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Sunday, December 11, 2016

The Current State and Implications of ANZTEC


Darson Chiu

Introduction

     The free trade agreement between Taiwan and New Zealand is a signature trade deal especially for Taiwan. Taiwan and New Zealand have very different economic structures; said trade deal can certainly benefit both nations and optimize their diverse comparative advantages. Nevertheless, more participants will create more benefits not only in theory but also in practice. As New Zealand is a critical member major multilateral free trade agreements of Asia-Pacific, helping Taiwan to join in those processes will enhance New Zealand’s economic welfare.


ANZTEC

     ANZTEC is the agreement between New Zealand and Taiwan (the Separate Customs Territory of Taiwan, Penghu, Kinmen, and Matsu) on economic cooperation. ANZTEC was signed on 10th July 2013 and came into force on 1st December 2013.  It is indeed a signature free trade agreement especially for Taiwan. It is the very first trade deal that Taiwan has achieved with a country that does not have diplomatic relations with. It is the second trade deal that Taiwan has signed with an Asia-Pacific Economic Cooperation (APEC) member economy; the economic cooperation framework agreement (ECFA) ought to be the first trade deal that Taiwan has signed with an APEC member.[1]

Before that, Taiwan had completed free trade agreements with 5 allies, Panama, Guatemala, Nicaragua, El Salvador, and Honduras.[1] However, none of these 5 diplomatic allies has significant economic and trade relations with Taiwan. In addition to that, ANZTEC can lead to more desirable objectives that have been on Taiwan’s wish list. New Zealand is not only an APEC member but also enjoys the membership of both Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP), two most significant mega-FTAs in the region of Asia-Pacific.





[1] The early harvest of ECFA was signed on June 20, 2010 as the first economic cooperation agreement that Taiwan has signed with its major trading partner.


[2] Taiwan-Panama FTA was signed and in effect on January 1, 2004. Taiwan-Guatemala FTA was signed and in effect on July 1, 2006. Taiwan-Nicaragua FTA was signed and in effect on January 1, 2008. Taiwan-El Salvador-Honduras FTA was signed and in effect on July 30, 2008.


     Because join in TPP, RCEP or even the Free Trade Area of Asia-Pacific (FTAAP) has been the most important priority of Taiwan with respect to its trade-oriented economic structure, Taiwan has been striving for support from existing members. Taking part in those multilateral processes requires consensus of all existing members, ANZTEC can be viewed as a very first step for Taiwan towards those processes.

Economic Overview


Table 1. Economy Overview of Taiwan and New Zealand as at 2015

Taiwan
New Zealand
Ø   GDP- US$ 522.95 billion
Ø   Population- 23.49 million
Ø   Exports/GDP- 64.58%
Ø   Major Exports Items: Machinery & electrical equipment (57.14%), basic medals and articles (9.68%), Plastic and rubber articles (8.03%), Chemicals (6.91%)
Ø   Major Destinations: China (27.89%), Hong Kong (14.87%), USA (13.12%), Japan (7.44%)
Ø   Imports/GDP- 51.58%
Ø   Major Imports Items: Machinery & electrical equipment (35.58%), Minerals (17.59%), Chemicals (10.84%), Basic Medals and articles (8.14%)
Ø   Major Origins: China (19.15%), Japan (16.44%), USA (12.35%), Korea (5.69%)
Ø   GDP- US$ 172.27 billion
Ø   Population- 4.59 million
Ø   Exports/GDP- 28.29%
Ø   Major Exports Items: Dairy (24.11%), Meat (13.92%), Forestry (7.17%), Wool (1.74%)
Ø   Major Destinations: Australia (17.64%), China (17.02%), USA (11.83%), Japan (6.07%)
Ø   Imports/GDP- 27.67%
Ø   Major Imports Items: Machinery & electrical equipment (22.21%), Transport equipment (15.47%), Mineral fuels (10.02%)
Ø   Major Origins: China (19.52%),  Australia (11.89%), USA (11.78%),  Japan (6.59%

Source: Economist Intelligence Unit (EIU) country data retrieved on 10 October 2016.
 
     The economy overview of Taiwan and New Zealand shows that both countries are actually specialized in very different sectors. Therefore, by referring to how diverse the economy of Taiwan and that of New Zealand can be giving that there would be more room for bilateral cooperation and actually not much for them to compete for external demand and market shares. Taiwan is a much more populous country;


     Taiwan’s size of population is roughly 5 times as large as New Zealand’s population, and Taiwan’s economic size is about 3 times bigger than New Zealand’s GDP. New Zealand has higher income per capita around US$ 38,000 every year compared with Taiwan’s per capita income standing at US$ 23,000. In terms of purchasing power parity (PPP), then Taiwan’s income level is higher at about US$ 47,000, and New Zealand is at US$ 37,000.

     As at the year of 2015, Taiwan’s degree of economic reliance on trade was 116.16%, whereas New Zealand was at only 55.96%. That means trade is much more important for Taiwan’s economy. Comparing the PPP and reliance on trade, many have argued that Taiwan’s exchange rate policy has been in favor of exports but internal demand.

     As for major export and import items, we can see that New Zealand’s strengths are in its agricultural sector. By comparison, Taiwan’s comparative advantages are with information and technology and manufacturing sectors. Export and import items of New Zealand are very different, but export and import items of Taiwan are almost in the same categories. That implies that Taiwan’s exports would be mainly intermediate goods, IT parts and components.

Bilateral Trade


Table 2. Bilateral Trade between Taiwan and New Zealand as at 2015

Taiwan
Zealand
Ø   Taiwan exports to New Zealand- US$ 0.44 billion
Ø   Major items: Machinery and electrical equipments; Plastic and rubber articles; Steel and products; Transport equipment; and Medals and articles.
Ø   New Zealand exports to Taiwan- US$ 0.84 billion
Ø   Major Items: Dairy products; Meat; Fruits and nuts; Forestry related products; Organic chemical products.

Source: Customs Administration, Ministry of Finance, ROC.

     Refer to the bilateral trade between Taiwan and New Zealand of the year of 2015 as an example, Taiwan’s exports to New Zealand at the total value of US$0.44 billion, and imports from New Zealand stood at US$ 0.84 billion giving a trade deficit of US$ 0.4 billion. Compared with the year of 2014, Taiwan’s exports to New Zealand decreased by 6.6%; imports also dropped by 7.6%. It is not because the ANZTEC has not helped promote bilateral trade between Taiwan and New Zealand. It is mainly because the deflationary impact triggered by the plunging crude oil price causing the shrinking overall global demand. The crude oil price started to fall in June 2014, the second year of ANZTEC entry into force. Because of slowing down global economic growth, the economic effect of ANZTEC has not been very evident. Although in theory, the free trade agreement will certainly help promote trade between signed members and as a result, pick up economic growth; however, the tepid global and regional growth in a way offset the expected outcome.

     From table 2, we can also see that export items of these two nations are very different, whereas the FTA will further encourage participant members to allocate their strengths and resources on sectors with comparative advantages.

GVC Participation Index

     In addition, their export structures are very different. As Taiwan’s export and import categories are almost the same as listed in table 1 meaning Taiwan has been exporting intermediate goods. By referring to the OECD global value chain participation index, we can see Taiwan’s GVC participation index is the highest among all Asia-Pacific countries. By comparison, New Zealand’s GVC index is the lowest among all countries. The index is defined as share of gross exports in fragmented production processes. It means 70.99% of Taiwan’s exports would be intermediate goods, and only 34.1% of New Zealand’s exports are parts and components. From this perspective, Taiwan is more integrated into economic cooperation processes by market mechanism, despite the fact that Taiwan’s participation in rule based integration is insufficient to back up its external trade and economic activities.

Table 3. GVC Participation Index-Share of Gross Exports in Fragmented Production Processes (%)

Australia
43.81
Canada
34.78
Chile
52.21
Japan
47.75
Korea
65.03
Mexico
41.79
New Zealand
34.10
USA
39.83
China
46.06
Indonesia
43.72
Brunei
43.72
Taiwan
70.99
Malaysia
65.57
Philippines
66.65
Singapore
70.66
Thailand
52.82
Viet Nam
51.35
Hong Kong
55.79

Source: OECD database retrieved on 7 October 2016.

     As Taiwan and New Zealand present two very diverse manufacturing structures reflected on their major exporting goods and GVC indices. That implies there’s room for further cooperation. We should confirm such implication by referring to export similarity index in the world market. As the index approaches 1, which means that two countries are exporting goods that are 100% similar. When the index closes to 0 that means two countries are exporting totally different goods. In short, the higher the index, the more likely they are in competition. On the other hand, the lower the index, there is more room for cooperation.

Table 4. Export Similarity Index

 
Taiwan
China
Japan
Korea
ASEAN
India
Australia
New Zealand
Taiwan
 
0.76
0.67
0.80
0.73
0.45
0.24
0.30
China
0.76
 
0.60
0.73
0.72
0.55
0.27
0.36
Japan
0.67
0.60
 
0.76
0.54
0.40
0.23
0.29
Korea
0.80
0.73
0.76
 
0.72
0.47
0.25
0.31
ASEAN
0.73
0.72
0.54
0.72
 
0.53
0.37
0.39
India
0.45
0.55
0.40
0.47
0.53
 
0.37
0.35
Australia
0.24
0.27
0.23
0.25
0.37
0.37
 
0.40
New Zealand
0.30
0.36
0.29
0.31
0.39
0.35
0.40
 

Source: REI Study, Taiwan Institute of Economic Research.

      The indices of most East Asian economies are above 0.5 meaning they are more in status of competition. That also explains why Korea has been taking Taiwan’s market shares in most export destinations and why China’s import substitution policy has been causing a serious damage on Taiwan’s economy.[1] As the index between Taiwan and New Zealand is only 0.3, they are in perfect conditions for economic cooperation.

Tariffs Removal of ANZTEC

     The ANZTEC delivers removal of tariffs on 94.5% of New Zealand’s exports to Taiwan and 99% of Taiwan’s exports to New Zealand as soon as the deal comes about.  As for the rest of the items, Taiwan will take a gradual step to remove tariffs.  However, 11 items related to rice will be excluded from the tariffs removal list. New Zealand will remove all tariffs by next year. It seems to be a very good deal for Taiwan, but Taiwan has been having deficits when trading with New Zealand.

Table 5. Tariff Profiles-Members of TPP, RCEP, & TTIP and Taiwan (%)

RCEP
TPP
Members
Total
Ag
Non-Ag
Members
Total
Ag
Non-Ag
Australia
2.7
1.2
3.0
Australia
2.7
1.2
3.0
New Zealand
2.0
1.4
2.2
New Zealand
2.0
1.4
2.2
Japan
4.2
14.3
2.5
Japan
4.2
14.3
2.5
Brunei
1.2
0.1
1.3
Brunei
1.2
0.1
1.3
Malaysia
6.1
9.3
5.5
Malaysia
6.1
9.3
5.5
Singapore
0.2
1.1
0.0
Singapore
0.2
1.1
0.0
Vietnam
9.5
16.3
8.4
Vietnam
9.5
16.3
8.4
China
9.6
15.2
8.6
USA
3.5
5.1
3.2
India
13.5
33.4
10.2
Peru
3.4
4.1
3.3
Korea
13.3
52.7
6.8
Canada
4.2
15.9
2.2
Indonesia
6.9
7.5
6.7
Chile
6.0
6.0
6.0
Philippines
6.3
9.9
5.7
Mexico
7.5
17.6
5.9
Thailand
11.6
31.3
8.3
 
Laos
10.0
20.1
8.3
Myanmar
5.6
8.6
5.1
Cambodia
11.2
14.9
10.6
Taiwan
6.5
16.7
4.8

Source: WTO Tariff Profiles 2015.

      The most recent tariff profiles retrieved from the WTO show that the tariff ratios on average in New Zealand have already been lower than most Asia-Pacific countries.  When New Zealand started to liberalize its agricultural sector in the 1970s, many New Zealand farmers went bankrupt. However, bringing in competition has made New Zealand’s agricultural sector extremely strong and competitive. From such perspective, the model of New Zealand’s agricultural liberalization would be a good model for Taiwan to adopt. After all, protection will not lead to reform, and postponing reform will make certain sectors even more defenseless.

General Equilibrium Test Results

      Table 6 shows a general equilibrium test conducted by the WTO & RTA Center of Chung-Hua Institute for Economic Research; the results show that both Taiwan and New Zealand will acquire economic benefits from the ANZTEC. And the benefits can be significantly expanded with further liberation in all sectors. The results imply that the transaction costs derived from liberalization would be less compared with the potential benefits generated by liberalization.

Table 6. ANZTEC CGE Test Results

Scenario
Scenario 1
Scenario 2
Scenario 3
Growth rate
First year of ANZTEC in effect
Fourth year of further liberalization
Twelfth year of full promised liberalization
Taiwan GDP
+0.01%
+0.03%
+0.08%
New Zealand GDP
+0.14%
+0.16%
+0.18%
Taiwan Exports
+0.11%
+0.18%
+0.22%
New Zealand Exports
+0.28%
+0.32%
+0.32%
Taiwan Imports
+0.12%
+0.21%
+0.26%
New Zealand Imports
+0.50%
+0.63%
+0.66%

Source: WTO & RTA Center, Chung-Hua Institute for Economic Research.

      Another CGE test conducted by Lee and Itakura (2015) shows that there would be negative economic impacts on Taiwan if Taiwan cannot join the second wave of TPP.  However, the impact can turn into positive if Taiwan is included in RCEP.  Nevertheless, the economic welfare can be maximized when Taiwan gains membership of both TPP and RCEP. Also, we can see New Zealand’s welfare can be further expanded as more members join in those multilateral processes.

Table 7. TPP CGE Test Results[2]

%, Percentage deviations in economic welfare
TPP 13 (TPP 12+South Korea)
TPP 16 (TPP13+Indonesia, Philippines, Thailand)
TPP 19 (TPP16+China, India, Taiwan)
Japan
0.24
0.64
0.87
China
-0.07
0.12
0.58
South Korea
0.55
1.71
3.09
Taiwan
-0.05
0.46
2.35
Singapore
0.40
1.40
2.06
Malaysia
0.47
1.20
1.24
Vietnam
1.50
2.79
2.94
Australia
0.15
0.53
1.61
New Zealand
0.31
0.88
0.91
USA
0.05
0.12
0.16
Canada
0.30
0.57
0.73
Mexico
0.44
0.82
0.73
Chile
0.33
1.16
1.83
Peru
0.13
0.35
0.53

Source: Lee and Itakura (2015).

Conclusions and Suggestions

     From economic modeling test results as well as major items of external trade, it is very obvious that the economic structures of Taiwan and New Zealand are different and ought to be complimentary; therefore, cooperation between these two nations will lead to more optimal allocation of their limited resources as their comparative advantages can be maximized.

     From the past history, it is the fact that liberalization has made the agricultural sector of New Zealand more competitive and resilient despite there could be transaction costs to some certain extent during the transition period. Taiwan’s economic growth has been very slow since the second quarter of 2015, and New Zealand’s liberalization model would be a good model for Taiwan’s adopt. There are certain sectors of Taiwan, which are still over protected, and many have argued that liberalization is the way and only way to restructure Taiwan’s industries and revitalize Taiwan’s economy.

     Evidences have showed that ANZTEC generates benefits for both nations; more benefits are created as sectors are further liberalized. Regarding the outlook of future cooperation, New Zealand is a critical member of both TPP and RCEP, helping Taiwan and more countries to join in will enhance New Zealand’s economic welfare.

(Dr. Darson Chiu is the Director General of CTPECC.)




[1] China’s import substitution policy has been identified as “the red supply chain”, which constraints Taiwan’s exports and result in tepid GDP growth.
[2] It’s assumed that Taiwan is already a RCEP member as TPP 16 takes place; however, Taiwan is not yet a TPP member.

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