An Analysis of the Trade-Investment Relationship Across the Taiwan Strait

Abstract

Over the past decade, there have been many studies of cross-Strait trade and investment relations based on the theories of comparative advantage. However, none have provided a satisfactory explanation of the cross-Strait trade-investment complementarity. In this paper, the author attempts to use a footloose specific factors model to analyze the moving forces which shape the patterns of cross-Strait trade and investment. The model shows that Taiwan investment in the Chinese mainland has been determined by the comparative advantages of the two sides, as well as the absolute advantages that Taiwan enjoys relative to the mainland and other institutional factors. The model also helps clarify come commonly- confusing issues linked to cross-Strait trade and direct investment.