Effects of Japan’s Economic Partnership Agreements on the Extensive Margin of International Trade

Abstract

This article investigates the effects of Japan’s economic partnership agreements (EPAs) on the Japanese import variety with respect to tariff reductions and outward foreign direct investments. The study is focused on the impact of changing tariffs and investments on the range of goods that EPA partners export to Japan for the periods 2005–10 and 2007–12. By using disaggregate tariff and trade data at the nine-digit HS level and by introducing the logit estimates with goods-specific effects, the article finds that both tariff reductions and Japan’s outward foreign direct investment help increase the likeliness of a commodity in the industrial sector to be exported to Japan from its EPA partner countries in the periods 2005–10 and 2007–12.

• extensive margin
• economic partnership agreements
• tariff reduction
• Japanese FTA

ACKNOWLEDGMENTS

I gratefully acknowledge valuable guidance from my supervisor, Craig R. Parsons. I am also grateful for excellent comments from anonymous referees as well as for helpful comments from Eiichi Tomiura and Minako Fujio on earlier versions.

Notes

¹ Following WTO terminology, in a free trade area, trade among members is duty free but members set their own tariffs on imports from nonmembers.

² Due to the coverage and distinctive approach toward FTAs, Japan calls its FTAs “EPAs.”

³ According to the 41st Basic Survey of Overseas Business Structure and Activities conducted by the Ministry of Economy, Trade, and Industry of Japan, the purpose of Japanese firms’ overseas business development is either to capture overseas markets or to take advantage of comparative endowments to export made in emerging countries to Japan. Thus, the Japanese affiliates in the emerging countries such as China and India used to function mainly as manufacturers’ supply and production bases.

⁴ A seminal paper by Baier and Bergstrand takes a detailed look at the long-run treatment effects of free trade agreements on member’s bilateral trade flows using nonparametric matching econometrics, and it finds a narrower range and more economically plausible values of the long-run effects of FTAs on members’ trade using nonparametric estimates than parametric ones in cross section. The current article instead focuses more narrowly on EPA partners of Japan at import varieties.

⁵ In the context of inter alia Japan’s possible participation in the Trans-Pacific Partnership (TPP) initiative, various governmental bodies have recently estimated the cost (and benefit) of its participation in FTAs (EPAs). METI online information (in Japanese), http://www.meti.go.jp/topic/downloadfiles/101027strategy02_00_00.pdf (accessed November 30, 2010).

⁶ These results seem contrary to the findings of investigations by Cieślik and Hagemejer (2011) into institutionalized trade liberalization in Central and Eastern Europe (CEE). They found that institutionalized trade liberalization is more effective compared to trade liberalization on bilateral basis in CEE countries.

⁷ See “Foreign Policy Speech by Minister for Foreign Affairs Katsuya Okada to the 174^th Session of the Diet.” MOFA online information, http://www.mofa.go.jp/announce/fm/okada/speech1001.html (accessed July 19, 2010).

⁸ Japan prefers to call these preferential agreements economic partnership agreements (EPAs) rather than FTAs.

⁹ JSEPA includes a national treatment provision (Article 73) but does not include an MFN provision; it includes a provision on access to the courts of justice (Article 92).

¹⁰ Regional Comprehensive Economic Partnership (RCEP) is an initiative to link the 10 ASEAN member states and the group’s free trade agreement partners: Australia, China, India, Japan, South Korea, and New Zealand. In total, the grouping of 16 nations includes more than 3 billion people, has a combined GDP of about $17 trillion, and accounts for about 40% of world trade. If negotiated successfully, RCEP would create the world’s largest trading bloc and have major implications for Asian countries and the world economy. Negotiations among the 16 parties began in early 2013 and are scheduled to conclude by the end of 2015.

¹¹ The authorities maintain that this broadens the choice of preferential tariffs from which exporters can choose.

¹² Duty-free tariff lines account for about 82% of total lines.

¹³ The authorities maintain that duties have been eliminated for about 21% of Japan’s tariff lines in agriculture (WTO document WT/REG140/7, February 7, 2006).

¹⁴ Excluded items include meat and meat offal, dairy products, apples, rice, rice products, wheat, plywood, blue fin tuna, leather, leather products, and footwear. Under the JUMSEPA, applied tariff rates for 86.3% of total tariff lines are either zero or lower than the corresponding applied MFN rates; duty-free tariff lines account for 79.2% of all the total lines.

¹⁵ Excluded items include dairy products, pineapples, rice, rice products, wheat, meat and meat products, wood and wood products, fish and fish products, leather, leather products, and footwear. Under the JMEPA, applied tariff rates for 89.8% of total tariff lines are either zero or lower than the corresponding applied MFN rates; duty-free tariff lines account for 82.3% of all lines.

¹⁶ Under the JTEPA, applied tariff rates for 90.1% of total tariff lines are either zero or lower than the corresponding applied MFN rates; duty-free tariff lines account for 81.9% of all lines.

¹⁷ Under the JIEPA, applied tariff rates for 88.7% of total tariff lines are either zero or lower than the corresponding applied MFN rates; duty-free tariff lines account for 81.8% of all lines.

¹⁸ Under the JBEPA, applied tariff rates for 86.9% of total tariff lines are either zero or lower than the corresponding applied MFN rates; duty-free tariff lines account for 81.5% of all lines.

¹⁹ Japan excluded 238 tariff lines: 202 agricultural products (including fish products such as cod, herring, sardines, and mackerel, which the Philippines has an advantage in) and 36 industrial products (including slippers and footwear). Moreover, Japan likewise maximized its privilege to impose quotas and delay tariff reduction on certain agricultural products coming in from the Philippines, including bananas, which are supposed to be the primary export to Japan. On the other hand, the Philippines excluded only 6 tariff lines: 5 for rice and 1 for salt.

²⁰ Ministry of Foreign Affairs of Japan: http://www.mofa.go.jp/announce/announce/2012/1/0124_01.html.

²¹ The Japanese tariff schedule has three distinct sets of rates: statutory rates (include both general and temporary rates); WTO bound rates; and preferential rates (under the GSP, and EPAs with Singapore, Mexico, Malaysia, Chile, Thailand, Indonesia, Brunei, Vietnam, Philippines, Switzerland, India, and Peru). In the case of statutory rates, the “temporary” rate, which is reviewed annually, is normally used instead of the higher general rate; the lower of the statutory and WTO bound rates are applied to WTO members on an MFN basis, except when preferential rates are applied. Where the temporary, general, or preferential rate is above the WTO bound rate, the latter rate applies to WTO members.

²² Sales data are available on http://www.meti.go.jp, updated until 2011 as of October 1, 2013.

²³ This survey targets Japanese enterprises (excluding the finance, insurance, and real estate industries) that hold overseas subsidiaries as of the end of fiscal year.

²⁴ Tables 6 and 7 present only the results of key variables of interest.

²⁵ Only the distance variable is insignificant.

²⁶ GDP per capita, PPP from World Bank’s Development Indicator Database 2013, is used as a proxy for labor cost.

²⁷ Tables 8 and 9 present only the results of key variables of interest.