The administration of President Ma Ying-jeou (馬英九) insists on signing an economic cooperation framework agreement (ECFA) with China and is using an assessment report by the Chung-Hua Institution for Economic Research as an endorsement. The institute has assessed the impact of the cross-strait economic pact based on the Global Trade Analysis Project (GTAP) model. The Ministry of Economic Affairs then made “expert adjustments” to the report to minimize or eliminate any negative impact before concluding that an ECFA with China would raise the nation’s economic growth by about 1.7 percentage points and increase the number of employed by about 260,000.
However, this illusion is a result of numerous hypotheses that defy economic reality. The GTAP model is a full employment model, implying that production resources can move freely between industries — for example, that engineers can work at a farm and that farmers can work at an information technology (IT) company — to exclude the possibility of unemployment.
Under this model, when an unfavorable impact on certain industries results in unemployment, full unemployment will be restored because markets will cause a reduction in wages or induce workers to transfer from a negatively affected industry to an industry benefiting from the impact. This model, however, does not tell us how long this adjustment will take and how great the cost will be.
The insitute’s assessment says the electrical, electronics and transport equipment industries will be the hardest hit by the proposed ECFA, while the chemical, plastic, rubber, mechanical and agricultural industries benefit the most. The result of the assessment is that many workers in the electrical and electronics industries will transfer to agricultural and chemical industries. In other words, some IT engineers will become farmers. Will there really be farming jobs for those who want them. Is it possible for farmers to switch to IT jobs?
More seriously, assume that the substitution elasticity for Taiwanese and Chinese products is zero. The GTAP model uses the level of market overlap to estimate the replacement effect, but it fails to consider the replacement effect on domestic products in the local markets. In other words, the assessment report only mentions that following the signing of an ECFA with China, Taiwanese products may replace products from Japan, South Korea, ASEAN countries and so on in the Chinese market and Chinese products may do the same in Taiwan, but it ignores the possibility of cheap and inferior Chinese product rip-offs replacing Taiwanese products. This is a key issue, and the issue that will most affect Taiwan.
There will be a massive influx of cheap Chinese rip-offs and agricultural produce thanks to the zero-tariff preferential treatment, and this is certain to cause labor-intensive and agricultural industries to collapse, especially small and medium-sized enterprises manufacturing towels, ready-made garments, shoes, bedding and ceramics, thus exacerbating unemployment. In future, Taiwanese may be reduced to migrant workers in China. In the meantime, the high unemployment levels will lower the take-home wages in the nation and lead to a serious income imbalance. These problems are all excluded from the GTAP model.
In addition, when cross-strait customs tariffs are removed and economic regulations relaxed, Taiwanese competitive industries will likely increase their exports to China while edging out exports to other countries, in particular the US, the EU, Japan and ASEAN members. As a consequence, Taiwan’s economic security will come under greater risk and the lifeline of the nation’s economic development will become completely controlled by China. The assessment report only briefly touches on this trade diversion effect, which probably would be the biggest long-term concern resulting from the signing of an ECFA with China.
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