Trade Policy
Do the Japanese play fair?

The pattern of international trade in manufactures has changed substantially since 1960. From the early 1960s, for example, the developing countries encroached rapidly upon industrial countries' market shares. This initially reflected the success of the newly industrialized countries (NICs), but in the 1970s and 1980s another group - the newly exporting countries (NECs) - displaced them at the top of the growth league, although they account for only a small share of world trade. Does trade policy explain these developments? In Discussion Paper No. 160, Research Fellow L Alan Winters examines how far changes in the pattern of manufactured trade are attributable to national trade policies or to factor endowments and technological advance.

The most popular explanation of trade patterns is based on factor endowments. Winters summarizes recent research, in particular a very detailed study by Edward Leamer, which suggests that even the simplest form of this theory can explain a high proportion of world trade flows. The developing countries (including the NICs) produce goods which make intensive use of labour and, increasingly, of physical capital. The industrial countries, on the other hand, possess abundant human capital (skills) and have displayed a strong comparative advantage in machinery and chemicals. Tariffs appear to have been an important influence on trade flows in the past, and their removal in various GATT rounds stimulated trade over the period 1950-70. Now, however, tariff levels are generally relatively low, and evidence suggests that they have little effect on broad trade patterns.

For decades Japanese penetration of other countries' markets has increased, while penetration of her own market has remained roughly constant. Japan now has the lowest ratio of imports of manufactures to GDP among industrial countries (Japan 2.8%, the United States 4.7%, West Germany 13.0%). Many observers have assumed that this success must result from 'unfair' trading practices. Winters argues, however, that there is very little evidence of Japanese 'foul play'. Japan's average tariffs (after the Tokyo Round cuts) are lower (at 2.9%) than those of the United States (4.3%) and members of the EEC (5.2% to 5.9%). Her identifiable non-tariff barriers are fewer and cover a small proportion of imports. The Japanese subsidize some sectors, such as agriculture, other primary industries, and public utilities, but support for the tradable goods sector falls far short of that offered by the United States and EEC. Even in the controversial hi-tech sectors, according to Winters, the small amount of official lending to such sectors only compensates for Japan's weak equity markets, while the corporatist organization of lending for R&D compensates for the lack of effective markets in skilled labour.

Winter argues that the Japanese current account surplus owes little or nothing to trade policy: it is a macroeconomic phenomenon, reflecting Japanese thrift and tight fiscal policies. In addition, the Japanese surplus on manufactured trade can be explained by her factor endowments and location. Japan is well endowed with capital and with professional and skilled labour, and it exports manufactures which use these factors intensively. In a finely disaggregated study, Gary Saxonhouse finds that out of 327 commodities for which Japan is a net exporter, there are only 81, accounting for 5.1% of Japanese gross trade, for which the net surplus cannot be explained by a factor endowments model. Econometric trade models based on factor endowments thus find Japanese trade just as explicable as other countries'.

Winters concludes that it is comparative advantage rather than industrial or trade policy that explains Japanese success in manufactures and world trade patterns in general. Policy affects particular trade flows, but it is no longer a major factor behind the broad pattern of international trade in manufactures.


Patterns of World Trade in Manufactures: Does Trade Policy Matter?
L Alan Winters

Discussion Paper No. 160, March 1987 (IT)