① Trade Policy 1960-1970

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Trade Policy 1960-1970

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The Future of Trade Policy: Pandemics, Populism \u0026 other Challenges

Issues raised in the Structural Impediments Initiative, and by the Japanese themselves in domestic discussions, included the distribution system in which manufacturers continued to have unusually strong control over wholesalers and retailers handling their products, inhibiting newcomers, especially foreign ones and investment behavior that made it very difficult for foreign firms to acquire Japanese firms such as that of the management of Koito Mfg. Boone Pickens despite the fact that he had become the majority stockholder. These discussions highlighted some of the fundamental differences in the Japanese and United States economies.

Pressure to raise imports peaked in the late s and early s when the US pushed for quantitative targets for more imports in semiconductors, autos and auto parts. In general, these policies tended to have negative welfare effects and usually higher prices in theory Greaney, and in practice Dick, or little effect at all Parsons, The collapse of the Japanese asset price bubble in the early s and the following Lost Decade helped to open inbound trade. Discount markets opened the distribution chains, and several companies turned to foreign trade and investment to avoid losses and even bankruptcy. Products of Japanese companies that were manufactured in South-Asian countries were reimported at lower prices.

The Japanese consumer also changed: Economic problems forced many Japanese to look for cheap prices first and care about national pride or superior quality later. In a diet speech of January 24, , former prime minister Kan proclaimed that Japan would and should participate to the Trans-Pacific Strategic Economic Partnership. This proclamation raised an unusual controversy among Japanese, not only those policy people and media people, but among wide range of people in industry, agriculture, medicine and even writers. The controversy continued until prime minister Noda decided that the Government would start to negotiate with TPP countries on November 11, Mass media stopped covering the question on a daily basis but the opposition movements continued.

Recently Mr. Noda revealed that he will not discuss TPP question at the coming talk with U. President Obama on April The Potsdam Declaration of , declared that Japan would surrender all of its armed forces, and the Japanese military would be under the control of the Supreme Commander for the Allied Powers. In theory, the economy would be left to the management of the Japanese government. In practice however, the economy was largely influenced by the Occupation policies of the Allied Powers. During the early phase of post-war Japan, private foreign trade had been prohibited by SCAP, and all trade was state conducted. There were restrictions to heavy industry outputs such as steel, aluminium, and copper; which limited Japan's shipbuilding, machinery, and chemical industries.

Imports were only allowed when they were judged to be indispensable to the sustenance of the Japanese economy. On August 15, , the United States' government announced a policy that relaxed trade restrictions to Japan; reopening private exports. Trade was still heavily regulated; as a foreign buyer would need to submit a purchase and sale agreement, and the Japanese exporter also needed to file an application to the Board of Trade, which would then be forwarded to SCAP for final approval.

Japanese exports grew rapidly in the s and s, but growth slowed considerably during the s. Over these decades, both the composition and the reputation of products from Japan changed profoundly. Because of the success of certain exports, Japan is often viewed as a heavily export-dependent nation. As an example, just under half of all automobiles produced in Japan were exported. The growth of Japanese exports during the s and s was truly phenomenal.

From to , however, export growth averaged The growth in exports can be viewed in terms of both pull and push factors. The pull came from increasing demand for Japanese products as the United States and other foreign markets grew and as trade barriers in major market countries were reduced. Another pull factor was the price competitiveness of Japanese products. This record enhanced the international price competitiveness of Japanese products. During the s, Japanese export products had a reputation for poor quality. However, this image changed dramatically during the s. Japanese steel , ships, watches , television receivers, automobiles, semiconductors , and many other goods developed a reputation for being manufactured to high standards and under strict quality control.

The Japanese were the acknowledged world leaders for quality and design in the s for some of these products. This rise in product quality also increased demand for Japanese exports. The push behind Japan's exports came from manufacturers. Many recognized that to reach efficient levels of production they needed to adopt a global approach. Manufacturers concentrated on the domestic market often protected from foreign products until they reached internationally competitive levels and domestic markets were saturated.

Often helped by the large general trading companies, manufacturers aggressively attacked foreign markets when they felt able to compete globally. This push factor partially accounted for the extraordinarily high level of export growth in the s, when the domestic economy slowed; increasing exports was a way for manufacturers to continue expanding despite the more sluggish domestic market. Japanese manufacturers were part of larger conglomerates, the zaibatsu , which provided financing of activities. Thus, they could concentrate on gaining high market shares, without the need to achieve high profits in the process.

Exports included a wide variety of products, virtually all of which were processed to some degree. After the war, the composition of exports shifted through technological progression. Primary products, light manufactures, and crude items, which predominated during the s, were gradually eclipsed by heavy industrial goods, complex machinery and equipment, and consumer durables , which required large capital investments and advanced technology to produce. In Japan's major exports were motor vehicles, office machinery, scientific and optical equipment, and semiconductors and other electronic components. After the Fukushima Nuclear Disaster in concerns were expressed about the safety of Japanese food exports.

Factory output was also badly affected by power supply problems. Sales of electronics and equipment used to make semiconductors have been effected as China has slowed purchases due to the combined factors of the trade war and also declining demand for smart phones. During the s and s, imports grew in tandem with exports, at an average annual rate of In a sense, import growth over much of this period was constrained by exports, because exports generated the foreign exchange to purchase the imports. During the s, however, import growth lagged far behind exports, at an average annual rate of only 2. This low level of import growth led to the large trade surpluses that emerged in the s.

In general, Japan has not imported an unusually large amount as a share of its GNP , but it has been highly dependent on imports for a variety of critical raw materials. Japan has by no means been the only industrialized nation dependent on imported raw materials, but it has depended on imports for a wider variety of materials, and often for a higher share of its needs for these materials. The long-term growth in imports was facilitated by several major factors. The most important was general growth in the Japanese economy and income levels. Rising real incomes increased demand for imports, both those consumed directly and those entering into production. Another factor was the shift in the economy toward greater reliance on imported raw materials.

Primary energy sources in the late s, for example, were domestic coal and charcoal. The shift to imported oil and coal as major energy sources did not come until the late s and s. The small size and poor quality of many of the mineral deposits in Japan, combined with innovations in ocean transportation, such as bulk ore carriers, meant that as the economy grew, demand outstripped domestic supply and cheaper imports were utilized. The price of imports was also a factor in their growth. In Japan's import price index was at essentially the same level as in , partly because of the appreciation of the yen after , which reduced the yen price of imports, but also because of the reduced costs of ocean shipping and stable prices for food and raw materials.

This dramatic price rise, especially for petroleum but by no means confined to it, was responsible for the rapid growth of the dollar value of imports during the s, despite the slower growth of the economy. A third factor affecting imports was trade liberalization. Reduced tariff rates and a weakening of other overt trade barriers meant that imports should have been able to compete more fully in Japan's markets. The extent to which this was true, however, was subject to much debate among analysts. The share of manufactured imports in GNP changed very little from to , suggesting that falling import barriers had little impact on the propensity to purchase foreign products.

Falling trade barriers might become more significant in the s as liberalization continues. Yet another factor determining import levels was the exchange rate. After the ending of the Bretton Woods System in , the yen appreciated against the United States dollar and other currencies. The appreciation of the yen made imports less expensive to Japan, but it had a complex effect on total imports. Demand for raw material imports was not affected much by price changes at least in the short run. Demand for manufactured goods, however, was more responsive to price changes. Much of the rapid increase in imports of manufactures after , when the yen began to appreciate rapidly, can be attributed to this exchange-rate effect.

All factors combined led to the rapid growth of imports in the s and s and their very slow growth in the s. Rapid economic growth combined with stable import prices and the shift toward imported raw materials brought high import growth in the s. The big jump in raw material prices in the s kept import growth high despite lower economic growth. In the s, falling raw material prices, a relatively weak yen, and continued modest economic growth kept import growth low in the first half of the decade. Import growth finally accelerated in the second half of the s, when raw material prices stopped falling and as the rise in the value of the yen encouraged manufactured imports.

Japan imported a wide range of products, although energy sources, raw materials, and food were the major items. These shifts show the enormous impact of price changes on imports. Swings in imports of other raw materials were far less dramatic, and many declined over time as a share of total imports. By a slight decline, Manufactured goods—chemicals, machinery and equipment, and miscellaneous commodities—gained as a share of imports, but the variation among them was considerable.

Imports of textiles, nonferrous metals, and iron and steel products all showed significant gains, for the same reasons that the raw material imports to produce them had declined. However, chemical and machinery and equipment imports showed little increase in share until after The heavy dependency on raw materials that characterized Japan until the mids reflected both their absence in Japan and the process of import substitution industrialization , in which Japan favored domestic industries over imports.

Bloom, Draca and Van Reenen examined the impact of rising Chinese import competition on European firms over the period , and obtained similar results. They found that innovation increased more in those firms most affected by Chinese imports. And they found evidence of efficiency gains through two related channels: innovation increased and new existing technologies were adopted within firms; and aggregate productivity also increased because employment was reallocated towards more technologically advanced firms. On the whole, the available evidence suggests trade liberalization does improve economic efficiency. This evidence comes from different political and economic contexts, and includes both micro and macro measures of efficiency. This result is important, because it shows that there are gains from trade.

But of course efficiency is not the only relevant consideration here. As we discuss in a companion blog post , the efficiency gains from trade are not generally equally shared by everyone. Because distributional concerns are real it is important to promote public policies — such as unemployment benefits and other safety-net programs — that help redistribute the gains from trade. When a country opens up to trade, the demand and supply of goods and services in the economy shift. As a consequence, local markets respond, and prices change.

This has an impact on households, both as consumers and as wage earners. The implication is that trade has an impact on everyone. The effect of trade extends to everyone because markets are interlinked, so imports and exports have knock-on effects on all prices in the economy, including those in non-traded sectors. The distribution of the gains from trade depends on what different groups of people consume, and which types of jobs they have, or could have. You can read more about these economic concepts, and the related predictions from economic theory, in Chapter 18 of the textbook The Economy: Economics for a Changing World. In this paper, Autor and coauthors looked at how local labor markets changed in the parts of the country most exposed to Chinese competition, and they found that rising exposure increased unemployment, lowered labor force participation, and reduced wages.

Additionally, they found that claims for unemployment and healthcare benefits also increased in more trade-exposed labor markets. The visualization here is one of the key charts from their paper. The vertical position of the dots represents the percent change in manufacturing employment for working age population; and the horizontal position represents the predicted exposure to rising imports exposure varies across regions depending on the local weight of different industries. The trend line in this chart shows a negative relationship: more exposure goes together with less employment. There are large deviations from the trend there are some low-exposure regions with big negative changes in employment ; but the paper provides more sophisticated regressions and robustness checks, and finds that this relationship is statistically significant.

This result is important because it shows that the labor market adjustments were large. Many workers and communities were affected over a long period of time. In particular, comparing changes in employment at the regional level misses the fact that firms operate in multiple regions and industries at the same time. So companies that outsourced jobs to China often ended up closing some lines of business, but at the same time expanded other lines elsewhere in the US. This means that job losses in some regions subsidized new jobs in other parts of the country. On the whole, Magyari finds that although Chinese imports may have reduced employment within some establishments, these losses were more than offset by gains in employment within the same firms in other places.

This is no consolation to people who lost their job. She finds that rural regions that were more exposed to liberalization, experienced a slower decline in poverty, and had lower consumption growth. In the analysis of the mechanisms underlying this effect, Topalova finds that liberalization had a stronger negative impact among the least geographically mobile at the bottom of the income distribution, and in places where labor laws deterred workers from reallocating across sectors.

The fact that trade negatively affects labor market opportunities for specific groups of people does not necessarily imply that trade has a negative aggregate effect on household welfare. This is because, while trade affects wages and employment, it also affects the prices of consumption goods. So households are affected both as consumers and as wage earners. Most studies focus on the earnings channel, and try to approximate the impact of trade on welfare by looking at how much wages can buy, using as reference the changing prices of a fixed basket of goods.

This approach is problematic because it fails to consider welfare gains from increased product variety , and obscures complicated distributional issues such as the fact that poor and rich individuals consume different baskets so they benefit differently from changes in relative prices. Ideally, studies looking at the impact of trade on household welfare should rely on fine-grained data on prices, consumption and earnings. Atkin and coauthors use a uniquely rich dataset from Mexico, and find that the arrival of global retail chains led to reductions in the incomes of traditional retail sector workers, but had little impact on average municipality-level incomes or employment; and led to lower costs of living for both rich and poor households.

The chart here shows the estimated distribution of total welfare gains across the household income distribution the light-gray lines correspond to confidence intervals. These are proportional gains, and are expressed as percent of initial household income. As we can see, there is a net positive welfare effect across all income groups; but these improvements in welfare are regressive, in the sense that richer households gain proportionally more about 7. Evidence from other countries confirms this is not an isolated case — the expenditure channel really seems to be an important and understudied source of household welfare.

The available evidence shows that, for some groups of people, trade has a negative effect on wages and employment opportunities; and at the same time it has a large positive effect via lower consumer prices and increased availability of products. For some households, the net effect is positive. In particular, workers who lose their job can be affected for extended periods of time, so the positive effect via lower prices is not enough to compensate them for the reduction in earnings.

On the whole, if we aggregate changes in welfare across households, the net effect is usually positive. But this is hardly a consolation for those who are worse off. This highlights a complex reality: There are aggregate gains from trade , but there are also real distributional concerns. The following visualization presents a compilation of available trade estimates, showing the evolution of world exports and imports as a share of global economic output. The higher the index, the higher the influence of trade transactions on global economic activity. The first wave of globalization came to an end with the beginning of the First World War, when the decline of liberalism and the rise of nationalism led to a slump in international trade.

In the chart we see a large drop in the interwar period. After the Second World War trade started growing again. This new — and ongoing — wave of globalization has seen international trade grow faster than ever before. Klasing and Milionis , which is one of the sources in the chart, published an additional set of estimates under an alternative specification. You find all these alternative overlapping sources in this comparison chart. Over the early modern period, transoceanic flows of goods between empires and colonies accounted for an important part of international trade.

The following visualizations provides a comparison of intercontinental trade, in per capita terms, for different countries. As we can see, intercontinental trade was very dynamic, with volumes varying considerably across time and from empire to empire. Leonor Freire Costa, Nuno Palma, and Jaime Reis, who compiled and published the original data shown here, argue that trade, also in this period, had a substantial positive impact on the economy.

The following visualization shows a detailed overview of Western European exports by destination. Figures correspond to export-to-GDP ratios i. But this process of European integration then collapsed sharply in the interwar period. After the Second World War trade within Europe rebounded, and from the s onwards exceeded the highest levels of the first wave of globalization. In addition Western Europe then started to increasingly trade with Asia, the Americas, and to a smaller extent Africa and Oceania.

The indicators in this chart are indexed, so they show changes relative to the levels of integration observed in This gives us another viewpoint to understand how quickly global integration collapsed with the two World Wars. In this interactive chart you can explore trends in trade openness over this period for a selection of European countries.

The world-wide expansion of trade after the Second World War was largely possible because of reductions in transaction costs stemming from technological advances, such as the development of commercial civil aviation, the improvement of productivity in the merchant marines, and the democratization of the telephone as the main mode of communication. The visualization shows how, at the global level, costs across these three variables have been going down since The reductions in transaction costs had an impact, not only on the volumes of trade, but also on the types of exchanges that were possible and profitable.

The first wave of globalization was characterized by inter-industry trade. This means that countries exported goods that were very different to what they imported — England exchanged machines for Australian wool and Indian tea. As transaction costs went down, this changed. In the second wave of globalization we are seeing a rise in intra -industry trade i. France, for example, now both imports and exports machines to and from Germany. The following visualization, from the UN World Development Report , plots the fraction of total world trade that is accounted for by intra-industry trade, by type of goods.

As we can see, intra-industry trade has been going up for primary, intermediate and final goods. This pattern of trade is important because the scope for specialization increases if countries are able to exchange intermediate goods e. Above we took a look at the broad global trends over the last two centuries. This chart plots estimates of the value of trade in goods, relative to total economic activity i. These historical estimates obviously come with a large margin of error in the measurement section below we discuss the data limitations ; yet they offer an interesting perspective.

Each country tells a different story. If you add the Netherlands, for example, you will see how important the Dutch Golden Age was. Here is the same chart but showing imports , rather than exports. In the next chart we plot, country by country, the regional breakdown of exports. This gives us an interesting perspective on the changing nature of trade partnerships. In India, we see the rising importance of trade with Africa — this is a pattern that we discuss in more detail below.

This metric gives us an idea of integration, because it captures all incoming and outgoing transactions. The higher the index the larger the influence of trade on domestic economic activities. The visualization presents a world map showing the trade openness index country by country. For any given year, we see that there is a lot of variation across countries. The weight of trade in the US economy, for example, is much lower than in other rich countries. If you press the play button in the map, you can see changes over time. This reveals that, despite the great variation between countries, there is a common trend: Over the last couple of decades trade openness has gone up in most countries. Expressing trade values as a share of GDP tells us the importance of trade in relation to the size of economic activity.

The chart shows the value of exports goods plus services in dollars, country by country. All estimates are expressed in constant dollars i. The main takeaway here are the country-specific trends, which are positive and more pronounced than in the charts showing shares of GDP. This is not surprising: most countries today produce more than a couple of decades ago ; and at the same time they trade more of what they produce. Here is the same chart, but showing imports rather than exports. Trade transactions include goods tangible products that are physically shipped across borders by road, rail, water, or air and services intangible commodities, such as tourism, financial services, and legal advice.

Many traded services make merchandise trade easier or cheaper—for example, shipping services, or insurance and financial services. Trade in goods has been happening for millenia ; while trade in services is a relatively recent phenomenon. Globally, trade in goods accounts for the majority of trade transactions. This interactive chart shows trade in services as share of GDP across countries and regions. Firms around the world import goods and services, in order to use them as inputs to produce goods and services that are later exported. That is, the share of the value of exports that comes from foreign inputs. Foreign value added in trade peaked in — after two decades of continuous increase. This is consistent with the fact that, after the global financial crisis, there has been a slowdown in the rate of growth of trade in goods and services, relative to global GDP.

This is a sign that global integration stalled after the financial crisis. The integration of global value chains is a common source of measurement error in trade data, because it makes it hard to correctly attribute the origin and destination of goods and services. We discuss this in more detail below. You can visit the AEC website to see this composition country by country. The settings tab allows you to choose alternative product classes, trade flows choices, and the level of product aggregation. If you move the time slider below the tree map, you can also change the year for which the data is plotted. If we consider all pairs of countries that engage in trade around the world, we find that in the majority of cases, there is a bilateral relationship today: Most countries that export goods to a country, also import goods from the same country.

The interactive visualization shows this. In this chart, all possible country pairs are partitioned into three categories: the top portion represents the fraction of country pairs that do not trade with one-another; the middle portion represents those that trade in both directions they export to one-another ; and the bottom portion represents those that trade in one direction only one country imports from, but does not export to, the other country.

As we can see, bilateral trade is becoming increasingly common the middle portion has grown substantially. As we can see, up until the Second World War the majority of trade transactions involved exchanges between this small group of rich countries. But this has been changing quickly over the last couple of decades, and today trade between non-rich countries is just as important as trade between rich countries.

Here is a stacked area chart showing the total composition of exports by partnership. The last few decades have not only seen an increase in the volume of international trade, but also an increase in the number of preferential trade agreements through which exchanges take place. A preferential trade agreement is a trade pact that reduces tariffs between the participating countries for certain products.

The visualization here shows the evolution of the cumulative number of preferential trade agreements that are in force across the world, according to the World Trade Organization WTO. These numbers include notified and non-notified preferential agreements the source reports that only about two-thirds of the agreements currently in force have been notified to the WTO , and are disaggregated by country groups. This figure shows the increasingly important role of trade between developing countries South-South trade , vis-a-vis trade between developed and developing countries North-South trade.

In the late s, North-South agreements accounted for more than half of all agreements — in , they accounted for about one quarter. Today, the majority of preferential trade agreements are between developing economies. The increase in trade among emerging economies over the last half century has been accompanied by an important change in the composition of exported goods in these countries. Two points stand out. First, there has been a substantial decrease in the relative importance of food exports since s in most countries although globally in the last decade it has gone up slightly. And second, this decrease has been largest in middle income countries, particularly in Latin America. Regarding levels, as one would expect, in high income countries food still accounts for a much smaller share of merchandise exports than in most low- and middle-income-countries.

Economic costs include physical inputs the value of the stuff you use to produce the good , plus forgone opportunities when you allocate scarce resources to a task, you give up alternative uses of those resources. The forgone opportunities of production are key to understand this concept. It is precisely this that distinguishes absolute advantage from comparative advantage. To see the difference between comparative and absolute advantage, consider a commercial aviation pilot and a baker.

Suppose the pilot is an excellent chef, and she can bake just as well, or even better than the baker. In this case, the pilot has an absolute advantage in both tasks. Yet the baker probably has a comparative advantage in baking, because the opportunity cost of baking is much higher for the pilot. At the individual level, comparative advantage explains why you might want to delegate tasks to someone else, even if you can do those tasks better and faster than them.

This may sound counterintuitive, but it is not: If you are good at many things, it means that investing time in one task has a high opportunity cost, because you are not doing the other amazing things you could be doing with your time and resources. So, at least from an efficiency point of view, you should specialize on what you are best at, and delegate the rest. The same logic applies to countries. In countries with relative abundance of certain factors of production, the theory of comparative advantage predicts that they will export goods that rely heavily in those factors: a country typically has a comparative advantage in those goods that use more intensively its abundant resources.

Colombia exports bananas to Europe because it has comparatively abundant tropical weather. Under autarky, Colombia would find it cheap to produce bananas relative to e. The empirical evidence suggests that the principle of comparative advantage does help explain trade patterns. Bernhofen and Brown 25 , for instance, provide evidence using the experience of Japan. The graph here shows the price changes of the key tradable goods after the opening up to trade. It presents a scatter diagram of the net exports in graphed in relation to the change in prices from —53 to As we can see, this is consistent with the theory: after opening to trade, the relative prices of major exports such as silk increased Japan exported what was cheap for them to produce and which was valuable abroad , while the relative price of imports such as sugar declined they imported what was relatively more difficult for them to produce, but was cheap abroad.

The resistance that geography imposes on trade has long been studied in the empirical economics literature — and the main conclusion is that trade intensity is strongly linked to geographic distance. Each dot represents a country-pair from a set of 19 OECD countries, and both the vertical and horizontal axis are expressed on logarithmic scales. As we can see, there is a strong negative relationship. Trade diminishes with distance. Through econometric modeling, the paper shows that this relationship is not just a correlation driven by other factors: their findings suggest that distance imposes a significant barrier to trade.

The fact that trade diminishes with distance is also corroborated by data of trade intensity within countries. The colors reflect the percentage of firms which export to each specific country. As we can see, the share of firms exporting to each of the corresponding neighbors is largest close to the border. The authors also show in the paper that this pattern holds for the value of individual-firm exports — trade value decreases with distance to the border. Conducting international trade requires both financial and non-financial institutions to support transactions.

Some of these institutions are fairly obvious e. For example, the evidence shows that producers in exporting countries often need credit in order to engage in trade. As can be seen, financially developed economies — those with more dynamic private credit markets — typically outperform exporters with less evolved financial institutions. Other studies have shown that country-specific institutions, like the knowledge of foreign languages, for instance, are also important to promote foreign relative to domestic trade see Melitz The concept of comparative advantage predicts that if all countries had identical endowments and institutions, then there would be little incentives for specialization, because the opportunity cost of producing any good would be the same in every country.

So you may wonder: why is it then the case that in the last few years we have seen such rapid growth in intra-industry trade between rich countries? The increase in intra-industry between rich countries seems paradoxical under the light of comparative advantage, because in recent decades we have seen convergence in key factors, such as human capital , across these countries. The solution to the paradox is actually not very complicated: Comparative advantage is one, but not the only force driving incentives to specialization and trade.

The idea is that specialization allows countries to reap greater economies of scale i. In a much cited paper, Evenett and Keller 33 show that both factor endowments and increasing returns help explain production and trade patterns around the world. There are dozens of official sources of data on international trade, and if you compare these different sources, you will find that they do not agree with one another.

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