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Abstract
When some sectors are more heavily protected than others, will removing lightly protected sectors’ tariffs improve welfare? We argue that this second-best question is highly relevant in Japan, wherein its government made some exceptions to the across-the-board tariff elimination during the Trans-Pacific Partnership negotiations. We have calibrated a specific factor model with multiple import-competing sectors to the 2015 Japanese economy and conducted some counterfactual exercises. Although the partial tariff removal policy in question barely affects Japanese welfare, when it is combined with the agricultural sector tariff removal (across-the-board tariff elimination) the effect on Japanese welfare is made positive. Furthermore, the positive welfare effect more than doubles if it is combined with the removal of the subsidy in the agricultural sector. Both findings indicate the severity of the existing distortion stemming from the Japanese agricultural sector protection as well as the importance of lowering the protection to render the nonagricultural sector tariff removal meritorious.
Acknowledgements
The authors are grateful to Taiji Furusawa for discussing an earlier version of this paper at the Japanese Economic Association (JEA) Spring Meeting. We benefited immensely from his criticism and constructive comments. The authors would also like to thank participants of Economic Theory Seminar at the Australian National University, the Asia Pacific Trade Seminars (APTS), the JEA Spring Meeting, and the Midwest Economic Theory and International Trade Conference for the feedback, and in particular, Naoto Jinji, Tsutomu Miyagawa and Martin Richardson for their detailed and helpful comments. The authors would also like to thank the two anonymous referees for their constructive pieces of advice. Part of this project was conducted when Asano was visiting the Australian National University, and he thanks the Research School of Economics for their hospitality. Sakane acknowledges the financial support of the FLA Special Research Budget (SRB) 2020 of Sophia University. All remaining errors are our own.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Data availability statement
The data that support the findings of this study are openly available at the following websites:
Notes
1 We thank an anonymous referee for pointing out the potential importance of multifunctionality of agriculture in the political discourse of trade protection. Margulis (Citation2017) provides a comprehensive review on the history of how food security was taken into consideration in the past trade negotiations.
2 For anecdotes on the strong political influence of the Japanese agricultural sector, see, for example, Harimaya et al. (Citation2010) and Kagitani and Harimaya (Citation2017).
3 According to MAFF (Citation2016), 459 tariff lines were to remain out of the total of 9321, all of which are in agriculture, forestry and fisheries. The vast majority of the remaining tariff lines are applied to these five sensitive items.
4 See MAFF (Citation2020) for the details of the RCEP agreement.
5 More than 300 regional trade agreements were in force as of June 1, 2020. Facts and figures are available from the World Trade Organization (WTO, Citation2020).
6 For example, Petri and Plummer (Citation2016) estimate the annual welfare gains from TPP for the members (Japan) to be $312-$525 billion ($92-$156 billion, respectively). Cabinet Secretariat (Citation2015) estimates that Japan’s real GDP will increase by 2.6 per cent in the new long-run equilibrium path.
7 For the seminal work on the theory of the second best, see Lipsey and Lancaster (Citation1956).
8 Throughout this paper, we omit the second-order sufficient conditions for brevity as all our setups are standard and they are trivially satisfied.
9 Although our focus is the welfare effect of a reduction in a tariff, in most of the text we will discuss the opposite, i.e., the welfare effect of an increase in a tariff. Focusing on the latter is less confusing as it is what the (partial) derivative of the maximized utility with respect to a tariff in question means.
10 The equivalent conditions for for each of the subsectors are inessential for the rest of the analysis and hence are not presented here in the interest of brevity.
11 The following 9 sectors from the IO table are omitted: “Prepared animal foods and organic fertilizers,” “Miscellaneous business oriented machinery,” “Ordnance,” “Printing,” “Furniture and fixtures,” “Watches and clocks,” “Miscellaneous manufacturing industries,” “Housing,” “Activities not elsewhere classified.” Our data cover roughly 90 per cent of the Japanese economy in terms of value added.
12 For example, in 2010 the Japanese government launched the initiation of ‘Roku-ji Sangyo-ka’ (Sixth Industrialization) of the agricultural sector, which encourages agro-producers to undertake not only production but also the processing and distribution of their products. Various supports are provided under this scheme, which include purchasing of machinery/facilities for processing/distribution and training sessions related to a range of subjects in agro-management (MAFF, Citation2011).