Academic journal article International Journal of Business

The Three-Way Economic Relationships among U.S., Taiwan, and China

Academic journal article International Journal of Business

The Three-Way Economic Relationships among U.S., Taiwan, and China

Article excerpt

ABSTRACT

The study investigates the economic relationships in terms of trade and foreign direct investment among U.S., Taiwan, and China. Our results indicate that their relationships are increasingly linked.

JEL: F14, F18, F21

Keywords: Trade; Foreign direct investment; Economic relationships

I. INTRODUCTION

The relationships among the United States, Taiwan and People's Republic of China have attracted attention both politically and economically [Chaff (1999) and Janow (1998)]. The changing relationships among the three parties have become more conspicuous as the ruling party platform of the new Taiwan government leans toward pro-independence and the current Bush administration in the U.S. takes a tougher stance on the U.S.-China diplomacy. Seeking a new equilibrium is on the front burner in the millennium.

It is undeniable that the three economies are increasingly linked. My research aims to shed light on the economic relationship and illustrate its increasing importance in recent years. Economic ties studied in the paper are basically focused on international trade and foreign direct investments (FDI). Some misconceptions of their economic ties are clarified.

We discuss separately China's trade, bilateral trade between China and Taiwan, and the economic relationship between Taiwan and the U.S. The economic links between China and the U.S are discussed briefly, and some policy implications are drawn.

II. CHINA'S TRADE

International trade is an important component of China's economic growth. The economic growth rate had sustained at about 9 percent per year for almost two decades before the 1997 Asian financial crisis. Table 1, Panel A, documents China's export and total trade (exports and imports) for the period 1990-2000. In 1999, exports amounted to US$ 194.9 billion, almost about 20 percent of China's gross domestic product (GDP). Total trade was US$ 360.6 billion, just over about 36 percent of its GDP. Exports increased to US$ 249.2 billion (23 percent of GDP) and the total trading increased to US$ 474.3 billion (44 percent of GDP) in 2000. We can draw two conclusions from these data. China's economic growth depends critically on its external trade sector. China is also economically vulnerable with this amount of dependence on international trade.

Table 1, Panel B, identifies China's top ten trading partners in the year 2000. The ranking of these trade partners has been quite stable for the past several years. Japan is the largest trading partner, making up about 18 percent of China's total trade, followed by the U.S., which accounts for about 16 percent. Taiwan ranks as the fifth trading partner, accounting for over 6 percent of China's total trade. Thus, Taiwan and the U.S. are indeed strategically important trading partners with China.

III. TRADE POLICY AND ECONOMIC RELATIONS BETWEEN CHINA AND TAIWAN

Following China's open-door policy implemented in 1978, a trade relationship between Taiwan and China started to develop. Trading between China and Taiwan began first as an exchange among fishermen of merchandise, which was followed by indirect trade relations. From China's perspective, trade with Taiwan promotes contact between the two governments and economic integration between the two economies. At the same time, China can provide Taiwan business people with resources such as labor and land for expansion.

In April 1980, China allowed imports from Taiwan to be duty free as "interprovincial material exchange." On May 1, 1981, Taiwan imports were declared to be domestic products and thus exempt from custom tariffs.

In July 1985, Taiwan allowed entrepot trade but prohibited direct trade. After Taiwan's lifting of travel restrictions to China in 1987, an increasing number of Taiwan business people have gone to the mainland for trade and business opportunities.

Table 2 documents the different stages of trade relationships and policy changes between the two parties. …

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