Cooperation or Confrontation in U.S.–Japan Trade? Some General Equilibrium Estimates

Abstract

Using a detailed calibrated general equilibrium model, we evaluate the effects of greater cooperation or confrontation in bilateral trade relations between the U.S. and Japan. Our numerical results indicate that, if a trade war between the two were precipitated, the U.S. would eventually benefit from the mutual imposition of reciprocally optimal tariffs. While this result appears negative for those who advocate free trade, it provides the key to overcoming an important incentive problem of liberalization. Specifically, we find that Japan gains more from U.S. unilateral liberalization than from bilateral liberalization and thus has an incentive to limit its commitment to removing trade barriers. Since the U.S. has a credible threat of retaliation, however, it can bargain with Japan to implement bilateral cooperation. In other words, the strategic environment is neither completely harmonious nor discordant. A credible threat of confrontation can secure the basis of cooperation. J. Japan. Int. Econ. June 1999, 13(2), pp. 119–139. Research Institute for Economics and Business Administration, Kobe University, Kobe 657-8501, Japan; and Department of Economics, Mills College, Oakland, California 94613, and Centre for Economic Policy Research, London, United Kingdom. Copyright 1999 Academic Press.Journal of Economic Literature Classification Numbers: F13, F14.