An Economy-wide Analysis of Trade Liberalization Impacts on Rural Household Income in Taiwan

As Blank (2008, p. 302) notes, off-farm income earned by farm household plays at least two major roles in agriculture. In a macroeconomic role, off-farm income is a neglected index of a country’s economic development. In a microeconomic role, off-farm income is one of the most important risk management tools available to farm households. Blank (2008, p. 133) further emphasizes, “Currently, economy-wide demand for labor is the engine of “growth” in American agriculture. A growing real wage is a sufficient condition for rural household income growth.” Gardner (2005) also points out that this is the dominant explanation for the catch-up of farm to urban household income levels observed over recent decades in the U.S. Like in the U.S., off-farm income represents a high and generally increasing percentage of average farm operator household income in Taiwan. Off-farm income accounted for about 80 percent of total farm household income in 2014. The contribution of off-farm income for farm household and rural development are too important to be ignored. In recent decades, the major trends of commercialization, globalization, science and technology are all ongoing and interrelated. The impacts of trade liberalization (e.g., WTO, FTA, or TPP) on Taiwan’s agriculture sector has been an important issue in policy debates. Most of the debates focus on decreases in major indicators, e.g., total output value in production agriculture sector, food security, food self-sufficiency rate and on-farm income of farm household. Almost all of them neglect or ignore those potential increases in off-farm employment and income from local economic growth with trade liberalization. For the research methodology, Irwin et al. (2010) provide a selected review of the economics literature over the past 100 years with a focus on the economic transformation of rural places and conclude that “Rural development is a general equilibrium problem that requires general equilibrium tools.” The development of computable general equilibrium (CGE) modeling techniques by agricultural economists has been a major contribution to the entire economics profession and rural development, in particular. Computable general equilibrium models are the only ones that endogenously determine primary factor supplies as well as all prices and incomes in an economy. In this study, we built the SAM-based GEMTEE (General Equilibrium Model for Taiwanese Economy and Environment) model—a recursive dynamic computable general equilibrium (CGE) model that depicts the economy of Taiwan and its demographic structure through time—a flexible mechanism to reflect how fertility respond to income and demographic policies, as well as demographers’ perspectives. The GEMTEE model is a CGE model derived from the Monash-type CGE model (Dixon and Rimmer 2002) and is calibrated to the 2006 Social Accounting Matrix of Taiwan as the benchmark. We use cross-strait trade liberalization as a case study. The 57 sectors of GTAP (Global Trade analysis Project) dataset and 166 sectors of Taiwan’s Input-Output Tables are aggregated into four major sectors: agriculture, agro-processing, manufacture and services. With all tariff rates eliminated from bilateral trade between China and Taiwan, GTAP simulations produce different import and export price changes to both economies. We then use SAM-based GEMTEE model to simulate the impacts of cross-strait trade liberalization on Taiwan’s economy, agriculture output off-farm income, farm household income and employment. Simulation results demonstrate that Taiwan’s GDP will increase by 1.78%, but total agriculture output will decrease by 0.9%. For per farm household income, although on-farm income decreases by NT$1,648, off-farm income will increase by NT$10,580. In total, per farm household income increases by NT$8,932 with cross-strait trade liberalization. With trade liberalization as the engine of growth and trade adjustment assistance (TAA) mechanism in work, economic growth in Taiwan’s agriculture may be maintained and in the long run off-farm income and employment will increase to provide a “safety net” for rural households.