Pacification Cost: Estimate Trade Bloc’s Price of De-escalating Tension

• In Event: Foreign Policies and Their Effectiveness: Case of East Asia and Beyond

Abstract

How much should a trade bloc be compensated for due to its role in de-escalating tensions? This paper examines the economic impacts that Taiwan joining the Regional Comprehensive Economic Partnership (RCEP) would have on the RCEP trade bloc, the United States, and China. Assuming Taiwan’s exclusion is due to political reasons, we use the Computational General Equilibrium (CGE) model and Global Trade Analysis Project (GTAP) database to simulate the economic shock of Taiwan joining the RCEP. First, we identify and aggregate Taiwan’s major trading partners, including China, the United States, and the RCEP countries. Then, we use the auxiliary program RunGTAP to simulate policy shocks that affect import tariffs. By analyzing the counterfactual economic impact of trade liberalization, we estimate the potential loss of the RCEP and the economic rationale for Taiwan’s exclusion. The conclusion shows the opportunity cost ofthetradebloc’s political compromise and could be generalized to other conflicted regions worldwide.

Keywords: Economic Integration, Trade Forecasting, and Simulation

JEL Code: F15, F17

Latest version: https://jeffjkuo.github.io/CGE1

Author

• Jeffrey Kuo, George Washington University