Trade and Investment Relations Among the United States, Canada and Japan. - book reviews

Business Horizons, Nov-Dec, 1990 by Catherine Ann Beegan

Even at a time when it is impossible to pick up any periodical without reading about Japan and its economic impact on global financial problems, this book would be important reading material for anyone interested in Japan and the world. Important economic factors such as the intercountry differences in private savings rates, tax treatment of consumer borrowing, availability of consumer credit, tax treatment of interest income and private savings for retirement, differential rates of inflation, increases in life expectancy, differences in the role and structure of the family, the work ethic, the Japanese bonus system, and differences in female labor force participation rates are carefully analyzed.

This book contains the papers and discussants' comments prepared in connection with a conference on U.S.-Canadian trade and investment relations with Japan that was held at the University of Michigan on April 2-3, 1987. The planning and organization of the conference represent the joint efforts of Robert M. Stern, Gary R. Saxonhouse, John Whalley, and the associated staff members of the Institute of Public Policy Studies (IPPS), the Japan Economy Program of the University of Michigan, and the Centre for the Study of International Economic Relations of the University of Western Ontario.

The introduction is a comparative review of the key macroeconomic features of each country. The empirical evidence, however, shows that the Japanese economic rate will gradually fall in the future.

Evidence of product upgrading by Japanese exporters to the United States in response to the VERs (Voluntary Export Restraints) on electronic products and automobiles is cited by Sazanami in his paper, "Trade and Investment Patterns and Barriers in the United States, Canada, and Japan. " It is also noted that trade diversion would be unlikely in view of Japan's comparative advantage, especially in electronic products.

Sazanami's survey notes that since the Japanese automobile investment in the United States is motivated by the protectionist action of the United States, it seems likely that here one will find a negative relationship between investment and exports. The bilateral disputes that have recently arisen among the U.S., Canada, and Japan, and have resulted in such arrangements as the Japanese VER on autos, the agreement between the U.S. and Japan to control the prices of computer chips, and the 15 percent Canadian export tax on softwood lumber, forcefully demonstrate the need for greater agreement at the multilateral level on such matters as safeguard actions, antidumping measures, and subsidies and countervailing actions.

Robert Z. Lawrence notes that the structure of Japanese firms and banks is such that they are subjected to strong pressures to adjust to change. Japanese policymakers also appear to provide considerable guidance to industries for which they are responsible. In contrast to U.S. policy in relation to depressed industries, budgetary outlays for industry assistance in Japan are kept to a minimum and efforts are made to avoid the use of restrictive trade barriers.

John Whalley uses a general equilibrium model of the United States to simulate the effects of changes in Canadian and Japanese tax policy on capital flows and the U.S. trade deficit. One important fact mentioned is that Japan and Canada hope to implement some type of value-added tax. it is possible that these changes in taxes may affect saving and investment in the U.S, Canada, and Japan in ways that will reduce capital movements between the two countries and thus reduce the U.S. trade deficit.

Okita expects that Japan will continue to experience a net capital outflow for the next decade or so. He further expects that high rates of growth will be Sustained in the rapidly industrializing countries of Asia, as well as in the member countries of the Association of Southeast Asian Nations and the People's Republic of China.

Two models suggest themselves for use: the Heckscher-Ohlin model, in which differences in factor endowments are the primary determinants of trade, and the Helpman-Krugman model, in which product differentiation and scale economies are the motivating factors determining trade. The Heckscher-Ohlin model is presented, in which net exports of individual sectors are shown to be linear in factor endowments. The framework is used in a cross-national analysis of trade flows, and leads to the conclusion that few countries have distinctive trade policies that affect their sectoral trade patterns. Saxonhouse has used a similar framework, but with allowance for differences in factor quality, and has reached essentially the same conclusion.

As for informal barriers affecting foreign direct investment, we note that there is insufficient evidence available to reach any conclusion about the restrictiveness of the existing barriers for individual countries.

The overall conclusion is that if one wishes to understand the causes of the existing U.S.-Japanese trade imbalance, one should focus on the macroeconomic structure and determinants of absorption and output in the two countries, rather than on national trade policies.