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

See all articles by Sokchea Lim

Sokchea Lim

Southern Illinois University Carbondale

Channary Khun

Southern Illinois University at Carbondale

Date Written: January 18, 2010

Abstract

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

Suggested Citation

Lim, Sokchea and Khun, Channary, U.S. Bilateral Trade Deficits with China and Japan: The Role of Japanese Direct Investment (January 18, 2010). Empirical Economics Letters, Vol. 11, No. 6, pp. 527-534, June 2011, Available at SSRN: https://ssrn.com/abstract=2034479

Sokchea Lim

Southern Illinois University Carbondale ( email )

Rehn Hall - Mail Code 4626
Carbondale, IL Illinois 62901-4515
United States

HOME PAGE: http://www.siu.edu

Channary Khun (Contact Author)

Southern Illinois University at Carbondale ( email )

Rehn Hall - Mail Code 4626
Carbondale, IL Illinois 62901-4515
United States

HOME PAGE: http://www.siu.edu

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