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

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. 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. 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. The GEMTEE model is a CGE model derived from the Monash-type CGE model (Dixon and Rimmer 2002) and is calibrated to the 2011 Social Accounting Matrix of Taiwan as the benchmark. 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.