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PIIE Update Newsletter
June 25, 2010
"Top Think Tank in the World" in 2008
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Policy Brief 10-16
Deepening China-Taiwan Relations through the Economic Cooperation Framework Agreement
[pdf]
Daniel H. Rosen and Zhi Wang
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On June 13, 2010, representatives from China and Taiwan held a third round of talks in Beijing on an Economic Cooperation Framework Agreement (ECFA) that would liberalize important aspects of cross-Strait economic relations. It is clear from available details that ECFA will be an ambitious accord that fundamentally changes the game between Taiwan and China and hence affects the regional economy and even the transpacific tempo for the United States. Rosen and Wang's economic projections of the effects of a China-Taiwan ECFA point to significant benefits of cross-Strait economic reform, especially for Taiwan, which would increase its 2020 GDP by about 4.5 percent, or $21 billion, from the current trend line. The authors, however, also conclude that the regional economy around China and Taiwan is not standing still but is extraordinarily dynamic. Other agreements in the region will be negotiated (e.g., ASEAN+3), which will impose costs on Taiwan, if it does not do an ECFA, to the tune of almost –0.8 percent of GDP. So the net effect of ECFA for Taiwan would be some 5.3 percent improvement in GDP by 2020. For China, the net results of ECFA are positive, though far less so than for Taiwan in value terms and of course as a share of GDP.
For the United States, the authors project a very modest positive result from ECFA (though statistically marginal) but a more negative impact as the scenarios incorporating further Asian integration (ASEAN+3) unfold. If the US objective is to maximize Taiwan's economic prospects and hence its freedom of independent action, then ECFA is highly desirable, and Taiwan's involvement in further Asian deepening is to be supported. However, US economic interests per se erode as Asia draws tighter together without US inclusion. That is an econometric reality. More significant still is the geoeconomic, qualitative implication of even long-standing nemeses China and Taiwan drawing together in a free trade pact while the United States watches, unable to ratify already negotiated Asian trade agreements like the US-Korea free trade agreement. While modest in global economic effects, the geoeconomic implications of a China-Taiwan economic pact are significant enough to demand strategic attention from the United States and underscore the importance of securing US economic engagement of the first order in Asia.
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Read full policy brief [pdf]
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Op-ed
Will the New Climate Bill Damage US Energy Security?
Trevor Houser and
Michael A. Levi
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Trevor Houser and Michael A. Levi use the US Chamber of Commerce's new "Index of US Energy Security Risk" to analyze the Kerry-Lieberman climate bill and find that it would increase energy security. The chamber's new index, released in May, assigns numbers to a slippery concept, combining 37 factors that measure how energy use affects the economy and national security.
The chamber predicts how the index will evolve in the future by using projections from the Department of Energy's 2009 Annual Energy Outlook, along with some related data from another US government publication. In the absence of any new US policies, they say, the index will rise by 18 percent between today and 2020—from 83.7 to 98.8—before declining slightly through 2030. Houser and Levi first made sure they could reproduce these predictions and then simulated the effect of the Kerry-Lieberman bill on US and global energy systems over the next two decades using the same modeling system that the government uses to produce the Annual Energy Outlook. Their simulations show that under the Kerry-Lieberman bill, the energy security risk index would be at least 8 percent lower than it would be otherwise.
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Read full op-ed
>> See also: Simulating the Effects of the American Power Act (Kerry-Lieberman) on Energy Security
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Op-ed
Modernize or Marginalize
Anders Åslund and Andrew Kuchins
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Russia's current dilemma is whether to modernize or marginalize. After weathering a perfect storm of oil price decreases, reversed capital flows, and political isolation following the war with Georgia, Anders Åslund and Andrew Kuchins recommend that Russia aspire to emulate and join the West via coming to the World Trade Organization. The Kremlin currently faces no immediate internal or external threats, making this the perfect time for the government to find the political will and courage to launch reforms.
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Read full op-ed
>> See also: Russia after the Global Economic Crisis
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Speech
When Central Banks Buy Bonds: Independence and the Power to Say No
[pdf]
Adam S. Posen
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Acting responsibly and utilizing the tools available to respond to the global financial crisis, including large-scale bond purchases, enhances the credibility of major central banks, Adam Posen argues in his speech at Barclays Capital 14th Annual Global Inflation-Linked Conference. Furthermore, he disagrees with the popular sentiment that central bank independence is dictated by reputation and argues that it is the actions of central banks, not their appearances, that really matter. Central bank independence is simply about the ability to say no to demands for bond purchases when they are economically unjustified. Under some circumstances, it is right for central banks to initiate bond purchases—in which case the appearance of cooperation with politicians should not deter central banks from doing the right thing.
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Speech
Linkages between International Trade and Financial Markets: Mapping the Issues
[pdf]
Edwin M. Truman
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Present academic thinking and institutional arrangements do not appreciate the strength of the linkages between policymaking and trade and finance in the global economy. In his speech, Edwin Truman posits that this underappreciation stems primarily from the increased globalization of the last 60 years. Relevant international players have increased in number at government and private levels while trade and capital flow barriers have been considerably eliminated. This underappreciation of globalization causes some concern that the wrong lessons will be learned from the current crisis—and the globalization that aided its spread—and countries will react by erecting new barriers. The WTO, the IMF, and the Financial Stability Board all have roles to play in limiting the fragmentation of the global system in the near future.
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Read full speech [pdf]
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PIIE Noted in the News and on the Web
The Diane Rehm Show
China's Currency Valuation
The United States welcomed China's decision to allow the value of its currency to rise against the dollar, but the long-term implications are unclear. Diane and guests explore what Chinese exchange rate flexibility could mean for the United States and the global economy.
PBS NewsHour
Tensions Flare Between U.S., China After Push for Revalued Currency
The Obama administration has placed pressure on China to revalue its currency, creating economic tensions between the two countries. Ray Suarez sits down with C. Fred Bergsten, director of the Peterson Institute for International Economics, about this latest turn of events.
Preview of Our Next Issue
Op-ed
Chinomics: Yes, China Does Need that Infrastructure
Nicholas R. Lardy
Op-ed
The G-20 and "Chermany"
Arvind Subramanian
Op-ed
Going from State Capitalism to Pragmatism
Anders Åslund
Working Paper 10-10
Wholesalers and Retailers in US Trade
Andrew B. Bernard, J. Bradford Jensen, Stephen J. Redding, and Peter K. Schott
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Peterson Institute for International Economics
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Tel: 202-328-9000 | Fax: 202-659-3225 | www.piie.com
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