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

29 Pages Posted: 19 Jul 2013

See all articles by Sebastian Benz

Sebastian Benz

Organization for Economic Co-Operation and Development (OECD)

Erdal Yalcin

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute; University of Applied Sciences Konstanz

Date Written: July 17, 2013

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.

Keywords: free trade agreement, intra-industry trade, gains from trade

JEL Classification: F120, F130, F160, F170

Suggested Citation

Benz, Sebastian and Yalcin, Erdal and Yalcin, Erdal, Quantifying the Economic Effects of an EU-Japan Free Trade Agreement (July 17, 2013). CESifo Working Paper Series No. 4319, Available at SSRN: https://ssrn.com/abstract=2294880 or http://dx.doi.org/10.2139/ssrn.2294880

Sebastian Benz

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Erdal Yalcin (Contact Author)

University of Applied Sciences Konstanz ( email )

Alfred-Wachtel-Straße 8
Konstanz, 78462
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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