Labor Market Implications of Taiwan's Accession to the WTO: A Dynamic Quantitative Analysis

We study the effects of Taiwan’s accession to the WTO in 2002 on the labor market dynamics in Taiwan during 1995–2020. Based on the dynamic hat algebra of Caliendo, Dvorkin and Parro (2019), we modify the framework to allow for differently skilled labor inputs (low, middle, high) and sector-skill dynamic choice by workers. We map the model to the labor-market transition data in Taiwan (based on quasi-longitudinal household surveys), the country-sector-specific skill shares in production, and the bilateral trade flows and import tariffs, for 61 economies and 22 sectors for the period 1995–2007. We study the counterfactual dynamics if the bilateral tariffs related to Taiwan’s imports and exports were rolled back to their levels in 1995, and calculate the cumulative effects on the employment shares and on the welfare of workers by sector and skill. We find the tariff reductions during this period to explain very much the observed expansion of Taiwan’s MCEE and business services sectors in their employment shares, and the growing share of high-skilled workers in Taiwan’s labor composition. We also conduct alternative counterfactuals to evaluate the effects of bilateral tariff concessions between Taiwan and China only, China’s WTO accession, and combined accessions by both Taiwan and China. We find bilateral tariff concessions to account for the bulk of the effects of Taiwan’s WTO accession, illustrating the importance of China to Taiwan in the latter’s trade structure.