Computational Analysis of the Menu of US‐Japan Trade Policies

We have used the Michigan Computable General Equilibrium (CGE) Model of World Production and Trade to calculate the aggregate welfare and sectoral employment effects of the menu of US‐Japan trade policies. The menu of policies encompasses the various preferential US and Japan bilateral and regional free trade agreements (FTAs) negotiated and in process, unilateral removal of existing trade barriers and global (multilateral) free trade. The welfare impacts of the FTAs on the United States and Japan are shown to be rather small in absolute and relative terms. The sectoral employment effects are also generally small but vary across the individual sectors depending on the patterns of the bilateral liberalisation. The welfare effects on the FTA partner countries are mostly positive though generally small, but there are some indications of potentially disruptive employment shifts in some partner countries. There are indications of trade diversion and detrimental welfare effects on non‐member countries for some of the FTAs analysed. In comparison to the welfare gains from the US and Japan bilateral FTAs, the gains from both unilateral trade liberalisation by the United States, Japan and the FTA partners, and from global (multilateral) free trade are shown to be rather substantial and more uniformly positive for all countries in the global trading system. The US and Japan FTAs are based on ‘hub’ and ‘spoke’ arrangements. We show that the spokes emanate out in different and often overlapping directions, suggesting that the complex of bilateral FTAs may create distortions of the global trading system.     

Bilateral versus Multilateral Trade and Investment Liberalisation

To assess the welfare effects of bilateral versus multilateral trade and/or investment liberalisation in general equilibrium, we set up a three‐country and three‐factor knowledge‐capital model of trade and multinational activity. Numerical simulation results indicate that multilateral liberalisation tends to dominate bilateral liberalisation in welfare terms. A transition economy tends to prefer bilateral over multilateral liberalisation to avoid plant relocation. For similar reasons, a developed country may prefer bilateral over multilateral liberalisation, if the other economies exhibit big relative factor endowment differences.     

Bilateral ‘WTO‐Plus’ Free Trade Agreements: The WTO Trade Policy Review of Singapore 2004

The World Trade Organisation's 2004 Trade Policy Review of Singapore (WTO‐TPR Singapore 2004) depicts the small and outward‐oriented economy as one of the most open countries to international trade and investment. The review highlights the benefits of the outward‐oriented strategy that has enabled the Singapore economy to weather recent external shocks such as the Asian financial crisis to the SARS and to the recent unfavourable conditions in the Middle East. In particular, the report commended Singapore's efforts on its liberalisation of the services sector and its economic benefits to consumers and global trade. However, the WTO‐TPR Singapore 2004 highlights several key areas of concerns: (a) the commitment to multilateral agreements with the rising number of bilateral free trade agreements signed by Singapore and (b) the lack of growth of total factor productivity, a key indicator for long‐run efficiency of the economy. The paper addresses the above key concerns raised in the WTO's TPR of Singapore in terms of its commitment to global trade in terms of WTO‐plus bilateral FTAs, which intends to support a multilateral trading system, and its overall industrial strategies to raise its competitiveness.     

Determinants of Bilateral Trade Protection

In this paper, determinants of bilateral protection levels are empirically identified when controlling for multilateral trade regulation and importing‐country‐specific factors. Strong empirical support is provided of that three bilateral factors are influencing the bilateral protection level. Specifically, a country's protection level on goods from a trade partner is positively affected by the domestic import penetration of goods produced by the trade partner, negatively influenced by the intra‐industry traded share of these imports and positively affected by the trade partner's protection level on domestic goods. Moreover, very high explanatory values are provided in the cross‐section estimations, indicating that these determinants, policy regulations and importer‐specific factors jointly explain almost all of the variation in bilateral protection levels. The results are general in the sense that estimations are performed for a large sample of bilateral trade relations including 22 trade partners that are highly differentiated in terms of country characteristics. The overall results indicate that, to the extent that policy makers can affect bilateral protection levels under multilateral trade regulation, they act on political‐economy rather than economic goals.     

Computational Analysis of the US FTAs with Central America,Australia and Morocco

We use the Michigan Model of World Production and Trade to assess the economic effects of the US bilateral FTAs negotiated with Central America, Australia and Morocco. The model covers 18 economic sectors in each of 22 countries/regions and is based on version 5.4 of the GTAP database for 1997 together with specially constructed estimates of services barriers and other data on sectoral employment and numbers of firms. The distinguishing feature of the model is that it incorporates imperfect competition in the manufacturing and services sectors, including monopolistic competition, increasing returns and product variety. The modelling focus is on the effects of the bilateral removal of tariffs on agriculture and manufactures and services barriers. Rules of origin and other restrictive measures and the non‐trade aspects of the FTAs are not taken into account due to data constraints. The computational results indicate that the benefits of bilateral FTAs for the United States and partner countries are rather small in both absolute and relative terms, and that far greater benefits could be realised if the United States and its FTA partners adopted unilateral free trade and especially if multilateral free trade was adopted by all countries/regions in the global trading system.     

Determinants of Foreign Trade in China's Textile Industry

The article sets out to examine whether the volume of bilateral trade between China and 40 of its trading partners in the up-, mid-, and downstream segments of the textile industry is affected by factors such as GDP, per capita GDP, geographic distance, FDI outflows and inflows, openness to trade, and bilateral investment treaties. The significant negative correlation between import/export volume and distance reflects the close trading relations between China and the other countries of East Asia. A home market effect is evident for downstream exports. China's FDI outflows stimulate growth in midstream textile product exports.     

Accounting for the Differences Between Gross and Value Added Trade Balances

One of the main stylised facts that has emerged from the recent literature on global value chains is that bilateral trade imbalances in gross terms can differ substantially from those measured in value added terms. However, the factors underlying the extent and sign of the differences between the two measures have so far not been investigated. Here, we propose a novel decomposition of bilateral gross trade balances that accounts for the differences between gross and value added concepts. The bilateral analysis contributes conceptually to the literature on double counting in trade by identifying the trade flow in which value added is actually recorded for the first time in international trade statistics. We apply our decomposition framework to the development of intra‐EU‐27 trade balances from 1995 to 2011 and show that a growing share of intra‐EU bilateral trade balances is due to demand in countries other than the two direct trading partners. The latter accounted for 25 per cent of the total variance of intra‐EU gross bilateral trade balances in 2011, which marks a considerable rise from 3 per cent in 1995.     

Simulating World Trade in the Decades Ahead: Driving Forces and Policy Implications

Notwithstanding the current slowdown, the geography and composition of international trade are changing fast. We link a macroeconomic growth model and sectoral computable general equilibrium framework in order to project the world economy forward to the year 2035 and assess to what extent current trends in trade are expected to continue. Constructing fully traceable scenarios based on assumptions grounded in the literature, we are also able to isolate the relative impact of key economic drivers. We find that the stakes for developing countries are particularly high: the emergence of new players in the world economy, intensification of South–South trade and diversification into skill‐intensive activities may continue only in a dynamic economic and open trade environment. Current trends towards increased regionalisation may be reversed, with multilateral trade relationships gaining in importance. Hypothetical mega‐regionals could slow down, but not frustrate the prevalence of multilateralism. Continuing technological progress is likely to have the biggest impact on future economic developments around the globe. Population dynamics are influential as well: for some countries, upskilling will be crucial; for others, labour shortages may be addressed through migration. Several developing countries would benefit from increased capital mobility; others will only diversify into dynamic sectors, when trade costs are further reduced.     

Are bilateral and multilateral aid‐for‐trade complementary?

Using the first comprehensive estimates of ad valorem tariff equivalent bilateral trade costs spanning the time period 2002–10, we examine whether the aid‐for‐trade (AFT) inflows reduce bilateral trade costs facing aid recipients. If so, we ask whether the trade costs reduction effects of AFT from bilateral and multilateral sources are complementary. By showing the extent to which the observed trade cost reduction effects of AFT from bilateral (multilateral) sources correlate with the magnitudes of AFT disbursements from multilateral (bilateral) sources, we present plausible explanation for the cross‐country variations in the extent to which AFT promotes trade flows. Our findings have, thus, important policy implications for shaping future discourses on the coordination of disbursements for enhancing the effectiveness of AFT.     

Per capita income,market access costs,and trade volumes

There is strong empirical evidence that countries with lower per capita income tend to have smaller trade volumes even after controlling for aggregate income. Furthermore, poorer countries do not just trade less, but have a lower number of trading partners. In this paper, I construct and estimate a general equilibrium model of trade that captures both these features of the trade data. The key element of the model is an association between trade costs (both variable and fixed) and countries' development levels, which can account for the effect of per capita income on trade volumes and explain many zeros in bilateral trade flows. I find that market access costs play an important role in fitting the model to the data. In a counterfactual analysis, I find that removing the asymmetries in trade costs raises welfare in all countries with an average percentage change equal to 29% and larger gains for smaller and poorer countries. Real income inequality falls by 43%.     

Tariff Liberalisation and the Growth of World Trade: A Comparative Historical Analysis of the Multilateral Trading System

The aims of this study are to assess the relationship between tariff barriers and world trade growth from a comparative and historical perspective, and to derive some useful indications for evaluating the effectiveness of the current multilateral trading system for promoting world trade. The novelty of this work is the complex reconstruction of a historical tariffs and trade series for the period 1870–2000, for 23 countries; this constitutes a good proxy for world trade (accounting for over 60 per cent) in this period. The effect of tariff liberalisation on trade growth is analysed empirically using panel data and time series. The results, while confirming the existence of a world level long‐term relationship between tariff reductions and trade growth, demonstrate how this substantial and significant relationship pre‐World War II gradually diminished in importance and significance after 1950. This result does not conflict with the key role of the General Agreement on Tariffs and Trade/World Trade Organization system in trade liberalisation; however, it underlines the importance of a formalised multilateral trading system, not so much for tariff liberalisation, but for building a virtuous process of international coordination of trade policies and ensuring fuller participation in world trade.     

The FTA Music Is Playing in Asia: After ECFA,Will Taiwan Join the Dance?

In the context of stalled multilateral trade negotiations, major trading economies are seeking free trade agreements (FTAs) to secure their market access objectives. Nowhere is this dynamic stronger than in East Asia, where a web of bilateral and plurilateral agreements is stitching together piecewise an Asian free trade area that could plausibly rival the EU and NAFTA trade blocs and where the possibility of a formal pan-Asian agreement has been raised. Taiwan has been largely excluded from this dynamic. However, with the June 29, 2010 signing of the Economic Cooperation Framework Agreement (ECFA) with China, the possibility of Taiwan joining the FTA dance in East Asia would appear to have been greatly strengthened as the advocates had anticipated. This article considers the economic and trade implications of Taiwan's participation versus non-participation in an emerging East Asian trade bloc. We support our analysis with simulations using the GTAP computable general equilibrium model. The article finds that the benefits to Taiwan of participating in such a bloc have increased, as have the opportunity costs of exclusion, since the share of East Asian partners in its trade has risen.     

Misalignment of the Baht and its Trade Balance Consequences for Thailand in the 1980s and 1990s

This paper examines Thailand's pre‐crisis exchange rate policy, focusing on the degree of the country's real exchange rate misalignment pre‐crisis and its consequent effects on Thailand's trade balance with its two large trading partners, the US and Japan, in the 1980s and 1990s. Defining misalignment as the difference between actual and ‘equilibrium’ exchange rates, we estimate three key ‘equilibrium’ exchange rates of the Thai baht: (a) the real effective equilibrium exchange rate of the Thai baht against its twenty‐two major trading partners; (b) the bilateral real equilibrium exchange rates of the baht against the US dollar; and (c) the bilateral real equilibrium exchange rate of the baht against the Japanese yen.     

Modes of Foreign Direct Investment and Patterns of Trade: An Alternative Empirical Approach

Modes of FDI can be clarified by analysing the changing patterns of trade among host, home and third countries. However, most empirical experiments of foreign direct investment (FDI) determinants have been confined to general characteristics of host countries and multinational enterprises' outward investment activities. This may not clearly characterise the specific characteristics of inward FDI in regard to the host country. Thus, we introduce an alternative approach to clarify modes of FDI by investigating the link between patterns of trade and inward FDI. To empirically test whether our approach is applicable, we choose China during the period 1998–2007. We construct a modified gravity equation of bilateral trade while considering spatially lagged interdependence between host, home and third countries. The problem of endogeneity is controlled by applying the system generalised method of moments (GMM) estimation technique. Our findings are consistent with results in existing studies on modes of outward FDI to China and prove that our approach in dealing with the link between patterns of trade and inward FDI has wide applicability to all modes of FDI. We discover there is strong evidence for statistically significant complementarity between bilateral trade and inward FDI within the aggregate trade data. As we decompose the aggregate trade data into final and intermediate goods, we find the motivation concerning export‐platform and complex vertical FDI is very significant. In addition, as we separate the bilateral partners into developing partners and developed partners, we find both bilateral and multilateral linkages are much stronger with developing partners.     

中国自由贸易区战略的有效性:基于商品竞争性与互补性的分析

2004年至今,中国对外商谈的自由贸易区已达14个,涉及全球31个国家和地区,中国对外自由贸易网络正在形成.文章以中国与其中9个代表性经济体的双边贸易为对象,通过贸易密集度指数、修正后显性比较优势指数、相对贸易竞争指数和贸易互补性指数的详细测算,分析比较这些经济体与中国可贸易品的竞争优势及互补程度,以此对当前中国实施自由贸易区战略的有效性作出科学评价.     

The volatility of world trade in the 21st century: Whose fault is it anyway?

This paper explores the drivers of the volatility of international trade. It decomposes trade growth into six components that have gained attention in the literature and studies their contribution to overall volatility. It yields three main findings. First, trade volatility in the 1990–2015 period is mostly explained by a common factor, changes in the gravity‐related characteristics of a country's trading partners and country‐specific factors. Product composition and the identity of trading partners appear to be less important in explaining volatility. Second, the pre‐2009 decline in volatility and the post‐2009 increase in volatility appear to be driven by different factors. The former is mostly explained by a decline in the variance of country‐specific factors; the latter appears to be driven by an increase in the volatility of common factors. Third, diversification is a likely force behind the steady decline in the volatility stemming from country‐specific factors, especially in developing countries.     

Unemployment and Trade Liberalisation

In contrast to the focus of the public debate over trade liberalisation on job losses there is a widespread view among economists that unemployment and trade issues should be considered separately. This view cannot be justified theoretically, and ignores the growing number of general equilibrium trade models with unemployment. In a simple model with an exogenous wage floor, trade liberalisation can lead to either gains or losses depending on the production technology, severity of the factor market distortion, factor intensities of the industries and conditions in trading partners. Definite results can be derived about gains from liberalising trade with lower wage floors, about relative abundance of the unemployed factor dampening losses when trade is liberalised, and about gains when the good which uses the unemployed factor is exported. The theoretical models are then linked to the policy modelling literature, using the example of recent Australian controversies over liberalisation of trade in automobiles and textiles. It is argued that trade liberalisation would be better advanced by including endogenous employment in trade policy simulation exercises and by discussing employment effects rather than brushing them aside as temporary adjustment problems or regional difficulties.     

EU Anti‐dumping and Tariff Cuts: Trade Policy Substitution?

The world trading system in its current form aims at reducing multilateral trade barriers across the board. Indeed, the last successfully concluded multilateral trade negotiations led to substantial tariff concessions on the part of most developed economies. What, however, happened to other forms of import protection? Have substantial tariff concessions subsequently been replaced by the use of alternative forms of import protection? In this paper we empirically investigate the relationship between negotiated external tariff cuts and the subsequent use of anti‐dumping actions by the EU. Evidence is found for larger Uruguay Round tariff cuts increasing the probability of subsequent anti‐dumping investigations.     

The Political Economy of Trade Integration in South Asia: The Role of India

The South Asian regional trade integration process to date has generated only limited enthusiasm. It suffers from significant shortcomings, primarily on account of a very cautious approach adopted to achieve the ultimate objective of ‘free trade’ within the region. In turn, this has led to a fragmentation of the integration process, with some of the partners of the South Asian Association for Regional Cooperation (SAARC) bloc opting for a speedier and more liberal bilateral process with India. India’s engagement remains the critical feature as the single most important trading partner for almost all the other South Asian countries. However, the dynamics of Indian economic integration initiatives too have been changing rapidly, whereby it is looking increasingly to strengthen its economic relations with the wider Asian region. In this context, the question of India’s willingness to give leadership to carry the rest of South Asia as the bridge that connects the region to East Asia needs to be examined. The current evidence suggests that India has attempted to do so via a host of bilateral and regional arrangements, but that the divergences in strategic interests amongst SAARC countries has left Pakistan on the margins of an evolving scheme of overlapping trade initiatives in South Asia. Thus, while something approximating ‘free trade’ in South Asia appears to be taking shape, it is unlikely to take the form of an inclusive South Asian regional integration process envisaged by SAARC.