Differentiated Products, Economies of Scale and Access to the Japanese Market

Abstract

For much of the past thirty-face years Japan has imported a remarkably small share of the manufactured goods it consumes. This distinctive trade structure is regularly cited by policy makes as evidence that, despite the absence of formal barriers, foreign manufacturers are systemically denied access to the Japanese market. Alternative explanations of Japan's distinctive trade structure are possible. Using specifications directly derived from traditional models of comparative advantage, Japan's distinctive inter-industry trade structure can be largely explained by Japan's equally distinctive pattern of factor endowments. Scarcely any reference needs to be made at all to distinctive Japanese government trade policies. Japan's participation in intra-industry trade in manufactures is also distinctively low. Traditional models of comparative advantage do not explain intra-industry trade. Such trade can be explained, however, if allowance is made for product differentiation and economies of scale. While traditional models of comparative advantage explain net trade as a linear function of factor endowments, with intra-industry trade models gross trade in imports and exports can still be a function of factor endowments. Indeed, if expressed as a share of GNP, gross imports are still a linear function of factor endowments. Using this framework, it can be shown that Japan's intra-industry trade, like Japan's inter-industry trade, does conform to international patterns. The removal of the remaining distinctive Japanese barriers, both formal and informal, to the import of manufactures, while highly desirable from a diplomatic standpoint, may have little impact on Japanese trade structure.