U.S. Bilateral Trade Deficits with China and Japan: The Role of Japanese Direct Investment
Empirical Economics Letters, Vol. 11, No. 6, pp. 527-534, June 2011
20 Pages Posted: 4 Apr 2012
Date Written: January 18, 2010
This paper argues that Japanese Foreign Direct Investment (FDI) in China plays a critical role in home and host country’s bilateral trade imbalances with the U.S. Using six cross-sectional panel data from 1981 to 2007, we find strong evidence in support of the role of Japanese FDI in mounting U.S.-China trade imbalance and in reducing deficit of U.S. trade with Japan. The results also indicate that the devaluation of Chinese Yuan does not affect its bilateral trade balance with the U.S. and there are mixed evidence in terms of the relationship between the Japanese Yen exchange rate and the U.S.-Japan trade deficit. The implication of these findings is that U.S. trade deficit is a macroeconomic problem which cannot be blamed on the exchange rate alone. Policies to attract and retain Japanese firms in the U.S. will help reduce its trade deficit in the long-run.
Keywords: Japanese Foreign Direct Investment, bilateral trade imbalance, devaluation of exchange rate
JEL Classification: F1, F2, F13, F31
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