Multilateral, Regional, and Bilateral Trade-Policy Options for the United States and Japan

We have used the Michigan Model of World Production and Trade to simulate the economic effects on the United States, Japan, and other major trading countries/regions of a prospective new round of WTO multilateral trade negotiations and a variety of regional/bilateral free trade agreements (FTAs) involving the United States and Japan. We estimate that an assumed reduction of post-Uruguay Round tariffs on agricultural and industrial products and services barriers by 33 percent in a new WTO trade round would increase world welfare by $613.0 billion, with gains of $177.3 billion for the United States, $123.7 billion for Japan, and significant gains for all other industrialized and developing countries/regions. If there were global free trade with all post-Uruguay Round trade barriers completely removed, world welfare would increase by $1.9 trillion, with gains of $537.2 billion (5.9 percent of GNP) for the United States and $374.8 billion (5.8 percent of GNP) for Japan. Regional agreements such as an APEC FTA, an ASEAN Plus 3 FTA, and a Western Hemisphere FTA would increase global and member country welfare but much less so than a new WTO multilateral trade round would. Separate bilateral FTAs involving Japan with Singapore, Mexico, Chile, and Korea and the United States with Chile, Singapore, and Korea would have positive, though generally small, welfare effects on the partner countries, but potentially disruptive sectoral employment shifts in some countries. There would be trade diversion and detrimental welfare effects on some nonmember countries for both the regional and bilateral FTAs analyzed. The welfare gains from multilateral trade liberalization are therefore considerably greater than the gains from preferential trading arrangements and more uniformly positive for all countries.