The Economic Impact of the Emergence of China on Taiwan




Tsai, Kai-Yun

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This thesis is a collection of three self-contained chapters focusing on the economic impact of China's emergence on Taiwan's economy and contributing to the pool of empirical evidence of China's economic influence on Asian economies. Chapter 2 investigates the determinants of Taiwan's macroeconomic fluctuations via an SVAR model with block exogeneity, focusing on two foreign output disturbances, the US and China. This chapter considers five external economic disturbances and five domestic variables during 1987-2015 when modelling Taiwan's economy. The results show that external disturbances are more significant to Taiwan's economic fluctuations than domestic shocks. The economic impact of the US and China are both significant to Taiwan: the US impact is relatively far-reaching while China's influence is mainly through international trade. The results also show how Taiwan's economy recovered from the Global Financial Crisis. The lower commodity prices and China's positve economic impact provided a substantial contribution to this recovery. Chapter 3 focuses on how China's economic disturbances impact on Taiwan via international trade and compare it with the US influence. As China's economy grows and vertical specialisation rises in Asia, researchers are increasingly interested in China's economic impact on Asian economies. Given the interaction between Taiwan and China from indirect to direct after joining the World Trade Organisation (WTO), the high degree of global value chain participation, and the US and China both being important trading partners, Taiwan serves as a natural experiment to explore. Chapter 3 adopts a VAR model with block exogeneity, considering two external shocks--US GDP, Chinese GDP--and three domestic variables--Taiwan's exports, GDP and imports--during 1991-2018. Also, The data period is split into two sup-periods--the pre-WTO period and the post-WTO period. The results show that China's influence is increasing over time. More specifically, during the pre-WTO period, China's influence is insignificant, while during the post-WTO period, China's impact on Taiwan's economy is almost comparable with the impact of the US. Chapter 4 examines the determinants of Taiwan's terms of trade (TOT) from 1989 to 2018. The Prebisch-Singer hypothesis suggests that a manufacturing-based economy would have an increasing trend in its TOT. Kaplinsky and Santos-Paulino (2005) indicate that an economy primarily exporting high-tech goods should not experience declining export prices. However, as a major exporter of information and communication technology (ICT) goods, Taiwan has experienced a declining TOT and export price in recent decades. Intense demand by China and other emerging markets has pushed up commodity prices and, in turn, impacted Taiwan's import price. China's improvement in technological capacity enables it to compete with Japan, Korea, and Taiwan over ICT products, the prices of which dominate Taiwan's export price. Despite China's economic growth stimulating Taiwan's export and import prices, due to the competition over ICT goods, the magnitude in increasing Taiwan's export price is less than that in the import price. This combination results in a negative impact on Taiwan's TOT. The results also highlight the necessity of incorporating two foreign output disturbances for small open Asian economies, which have close economic relationship with China. It also demonstrates the riskiness for a small open economy of specialising in producing specific products, which are subject to unfavourable export prices.






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