Essays on trade policy, foreign direct investment and industrial policy in Japan and the United States.

Abstract

The purpose of this dissertation is to improve understanding of the U.S.-Japan trade imbalance at the microeconomic level, to examine policies proposed to increase access to Japan's markets and thereby reduce sectoral trade imbalances, and to establish a ranking of policies used to assist domestic firms hurt by foreign competition. Advocates of a new U.S. trade strategy with Japan--voluntary import expansion (VIE)--claim that it serves to reduce sectoral trade imbalances by increasing access to Japan's markets while increasing competition and reducing prices. In the first chapter, I show that a market share VIE cannot live up to these expectations. A VIE that guarantees an increase in the import market share invariably raises prices in the domestic (i.e., Japanese) market. I conclude that a market share VIE, such as that used in the semiconductor market in Japan, only serves to reduce competition and increase prices and, therefore, cannot be justified as a substitute for market-opening measures. The second chapter of this thesis provides an economic theory that explains why Japanese firms tend to invest more in product development for the U.S. market and why these firms are therefore more competitive in the U.S. market than are American firms in Japan. The theory is based on differences in user preferences across national markets and asymmetric information in observing these differences. By conducting product development activities in the country of sales, a firm gains an advantage in tailoring its product to better meet consumer needs. A larger market and one with lower investment costs attracts more foreign direct investment (FDI) in product development activities, resulting in more competitive products from foreign firms. Both of these conditions favor the U.S. over Japan as the host of more FDI in product development and more competitive foreign products. The third chapter considers the use of strategic trade policies to assist distressed domestic industries competing at home and abroad as oligopolists. Policy rankings are established for tariffs, voluntary export restraints (VERs), quantity VIEs and government -sanctioned collusion. The non-traditional policies--quantity VIEs and collusion--are shown to offer some potential for both countries to gain through their implementation.