China, Taiwan, and Regional Trade Integration

As the world evolves into an increasingly interconnected community, multinational corporations (MNCs) and regional trade agreements (RTAs) play an integral role in shaping the changing economic landscape. In 2014, MNCs accounted for 55% of global exports and 49% of imports, with a large part consisting of intermediate goods trade within MNC networks. According to WTO’s Regional Trade Agreement Database, total active RTAs among member countries increased from 124 to 264 between 2004 and 2014.  

ACI’s recent research paper ‘Regional Trade Integration and Input Sourcing Patterns of Multinational Enterprise Plants: Evidence from the ECFA’ looks into (i) how RTAs influence MNCs’ input sourcing patterns within or beyond the integrated region and the MNCs’ organizational borders; and (ii) the role of MNC production networks in shaping trade creation or trade diversion outside the integrated bloc. The research draws upon data from Taiwan-MNC affiliates in mainland China and studies changes in their input sourcing patterns, specifically looking at the time period around the signing of the Economic Cooperation Framework Agreement (ECFA) between mainland China and Taiwan in 2010.  

The research concludes that following the ECFA, Chinese subsidiaries increased imports not only from members, but also from non-member trade partners. The scale effect through the demand response to lower input costs appears to dominate the direct substitution effect from the enhanced trade relation across the Strait, leading to a trade creation effect outside the integrated bloc. Moreover, to a large extent, the trade created outside the bloc appears to be contained within multinationals’ organizational boundary. In particular, for contract-intensive products, firms mainly increased sourcing from related parties. The findings suggest that MNC production network strengthen the trade creation effect of regional trade agreements by reducing contractual frictions and search frictions along input-output linkages.  

Researchers: Yuting HUANG and Binjing LI

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