Evaluation of the Impacts of Trade Restrictions between China and Japan

Using a simple static computable general equilibrium model, we quantitatively examine the impact of trade restrictions between China and Japan on gross domestic product (GDP) and welfare in both countries. Furthermore, we examine trade flows not only between these two countries, but also between Japan and its other trading partners. We examine export and import quotas’ long-run effect (large elasticity of substitution (EOS)) and short-run effect (small EOS) as trade restrictions. When trade restrictions are imposed on manufacturing sectors, we find that regardless of the type of restriction, trade restrictions in either country negatively affect its own GDP. However, because of improvement in terms of trade, the welfare of a country imposing the restriction may increase. We also examine the short-run and long-run impacts of unilateral export restrictions on the ELE (computer, electronic, and optical products) sector, which includes semiconductors. Japan benefits less from its own export restrictions against China than China does from its export restriction against Japan. China can increase its GDP by imposing export restrictions on Japan, whereas Japan cannot. In response to China’s export restrictions on Japan, the country increases imports from both major and minor trading partners. This suggests Japan should broaden its import sources to include minor trade partners.