Intra-industry Trade and the Potential Impacts of Free Trade Agreement among Taiwan, Japan, South Korea and China

This paper provides a thorough examination of the ongoing trade pattern among Taiwan, Korea, Japan and China. We observed trade among these four countries pair-wisely and segregate trade pattern into inter-industry trade and two-way trade, or intra-industry trade (IIT). Further efforts are made by disentangling such trade into horizontal IIT (HIIT) and vertical IIT (VIIT). The results show that although one-way trade still dominates most trade types among these four countries, IIT is growing in importance.
Additionally, we adopted a multi-sector computable general equilibrium model to simulate the potential impacts on Taiwan’s economy if Korea, Japan, and China form a Free Trade Agreement (FTA) with Taiwan being left out. Considering Taiwan's response to Japan-Korea-China FTA, the simulation of direct sailing between Taiwan and China is also implemented. As for the simulation, we use the GTAP (Global Trade Analysis Project) model and its newly released version 6.0 database. Simulation results show that the impacts of a FTA on GDP and welfare of member countries are generally positive, while the impacts on non-members are negative. In the case of Taiwan, the reaction of direct sailing somewhat increases GDP and welfare of Taiwan comparing to Taiwan’s situation in scenario 1 although GDP and welfare are still negative.