Project Leader

WAKASUGI Ryuhei, Faculty Fellow

Overview

In recent times, China has accomplished remarkable economic development and among developing countries has the strongest economic relationship with Japan. China is now Japan's largest trading partner and Japan is the third largest trading partner for China. Japan is also the second largest provider of foreign direct investment into China. It is this close economic relationship between the two countries that prompted policymakers and researchers to clarify the mechanism that supports China's current economic development. RIETI and the Development Research Center of the State Council of the People's Republic of China concluded an agreement for research cooperation in 2006, which has allowed RIETI to conduct in-depth analyses of the Chinese economy. This working group thus conducts various empirical analyses using industrial and firm-level data from China and Japan to uncover the important aspects of the Chinese economy such as the spillovers from the increased presence of foreign invested enterprises (FIEs) or the internationalization of indigenous Chinese firms.

Project Leader

KAWASE Tsuyoshi, Faculty Fellow

Overview

Subsidies are widely used throughout the world as a standard tool for the achievement of domestic policy goals. However, subsidies can create distortions in resource allocation as seen in the impact of export subsidies on international trade. For this reason, subsidies are subject to regulation under the WTO Subsidies and Countervailing Measures (SCM) Agreement and Agriculture Agreement. Since the establishment of the WTO, more than 30 adjudications have been handed down on the issue of subsidies by WTO Panels and Appellate Body. Moreover, the number of subsidy-related disputes referred to the WTO is expected to increase with the expiration of provisions temporarily suspending the application of related agreements ("Peace Clause"). This project has the following three objectives: to research the interpretations and applications of relevant rulings made under the SCM Agreement and Agriculture Agreement; to examine the problems that may exist in the subsidy systems of Japan and Japan's major trading partners from the perspective of the WTO Agreement; and to gain insight into how Japan can develop its subsidy and countervailing duty systems while assuring compliance with the WTO Treaty.

Major Research Results

RIETI Policy Discussion Papers

• "Fisheries Subsidy Negotiations at the WTO: An analysis from the perspective of environmental standards" (YAGI Nobuyuki)

Project Leader

THORBECKE, Willem, Senior Fellow

Overview

This year's research seeks to understand Asian production networks and Asia's trade with the rest of the world. It also considers policy measures to promote recovery and bring stability to East Asia. Some of the work involves presenting an analytical description of production networks and investigating how exchange rate changes and changes in income in the rest of the world affect Asian trade. For example, one policy implication is that exchange rate stability in East Asia would be desirable because exchange rate volatility would interfere with the slicing up of the value-added chain. Another policy implication is that East Asian countries should stimulate demand domestically to reduce their exposure to a slowdown outside of the region. Some of the work looks at previous agreements between world leaders to resolve global imbalances and to promote recovery. Other work considers how Federal Reserve monetary policy can be effective in the face of changes in inflation. Finally, the work considers a new development model for China and East Asia. The question is whether East Asia can be an engine of growth for the world economy, given that demand in Western economies has collapsed. The evidence indicates that if East Asia shifts to a domestic demand-led growth model, it could contribute significantly to growth in the rest of the world.

Project Leader

SAWADA Yasuyuki, Faculty Fellow

Overview

International discussions on development aid have come to a major turning point. This reflects the transition from aid for economic growth to direct aid for poverty reduction, from project-based aid to budget support aid, from loan-centered to debt reduction aid and grants, and from bilateral to multilateral aid. The aim of the "Foreign Aid Governance Project" implemented during fiscal 2006-08 was to systematically identify the differences in the macroeconomic impact of aid in Asia and Africa based on available evidence, and to measure the impact of the aid allocation behavior of donors and the effectiveness of technical assistance. Using the results obtained from this research, this project will pursue the following objectives during fiscal 2009:

• (1) Basic research on developing insurance schemes to manage and cope with disaster risks through international cooperation; and
• (2) Clarification of the cause and effect relationship in the impact of aid on promoting economic growth.

Major Research Results

RIETI Discussion Papers

• "Asking Retrospective Questions in Household Surveys: Evidence from Vietnam" (NAKATA Hiroyuki, SAWADA Yasuyuki and TANAKA Mari)
• "Aid effectiveness, Governance and Public Investment" (KASUGA Hidefumi and MORITA Yuichi)
• "Consumption Insurance against Unforeseen Epidemics: The case of avian influenza in Vietnam" (TAMURA Sakuya and SAWADA Yasuyuki)

Project URL

• "The Foreign Aid Governance" (Japanese)

Project Leader

ITO Takatoshi, Faculty Fellow

Sub-Leader

OGAWA Eiji, Faculty Fellow

Overview

In the aftermath of the global financial crisis of 2007-2009, the key currency status of the U.S. dollar has been questioned. Several proposals have been made to reform the international monetary system. One of the main focuses of our project "Monetary Cooperation and an Optimal Exchange Rate Basket in East Asia" has been to create a basket currency (unit) in the East Asian region, with the presumption that making the intra-regional exchange rates stable, at around the basket currency unit, is desirable for the region. Research has been conducted on policy issues, including monetary and exchange rate policy, and private sectors' reactions to monetary and exchange rate changes, including behaviors that affect the pass-through of the exchange rate to domestic prices. We have published the Asian Monetary Unit (AMU) and its deviation indicators on the RIETI web page since 2005, contributing to research on the exchange rate coordination and trade invoicing in the region.

Major Research Results

RIETI Discussion Papers

• "Analysis on β and σ Convergences of East Asian Currencies" (OGAWA Eiji and YOSHIMI Taiyo)
• "Determinants of Currency Invoicing in Japanese Exports: A firm-level analysis" (ITO Takatoshi, KOIBUCHI Satoshi, SATO Kiyotaka and SHIMIZU Junko)

Project URL

• AMU and AMU Deviation Indicators

Project Leader

JINJI Naoto, Faculty Fellow

Overview

"Trade and the environment" and "food safety and trade" have emerged as critical issues in international trade. The purpose of this project is to approach these issues from the perspectives of both economics and law and to conduct comprehensive and interdisciplinary research. The following research will be conducted in the area of trade and the environment: empirical study on the effects of trade liberalization on the environment; theoretical study on illegal logging; and, theoretical study on voluntary corporate environmental action. The following research will be conducted in the area of food safety and trade: legal and economic analysis of the application of provisions of the WTO Agreement on Sanitary and Phytosanitary Measures (SPS Agreement); case studies on WTO disputes related to the SPS Agreement. In addition, the consumer benefits of food safety regulations will be estimated in the case of Japan's BSE countermeasures.

Major Research Results

RIETI Discussion Papers

• "An Economic Theory of the SPS Agreement" (JINJI Naoto)

Project Leader

URATA Shujiro, Faculty Fellow

Overview

A free trade agreement (FTA) is an arrangement, under which trade barriers such as import tariffs on trade between FTA members are eliminated. FTAs increased sharply in the early 1990s and the pace of the increase has accelerated since the establishment of the World Trade Organization in 1995. Slow progress in multilateral trade negotiation is a very important factor behind the rapid increase of FTAs. The objective of this research project is to discern the impacts of FTAs on the foreign trade of FTA members. The analysis process is two-fold. First, researchers examine the usage of FTAs by companies, and then they investigate the impacts of FTAs on foreign trade. The countries selected for this study are Japan, China, South Korea, Thailand, and Australia.

Major Research Results

RIETI Discussion Papers

• "Impacts of FTAs in East Asia: CGE simulation analysis" (ANDO Mitsuyo)
• "On the Use of FTAs by Japanese Firms: Further evidence" (TAKAHASHI Katsuhide and URATA Shujiro)
• "Trade Creation and Diversion Effects of Regional Trade Agreements on Commodity Trade" (URATA Shujiro and OKABE Misa)

Project Leader

SHIRAISHI Takashi, Faculty Fellow

Overview

The emergence of China as an economic powerhouse has been transforming the regional order in East Asia, particularly in the areas of economy, politics and security. The project will address the question of how to manage these transformations. Project members will examine Japan's and other countries' engagement with China from the "realist" (which emphasizes balance of power politics) and "liberal" (which emphasizes economic interdependence and institution-building) perspectives. The project will underline the importance of balancing and regional cooperation for managing the regional transformations.

Major Research Results

RIETI Discussion Papers

• "Rise of China and Its Neighborhood Diplomacy - Implications for Japanese foreign policy" (TAKAHARA Akio)

Project Leader

KOTERA Akira, Faculty Fellow

Sub-Leader

MATSUMOTO Kayo, Fellow

Overview

The purpose of this project is to empirically assess and analyze the impact and effect of trade policies on the behavior of firms and structure of industries. Traditional research in this field often assumes the existence of a representative firm and has focused mainly on the evaluation of economic welfare. More recent research attempts to put more emphasis on the aspects of firm heterogeneity while allowing for strategic interactions among firms. In a globalized economy, firms will not necessarily respond passively to trade policies. For instance, it is known that firms will take a strategic approach to influencing policymaking processes. On the other hand, empirical analyses aimed at determining the validity of this theoretical possibility have only been recently started. Against the backdrop of the increased globalization of corporate activities and the expansion and development of East Asian business networks, this project will focus on analyzing firm behavior while empirically evaluating the impact of international trade systems and trade policies.

Project Leader

OHASHI Hiroshi, Faculty Fellow

Overview

The purpose of this project is to empirically assess and analyze the impact and effect of trade policies on the behavior of firms and structure of industries. Traditional research in this field often assumes the existence of a representative firm and has focused mainly on the evaluation of economic welfare. More recent research attempts to put more emphasis on the aspects of firm heterogeneity while allowing for strategic interactions among firms. In a globalized economy, firms will not necessarily respond passively to trade policies. For instance, it is known that firms will take a strategic approach to influencing policymaking processes. On the other hand, empirical analyses aimed at determining the validity of this theoretical possibility have only been recently started. Against the backdrop of the increased globalization of corporate activities and the expansion and development of East Asian business networks, this project will focus on analyzing firm behavior while empirically evaluating the impact of international trade systems and trade policies.

Project Leader

TOMIURA Eiichi, Faculty Fellow

Overview

In recent years, firms in advanced economies have been increasingly relocating a broad range of operations and functions including R&D activities and manufacturing processes to overseas sites (offshoring). Furthermore, these relocations are not only to divisions within their own multinational corporations but also to unrelated firms (outsourcing). As a result, identifying the current status of cross-border outsourcing has become critically important in formulating Japan's trade policies, regional economic policies and industrial policies. The aim of this project is to undertake an econometric analysis of corporate survey results in order to contribute to an understanding of the offshore outsourcing by Japanese firms, which has an important bearing on Japan's policies. In addition, offshore outsourcing is analyzed with an aim to verify new trade theories.

Project Leader

WAKASUGI Ryuhei, Faculty Fellow

Sub-Leader

TODO Yasuyuki, Faculty Fellow

Overview

Theory of international trade has recently incorporated heterogeneity across firms, predicting that firms' productivity is an important factor, which influences the decision to engage in export and foreign direct investment (FDI). Accordingly, many empirical studies have tested this hypothesis, and most of the studies found support for the hypothesis. However, there has been a lack of research in relation to Japanese firms. Deepening the research on Japanese firms enables us to compare Japanese firms with firms in other countries such as the United States and Europe and thus to contribute to the literature. Moreover, since export and FDI are important channels of economic growth, research on how they are determined and how they can be promoted could provide policy implications for growth of the Japanese economy. This research project, applies new perspectives and methodologies to firm-level datasets for Japanese firms, and aims to contribute to both the academic literature and policies. In 2009, the project continues to engage in theoretical and empirical research on internationalization of firms based on theory of trade with firm heterogeneity. In particular, in order to analyze the internationalization of Japanese firms in and after the global financial crisis, we examine issues such as the impact of internationalization on domestic employment, the legitimacy of policies to foster export industries, complementarity between firms' internationalization, performance, and R&D activities, and structural changes in export industries since the crisis.

Major Research Results

RIETI Discussion Papers

• "Intra-firm Trade and Contract Completeness: Evidence from Japanese affiliate firms" (MATSUURA Toshiyuki and ITO Banri)
• "Firm Heterogeneity and FDI with Matching Frictions" (SATO Hitoshi)
• "Firm Heterogeneity and the Choice of Internationalization Modes: Statistical Evidence from Japanese Firm-Level Data" (WAKASUGI Ryuhei and TANAKA Ayumu)
• "Quantitative Evaluation of Determinants of Export and FDI: Firm-level evidence from Japan" (TODO Yasuyuki)

Project Leader

NAKANISHI Hiroshi, Faculty Fellow

Overview

Events occurring during 2008 and 2009 point to the advent of the most significant juncture in the restructuring of the international order since the end of the Cold War. These events include the launch of a new U.S. administration, changes taking place in China since the Beijing Olympics, and the resurrection of Russian diplomacy in the sphere of its influence. On the other hand, Japan's efforts to restructure its domestic order have lost speed and momentum after the Koizumi reforms, and Japan can be expected to continue to experience turmoil in its internal politics for some time to come. While Japan will have to engage in more fundamental discussions once the internal turmoil has settled, there is a need to analyze the ongoing changes in the international environment and to adopt diplomatic policies that correspond to these changes. This project suggests that the global international order has entered a period of change during 2008 and 2009, and seeks to identify the essential features of this change. The project also considers, on a very fundamental level, the question of how Japanese diplomacy should respond to these changes. Efforts will be made to formulate recommendations on practical policy issues as needed. (We believe that substantial discussion of changes occurring in the East Asian circumstances will become possible after the second half of 2009.)

Project Leader

YAMASHITA Kazuhito, Senior Fellow

Overview

It has been pointed out that environmental problems and international trade are closely linked. In the past, trade disputes related to the "environment and trade" have frequently occurred within the GATT/WTO framework. The GATT panel ruling in the "dolphin and tuna case" was the first GATT ruling ever to be reported on the front page of the New York Times. Environmental groups upset with this ruling took to the streets to demonstrate against globalization. Under pressure from demonstrators, the WTO Ministerial Conference held in Seattle in 1999 ended in failure. As symbolized by these events, environmental groups began to criticize GATT/WTO during the 1990s, claiming that GATT/WTO undermined environmental interests and that trade liberalization leading to economic expansion would further contribute to environmental destruction. During the presidential election, President Obama advocated the adoption of a series of new rules in free trade agreements and for the WTO to prevent companies from gaining competitive power by sacrificing and degrading the environment. It is highly likely that debates concerning the issue of "environment and trade," which have been generally subdued in the past, will emerge as a central issue in WTO negotiations beginning next year. This project will consider "environment and trade" which is one of the key issues in international trade from a comprehensive and interdisciplinary approach, taking into account the perspectives of both law and economics.

Major Research Results

RIETI Discussion Papers

• "Proposals for the Environment and Trade to the WTO" (YAMASHITA Kazuhito)
• "Economic Analysis of the Environment and Trade (2) - Cross-border or global environmental problems and trade -" (YAMASHITA Kazuhito)
• "Economic Analysis of the Environment and Trade (1) - Environmental policies and trade policies -" (YAMASHITA Kazuhito)
• "Legal Analysis of the Environment and Trade" (YAMASHITA Kazuhito)

Project Leader

SHIRAISHI Shigeaki, Senior Fellow

Overview

Thus far, this project has examined economic globalization as a multiple game and has identified its realities and challenges with the intent of developing effective policy recommendations for productivity improvement in the context of economic globalization. Building on these results, we will study the specific developments in the re-organization of European electric power and gas businesses through cross-border M&A from the perspective of business strategies. In addition, while taking into account the responses of the European Commission and member states to these developments, we will examine what may be considered to be a desirable framework for such rules. This project will be undertaken jointly with the OECD/IEA.

Major Research Results

Policy Update

• "Business Strategy and rules for Globalization in the Energy Business Sector - Considerations on the Re-organization of European Electricity and Gas Industry and Policy Perspectives" (SHIRAISHI Shigeaki)

Project Leader

KUBO Fumiaki, Faculty Fellow

Overview

The Obama Administration faces a number of extremely serious and substantial problems both domestically and in the field of foreign policy. Foreign policy issues start with Iraq and Afghanistan but extend to North Korea, Iran, Israeli-Palestinian relations, and developments in Pakistan. However, these are but a sample of the urgent foreign policy issues facing the Obama administration. The purpose of this project is to elucidate the direction of U.S. foreign and security policies under the Obama administration by focusing on the foreign policy philosophies of policy makers. A review of the foreign and security policy staff of the Obama administration seems to reveal the following at the present time. The most left-leaning elements of the Democratic Party adhering to left and anti-war positions have been basically excluded and the staff is centered on moderates. Moreover, efforts have been made to include moderate Republicans and realists, such as Robert Gates and Brent Scowcroft. The project will aim to develop a fuller understanding of basic foreign policy positions reflected in these appointments. The project will also aim to deepen its analysis of specific policy areas, such as Asia, the Middle East and nuclear non-proliferation.

Project Leader

SHIBOTA Atsuo, Senior Fellow

Overview

In the past, the Japanese business community tended to view China and its rapidly expanding economy as a threat. However, this is now being replaced by the view that the vitality of the Chinese economy can be effectively utilized to energize Japanese firms. The economic ties between Japan and China are being strengthened and Japanese-affiliated firms are upgrading the level of their commitment to China. But this implies that Japanese-affiliated firms will become increasingly susceptible to events and changes occurring in the Chinese economy. With this in mind, Japanese-affiliated firms are becoming keenly aware of China-related risks even as they increase their business exposure to China.

The purpose of this project is to survey such current conditions in Japan-China economic relations from the perspective of foreign direct investment. First, developments in Japan-China investment will be surveyed in chronological order, followed by an analysis of Japanese foreign direct investment in China during 2007 and 2008. Next, Japan's position in China's total incoming foreign direct investment will be examined and a number of issues pertaining to foreign direct investment in China will be examined. Finally, we intend to make some projections concerning the future of Japan-China investment relations and will review some specific matters on the Chinese side that need to be understood in order to ensure smooth implementation of investment activities by Japanese-affiliated firms in China.

Major Research Results

RIETI Policy Discussion Papers

• "Japanese Companies' Investments in China" (SHIBOTA Atsuo)

Project Leader

YASHIRO Naomitsu, Consulting Fellow

Overview

The globalization of economic activity and the rapid catch-up of developing countries such as China and India have brought about a drastic change to Japan's economy and its enterprises. Japan needs to further intensify efforts to internationalize its economy and industry in order to utilize globalization as an opportunity to promote the development of Japanese firms and the economy as a whole. Previous studies have shown that firms engaged in exports or foreign direct investments enjoy higher performance than those that constrain their activities to the domestic market. This research aims to observe the internationalization of firms, not only by their trade or offshore production but from broader perspectives such as their innovation activities, to clarify the mechanism through which internationalization shapes such advantage. It also aims to provide a policy recommendation for the internationalization and growth of broader Japanese firms including small and medium enterprises.