Japan and a Pacific Free Trade Area

Japan and a Pacific Free Trade Area

Japan and a

Pacific Free Trade Area

KIYOSHI KOJIMA

UNIVERSITY OF CALIFORNIA PRESS Berkeley and Los Angeles

University of California Press Berkeley and Los Angeles, California

© Kiyoshi Kojima, 1971

ISBN 0-520-01736-6

Library of Congress Catalog Card Number 70-121187

Printed in Great Britain

Contents

Contents

Preface

1. Japan and World Trade Liberalisation

2. An Approach to Integration: The Gains from Agreed Specialisation

3. The Proposal for a Pacific Free Trade Area

4. Trade Preferences for Developing Countries

5. PAFTA and Asian Developing Countries

6. A Pacific Currency Area: A New Approach to International Monetary Reform

7. PAFTA as a New Design for World Trade Expansion

Notes

Index

Preface

International trade and monetary policies in the post-Kennedy Round world are in a state of flux, and need new direction. A restructuring of European trade can be anticipated. The NorthSouth problem still awaits an effective solution.

This volume, which has been drawn together from a collection of essays produced over the past five years, focuses on the genesis of the Pacific Free Trade Area idea as a new design for expanding trade and for accelerating economic development both within and between advanced Pacific countries and neighbouring Asian developing countries. The Pacific should become the major centre of world trade growth. Certainly, Japan should play a leading part in trade expansion among developed countries and in extending aid to and fostering trade growth with developing countries.

The editors of Studies in Trade Liberalization, Essays in Honour of Sir Roy Harrod and the Hitotsubashi Journal of Economics kindly allowed me permission to republish material from their pages. Chapter i is a revised version of ‘Trade Arrangements among Industrial Countries: Effects on Japan’ in Bela Balassa and associates, Studies in Trade Liberalization: Problems and Prospects for Industrial Countries (Johns Hopkins Press, Baltimore, 1967). Chapter 2 is an amended version of ‘Towards a Theory of Agreed Specialization: the economics of integration’, in Maurice Scott (ed.), Essays in Honour of Sir Roy Harrod (Oxford, 1970). Chapter 3 incorporates material from two papers: ‘A Pacific Economic Community and Asian Developing Countries’, Hitotsubashi Journal of Economics, vu 1 (June 1966) 17-37, and ‘Japan’s Interest in Pacific Trade Expansion: PAFTA Reconsidered’, Hitotsubashi Journal of Economics, ix 1 (June 1968) 1-31 (originally presented to the conference on Pacific Trade and Development held from 11 to 13 January 1968 by the Japan Economic Research Center in Tokyo). Chapter 4 is reprinted from the Hitotsubashi Journal of Economics ix 2 (Feb 1969) I-12. And Chapter 5 is reprinted from the same journal, x 1 (June 1969) i-ï 7 (originally presented to the second conference on Pacific Trade and Development held from 8 to 11 January 1969 by the East-West Center in Honolulu).

I am especially grateful for having had the opportunity to join in stimulating discussions of the proposals put forward in this book at successive Pacific Trade and Development conferences for which I have been privileged to act as general chairman. Professors H. W. Arndt, Sir John Crawford, Richard Cooper, Harry Johnson, William Lockwood, Saburo Okita, Hugh Patrick and Robert Triffin all contributed much in this way to the clarification of my ideas.

Since this is the first book I have published in English, I should acknowledge older debts. Professors Kaname Akamatsu, Bela Balassa, A. J. Brown, G. C. Allen, Gottfried Haberler, Roy Harrod, Fritz Machlup, M. C. Kemp and Jacob Viner had a profound influence on the development of my understanding of international economics, and the award of a British Council Scholarship and Rockefeller Foundation Fellowship helped me to broaden my view of international economic problems.

I am especially indebted, in this context, to Dr Peter Drysdale of the Australian National University for devoting his time to going over my English text, and to Mr Ippei Yamazawa for compiling statistical data.

KIYOSHI KOJIMA Hitotsubashi University, Tokyo, August 1969

1. Japan and World Trade Liberalisation

I. Japan’s Position in World Trade

Changing patterns in Japanese trade

Japan is a small country, with a high population density and an unfavourable resource endowment.¹ Consequently, the Japanese have had to concentrate on the development of manufacturing industries in order to attain a steady growth of income, and specialisation in manufacturing is associated with heavy dependence on foreign trade. In the past, the commodity and the geographical composition of Japan’s exports have undergone successive changes in response to rapid shifts in world demand. This, in turn, has required a continuous process of transformation and modernisation in the Japanese economy. Continuation of this process will be necessary for reducing the gap between Western and Japanese levels of industrialisation and per capita income.

In which commodities and with what countries will Japan’s trade expand? These are the questions to which the present chapter seeks some answer. As an introduction to this inquiry, information will be provided about changes in the pattern of Japan’s trade, the transformation of her production structure, as well as the geographical and commodity composition of her exports and imports. In subsequent sections Japan’s comparative advantage in a multi-country set will be examined and the potential impact of multilateral trade liberalisation on her trade analysed. Finally, alternative trade arrangements will be appraised from the point of view of Japan.

The Japanese economy passed through three major stages of growth between the opening of Japan to foreign influences and the Second World War: the first period was from the 1870s to 1900; the second, 1900 to 1931; the third, 1932 to 1942. In each period, the economy underwent successive transformation through the development of some leading sectors: agriculture and mining in the first period; silk and cotton textiles in the second; heavy industries in the third. The development of heavy industries was not completed during the inter-war years, however, and has continued until the present time.² The rate of growth of Japanese exports was high throughout the period: 7-5 per cent a year during the years 1881-5 and 1911-13, and 5-1 per cent during 1911-13 and 1938. This high rate of growth was accompanied by shifts in the structure of exports. After the Meiji Restoration of 1868, Japan was an exporter of primary products and importer of manufactures, like most of the presently developing economies. However, between the 1870s and the Second World War, the composition of Japanese exports changed from reliance on food (especially tea) and raw materials, to semi-manufactured goods (mainly raw silk and cotton yarns), and subsequently to finished manufactures.

The Second World War disrupted Japanese trade to a considerable extent. In 1950, exports were only 32 per cent of their pre-war level, which was not attained again until 1958. Exports grew at an average annual rate of 14-8 per cent between 1950 and 1963 — a growth rate 2-7 times higher than that of world trade, and 17 times higher than that of world manufactured exports. Nevertheless, despite rapid recovery and expansion since the Second World War, Japan’s share in world trade was only 3-6 per cent in 1963 — still lower than the share she enjoyed before the war (which was 4-6 per cent in 1938).

The post-war period may also be divided into three stages: the first was the wake of war devastation between 1946 and 1953; the second, a period of recovery between 1953 and 1959; and the third, a period of normalisation from 1959 onwards. In 1948, exports were only $U.S. 145 million, but they increased markedly during the Korean War and reached $U.S. 1,273 million in 1953. During this period, about four-fifths of the exports were traditional products such as raw silk, silk fabrics, cotton yarn and cotton fabrics. Manufacturing industries recovered in the second period, however, and provided an increasing share of exports. Total exports grew at an annual rate of 17-4 per cent between 1953 and 1959, and surpassed JU.S. 3-6 billion in the latter year.

The growth of exports slowed down somewhat after 1959, but the 11-7 per cent annual rate of increase between 1959 and 1963 was still more than double the growth rate of world exports. By the end of this period manufactured goods accounted for nine-ten ths of Japanese exports and within this category the share of heavy manufactured goods and chemicals increased to a considerable extent. Parallel with these developments, the severe import restrictions in effect throughout the post-war period were progressively liberalised.

As to the dependence of the Japanese economy on foreign trade, we find that imports as a percentage of national income expressed in terms of 1913 prices increased steadily from 6 per cent in the 1880s to 21 per cent in the 1920s. After 1930 this ratio declined to 17 per cent, in a large part because of the fall in world market prices of primary products. The expansion of heavy industries may also have contributed to this result since, as we shall see below, the import content of production is considerably smaller in heavy than in light industries.³

Following the decline in the volume of trade during the Second World War, the growth of foreign trade has led income growth in Japan. The ratio of imports to national income, expressed in terms of 1958 prices, increased from the low level of 7-3 per cent in 1950 to 18*5 per cent in 1963. During the same period, the share of exports rose from 7-2 per cent to 14*6 per cent. Finally, in 1963, the average ratio of exports and imports to value added to the production of traded goods was 27*5 per cent in Japan.

Despite the rapid increase of foreign trade in the post-war period, the share of imports in Japan’s national income remained well below the inter-war level. Among the factors contributing to this result, the shift from light to heavy manufactures in Japanese production and exports should first be mentioned. The import content of exported goods is 26 per cent in the case of textiles, as compared to 16 per cent for chemicals and 6 per cent for machinery.⁴ As the share of textiles in exports and in the gross domestic product declined and that of machinery increased, the import content of exports fell from 23 per cent in 1954 to 15 per cent in 1963, and the import-national income ratio also decreased. The increased selfsufficiency in staple food, the shift from consumption of natural fibres to the use of synthetic fibres, and other technical changes of a material-saving character have had a similar influence, while the rapid rise in imports of mineral fuels has been an offsetting factor.

Transformation of the structure of production

Shifts in the pattern of trade have been associated with changes in the structure of production in Japan. In the 1950s, the transformation of the Japanese industrial structure was more rapid than anywhere else in the world. Between 1954 and 1961, the share of agricultural output in the gross domestic product decreased by 7-5 percentage points, the share of mining output fell by 0-9 percentage points, and transport, communications, commerce and banking by 0-8 percentage points, whereas the share of manufacturing output increased by 6-6 percentage points, construction by 1-5 percentage points, and electricity, gas and water supply by i • 1 percentage points. The sum of these negative and positive movements in sectoral shares was 18-4 percentage points, as compared to 14-3 for Italy, 9-1 for the United Kingdom, 7-0 for the Federal Republic of Germany, 5-6 for the United States, and 5-4 for France. Similar results are reached if we consider changes in the shares of thirteen major industries within the manufacturing sector. The sum of percentage changes is 43-8 for Japan, 20-8 for Italy, 16-0 for France, 11-9 for the Federal Republic of Germany, 8-8 for the United Kingdom, and 4-0 for the United States.⁵ During this period, Japanese labour productivity rose more rapidly than money wages, and the reduction in labour costs has been accompanied by a rate of increase of exports far exceeding that of any other industrial country. One of the most important factors contributing to the growth of labour productivity has been a high rate of investment and capital accumulation in the Japanese economy. With the ratio of savings to the gross domestic product exceeding 30 per cent, fixed capital per worker approximately doubled between 1955 and 1963. The importation of foreign technological know-how has also played a part in these developments, while the availability of an ample labour supply has supported the rapid expansion. Investments, as well as increases in productivity, have been concentrated in heavy and chemical industries: between 1950 and 1960, labour productivity in heavy manufacturing and chemicals increased at an annual rate of 13-4 per cent, as compared to 7*6 per cent for light manufacturing.

By 1963, the Japanese economy had attained a level of industrialisation comparable to that of Italy, although it still lagged behind the United States and the more developed European countries. While the share of heavy manufactures and chemicals in total value added in manufacturing in Japan approached that in advanced industrial countries, these industries comprised a much smaller share of manufacturing exports in Japan than in other major industrial countries. In 1960, the relevant figures were 46 per cent for Japan, 60 per cent for Italy, 77 per cent for the United Kingdom, 80 per cent for the United States, and 81 per cent for Germany.

The expansion of heavy manufacturing and chemical industries has followed roughly the same course of development as in the larger industrial countries. Domestic demand,, first satisfied by imports, encouraged the expansion of domestic production. The expansion of production then led to the exploitation of economies in scale, increases in productivity, improvements in quality, and reductions in costs. As domestic costs reached the international comparative cost threshold, foreign markets were developed, the scale of production was extended further, and costs were reduced again. Thus, the expansion of exports that had originally been made possible by the growth of domestic demand has, in its turn, provided a stimulus to industrial development.

The production of heavy manufactures and chemicals was increasing rapidly during the inter-war period in Japan but exports remained insignificant. After the war, the expansion of domestic demand for industrial equipment and durable consumer goods stimulated the further development of these industries, and also led to increases in exports. First iron and steel, ships and boats, and light machinery, then radio and television sets, automobiles and motor-cycles, as well as heavy machinery, came to be exported. The importance of new commodities in Japanese exports is indicated by the fact that goods whose share in total exports has risen above 0-2 per cent between 1951 and 1963 accounted for 26 per cent of the total increase in exports during the period.

Structure of Japanese trade

Data on the commodity composition of Japanese exports show the increasing importanceof heavy manufactures and chemicals. With an annual growth rate of 23-5 per cent between 1953 and 1963 and 24-5 per cent between 1963 and 1968, the share of these commodities in the total exports of Japan rose from 33-9 per cent in 1953 to 49-8 per cent in 1968 (see Table 1.1). Despite a rate of growth of 13-8 per cent and 10-0 per cent respectively, in the two periods, the proportion of exports supplied by the light manufacturing sector declined from 47-0 per cent to 27-2 per cent between the first and last years. In particular, machinery and transport equipment have replaced textiles as the leading export group. Between 1953 and 1968, the share of the former increased from 16-0 per cent to 43-6 per cent, while that of the latter fell from 36-1 per cent to 15*2 per cent.

Much of Japanese imports are industrial materials (37-5 per cent in 1968). Fuels account for another 20-6 per cent, and food for 14-5 per cent, bringing imports of primary products to nearly four-fifths of the total. Japan’s industrial development depends upon her ability to import cheap primary products, since almost 100 per cent of her demand for a number of basic materials — such as wool, cotton, petroleum, iron ore and various non-ferrous metals — is supplied by imports. On the other hand, despite rapid increases since 1953, the share of manufacturing imports remains relatively small (27*1 per cent in 1968). The increase in imports of manufactured goods has been concentrated in machinery that is necessary for the modernisation of manufacturing industries.

The geographical distribution of Japan’s exports has also undergone considerable changes in the post-war period (see Table 1.2). Developed countries (North America, Western Europe and Oceania) took 51-1 per cent of Japan’s exports in 1968 as compared with 30-4 per cent in 1953, while the share of 14

Table i.i. Japan’s Trade: Commodity Composition and Annual Rate of Growth, 1953-68

(per cent)

Note: According to the revised classification of S.I.T.C., the coverage of commodity groups is: (a) Sections o and I; (b) Sections 2 and 4 (less 27 and 28); (c) Divisions 27 and 28; (d) Section 3; (e) Sections 6 and 8 (less 67, 68 and 69); (/) Sections 5 and 7; and (g) Divisions 67, 68 and 69.

Source: Japanese Department of Finance, J apany s Foreign Trade Returns.

Table 1.2. Japan’s Trade: Market Composition and Annual Rate of Growth, 10e4_68 (per cent)

Source: Japanese Ministry of International Trade and Industry.

developing countries fell from 69-2 per cent in 1953 to 44*3 per cent in 1968. Within the developed country group, the importance of North America as a market for Japanese exports further increased (the North American share rose from 19*5 per cent in 1953 to 34-2 per cent in 1968). Despite a rapid expansion of trade, Western Europe’s and Oceania’s shares have not surpassed 12*7 and 4-2 per cent respectively. At the same time, Japan provides only 1 per cent of Western Europe’s imports.

Changes in the geographical origin of Japanese imports have been less marked. Developed countries accounted for 53-3 per cent of Japanese imports in 1953 and 50-6 per cent in 1968, whereas underdeveloped countries supplied 45*1 per cent and 42-9 per cent respectively in the