Public Policy, Private Preferences, and the Japanese Trade Pattern

As non-tariff forms of trade protection proliferate it has become more difficult to analyze the impact of trade policy on trade flows. In a number of well-known papers researchers have attempted to infer the impact of trade policy indirectly by ascribing to trade policy the differences between actual and predicted trade flows. Much of the work has been applied to analysis of Japanese trade policy, and the conclusions of these studies have differed widely. Some previous research has also ascribed a role to the keiretsu, or networks of affiliated firms, in explaining Japan's apparently distinctive trade performance. This paper presents a model which integrates data on factor endowments, observable protection in traditional and non-traditional forms, and the keiretsu. It extends existing research in two principal ways. First, alternative cross-national models of comparative advantage are nested to permit the identification of critical modeling assumptions underlying the divergent conclusions of the previous studies. Second, the results of the indirect method are externally validated by confronting these inferences with data on trade policy and the keiretsu. The results indicate that trade policy and the keiretsu have an important impact on Japanese trade performance. I would like to thank Masahiro Kawai, Robert Lawrence, Gary Saxonhouse, seminar participants at the Far Eastern Meetings of the Econometric Society, the Korean Institute for International Economic Policy, Berkeley, Southern California, Colorado, Johns Hopkins, Claremont, Santa Cruz, George Washington, the Japan Economic Seminar, and the anonymous referees for helpful comments on an earlier draft. Peter Uimonen, Chongshan Liu, and Yuichi Takahashi provided excellent research assistance; Robert Lawrence and Kazuo Ueda kindly shared their data on keiretsu.