Bilateralism and Regionalism in Japanese and U.S. Trade and Direct Foreign Investment Patterns

We apply a modified "gravity model" incorporating measures of factor endowments to analyze Japanese and U.S. bilateral trade flows and direct foreign investment positions with a sample of around 100 countries for the period 1985–1990. Country features that our analysis takes into account are population, income, the land–labor ratio, the average level of education, and region. We find that features of a country associated with more trade with either Japan or the United States also tend to be associated with more direct foreign investment (DFI) from Japan or the United States. U.S. economic relations with Japan and Western Europe provide an important exception. Despite U.S. concern about its trade deficit with Japan, we find Japan to be much more open to the United States, not only as a source of imports, but also as a destination for U.S. exports than most countries in Western Europe. Taking other factors into account, however, Western Europe is more open to U.S. direct foreign investment. We also find that a country′s level of education tends to increase significantly U.S. interaction of all types with that country, even after correcting for per capita income. Education does not play a significant role in Japanese trade patterns. As factor endowment theory would predict, the United States tends to trade more with densely populated countries, while Japan tends to import more from sparsely populated countries. Even after taking into account population, income, factor endowments, and region, there is a substantial degree of "bilateralism" in Japanese and U.S. economic relationships in that the residual correlation among exports, imports, and outward direct foreign investment is much larger than would be the case if these magnitudes were independent across countries. J. Japan. Int. Econ. December 1994, 8(4), pp. 478–510. Boston University, Boston, Massachusetts 02215; and National Bureau of Economic Research, Cambridge, Massachusetts 02138.     

The Euro and International Equity Flows

We use a new panel data set on bilateral gross cross-border equity flows between 14 countries. We fit a “gravity model” to these data and a strictly comparable set of data for manufactures trade between these countries. The results are strikingly similar, although the coefficient on the distance variable is lower for equity than for trade flows (but still highly significant). We use the results to throw some light on the likely consequences of unifying the European equity markets.J. Japan. Int. Econ.December 1998,12(4), pp. 406–423. London Business School and CEPR, Sussex Place, Regent's Park, London NW1 4SA, United Kingdom and London School of Economics, London WC2 2AE, United Kingdom.Copyright 1998 Academic Press.Journal of Economic LiteratureClassification Numbers F21, F3.     

Vertical intra-industry trade and foreign direct investment in East Asia

As economic integration in East Asia progresses, trade patterns within the region are displaying an ever-greater complexity: Though inter-industry trade still accounts for the majority, its share in overall trade is declining. Instead, intra-industry trade (IIT), which can be further divided into horizontal IIT (HIIT) and vertical IIT (VIIT), is growing in importance.In this paper, we set out to measure and examine vertical intra-industry trade patterns in the East Asian region and compare these with the results of previous studies focusing on the EU, to which such analyses so far have been confined. Based on the supposition that VIIT is closely related to offshore production by multinational enterprises, we then develop a model to capture the main determinants of VIIT that explicitly includes the role of FDI. The model is tested empirically using data from the electrical machinery industry. The findings support our hypothesis, showing that FDI plays a significant role in the rapid increase in VIIT in East Asia seen in recent years. J. Japanese Int. Economies 17 (4) (2003) 468–506.     

On trade creation and regional trade agreements: does depth matter?

Regional trade agreements (RTAs) are usually classified according to their form into four broad categories: preferential arrangements, free trade agreements, customs unions and common markets. This paper investigates whether the form/depth of RTAs matters concerning their effect on trade. I use a proper specification of the gravity model with panel data on the 1960–2000 period, which specifically control for self-selection into agreements. Results show that creating any kind of RTAs providing trade preferences to their member countries significantly increases bilateral trade. Nevertheless, their average treatment effect on bilateral trade does not significantly differ according to the depth of agreements.

Terms of trade, catch-up, and home-market effect: The example of Japan

This paper explores theoretically and empirically the medium- and long-run relation of the terms of trade (ratio of traded goods prices) and economic growth of a pair of countries—one of which experiences a major catch-up process towards the other. Two theoretical interdependencies between the terms of trade and economic growth are offered: the home-market effect and the productivity-shock effect. These two effects are tested against each other in a cointegration analysis on data for Japan and the US from 1971 until 1997. Income is cointegrated with the terms of trade. The relevant empirical channel is the home-market effect. However, financial-market effects appear also to be relevant. J. Japanese Int. Economies 21 (4) (2007) 470–488.     

Is Japan's trade (still) different?

Does Japanese trade in manufactured goods differ from the rest-of-the world average and from the US? We use a simple industry-level gravity model and 1981–1998 data to answer this question. We construct a measure of normalized imports by dividing bilateral industry-level imports by the importer's aggregate absorption and the exporter's industry output. We find that Japan imports less than other countries, but also exports less than other countries. Relative to the US, Japanese export performance is half as strong today as it was in the mid-1980s. Bilaterally, Japan is more open to imports from the US than the US is to imports from Japan. This means that the US runs a trade surplus with Japan in normalized imports of manufactured goods. J. Japanese Int. Economies 17 (4) (2003) 507–519.     

The Role of Nominal Anchor Currencies in Exchange Rate Arrangements

This paper studies the evolution of exchange rate arrangements of almost all countries in the world over the period 1970–1996. It examines both officially reported and empirically observed exchange rate arrangements. Several findings are obtained. First, the relative economic size of countries under fixed exchange rate regimes has not declined as dramatically as the measure based on reported arrangements would indicate. Second, the U.S. dollar has been the most dominant, global anchor currency because many developing economies, particularly those in Asia, Latin America, and the Middle East, have attempted to stabilize their exchange rates to the dollar. Third, the reserve currency composition is determined by the constructed measure of the net currency-area size in addition to the own-economic size of the reserve currency country. Fourth, as a result of the transition to the final stage of EMU, the euro is expected to emerge as the world's second most dominant anchor currency. While the Japanese yen will continue to play a less significant role as nominal anchor, its role in East Asia is expected to rise gradually.J. Japan. Int. Econ.December 1998,12(4), pp. 334–387. World Bank, 1818 H Street, N.W., Washington, DC 20433 and Institute of Social Science, University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113, Japan.Copyright 1998 Academic Press.Journal of Economic LiteratureClassification Numbers F31, F33, F36.     

NEA Presidential Address: Black Economists of the World You Cite!!

Economists who publish research in the economics and political economy of race seem averse to citing similar research by black economists. As citations are an important determinant of success as a research economist, black economists can possibly offset the aversion of non-black economists in citing black economists, by citing black economists themselves. This NEA Presidential address considers the relevance of black economist citations, and evaluates the extent to which black economists cite other black economists.

Dynamic Adjustment to Regional Integration: Europe 1992 and NAFTA

Recent research on the gains to trade liberalization, especially in a number of papers by Richard Baldwin, suggests that the static gains to trade liberalization that many economists attempt to measure may be dwarfed by the dynamic gains. One source of these dynamic gains is through capital accumulation. A similar argument can be made regarding the consequences of regional integration. As distortions are removed the effects of aggregate output through dynamic adjustments are likely to be larger than simple static calculations suggest. This paper focuses on the issue of the dynamic gains to regional integration for two recent episodes, European integration known as Europe 1992, and the North American Free Trade Agreement (NAFTA). The paper provides empirical results on the size and nature of global and regional adjustments to these two examples of regional integration. J. Japan. Int. Econ., December 1994, 8(4), pp. 422–453. Research School of Pacific and Asian Studies, Australian National University, Canberra ACT 0200, Australia; and Brookings Institution, Washington, DC 20036.     

Invoicing currency and the optimal basket peg for East Asia: Analysis using a new open economy macroeconomic model

An important characteristic of trade in Asia is that the US dollar is the dominant invoicing currency. This fact might have a consequence on the region's choice of the currency regime. To investigate this possibility, I develop a three country “new open economy macroeconomics” model that consists of East Asia, Japan, and the US. Assuming that East Asia pegs its currency to a basket of the other two's currencies, the optimal basket weights are derived numerically. It is shown that the weights under a realistic invoicing pattern are drastically different from those in the textbook case of “producer currency pricing.” J. Japanese Int. Economies 20 (4) (2006) 569–589.     

Size really doesn't matter: In search of a national scale effect

I search for a “scale” effect in countries. I use a panel data set that includes 200 countries over forty years and link the population of a country to a host of economic and social phenomena. Using both graphical and statistical techniques, I search for an impact of size on the level of income, inflation, material well-being, health, education, the quality of a country's institutions, heterogeneity, and a number of different international indices and rankings. I have little success; small countries are more open to international trade than large countries, but are not systematically different otherwise. J. Japanese Int. Economies 20 (4) (2006) 482–507.     

Unemployment and Labor Market Institutions: An Empirical Analysis

The development of the unemployment rate differs substantially between OECD countries. In this paper we investigate to what extent these differences are related to labor market institutions. In our analysis we use data of eighteen OECD countries over the period 1960–1994 and show that the way in which institutions interact is important. J. Japan. Int. Econ., December 2001, 15(4), pp. 403–418. Department of Economics, CentER, Tilburg University and Institute for Labour Studies (OSA), The Netherlands. © 2001 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: E24, J68.     

Disaggregate Real Exchange Rate Behaviour

In this paper, we re-examine the “PPP Puzzle” using sectoral disaggregated data. Specifically, we first analyse the mean reversion speeds of real exchange rates for a number of different sectors in 11 industrial economies and then focus on relating these rates to variables identified in the literature as key determinants of CPI-based real exchange rates, namely: the trade balance, productivity and the mark up. In particular, we seek to understand to what extent the relationships existing at the aggregate level are borne out at the disaggregate level. We believe that this analysis can help shed light on the PPP puzzle.

Market structure and the link between migration and trade

Many recent studies have looked at the impact of international migration on trade and found a significant effect. They posit that migration fosters trade by lowering costs or by means of a preference bias. However, to my knowledge, market structure has not as yet been considered. Using data from Switzerland, this paper empirically assesses the extent to which migration affects trade, taking goods differentiation into account. A monopolistic model with a multisector economy (Chaney in Am Econ Rev 98(41):1707–1721, 2008) is then empirically estimated. The findings show that market structure explains the different channels through which migration affects trade.

Estimating the economic cost of China's new desulfur policy during her gradual accession to WTO: The case of industrial SO2 emission

To understand the potential impacts of China's accession to WTO on her new desulphur policy (gradual reduction of 10% of annual SO₂ emission by 2005 with respect to that of 2000), we construct a CGE model in which SO₂ emission is directly linked to energy input consumption in production. The model equally considers the substitution possibility between energies of different SO₂ effluent ratios by including energy as labor and capital in the constant elasticity of transformation production function. The positive externality of trade in China's economy is also included. This model is then calibrated into a 55-sector Chinese SAM for the year 1997. Four policy simulations (Business as Usual, Openness policy only, desulfur policy only, and the combination of openness and desulfur policy) are made for the period from 1997 to 2005. The results show that the environmental impact of trade, though proven to be “negative”, stays rather modest. This is owing to the industrial composition transformation that deviates the specialization of the Chinese economy towards labor-intensive sectors under the new trade liberalization process. We do not find evidence for the “pollution haven” hypothesis. Seemingly ambitious, the new desulphur policy will only bring small economic growth loss. The pollution reduction objective will be realized mainly by substitution between polluting and less or non-polluting energies. The combination of trade liberalization and pollution control policy seems to give China more flexibility in adapting her economy to the new desulphur objective. Considering these different aspects together, the total economic loss due to the new desulphur policy will be limited to only − 0.26% under the presence of trade liberalization.     

Evaluating China’s Integration in World Trade with a Gravity Model Based Benchmark

This paper assesses China’s “natural” place in the world economy with a new set of trade integration indicators, which are used as a benchmark in order to examine whether China’s share in international trade is consistent with fundamentals such as economic size, location and other relevant factors. They constitute a better measure of trade integration that incorporates many more factors than traditional openness ratios. The model tracks international trade well and confirms that China is already well integrated in world markets, particularly with North America, several Latin American and East Asian emerging markets and most euro area countries.

Do Transition Economies and Developing Countries Have Similar Destinies?

This paper evaluates the potential of transition economies for achieving sustainable improvements in living standards vis-à-vis developing countries based on their productivity performance. The comparison is made using a bootstrapped Malmquist productivity index and its technological and efficiency change components. The results of estimation indicate that transition economies enjoy significantly higher increases in technical efficiency than developing countries with comparable rates of real GDP growth. Therefore, these results suggest that the former group of countries may have better growth prospects than the latter group, giving empirical support to Stern and Fries’ (Foreign Policy 111:164–165, 1998) optimism that transition economies are the “tiger” economies of tomorrow.

On Regional Monetary Arrangements for ASEAN

This paper analyzes the extent to which ASEAN may be suitable for a regional monetary arrangement. On the economic front, we review evidence on patterns of trade, economic shocks, the extent of factor mobility, and the monetary transmission mechanism. We find that ASEAN today is less suitable for a regional monetary arrangement than the Euro area was before the Maastricht Treaty, but the differences are not large. On the political front, we analyze the prerequisites for monetary integration in light of 50 years of European experience. We conclude that a firm political commitment would be key to ensuring that an attempt to form a regional monetary arrangement is not viewed as simply another fixed exchange rate system open to speculative attack. That commitment would have to be strong enough to survive for an extended period and to support difficult decisions such as rendering the central bank independent, adhering to fiscal and exchange rate arrangements even if the policy stance conflicts with that which would be adopted on the basis of purely domestic considerations, and accepting supranational directives. These are very considerable prerequisites for success. J. Japan. Int. Econ., June 2000, 14(2), pp. 121–148. International Monetary Fund; University of California, Berkeley; and International Monetary Fund. Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: F33, F36, F41, F42.     

Thinking About the Liquidity Trap

The phenomenon of the liquidity trap—defined as a situation in which even a zero interest rate is insufficiently low to produce full employment—has taken on new importance with the persistent slump in Japan. This paper restates recent theoretical work on liquidity traps, drawing a link between “intertemporal” models that are mainly concerned with demonstrating the underlying logic, and more ad hoc models that bear directly on policy; it then reexamines policy alternatives, including fiscal stimulus and inflation targeting. J. Japan. Int. Econ., December 2000, 14(4), pp. 221–237. Woodrow Wilson School, Princeton University, Princeton, New Jersey 08544-1013 Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: E52, E58, E31, F31.