Trade, investment, and economic conflict between the United States and Asia

Abstract

Trade and investment flows represent mutually beneficial exchanges which clearly enrich both the United States and Asia in a variety of ways. Nevertheless, considerable controversy surrounds the American economic relationship with Asia. This paper models US trade and investment. This work is then imbedded in a model of conflictual relations between the U.S. and Asia. A simple counterfactual is used to sketch possible developments in economic relations between the U.S. and Asia. The key result of this paper is that US investment and exports are complementary. This is important because bilateral trade deficits are the prime cause of bilateral trade conflict between the U.S. and its trade partners. The implication of this analysis is that increases in Asian inward FDI would only not raise welfare for the conventional reasons, but would also bring about a reduction in trade tensions with the U.S.