The J-Curve and Japan–China commodity trade

Abstract

Previous studies that have tested the J-Curve phenomenon for Japan or China employed either aggregate trade data between each country and the rest of the world, or aggregate bilateral data between two trade partners. These studies have found no support for the J-Curve. Suspecting that their models could suffer from aggregation bias, in this paper, we disaggregate bilateral trade flows between the two countries and examine trade by 73 industries. We find evidence of the J-Curve phenomenon in 24 industries, a unique finding for trade between Japan and China.

Keywords:

• J-Curve
• China
• Japan
• commodity trade

JEL Classification:

• F31

Notes

1. For a review article see Bahmani-Oskooee and Hegerty (2010) and for a detailed explanation of the J-Curve see Bahmani-Oskooee (1985).

2. It should be mentioned that the same question was raised about China-US trade by Bahmani-Oskooee and Wang (2008) who disaggregated the China-US trade data by commodity and tested the J-Curve phenomenon for 88 industries. Such disaggregation resulted in support for the J-Curve in 22 industries.

3. It should be noted that 80% of the trade between China and Japan is conducted by these 73 industries.

4. For a nice review of China’s reform policies, see Zhang (1999a).

5. For theoretical derivation of the reduced-form Equation (1), see Rose and Yellen (1989).

6. The measure is also said to be in real or nominal terms. For more details see Bahmani-Oskooee (1991).

7. Note that for small samples such as ours, critical values come from Narayan (2005).

8. For more details of normalization, see Bahmani-Oskooee and Tanku (2008).

9. For other applications of this approach see Halicioglu (2007), Narayan et al. (2007), Tang (2007), Mohammadi, Cak, and Cak (2008), Wong and Tang (2008), De Vita and Kyaw (2008), and Payne (2008).

10. Again, for details of this step, see Bahmani-Oskooee and Tanku (2008).

11. For more on the substitution effect see Bahmani-Oskooee (1986).