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In the statistical data from the Bureau of Foreign Trade of Taiwan, China is the top trade partner holding 22.68% of total trade value, 27.19% of export value and 17.47%
of import value of Taiwan between April, 2010 and November, 2019. As for the U.S. in the same period, it holds the third place of trade partner to Taiwan, accounting for 11.184% of total trade value, 11.759% of export value and 10.52% of import value.
Under the U.S.-China trade war, the channel for the firms to avoid the country-specific imposition for imports from China is to divert the destination for the goods to a third country thereby fleeing the additional tariffs. By diverting to another destination, the third country could be benefited by both trade deflection and creation. In this research, the focus is on Taiwan, one of the closest trade partners of China.
3. Data Sources
Table 2 shows the variable list for this study. The variables in the research are composed of air freight import (I) and export (E) weight volume, dummy for U.S.-China trade war’s tariffs lists, the weighted average unit price and value, and the control variables. In the following subsections, the source and the basic information of variables are presented.
3.1 Air Freight Volume
From the Civil Aviation Administration (CAA) of Taiwan, the air freight weight volume is listed specifically for main airports in Taiwan, such as Taoyuan (TPE4 ) located in northern Taiwan and Kaohsiung International Airport (KHH) in southern Taiwan. Starting from April, 2010 to Nov, 2019, the data covers 116 monthly data
4 The IATA airports code is used to represent the airports mentioned in this study, such as TPE for Taoyuan International airport, KHH for Kaohsiung, TSA for Songshan, and RMQ for Taichung.
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classified in 38 kinds of air freight categories. Due to the potential possibility of exogenous effect from the outbreak of pandemic the paper does not include the data after December 2019 to avoid the biased estimation.
I obtain the air freight trade volume the sum of both air ports (TPE and KHH). In the third column in Table 2, the expectation of this study is that implementation of tariffs will have a positive effect on both imports (trade deflection) and exports (trade creation), especially for those major trade categories for Taiwan, such as machines and electronics from category 23 to 27. Since the Songshan (TSA) and Taichung (RMQ) airport, the international airports in northern and central Taiwan, do not provide their air freight weight volume in separative air freight categories. Although these data are not available, the weight volume of RCSS and RCMQ only account for the total international (including entrepot trade) trade volume of around 2.5% and 0.1% respectively. Thus, the missing of these data does not bias the estimations.
Table 3 presents the descriptive statistics of all variables. Notice that the medians for the export side (trade creation) are smaller than 1. It is because a large proportion of the value in data is smaller than zero or close to zero. This also explains the significant drop of the number of observations.
Table 4 lists the air freight categories, including 38 kinds of commodity classification, i.e., metal, metal products, machinery, and electronics, etc. Nevertheless, the air freight categories are different from what we usually use in customs for tax imposition. It is used to classify the cargo for workers in the airports to precisely distinguish the commodities for the reason of applying appropriate protection during transportation. Thus, a matching of air freight category to the Harmonized System code is presented in the third column of Table 4. The matching will be further discussed in section 3.3.
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Figure 2 shows the aggregated air freight volume over time. The vertical axis shows the log-trade volume in kilogram through both airports. The horizontal axis is the corresponding month of year. The reference line indicates the starting month of the tariffs lists implementation (L1) in July, 2018. After the imposition, the trend of the air freight volume has increased, showing a potentially upward growth of the trade volume.
The outliers in every year are resulted from the spring break of Chinese New Year.
3.2 Dummy Variables of the U.S. Tariff Lists
To capture the effect of the implementation of tariffs lists, the monthly policy dummy variables for each air freight category are created. Each category has a dummy representing whether this category is included in a specific tariffs list, for instance, transportations had turned into 1 for L1 dummy after July, 2018, the month of implementing the first tariff list, showing a starting point of a 25% of tariff on some of the headings included in article 86, 87, 88 and 89. Therefore, there are totally 5 dummy variables for each air freight category representing the implementation of List 1, List 2, List 3 with 10% tariffs rates, L3 with 25% tariffs rates, and part A of List 4, represented by L1, L2, L3_10, L3_25, and L4A, respectively.
3.3 Weighted Average Unit Price and Trade Value
The monthly average import and export unit prices (USD/kg) are collected from trade statistic data base in Taiwan’s Bureau of Foreign Trade. This study uses the monthly average imports and exports prices reported at the customs as the proxy for the average prices for air freight prices.
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tariffs lists announced in the HS code. Table 4 shows comprehensive matching between air freight categories and HS along with the code for air freight categories. For instance, the category of transportation in air freight could be matched to the chapter 86 to 89 (2-digits) in HS and toys are linked to the heading of 9501 to 9503 (4-(2-digits). However, some of the categories, such as private baggage, diplomatic mail, and airliner cargo, and so on, cannot be matched with any HS chapter or heading because of the special characteristics of the air freight. These categories are also excluded from any tariffs list.The prices are weighted by its proportion of volume in the category. For instance, the weighted average unit import price of transportation, including HS chapter 86 to 89, is calculated from aggregating the average unit import price for HS chapter 86, 87 and 89, then weighted by its own import volume. The same logic is applied to the goods categorized with 4-digits HS code. Moreover, the weighted average unit prices are adjusted by the quarterly Gross Domestic Production deflator to reflect the real price for the month. The GDP deflator is collected from Directorate-General of Budgets Accounting and Statistics (DGBAS) of Taiwan and converted into monthly frequency by Quadratic-Match Sum method6. The adjusted unit prices are then used to construct the trade value by price times quantity in order to capture the scale of the air freight trade. The value of air freight is also expected to have a positive effect as a result of the U.S.-China trade war.
The data omits the average unit price of total import and export for the air freight because the calculated average unit prices are different between 2-digits and 4-digits
5 HS code is the Harmonized Commodity Description and Coding System developed and maintained by World Customs Organization (WCO) to standardize the traded products internationally with 2 to 6 digits code.
6 Quadratic-Match Sum method, according to EViews, performs the same proprietary local quadratic interpolation, but the low frequency data is divided by the number of observations first.
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classification. In addition, with the absence of average unit prices for the sum of imports and exports, their derived data of sum trade value is also missing.
3.4 Control Variables
The exchange rate is an essential factor in international trade since it potentially has a negative correlation on a country’s net export. This study uses the monthly real effective exchange rate (REER) of Taiwan collected from the open data in the Bank of International Settlement (BIS)7 to control the effect from fluctuating exchange rate.
The nominal effective exchange rate is the exchange rates weighted by other countries’
nominal exchange rate. Thus, the REER is the nominal effective exchange rate deflated by the price or production cost index to eliminate the fluctuation of the international prices. In other words, according to the International Monetary Fund (IMF), is the real effective exchange rate (a measure of the value of a currency, in this case is New Taiwan dollar (NTD), against a weighted average of several foreign currencies) divided by a price deflator or index of costs. Therefore, at the base year, in this case is 2010, the REER is 100. When the REER is greater than 100, it implies a depreciation of NTD which is a decrease for the competitiveness in trade. While it is smaller than 100, the implication is totally the opposite. Thus, REER is expected to have a positive effect on imports side (trade deflection), while exports are in contrast.
The quarterly real GDP data for Taiwan and the United States are obtained to control for the country’s economic scale over time. The quarterly real GDP data for the U.S. is from the U.S. Bureau of Economic Analysis (BEA), and the quarterly real GDP for Taiwan is from DGBAS. All the quarterly data must be converted into monthly
7 BIS provides two kinds of measurement of REER, broad or narrow. The broad REER includes more trading countries for weighted average than the narrow one. Thus, it is collected as a control variable for this study.
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frequency via Quadratic-Match Sum in order to match with the frequency of the air freight data. The real GDP should have a positive relation to the country’s imports and exports since it represents the production power and people’s consumption power economically for the market.