This paper explores the factors influencing agricultural trade between Chinese Mainland and Taiwan region, aiming to provide recommendations for cross-strait trade policies. Using a gravity model, we analyze panel data from 2012 to 2022 for agricultural products classified under Harmonized System (HS) Codes 1-24. Our findings indicate that Chinese Mainland’s imports of agricultural products from Taiwan region exhibit a significant positive inertia effect, with previous year’s imports strongly influencing the current year’s import volume. Additionally, there is a significant positive correlation between the imports and the per capita real income gap between the two economies. In contrast, Chinese Mainland’s outward foreign direct investment (FDI) in Taiwan region and the exchange rate between the two economies are significantly negatively correlated with import volumes. Specifically, an increase in the in-come gap favors higher imports, while depreciation of the Chinese Yuan (CNY) against the New Taiwan Dollar (TWD) and increased FDI from Chinese Mainland into Taiwan region are associated with reduced import volumes from agricultural sector in Taiwan region. These findings align with the Heckscher-Ohlin (H-O) theory and Mundell’s substitution theory, which suggests that differences in factor endowments drive international trade flows, and that Foreign Direct Investment can substitute for some aspects of international trade. This study suggests that the monetary authorities and financial institutions in the two economies should establish a local currency settlement mechanism between CNY and TWD to enhance cross-strait agricultural trade.
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