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Chapter 1 Analysis with an eye to sustainable globalization In Part I. Chapter 2, we described the growing concerns over and discontent with globalization in

advanced countries. In this chapter, we will examine the possibility that behind those concerns and discontent that trade is the main factor that is contributing to the widening of inequality while comparing it with other factors.

In Chapter 1, we will first examine the benefits of trade in order to show why trade is important in light of the theories of trade and the results of empirical studies in Section 1. Next, we will look at the current status of income inequality worldwide and in advanced countries and analyze the factors contributing to income inequality in Section 2. In Section 3, we will explain the trend in studies concerning the impact of trade on employment and wages and cite empirical analyses concerning trade and employment in Japan. In Section 4, we will summarize international opinions maintaining that trade serves as a driving force of growth for all people. Section 1 Benefits of Free Trade 1. Macroeconomic benefits (1) Expansion of the economic pie

We will first provide an overview of how economic theories have regarded the benefits of trade and then divide the benefits into the macroeconomic benefits and the microeconomic benefts. With respect to the macroeconomic benefits, we will explain the contributions to the expansion of the economic pie, an increase in the purchasing power through imports, a rise in national total factor productivity, and the narrowing of inequality. With respect to the microeconomic benefits, we will discuss productivity improvement at the company level.

Trade is essential to the expansion of the economic pie. According to Ricardo, who developed the traditional economic theory concerning trade, if two countries manufacturing two different goods export to each other goods that have a comparative advantage203 and import goods that do not, the economy of scale works due to additional production for export, thereby not only bringing benefits to producers through efficient production but also making it possible for consumers to consume more goods or obtain the same goods at lower cost. Table II-1-1-1-1 shows the outline of the traditional trade theory, the new trade theory and the new new trade theory (theory of firm heterogeneity).

203 Under a two-country, two-goods model, the level of production technology and the quantity of available production factors differ from country to country, but when one country has a comparative advantage over the other, it can manufacture goods more efficiently because of the possession of relatively superior production technology and production factors.

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Table II-1-1-1-1 Summarized theories of trade Researcher Trade pattern Assumption Reason for occurrence of trade

Ricardo (1817) Labor only as anelement of production

Comparative advantage: Inequality intechnology (productivity)

Heckscher (1919)Ohlin (1933)

Capital and labor as twoelements of production

Comparative advantage: Difference inthe quantity of relative elements

Krugman (1980) Company homogeneity(representativecompanies)

Economy of scale (increasing returns) +Consumers’ devotion to diversity

Coordination only between industries

Increase in types ofconsumable products

Melitz (2003) Company heterogeneity(difference inproductivity bycompany)

Exports available only by companieswith high productivityNew additional mechanism for inter-company coordination (entry andwithdrawal) in the same industry.

Redistribution of resourcesfrom low-productivitycompanies to high-productivity companies(productivity gains)

Theory Trade benefitTraditional tradetheory

Inter-industrytrade

Utilization of difference inproduction opportunity costsbetween countries

Study: Bernhofen and Brown (2005)Example: Japan’s opens up itself to the outside world in thelate 19th centuryOutcome: Equivalent up to 8 to 9% of GDP (based on theCGE model simulation)

New trade theory Intra-industrytrade

Study: Broda and Weinstein (2006)Example: The United States in the era between 1972 to 2001Outcome: An increase in the types of consumer goods due tothe inflow of imported goods brought about the value of 2.6%of GDP (0.1% annual rate) to consumers in the U.S. over 30years.

New new tradetheory

Study: Pavcnik (2002)Example: Trade liberalization in Chile since the 1970sOutcome: Productivity in the overall manufacturing industryincreased by 19.3%, of which two-thirds was brought aboutby the effect of redistribution.

It is difficult to make clear the degree of benefits generated by trade through an empirical analysis

intended to substantiate Ricardo’s traditional trade theory. That is because it is extremely difficult to calculate the value that meets the definition of the trade benefits, namely the value obtained by deducting the value of economic welfare in a situation without trade from the value of economic welfare in a situation with trade. However, as a study that meets the definition, the WTO (2008)204 cited an analysis conducted by Bernhofen and Brown with regard to the trade benefits generated when Japan ended the national isolation policy and opened itself to the outside world late in the 19th century. The study concluded that the trade benefits gained by Japan were equivalent to 8 to 9% of GDP. As another example of empirical analysis, the WTO report also cited a study conducted by Irwin, which showed that the welfare benefits lost by the United States due to the export ban imposed by the U.S. Congress between 1807 and 1809 were equivalent to around 5% of GDP (however, the lost benefits do not represent the total benefits that would have been gained from trade).

Later, Krugman (professor at the City University of New York’s Graduate Center; winner of the Nobel prize for economics in 2008) paid attention to the economy of scale and advocated a new trade theory showing that trade may arise between advanced countries. According to this theory, the benefits gained through trade between advanced countries include not only efficiency improvement of production due to a decline in the average cost proportionate to an increase in the production volume but also the availability of a wide variety of products for consumers due to the inflow of imported products into the domestic market in addition to domestic products.

Melitz (professor at Harvard University’s Department of Economics) developed the theory of firm heterogeneity, also known as the new new trade theory, that there are both exporting and non-exporting companies within the same industry because only companies with high productivity can export products. This theory explains that trade liberalization increases competition, resulting in redistribution of resources and causing workers to move from companies with low productivity to those with high productivity and that a similar shift occurs in terms of production volume, thereby creating trade benefits in the form of productivity improvement of the whole industry.

204 WTO (2008), p. 34.

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While the abovementioned analyses examined the static effects of trade, we would also like to mention the dynamic effects of trade and economic growth. According to the WTO (2008),205 traditional theories of economic growth have not given consideration to international relations. That is because theories of economic growth are generally based on the assumption that products are manufactured and consumed domestically. However, as it is impossible to analyze a country’s growth through examination of the country alone, it has become essential to take trade into consideration. Figure II-1-1-1-2 apparently shows that generally speaking, there is a positive correlation between the GDP growth rate and the trade growth rate. Although this does not suggest that either of the two is the leading driver of the other, it shows that there is an important relationship between the two. According to the WTO (2008), many studies have shown that there is a positive correlation between international trade volume and economic growth206.

Figure II-1-1-1-2 GDP growth rate and trade growth rate

Note: The horizontal axis shows trade growth rates (exports + imports), while the vertical axis shows

GDP/Capita growth rates. The unit of the table is a percentage (%).The table plots the average values of trade volume by five years between 1961 and 2005 and the GDP/Capita growth rates targeting the seven regions according to the World Bank regional classification (East Asia, high-income economies, Europe and Central Asia, Latin America & the Caribbean, Middle East and North Africa, South Asia, and Sub-Saharan Africa).

Source: Excerpts from Chart 8, p.65, World Trade Report 2008 (WTO).

Until now, many other economists and researchers have also forecast that creating multilateral, regional and bilateral frameworks of free trade will lead to economic growth for participating countries and have conducted studies concerning the ex post facto effects actually generated by free trade. Table II-1-1-1-3 is a list of representative examples of empirical research conducted in Japan with respect to free trade and regional trade agreements. All these studies showed that such agreements

205 WTO (2008), p. 64. 206 WTO (2008), p. 71.

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have a positive impact on trade and economic growth.207 Table II-1-1-1-3 Examples of the existing empirical research conducted in Japan with respect to free trade and regional trade agreements

Research Example Major outcome

Urata and Okabe(2010)

Estimated a variety of international FTA trade effects and trade diversion effects

The study shows that if a total trade value between FTA member countries is larger than that between non-FTA member countries in a statistically significant manner, an estimated value of trade effects becomes positive, thereby uncovering trade effects.

Kawasaki(2014, 2015）

Estimated economic effects brought about by the TPP, RCEP and FTAAP in the Asia-Pacific region

The study shows the estimated ratios as an economic impact on APEC economies caused by tariffs and non-tariff barriers reduction under the TPP, RCEP and FTAAP respectively as 1.2%, 2.1% and 4.3%.

Source: Based on the data on p.128 of Tanaka, A. (2015), Shinshin Boeki Riron toha Nanika.

As shown above, trade contributes to the expansion of the economic pie. In order to examine how much trade, among other factors, contributes to the expansion of the economic pie, we will conduct comparison with R&D investment, which is a major growth promotion factor.

According to the standard theory of economic growth, the per-capita GDP growth rate depends on the technological advance rate and the pace of capital accumulation. However, technological innovation has been regarded as more important than capital accumulation as a factor that supports economic growth over the long term. Furthermore, the idea that input of labor into R&D is necessary for technological innovation is regarded as important.208 Therefore, R&D is used as a substitute variable for technological advance. Trade is also said to lead to technological advance through the market expansion effect, competition promotion effect and technology diffusion effect, so both R&D and trade are used as substitute variables for technological advance in order to examine how much they contribute to per-capita GDP.

Figure II-1-1-1-4 shows the results of a survey conducted on how much per-capita GDP changed in the case of a 1% change in the ratio of the value of goods trades and in the ratio of R&D to GDP in OECD countries between 2001 and 2014 in order to analyze the contribution of trade and R&D to per-capita GDP. According to this figure, per-capita GDP grows 0.18% when the ratio of the value of goods trade to GDP changes 1%. Meanwhile, when the ratio of R&D to GDP changes 1%, per-capita GDP grows 0.32%. This finding indicates that the contribution of trade to per-capita GDP is not so

207Among studies not included in this table are those which show findings different from the results of the studies cited in this paragraph, such as that the contribution of free trade to economic growth is not statistically significant.

208 Hirata, W. (2011)

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small relative to the contribution of R&D, which is usually said to make significant contributions to economic growth.

Figure II-1-1-1-4 Contribution of respective elements to per-capita GDP (2001-2014)

Notes: 1. The horizontal axis shows the ratio (%) of changes in per-capita GDP in the case of a 1% change in the respective indices. 2. The per-capita GDP growth ratio, the ratio of the value of goods trade to GDP, and the ratio of R&D to GDP are the annual average of the growth ratios between 2001 to 2014. 3. Target countries are OECD member countries. Source: OECD Stat.

Moreover, when we look not only at goods trade but at a broad range of external economic activities, including services trade and foreign direct investment, we can see that in 13 OECD countries and China, there is a tendency that the higher the growth in the current account balance and in the goods and services trade is, the higher the nominal GDP growth rate is (Figures II-1-1-1-5 and II-1-1-1-6).

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Figure II-1-1-1-5 Total current account balance and nominal GDP (2005-2015)

Notes: Target countries are: Canada, China, Denmark, France, Germany, Italy, Japan, ROK, Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States. Source: World Development Indicators, World Bank and CEIC. Figure II-1-1-1-6 Goods/service trade and nominal GDP (2005-2015)

Notes: Target countries are: Canada, China, Denmark, France, Germany, Italy, Japan, ROK, Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

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Source: World Development Indicators, World Bank.

Trade is essential for the expansion of the economic pie. That is shown by the traditional trade theory, empirical studies concerning trade benefits, free trade agreements, including regional trade agreements, the positive correlation between international trade volume and economic growth and a broader range of external economic activities including not only goods trade but also services trade and foreign direct investment209 as well as the tendency that the higher the growth in the current account balance and the goods and services trade is, the higher the nominal GDP growth rate is. By expanding the pie, we can avoid falling into a state of diminishing equilibrium and being forced to compete for shares of the shrinking pie and can obtain resources for redistribution to resolve inequality.

(2) A rise in the purchasing power due to imports Next, we will look at the trade benefits from the standpoint of consumers. As was mentioned in the

paragraph concerning trade theories, importing more competitive products than domestic products makes it possible for consumers to obtain the same quality of goods at lower price or better-quality products at the same price. Figure Ⅱ-1-1-1-7 shows the results of the calculation of a rise in the purchasing power to be caused by imports as a benefit for consumers classified by income bracket in Japan and the United States based on the comparison of the purchasing power in a case where there is no imported product and the purchasing power in a case where there are imported products. For consumers in the top 10% income bracket and the middle bracket, the rise in the purchasing power is low—less than 10%—in both Japan and the United States. On the other hand, for consumers in the bottom 10% income bracket, the rise in the purchasing power is 46% in Japan and 69% in the United States, far above the rates for consumers in the top 10% and middle-income brackets. Moreover, there is a 23-point difference between the rates of rise in the United States andJapan.

209 However, there are many research papers, mainly written by U.S. researchers, regarding the point that some regions, industries and companies have been negatively affected, as will be mentioned later. Representative examples of such papers will be discussed in Section 3.

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Figure II-1-1-1-7 Growth rate of the purchasing power due to imports (by income bracket)

Notes: Based on the data of 35 sectors in 40 countries, including the trade value, production value and Gini coefficients, extracted from the World Input-Output Database and other databases, METI estimated parameters of the Engel curves and the Gravitational equation and then analyzed the results of the calculation to find a rise in the purchasing power for consumers by income bracket by the comparison of the purchasing power in a case where there is imported product and the purchasing power in a case where there are no imported products. Source: Fajgelbaum and Khandelwal (2016), “Measuring the Unequal Gains from Trade,” Table V, p.1152, Quarterly Journal of Economics. Put another way, this means that if protectionist trade policy is adopted, the trade benefit gained in the form of a rise in the purchasing power will disappear. It also suggests that the impact will be larger on people in lower income brackets and will be larger in Japan than in the United States.

(3) A rise in total factor productivity210 As was mentioned in (1), a rise in the ratio of the value of trade to GDP is presumed to have a

positive impact on economic growth. One way that trade contributes to economic growth, as explained by the theory of firm heterogeneity, is by raising the productivity of individual domestic companies and reallocating resources between companies, thereby resulting in an improvement in the productivity of a whole industry.

Focusing attention on this point, we will examine whether trade also leads to a rise in the total

210 Total factor productivity (TFP) is an indicator of productivity that takes into consideration all

production factors, including not only labor but also raw materials and capital. TFP is defined as: TFP = production volume ÷ total input volume of all production factors. TFP is regarded as an indicator of production efficiency improvement not dependent on input of goods, namely business efficiency improvement and technological innovation, because unlike labor productivity, which focuses exclusively on labor among production factors inputted into production, it takes into consideration not only labor but also raw materials and capital.

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factor productivity of a whole country. Figure Ⅱ-1-1-1-8 shows the results of examination of how much total factor productivity changed in the case of a 1% change in the ratio of the value of trade to GDP and in the ratio of ICT investment to GDP in OECD countries between 2001 and 2014.211 According to the results, when the ratio of trade value to GDP changes 1%, total factor productivity rises 2.41%, and when the ratio of ICT investment to GDP changes 1%, total factor productivity rises 1.85%. This finding indicates that trade contributes more to a rise in total factor productivity than ICT investment, which is generally said to be inseparably connected with total productivity factor improvement. It has been pointed out that trade leads to a rise in total factor productivity because it has (A) the market expansion effect, (B) the competition promotion effect and (C) the technology diffusion effect.212

With respect to imports alone, according to an analysis conducted by the IMF, imports accounted for around 20% of the rise in total factor productivity when a regression analysis was conducted to examine the contribution of imports and other factors (labor, capital and raw materials) to changes in industry-by-industry total factor productivity in the Republic of Korea (ROK) between 2006 and 2012. Many papers show the positive impact of imports on productivity improvement in countries other than the ROK.213 The positive impact of imports on productivity improvement is considered to be related to the competition promotion effect, one of the three effects mentioned earlier. This effect arises presumably because domestic companies can learn from superior foreign technology through imports, because imports of high-quality products lead to a quality improvement and because the expansion of the range of imported products (parts) available generates various positive effects.

211 For the details, see Supplementary Analysis 1. 212 Concerning the market expansion effect, competition promotion effect, technology diffusion effect and

institutional reform effect, see White Paper on International Economy and Trade 2001, Ministry of Economy, Trade and Industry (2001).

213 JaeBin Ahn and Moon Jung Choi (2016), p. 3.

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Figure II-1-1-1-8 Contribution of total factor productivity to respective elements (2001-2014)

Notes: 1. Target countries are OECD member countries. 2. The horizontal axis shows the ratio (%) of changes in the total factor productivity in the case of a 1% change in the respective indices. 3. Based on the FY2011 Annual Report on the Japanese Economy and Public Finance (CAO), METI changed the target period of the analysis from 1980-2009 to 2001-2014. Source: OECD Stat.

(4) Narrowing of income inequality In addition to the benefits so far examined, there is also another benefit—the narrowing of

inequality due to free trade. As a result of the examination of the relationship between the value of trade (as a percentage of GDP) and the Gini coefficient in OECD countries (of the OECD countries, the ROK and New Zealand were excluded because of the absence of the Gini coefficient data (before tax and redistribution)214 for 2014), it was found that the higher the trade value is, the lower the Gini coefficient is, that is, the narrower income inequality is (Figure II-1-1-1-9).

214 The Gini coefficient is an indicator of inequality of the distribution of income and assets. The Gini

coefficient is represented by a value between 0 and 1. It takes the value “0” in the case of complete equality and approaches 1 in proportion to the degree of inequality. This indicator was devised by Corrado Gini (1884-1965), an Italian statistician.

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Figure II-1-1-1-9 Correlation between a ratio of the value of trade to GDP and a Gini coefficient (1995)

Notes: The horizontal axis shows trade values (ratios to GDP) and the vertical axis shows Gini coefficients (before tax and redistribution), targeting OECD member countries excluding the ROK and New Zealand.

Source: OECD Stats, the World Bank and the MIC Statistics Bureau.

The value of trade (as a percentage of GDP) is higher than 100% for three countries—Belgium, Estonia and Ireland—but the Gini coefficient is not very high for any of these countries. On the other hand, for Chile and Mexico, the Gini coefficient is close to 0.5 and is divergent far upward from the regression line.

When we look at the relationship between the value of trade (as a percentage of GDP) and the Gini coefficient between 2005 and 2014 as expressed as a scatter plot, there is no change in the tendency that the higher the value of trade (as a percentage of GDP) is, the lower the Gini coefficient is despite a disparity in the correlation coefficient, indicating the presence of a certain degree of correlation (Figures II-1-1-1-10 and II-1-1-1-11). China is not included in graphs other than the one for 2014 because of the unavailability of the Gini coefficient data. Meanwhile, the relationship between the value of trade (as a percentage of GDP) between 2010 and 2014 and the Gini coefficient growth rate (2014/2010) showed a similar tendency (Figure II-1-1-1-12).

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Figure II-1-1-1-10 Correlation between a ratio of the value of trade to GDP and a Gini coefficient (2005)

Notes: The horizontal axis shows trade values (ratios to GDP) and the vertical axis shows Gini coefficients (before tax and redistribution), targeting OECD member countries excluding the ROK and New Zealand. Source: OECD Stats, the World Bank and the MIC Statistics Bureau. Figure II-1-1-1-11 Correlation between a ratio of the value of trade to GDP and a Gini coefficient (2014)

Notes: The horizontal axis shows trade values (ratios to GDP) and the vertical axis shows Gini coefficients (before tax and redistribution), targeting OECD member countries–excluding the ROK and New Zealand–and China (based on values in 2012 due to data restrictions). Source: OECD Stats, the World Bank and the MIC Statistics Bureau.

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Figure II-1-1-1-12 Correlation between a ratio of the value of trade to GDP and a Gini coefficient (Growth ratio between 2010 and 2014)

Notes: The horizontal axis shows growth ratios of trade values (ratios to GDP) between 2010 and 2014, and the vertical axis shows Gini coefficients (before tax and redistribution; growth ratios between 2010 and 2014), targeting OECD member countries excluding the ROK and New Zealand. Source: OECD Stats, the World Bank and the MIC Statistics Bureau. 2．Microeconomic benefits

Above, we looked at the trade benefits on the macroeconomic front. On the microeconomic front, more specifically at the company level, one benefit is a productivity improvement for companies.

The theory of firm heterogeneity, paying attention to the initial cost related to exports (fixed cost of export), maintains that only companies with a sufficient level of productivity to cover the fixed cost of export (export threshold value) can participate in the global market as exporting companies. The theory of firm heterogeneity is different from the new trade theory in that it assumes heterogeneity among companies within the same industry. This suggests the possibility that companies which have originally been unable to export products may turn into exporting companies as a result of trade liberalization or other policy measures.

In addition, a WTO report215 pointed out not only that companies which have high productivity from the beginning can export products but also that export has the effect of improving the productivity of exporting companies compared with the productivity of non-exporting companies. The WTO report observed that there is a sufficient reason to believe that export leads to a productivity improvement by citing an article216 arguing that participation in international trade has the effect of enhancing the incentive for companies to make technological improvements and developing new high-quality products by providing access to international best practices in addition to enabling them

215 WTO (2016), p. 22. 216 Baldwin, J.R. and Gu, W. (2003) and Avendano, R., Daude, C. and Perea, J. (2013)

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to expand market size, use the economy of scale and absorb excess production capacity. Concerning the labor productivity and total factor productivity of Canadian exporting and

non-exporting companies, this article cited survey results showing not only that exporting companies have higher labor productivity growth than non-exporting companies from the beginning but also that the difference in the growth rate significantly widens after the participating in the export market (Table II-1-1-2-1).

Table II-1-1-2-1 Difference in productivity growth rates between exporting and non-exporting companies

Difference in growth rates of

labor productivity (%/Year)

Difference in growth rates of total factor productivity

(%/Year) Before starting exports (1990-1993) 3.4* -0.1

After starting exports (1993-1996) 5.5* 1.7*

Difference in growth rates between before and after starting exports

2.1* 1.8*

There is also a study whose analysis results217 show that in Japan as well, companies which started

export recorded a productivity improvement compared with companies which did not (Figure II-1-1-2-2). This study divided companies which did not engage in export until 2000 into those which started export in 2001 and which did not start export and showed the trend in the logarithmic value of their average labor productivity between 1998 and 2008. The figure shows that companies which started export already had higher productivity than companies which did not before the start of export and that the difference widened year after year after the start of export. The companies covered by the study are manufacturing companies selected from among the companies covered by the Ministry of Economy, Trade and Industry’s “Basic Survey of Japanese Business Structure and Activities.”

According to the comparison of the absolute levels of productivity of companies which started export and companies which did not during two periods—the period before the global economic crisis (from 2001 to 2009) and the period after the crisis (from 2010 and 2014), the labor productivity of companies which started export was 7.44 during the pre-crisis period of 2001 to 2009, higher than 6.50 for companies which did not. During the post-crisis period of 2010 to 2014, the labor productivity of companies which started export, at 6.50, was also higher than that of companies which did not, at 6.34. The finding indicates that the export’s productivity improvement effect has continued after the global economic crisis for companies which started export (Figure II-1-1-2-3).

217 White Paper on International Economy and Trade 2012, Ministry of Economy, Trade and Industry

(2012), p. 489.

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Figure II-1-1-2-2 Productivity of companies that started exports and those that did not

Notes: 1. The vertical axis shows logarithmic values of labor productivity; Labor productivity = value added ÷ number of regular employees. 2. This figure shows changes in average logarithmic values of labor productivity concerning companies that started exports and those that did not start exports in 2001 among companies not having engaged in exports in 2000. Source: Survey of Overseas Business Activities (METI).

Figure II-1-1-2-3 Comparison of productivity between companies that started exports and those that did not

Notes: 1. The vertical axis shows absolute levels of labor productivity; Labor productivity = value added ÷

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number of regular employees. 2. This figure shows changes in annual averages of labor productivity of companies that started exports and those that did not start exports in 2001, among companies not having engaged in exports in 2000, during the period before (2001-2009) and after (2010-2014) the global economic crisis. Source: Survey of Overseas Business Activities (METI).

As a result of the productivity improvement due to export, many companies engaging in direct export expanded not only sales but also ordinary profits. Furthermore, according to a questionnaire survey218 conducted this year, around 30 to 40% of the respondent companies replied that they increased jobs and wages (Figure II-1-1-2-4).

Figure II-1-1-2-4 Rates of companies supposing that direct exports have contributed to their sales

Notes: This targets companies engaging in direct exports alone or those engaging in direct exports and cross-border e-commerce alone, excluding wholesalers.n=65.

Source: Data from a questionnaire survey conducted by Mitsubishi UFJ Research and Consulting Co., Ltd. in 2017.

3．Costs of the implementation of protectionist measures

In some countries, there are moves to implement protectionist measures against the backdrop of growing concerns over and discontent with globalization. However, if tariffs are increased as a protectionism measure, inequality could widen because the measure is highly likely to trigger a rise in import prices and cause the greatest damage to low-income households.

Moreover, the measure may produce a negative impact on the economy by inducing an interest rate

218 Mitsubishi UFJ Research and Consulting (2017)

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hike through a rise in the domestic inflation rate or by slowing down exports through a currency appreciation. In addition, if trading partner countries implement retaliatory measures, the negative impact could grow further. Besides, it has been pointed out that in a worst-case scenario, a spiral of tit-for-tat protectionism could arise and get out of control. To understand how difficult it is to end a spiral of protectionism, we need to look back at the history of the bloc economy after World War I.

According to an estimate by Kenichi Kawasaki, a researcher at the National Graduate Institute for Policy Studies, if the U.S. tariff rates for imports from China and Mexico are raised to 45% and 35%, respectively, as pledged during the U.S. presidential campaign by then candidate Donald Trump, negative effects will be generated in the United States as well as China and Mexico (Table Ⅱ-1-1-3-1). The Peterson International Institute of Economics,219 a U.S. think tank, also issued an estimate that if such a protectionist measure is implemented, it will have negative effects on the real GDP of the United States.

Table II-1-1-3-1 Estimated impact on GDP caused by high tariff rates for imports from China and Mexico imposed by the United States

Notes: This table shows the calculation results based on the assumption of a tariff ratio imposed by China as 45% and that imposed by Mexico as 35%. Source: Kawasaki, K. (2017).

Concerning the impact of the implementation of protectionist measures on the global economy and global trade, the OECD presented in the Economic Outlook report in November 2016 an estimate that if the United States, Europe and China raised the trade costs related to imported products, such as tariffs, by 10%, it would lower global GDP by 1.4% and reduce global trade by 6% (Figure II-1-1-3-2).

219 Peterson Institute for International Economics (2016)

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Figure II-1-1-3-2 Estimated impact on the global economy and global trade caused by an increase of the trade costs related to imported products by the United States, Europe and China

US China Europe Other regions

Worldwide

Notes: 1. Trade costs include those involving tariffs and non-tariffs, e.g., quantity costs and customs clearance. 2. The term “Europe” refers to EU member countries, Switzerland and Norway. Source: OECD (2016).