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Quantifying the Economic Effects of an EU-Japan Free Trade Agreement

Author Info

Listed author(s):
  • Sebastian Benz
  • Erdal Yalcin

    ()

Abstract

The European Union and Japan have recently launched negotiations about a bilateral free trade agreement as means of economic stimulation, with trade as a driving force to create growth and wealth. Since customs duties are already low, the success of the liberalization process hinges on the potential elimination of non-tariff barriers. The purpose of this paper is to shed light on two possible liberalization scenarios, a less ambitious and a comprehensive trade liberalization. In contrast to classical studies our paper builds on the modern trade literature, accounting for the dominance of intra-industry trade between the two economies and the existence of heterogeneous firms. Furthermore, we model a search-and-matching labor market allowing us to quantify employment effects of trade liberalization. We find that a comprehensive liberalization increases Japanese GDP by 0.86 per cent, whereas the EU only experiences an additional 0.21 per cent of real GDP growth. Most of the growth in real GDP is due to firms’ efficiency gains, while unemployment is only reduced by a small amount. Other world regions experience small reductions of GDP due to trade diversion effects.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4319.

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Date of creation: 2013
Handle: RePEc:ces:ceswps:_4319
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Keywords: free trade agreement; intra-industry trade; gains from trade;

Find related papers by JEL classification:

  • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
  • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
  • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
  • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

References listed on IDEAS
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  1. Hiau LooiKee & Alessandro Nicita & Marcelo Olarreaga, 2009. "Estimating Trade Restrictiveness Indices," Economic Journal, Royal Economic Society, vol. 119(534), pages 172-199, 01.
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  15. Andrea Bassanini & Romain Duval, 2006. "Employment Patterns in OECD Countries: Reassessing the Role of Policies and Institutions," OECD Social, Employment and Migration Working Papers 35, OECD Publishing.
  16. repec:adr:anecst:y:1996:i:41-42 is not listed on IDEAS
  17. Gabriel J. Felbermayr & Mario Larch & Wolfgang Lechthaler, 2012. "The Shimer-Puzzle of International Trade: A Quantitative Analysis," ifo Working Paper Series Ifo Working Paper No. 134, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
  18. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
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