Business Finance in Less Developed Capital Markets

By Klaus P. Fischer; George J. Papaioannou | Go to book overview

6
Reactions of the Taiwanese Stock Market to Trade Talks with the United States

GILI YEN and PHILIP CHANG


ISSUE AND OBJECTIVE

The trade surplus of Taiwan with the United States has been constantly increasing over the last 20 years. Table 6.1 shows the trade flows between these two countries during the period from 1966 to 1986. The United States has also been Taiwan's predominant foreign market. Table 6.2 shows the major Taiwanese commodities exported to the U.S. market. Note the importance of textiles. Concerned about the trade imbalance, the United States first initiated trade talks with Taiwan in 1978. Since then, trade talks between the two countries have become an annual event. In addition, there have been a number of talks targeted at specific industries, in particular, the textile industry. The goal of the U.S. side is to trim its huge deficits by limiting Taiwanese exports and by persuading Taiwan to open up its markets to American businesses.

Because of the extreme importance of the U.S. market to the Taiwanese economy, the trade talks conducted between the governments of the United States and the Republic of China are expected to exert a substantial impact on that economy. The purpose of this chapter is to examine empirically this impact by observing the reaction of Taiwan's stock market to the Sino-American trade talks that took place during the period from October 1, 1981, to September 30, 1986. News of developments in the trade talks is classified into the mutually exclusive categories of "good," "bad," and "indeterminate," reflecting the probable effects of the developments on Taiwan's stock market.

The balance of the chapter is organized as follows. The first section reviews previous studies. The second section illustrates the empirical methodology. The third section describes the collection and classification of the sample. Findings are presented and discussed in the fourth section. The fifth section concludes the chapter.

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