Japanese Contributions to the Theory of International Trade. Abstract

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1 Japanese Contributions to the Theory of International Trade Paul Oslington Deakin University Geelong, Victoria, 3217, Australia June 1998 Abstract This paper outlines a number of significant Japanese contributions to the theory of international trade in the post WWII period, and identifies some of their characteristic topics and methods. It then seeks to explain these characteristics, with reference to Japan s intellectual and cultural heritage, pressing national priorities, and the situation of the Japanese economist within Japanese society and the economics profession internationally. It is also argued that despite these common characteristics we cannot speak meaningfully of a Japanese school of trade theory, although there is a characteristically Japanese approach to trade policy. Finally, some reasons for the Japanese contributions being little known are explored. 1

2 1. Introduction Japanese international trade theorists have made many important contributions to their discipline over the past fifty years, but these contributions are not generally as well known as the contributions of Western trade theorists. Nor has the nature of the contributions been systematically considered in relation to their Japanese and international background 1. The main purposes of this paper are to describe the Japanese contributions, identify common characteristics and to explain these characteristics, as far as is possible, with reference to Japan s pressing national priorities, intellectual and cultural heritage, as well as the situation of the Japanese economist within Japanese society and the economics profession internationally. Towards the end of the paper some related questions will be considered: Can we speak of a Japanese school of international trade theory? Why are the Japanese contributions so little known outside Japan? 2. Definitions To describe the Japanese contributions the first problem is to decide how Japanese is to be defined. In their history of Australian economic thought Groenewegen and McFarlane (1990 p6) suggest three criteria for isolating a national economics. These are firstly, the nationality of the author, secondly, the author s place of residence and publication, and thirdly, the nature of the problems selected for discussion and their mode of analysis. The first two criteria are reasonably straightforward, even allowing for complications of individuals moving between different countries and cross country co-authorship. There is some tension between the first two criteria and the third because defining a country s economics in terms of a discussion of problems of relevance to the country could mean that Japanese economics ends up not being done by Japanese. For the purposes of this paper, the third criteria will not carry as much weight in defining Japanese contributions as the other two. It should also be recognised that defining a country s economics in terms of a particular mode of analysis presumes that such a distinctive mode of analysis exists, and a large part of Groenewegen and McFarlane s argument is that a distinctive and valuable Australian mode of analysis exists, although it is currently under threat from the increasing Americanisation of economics. The other problem in isolating Japanese contributions to trade theory is to define the boundaries of trade theory. In this paper the focus will be on theoretical works, or policy works with some explicit theoretical framework. Many works overlap trade theory among which are general equilibrium theory, social choice theory, growth theory and the theory of technical change. I have tended to include overlapping works where they have been important to trade theorists. Only contributions published in English as books or articles in major economics journals will be considered. In order to keep the study within reasonable bounds, the scope will be restricted to neoclassical contributions Japanese Contributions Even with these criteria for identifying what is Japanese and what is trade theory, there is an unavoidable degree of arbitrariness in the process of arriving at a list of important references 3. Such a list is a necessary starting point for discussion of the Japanese contributions, and they will be listed below, classified by topic and by method Characteristic topics 2

3 Gains from Trade. By the late 1960s Paul Samuelson and Murray Kemp had provided proofs of gains from trade propositions, but important questions about the robustness of the proof to increasing returns, imperfect competition and uncertainty remained. The work of Negishi (1969), Kemp and Negishi (1970), Kemp and Ohyama (1978) and Ohyama (1972a) was important in clarifying these questions, and establishing conditions under which gains from trade results continued to hold. Factor Price Equalisation. Early versions of the factor price equalisation theorem were presented by Paul Samuelson in the 1940s, but debate raged about the exact meaning of the proposition and the conditions (especially the necessary restrictions on production technologies) under which it held. Gale and Nikaido (1965) was perhaps the most important paper in the evolving debates throughout the 1950s and 1960s over the conditions under which the theorem held. Other Japanese contributions were Uzawa (1959), Kuga (1972), Nikaido (1972) and Nishimura (1991). Dimensionality. A large proportion of trade models contain just two factors of production and two final goods. This invites questions of whether the results derived from such model generalise meaningfully to situations where there are more and perhaps unequal numbers of factors and goods. This has been a major area of work for Japanese trade theorists. Important contributions examining the conditions under which these trade theoretic results generalise have been made by Inada (1967), Kemp and Wegge (1969a, 1969b), Uekawa (1971, 1984), Uekawa Kemp and Wegge (1973), Inada (1971), Otani (1973), Drabicki and Takayama (1979), Yano (1981), Inoue (1981), Inoue and Wegge (1986) and Minabe (1995). Komiya (1967) considered the consequences of adding a nontraded good to the model. Existence and Stability. International trade models are very often closely related to Arrow-Debreu general equilibrium theory, and so the same issues of the existence and stability of equilibria arise in trade theory. Japanese economists were some of the first to take seriously these issues in trade models, as reflected in the contributions of Negishi (1960, 1965,1972) on the existence question, and Negishi (1962, 1972) on the stability question. Negishi (1996b) also discusses the pioneering work of Takuma Yasui, mostly in Japanese, on these issues. Spatial Models. One of the ways of seeing general equilibrium trade models is as a special case of a general spatial model where countries or parts of countries are locations. This line of thought has not been followed up much in the English speaking countries, but developed fruitfully by Japanese economists, for example Takayama and Judge (1971), Takayama (1996), Ohta (1981), Fujita (1989) and Fujita and Krugman (1995). Growth. The initial formalisations of neo-classical general equilibrium trade theory were static, although it has long been recognised that the dynamics of capital accumulation and technical progress are crucial to many trade issues. Japanese economists have been at the forefront of dynamic modeling. Oniki and Uzawa (1965) produced one of the first and most widely cited dynamic trade models. Other important early Japanese contributions in this area were Uzawa (1962, 1963, 1964a), Morishima (1970), Amano (1964), Inada (1968), Takayama (1963). More recently, following the revival of interest in growth theory that has come with advances in modeling technical progress in imperfectly competitive markets, Japanese economists have begun to work in this area. See for example Matsuyama (1992a, 1992b), Nishimura and Yano (1992) and Suzumura (1995). International Factor Flows and Foreign Investment. Modeling the effects and determinants of international factor flows and foreign investment has been a topics of great interest for Japanese trade theorists. Contributions include Negishi (1965b), Uekawa (1972), Minabe (1974), Amano (1977), Kojima (1978), Itagaki (1979), Dei (1979,1985a,1985b) and Ohyama (1989). Domestic Distortions. The effects of domestic distortions, particularly in the labour market have been considered by Kemp and Negishi (1969), Ohyama (1972b), 3

4 Itoh and Negishi (1987), Shimomura (1984), and Kemp, Long and Shimomura (1991). This last work stands out from the literature on labour market distortions for its thoroughness and consideration of dynamics and interactions between distortions in different countries. Trade Policy and Multilateral Trade Policy Reform. Trade policy has been much discussed by trade theorists everywhere, and some Japanese contributions have been Shibata (1968), Kuga (1973), Otani (1980), Itoh and Kiyono (1987) and Matsuyama (1990). Hatta (1977a, 1977b) and Hatta and Fukushima (1979) were important early works on multilateral trade policy reform. 4

5 Characteristic methods Absorption, Systematisation, Extension. The most noticeable characteristic of the Japanese is the amount of work which reformulates and then generalises the work of others. This can be seen particularly in the papers cited above on the gains from trade, factor price equalisation and dimensionality. Use of Mathematics. Related to the above characteristic method is the extensive use of mathematics as a tool for reformulation and generalisation. Collaboration. Many of the Japanese contributions have resulted from collaboration between Japanese and Western economists. This collaboration has not always been reflected in co-authorship; many footnotes to papers and introductions to volumes of collected works of Japanese trade theorists bear testimony to the influence of colleagues in the West. This has been through doctoral and postdoctoral supervision, employment on research teams and at research institutes as well as through more informal channels. Avoidance of Polemics. In contrast to the work of Western trade theorists the Japanese seem to avoid rather than seek open controversy. They tend to emphasise the continuity with the previous literature, and show humility when discussing their own contributions. 4. Explaining the Characteristics of the Japanese Contributions Having now identified some characteristic topics and methods of Japanese trade theory, this section will attempt to explain them with reference to Japan s intellectual and cultural heritage, pressing national priorities, and the situation of the Japanese economist within Japanese society and within the economics profession internationally 4. Some of the essential background to the Japanese contributions to trade theory over the past fifty years is the earlier history of Japanese economics. This earlier history is considered by Bronfenbrenner (1956), Morris-Suzuki (1989), Morishima (1982), Sugiyama and Mizuta (1988), Sugiyama (1994) and Ikeo (1994, 1996). Without repeating details from these works, the broad outlines for the benefit of readers not familiar with this history are as follows. In the period prior to the Meji restoration of 1868 there was a tradition of reflection on economic questions by Japanese Confucian philosophers and others, but little contact with economic thinking in the West. Between the Meji revolution and WWI there was far greater contact with the West and a conscious attempt to absorb Western knowledge in order to promote the modernisation of Japan 5. This included economics. Both Dutch ideas and English classical political economy were brought to Japan. In the later part of this period there were countervailing influences of List s views on trade and national economic policy and trade, and a growing interest in the ideas of Karl Marx. The period between the wars and during WWII was marked by the ascendancy and then failure of the ultra-nationalist and militarist elements within Japanese society. After WWII interest in Marxian ideas grew, strengthened by their association with opposition to the previously ascendant ideology, and Japanese Marxist scholars have made significant contributions 6. The post WWII era in the economics profession internationally has been marked by the dominance of neoclassical ideas. Americanisation has also been part of the experience of post WWII economists, and this influence was particularly strong and early in Japan because of the American occupation of Japan and America s contribution to post war reconstruction. Neoclassical theory, after a slow start grew in importance beside Marxian economics, and has now perhaps supplanted it as the strongest tradition in academic economics. What is the significance of this heritage for the development of neoclassical trade theory in Japan? The strong American influence on Japan s history after WWII would seem 5

6 to be an important reason for the emergence of a neoclassical trade theory, and to have contributed some of the characteristic methods, including the mathematical approach and extent of collaboration with Western economists 7. The history might be thought to explain the tendency of Japanese trade theorists to systematise and extend rather than create new areas of research. It could be argued that by the1960s when Japanese neoclassical trade theorists came onto the scene the shape of competitive general equilibrium trade theory was established and the major breakthroughs had been made, so there was little room for further breakthroughs. The problem with this explanation, though, is that other major new areas of research have been created since that time, for example imperfect competition and endogenous technical progress, but the Japanese emphasis on systematising and extending established theory appears to have continued. Attention will now be turned from Japan s heritage to its pressing national priorities in recent times. Following Argy and Stein (1997) these may be summarised as catching up to the West in terms of knowledge, technology and living standards. They also note the nationalism of the Japanese, which means that national priorities would make a difference to topics and methods chosen by Japanese trade theorists. An illustration of this is provided by Morishima (1982 p175) who quotes the Imperial Universities Ordinance: The aim of the imperial universities shall be to teach the arts and sciences in accordance with the priorities of the State, and to make a study of their principles. Western science includes economics. The core of modern economics has been the general equilibrium economics modelled in the manner of Walras, which is now expressed in a more mathematically rigorous way. General equilibrium theory, and its trade theoretic variants were thus obvious candidates for the attention of Japanese economists. They saw it as a priority to pull apart and absorb this body of theory in the same way as Japan s engineers were absorbing Western automotive and microelectronic technology. This to some extent explains the Japanese concentration on topics like the gains from trade, factor price equalisation, dimensionality, and growth that are part of the technical core of trade theory. Another influence of the choice of topics over the period was Japan s economic experience, especially its high growth rate, rapid structural change, current account surpluses and high levels of foreign investment. This correlates fairly well with the more policy oriented topics chosen by Japanese trade theorists. Apart from Japan s heritage and pressing national priorities the other group of influences on the characteristics of the Japanese contributions to trade theory has been the situation of the Japanese economist within Japanese society and within the international economics profession. An important influence, documented by Komiya and Yamoto (1981), is that Japanese academic economists have had little direct involvement in policy making, even to the extent that it is doubtful whether the category of economist in the Western sense is meaningful in the Japanese policy making context. Anecdotal evidence suggests that the role of the economists in policy making since Komiya wrote has moved closer to the role they have in the West, but the lack of institutional support for policy related research and the small possibility of influencing policy could be another reason for the Japanese emphasis on pure theory. These comments are not meant to suggest that Japanese policy makers were ignorant of economic theory, for bureaucrats can be highly conversant with economic theory without this ever being reflected in the publications which define contributions for the purposes of this paper. Komiya and Yamoto (1981) describes various exchange and training schemes which exposed influential bureaucrats to economic theory, but these schemes often bypassed Japanese academic economists. Some interesting recent work has considered Japanese trade policy over the post WWII period in the light of trade theory, see for example Ozawa (1979), Komiya (1990), Itoh and Kiyono (1987), Sato (1992). A consequence of the lack of influence on domestic policy making has been that Japanese trade theorists have been fairly involved in the international economics profession and have gained recognition there. This lack of policy influence combined with the already noted factors of a prevalence of American postgraduate training, combined with subsequent American support through fellowships, research institutes and collaboration, goes a long way to explaining the tendency of Japanese trade theorists to choose 6

7 theoretical topics of international relevance. A part of the cultural heritage of the Japanese economist is group solidarity and consensus seeking. This contributes to the lack of interest in polemics. It also might explain avoidance of certain topics which we might have expected to be prominent considering Japan s economic experience. For instance there has been little work on the political economy of trade policy in the sense of Magee, Brock and Young (1989), or more generally on the economics of regulation and rent seeking despite the importance of bureaucracy and its not always unambiguous effectiveness. Of relevance to this lack of interest in the political economy of trade policy is the lack of attraction (noted by Coats 1982 p282) for most Japanese of extreme and doctrinaire liberalism emphasising atomistic individualism, personal rights, uninhibited pursuit of self interest etc, but this is surely the reverse side of valuing group solidarity and consensus. One of the achievements of the Japanese has been to be able to master Western economics while keeping some of the more socially destructive philosophies that are associated with economics in the West at a distance. It remains to be seen how strong this cultural resistance will be in the future. 5. A Japanese School? Previous sections identified common characteristics of Japanese contributions to trade theory, and offered some explanations. Do these common characteristics make it meaningful to speak of a Japanese school of trade theory? Note that the answer to this question does not reflect on the value or otherwise of Japanese trade theory it is merely an extension of the description of characteristics of Japanese trade theory. Some commonality of ideas and techniques is necessary but not sufficient for us to speak of a school There must also be institutions (perhaps very informal ones) which embody these ideas and pass them on. We speak of the classical school of economics, the German historical school, the institutional school of modern economics, the Chicago school and many others. An example of a well known non-western school of economics is the Latin American dependency school of development theory. It was not just a set of ideas but a network of scholars in various Universities, supported by various international, government and church agencies, having recognised publication outlets and some collective policy voice, and successfully passing on their ideas to at least one generation of younger scholars. The institutional element is common to the other schools listed above. In my view, Japanese trade theory lacks this institutional dimension and thus it is not meaningful to speak of a Japanese school of trade theory. If this is so, then why did it not develop an institutional expression in the same way as Latin American dependency theory? The answer seems to be firstly that common elements identified of Japanese trade theory are not of the type which lead to the formation of a school, and secondly that there have been other peculiarly Japanese factors working against a school. The characteristic tendency to work by systematising and extending the work of others, often Western economists, has meant that the central ideas or seminal writings around which a school might form have tended not to be Japanese. The previously noted Japanese coldness towards the larger liberal ideologies with which neoclassical economics is associated in the West has removed some of the (perhaps dangerous) fervour which has been a part of some of the Western Schools. Japan s success also perhaps blunted the passionate sense of injustice which was part of the Latin American dependency school. A practical factor that has worked against the formation of a Japanese school of trade theory has been the departure to America of many Japanese trade theorists for their postgraduate training, cutting off an important way that a school s ideas are passed on. Once re-employed in a Japanese University the intense loyalty to one s own University 7

8 and the personal patronage noted by Argy and Stein (1997 pp ) has made it difficult for Japanese trade theorists to develop the cross institutional links that would have been necessary to sustain a school. An illustration provided by Ikeo (1996) of this tendency is the importance of economics journals associated with particular Universities, like Keio Economic Studies, Hitotsubashi Journal of Economics, Kobe University Economic Review, Kyoto University Economic Review. Some cross institutional links did develop, like the Japan Association of Economic and Econometrics with its journal The Japanese Economic Review (formerly The Economic Studies Quarterly), the important regional activities of the Econometric Society, and the publication of the International Economic Review since From the 1980s the Journal of the Japanese and International Economies and Japan and the World Economy have also begun to contribute to these links which were missing in the earlier period. Another factor which worked against a school forming has been the distance between academic trade theory and trade policy making in Japan, which has deprived Japanese trade theorists of the financial and organisational support through things like government sponsored policy research institutes, consultancies, and secondments that have nourished schools in other countries. While it is difficult to speak of a Japanese school of trade theory, a distinctively Japanese approach to trade policy with an institutional expression certainly is meaningful. This particular approach associated with the large economic ministries such as the Ministry of Finance and the Ministry of International Trade and Industry is amply documented by Komiya (1990) but as we have seen the links between this distinctive approach to policy and the academic trade theory have been tenuous for most of the period under consideration. An illustration of this distance between the policy institutions is the fact that something like the new trade theory and formal models of the potential gains from strategic trade policy did not arise in Japan, even though trade policy was arguably conducted according to these principles for many years. It should be added that in recent times the Japanese have embraced the new trade theory, and Itoh and Kiyono (1992) and Sato (1992) have discussed past Japanese policy in the light of the new trade theory. Policy though seems to be now taking another direction. 6. Why are the Japanese Contributions So Little Known The observation which originally motivated this paper was that the Japanese contributions to trade theory seemed to be little known. Is this actually so, and what might be the reasons? A number of writers argue that the contributions of Japanese economists have been neglected. Coats (1988) contrasts the rapid transmission of ideas from West to East with the sluggish travel and unenthusiastic reception of Eastern economic ideas to the West, although he is primarily referring to the Meji period. Morris-Suzuki (1989 p196) concludes her book on Japanese economic thought as follows: Throughout the 300 years of history surveyed in this book the writings of Japanese economic thinkers have received little attention in other countries. Although since the mid-nineteenth century Japan has imported and assimilated an enormous volume of foreign economic ideas, the economic controversies that have raged within Japan might, for all the interest they attracted abroad, have been conducted within a soundproofed room. Specifically in relation to trade theory Kemp (1969b) points out the neglect of Japanese contributions to dynamic trade modeling and higher dimensional modeling. Is there some way to gauge the international reputation of these Japanese contributions? Major transmission channels for trade theoretic knowledge are professional journals, monographs, and major University graduate schools, with the later being particularly important in moulding the perspective of young trade economists. A collection of University course outlines edited by Edward Tower of Duke University lets us see what is taught and what the trade theory students are reading. Table 1 shows the citations of Japanese trade theorists relative to total citations in the trade theory courses selected by Tower (1985): 8

9 Table 1: Citation of Japanese Trade Theorists in University Course Outlines University Professor Number of Japanese Citations Total Number of Citations % of Japanese Citations University of California Neary % - Berkeley Princeton Grossman % Princeton Dixit % Princeton Grossman % Wisconsin Baldwin % Wisconsin McCulloch % John Hopkins Balassa % Michigan Deardorff % Virginia Eaton % Simon Fraser Grubel % Totals % Notes: Source is Tower (1985). Only trade theory courses have been included. Counts are approximate. The low overall 1.6% Japanese citations, together with the frequency of zeros, would suggest that the Japanese contributions are not as well known as they should be. An alternative source is the major survey articles and textbooks of trade theory that have appeared over the past forty years. Citation data for these is shown in Table 2: 9

10 Table 2: Citation of Japanese Trade Theorists in Major Surveys or Texts Survey or Texts Number of Japanese Citations Total Number of Citations % of Japanese Citations Bhagwati (1964) % Chipman ( ) % Chipman (1987) % McKenzie (1968) % Kemp (1969a) % Dixit and Norman (1980) % Woodland (1982) % Jones and Neary (1984) % Jones (1987) % Corden (1984) % Ethier (1984) % Krugman (1995) % Brander (1995) % Grossman and Helpman (1995) % Neary (1995) % Totals % Notes: Surveys and texts selected by the author. Counts are approximate. Citations of Japanese contributions vary considerably. More attention is paid to them by writers who have worked extensively with Japanese economists, e.g. Kemp (1969a), Jones (1987), and also by the more specialised and technical surveys, e.g. Ethier (1984). There also seems to be a decline in citations in the more recent surveys. The higher overall level of recognition in the surveys and texts in table 2 compared to the course reading lists perhaps reflects the greater thoroughness of the survey writers compared to the course presenters. The surveys better but not fully reflect the substantial contribution of Japanese trade theorists Tables 1 and 2 together provide some support for the view that the Japanese contributions are not as widely known as they should be. Possible reasons for this neglect has to do with the characteristics of Japanese contributions they often are highly mathematical and the style of writing is usually formal and very careful, although this has not stopped a number of Western contributions being widely known through citation by the economists who do read such articles. Other reasons might be that the major economic journals are located outside of Japan as well as the importance of proximity. Work becomes known through personal contacts, the seminal circuit, and eventual publication in a reputable journal. In this respect Japanese trade theorists have run up against similar barriers that other economists outside the major centres in America and the UK have faced. However, the extent of the problem is not perhaps as great due to the previously noted prevalence of American postgraduate training and links during the post WWII period. 10

11 7. Conclusions This paper has highlighted some significant Japanese contributions to trade theory, identified common characteristics, and sought to explain them with reference to Japan s heritage, national priorities in the post WWII period and the situation of the Japanese economist. Overall, Japanese trade theorists favour topics from the theoretical core of modern trade theory, often work which is accomplished by systematising and extending, and which makes extensive use of mathematics. Their work on the gains from trade, factor price equalisation, dimensionality, existence and stability particularly show these characteristics. There have also been contributions on questions suggested by Japan s postwar economic experience, for instance growth, international factor flows and foreign investment, and trade policy issues like quotas, VERs, retaliation, and multilateral tariff reform. Major factors explaining these characteristics were the national priority of taking apart and absorbing Western knowledge (of which trade theory is part), contact with America when mathematical theory was becoming more important, the strong mathematical training of Japanese economists, and a lack of any direct influence by academic economists on policy making. These common characteristics do not allow us to speak of a Japanese school of trade theory because the necessary institutional features of such a school are not present. The observation that Japanese contributions have been neglected has some validity. 11

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17 Notes 1 Kojima (1953) surveyed earlier Japanese trade theory there has been no comparable survey covering the more recent period since WWII. 2 It saddens me to exclude the important contribution of Japanese Marxian scholars to the understanding of international economic issues, but this should be the subject of another paper. The nature of Marxian economics makes it more difficult to separate trade from other areas of economics, and attempting to consider Marxian contributions would mean a full discussion of Marxian economics in Japan. This is something I am not qualified to undertake because many fewer of the Marxian than the neoclassical contributions have been translated into English, and because my own research has mostly used neo-classical rather than Marxian tools of analysis. One of the strengths of Japanese economics is the way scholars are often familiar with both Marxian and neo-classical approaches, whereas training in a Western University usually means a choice to pursue one or the other. I hope that another writer will consider the Marxian contributions to trade theory, but there is some discussion in the works of Morris- Suzuki (1989), Itoh (1980), Morishima (1973) and Negishi (1989, 1995, 1996a). 3 The sources used to collect the Japanese contributions were the Journal of Economic Literature electronic database, Blaug (1986), and the surveys of Viner (1937), Bhagwati (1964), Chipman ( , 1987), McKenzie (1968), Kemp (1969a), Dixit and Norman (1980), Woodland (1982), Gomes (1987, 1990), Jones and Neary (1984), Jones (1987), Corden (1984), Ethier (1984), Krugman (1995), Brander (1995), Grossman and Helpman (1995) and Neary (1995). Any suggestions of important contributions I have overlooked or comments on the selection would be welcomed. 4 An interesting and far larger project than this paper would be to compare the various non-western contributions to trade theory. The present paper on Japan could contribute to such a larger project. 5 The cautions of Morris-Suzuki (1989 p5) and others about dangers of constructions like Western knowledge, especially as contrasted to Eastern knowledge, must be borne in mind. Western is used as a convenient shorthand for the countries of Western Europe and North America. 6 As was discussed in a previous note these Marxian contributions are not the focus of this paper and the reader is referred to the works of Morris-Suzuki (1989), Itoh (1980), Morishima (1973) and Negishi (1989, 1995, 1996a). 7 Ikeo (1994) has also argued in relation to the mathematical approach, that the strength of Japanese mathematics in this period contributed significantly to the mathematisation of economics in Japan. 17