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Impact of Capital Flows on Trade Balance: Analysis of China and Taiwan's Economic Dynamics

This study explores how capital flows influence the trade balance, focusing on the implications of policy changes such as the elimination of quotas in 2005. Through a baseline versus policy simulation, we analyze the relationship between savings, investments, exports (X), and imports (M) and how changes in capital inflows affect trade balance metrics. It highlights findings related to net transfers and capital earnings that contribute to the trade balance improvements post-WTO accession for China and Taiwan, particularly in the textile sector.

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Impact of Capital Flows on Trade Balance: Analysis of China and Taiwan's Economic Dynamics

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Presentation Transcript

  1. How do capital flows affect trade balance? • Baseline vs. Policy simulation (Quotas eliminated in 2005) • S – I = X - M + Net Transfer • Trade balance: X –M DTBALR

  2. DTBALR (CHN_TWN)(yr on yr difference)

  3. Change in Saving and investment (yr on yr difference) Investment Saving

  4. Change in Saving and investment (yr on yr difference) • S – I = X - M + Net Transfer • Initial investment inflow results in deterioration of trade balance, relative to baseline

  5. Changes in Net Transfer (yr on yr difference) yqtf yqht

  6. Changes in Net Transfer (yr on yr difference) • S – I = X - M + Net Transfer • Increased capital earnings payments to trust require subsequent improvement in trade balance, relative to balance

  7. Textiles Grain China – D, E, I

  8. Textiles Grains NAM

  9. How does China and Taiwan’s accession to WTO affect textile sector and structural change?

  10. Base

  11. policy

  12. Cum dif in quantity

  13. Domestic Sales and Outputs

  14. Exports

  15. Export Prices

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