Openness to Trade

University of Dhaka
Department of International Business

IB/EIB 519 International Economics

Term Paper

Prepared by
Name ID Number
Mahmuda Khatun 801826001
Farabi Masum Khan 801826006
Mohammad Mostafizur Rahman 801825016
Mahbub Ahmed Pathan 801621011
Kazi Muhammad Mofathe 801723019
Rahat Ara Islam 801723012
Sharmin Akhter 801724018
Asif Aresfin 801825054

Supervisor
Hazera-Tun-Nessa

Date of Submission
April 13, 2019
Growth and Trade Openness: Does the relationship vary due to several measures
of Openness?

Table of Contents
Trade openness and growth in the literature: .................................................................. 3
Measures of Trade openness: ......................................................................................... 3
Correlation between trade and growth ............................................................................ 3
Japan –Singapore Economic Partnership Agreement (JSEPA): ..................................... 4
Japan- Vietnam Economic Partnership Agreement (VJEPA) .......................................... 5
Japan-Australia Economic Partnership Agreement (JAEPA) .......................................... 6
Ranking related to the trade openness of the four countries being under discussion: .... 7
Graphical Representation of the Effects of Japan’s Economic Partnership with the Three
countries:......................................................................................................................... 8
Findings......................................................................................................................... 11

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Trade openness and growth in the literature:

Traditional trade theory predicts growth gains from openness at the country level through
specialization, investment in innovation, productivity improvement, or enhanced resource
allocation. The role of trade policy in economic development has been a key matter of debate in
the development literature. New economic growth theories assume that technological change is
an endogenous variable and that trade policies can be combined with those on international trade.
The existence and nature of the link between trade openness and economic growth have been
the subject of considerable debate.

The benefits of trade openness are not automatic. Policies, such as measures aimed at fostering
macroeconomic stability and a favorable investment climate, must accompany trade openness
(Newfarmer and Sztajerowska, 2012). Kim and Lin (2009) found that trade openness contributes
to long-run economic growth, with effects varying according to the level of economic development.
Herzer (2013) found that the impact of trade openness is positive for developed countries and
negative for developing ones. The effect of trade liberalization on growth depends on the
liberalization level. An income threshold exists above which greater trade openness has beneficial
effects on economic growth and below which increased trade has detrimental consequences
(Agénor, 2004; Liang, 2006). If we look at country-level data from the last half century we find that
there is also a correlation between economic growth and trade: countries with higher rates of GDP
growth also tend to have higher rates of growth in trade as a share of output.

Measures of Trade openness:

Following Jouini (2015), Le Goff and Singh (2014), Zeren and Ari (2013), and Ulaşan (2015), we
chose as our trade openness variable a measure of effective trade openness and not a measure
of liberalization policies because the main concern of this study is the impact of actual
globalization on economic growth. We employ three variables for trade openness: we have used:

 Export (%of GDP)

 Import (%of GDP)
 Trade to GDP Ratio

We also provide details of trade agreement

Correlation between trade and growth

At the cross-country level, there is a correlation between economic growth and rising international
trade. Some of the research rely on long-run macroeconomic data and find evidence of a causal
relationship: trade is one of the factors driving economic growth.

Over the last couple of centuries the world economy has experienced sustained positive
economic growth, and over the same period, this process of economic growth has been
accompanied by even faster growth in global trade. In a similar way, if we look at country-level
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data from the last half century we find that there is also a correlation between economic growth
and trade: countries with higher rates of GDP growth also tend to have higher rates of growth in
trade as a share of output.

Among the potential growth-enhancing factors that may come from greater global economic
integration are: Competition (firms that fail to adopt new technologies and cut costs are more likely
to fail and to be replaced by more dynamic firms); Economies of scale (firms that can export to
the world face larger demand, and under the right conditions, they can operate at larger scales
where the price per unit of product is lower); Learning and innovation (firms that trade gain more
experience and exposure to develop and adopt technologies and industry standards from foreign
competitors).
Despite the slowing domestic economy, global demand for Japanese manufactured goods,
ranging from automobiles to scientific instruments, remains strong and has contributed to the
recent recovery of the Japanese machinery market. This trend is expected to continue over the
next few years as Japanese corporations continue to upgrade or replace existing equipment. As
of July 2017, Japan had entered into economic partnership agreements (EPAs) with 14 countries:

 Australia
 Brunei
 Chile
 India
 Indonesia
 Malaysia
 Mexico
 Mongolia
 Peru
 Philippines
 Singapore
 Switzerland
 Thailand
 Vietnam

For this term paper we have selected to analyze the effects of Japan’s Economic Partnership
effects over three countries:

 Singapore
 Vietnam
 Australia

Japan –Singapore Economic Partnership Agreement (JSEPA):

The Japan – Singapore Economic Partnership Agreement (JSEPA) was officially signed between
Japan’s Prime Minister Junichiro Koizumi and Singapore’s then Prime Minister Goh Chok Tong

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in January 2002 which was revised later on March 19, 2007. As a part of JSEPA, JETRO had
signed the memoranda of understanding with International Enterprise Singapore and SPRING
Singapore.

Under this MOU, JETRO Singapore has committed to:

 Promote more trade and investment between the two countries and greater co-operation
among small and medium sized enterprises.
 With the new tariff concessions and other liberalization measures under the new
agreement, Singapore companies can expect to save an additional S$10 million on their
exports to Japan.
 The revised terms also include better market access, improved specific commitments for
financial services, revised rules of origin and technical changes to provisions on
competition. Singapore will now enjoy tariff-free treatment for 8,315 industrial and
agricultural products, which account for 92 per cent of Japan's total tariff lines.

Effects of the partnership:

In terms of investments, Singapore-based businesses poured US$1.43 billion into Japan in 2014,
up sharply from US$330 million in 2013, according to figures from the Japan External Trade
Organization (Jetro). Only in 2008 (US$2.72 billion) and 2010 (US$1.58 billion) were there bigger
investment flows into Japan from Singapore.

Japan- Vietnam Economic Partnership Agreement (VJEPA)

The Vietnam-Japan Economic Partnership Agreement (VJEPA) started in January 2007. As of
September 2008, nine negotiating rounds had been held. The agreement was finally signed on
25 December 2008 and took effect in October 2009. Under this agreement a limited number of
Vietnamese nurses and healthcare workers who pass a Japanese language test will be allowed
to work in Japan, with the first workers expected to arrive in 2014.

 Thus, import duty rates will be cut in accordance with the agreed roadmap.
 Japan is intensifying the import of tuna and various kinds of fish from Vietnam. Since other
aquiculture export markets are drying up, many Vietnamese businesses are shifting the
focus onto Japan.
 They almost cut 92% tariffs on goods and services traded between the two nations within
a decade.
 Garment and textile manufacturers in Vietnam have shown their disapproval of Japan’s
desire to impose origin regulations under the Economic Partnership Agreement
negotiations which began in January this year.

Effects of the partnership:

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  From 1992 to 2011, Japan provided the accumulated amount of more than 2 trillion yen
(about US$19.7 billion) for Vietnam, combining financial cooperation approved and
technical cooperation disbursed. The total disbursed amount of Japan’s ODA (Official
Development Assistance) was at the top of the international development agencies and
accounted for 30% of total accumulated ODA to Vietnam.
 Japan has supported Vietnam to develop a total of 3,309 km roads and 287 bridges
including the ongoing projects. In particular, a total of 650 km national roads have been
provided with the cooperation of Japan, which correspond to about 70% of the total length
of Vietnam’s four-lane national highways.
 The facilities and human resources in Bach Mai Hospital in Hanoi, Cho Ray Hospital in Ho
Chi Minh and Central Hospital in Hue were improved through Japan’s ODA. The facilities
and human resources to produce measles vaccine were developed to make the
Vietnamese people reach quality public medical services.
 The facilities and human resources in Bach Mai Hospital in Hanoi, Cho Ray Hospital in Ho
Chi Minh and Central Hospital in Hue were improved through Japan’s ODA. The facilities
and human resources to produce measles vaccine were developed to make the
Vietnamese people reach quality public medical services.

Japan-Australia Economic Partnership Agreement (JAEPA)

The Japan-Australia Economic Partnership Agreement (JAEPA) entered into force on 15

January 2015. Prime Minister Tony Abbott and Prime Minister Shinzo Abe announced that
negotiations on the agreement had concluded on 7 April 2014, and signed the agreement on 8
July 2014 in Canberra. The agreement provides valuable preferential access for Australia's
exporters and will support further growth in two-way investment. JAEPA is by far the most
liberalising trade agreement Japan has ever negotiated and implemented. Japan was
Australia's second-largest trading partner in 2017, with two-way goods and services trade
valued at $71.8 billion. Japan is Australia's second-largest export market.

Goods exports to Japan were $45 billion in 2017, which was around 14.9 per cent of our total
goods exports. In 2017, Australia's major merchandise exports to Japan included LNG, coal
($16.5 billion), iron ore ($5.6 billion), beef ($2 billion), and copper ores and concentrates ($1.3
billion). Japan was Australia's largest merchandise export market for coal, LNG, beef,
aluminium, cheese and curd, liquefied propane and butane, and animal feed.

Total bilateral trade in services in 2017 was valued at $5.8 billion, mostly in the recreational
travel, transport and education sectors. Services exports were worth $2.3 billion and services
imports were valued at $3.5 billion.

Effects of the partnership:

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Japan is Australia’s second-largest trading partner and export market, and is likely to remain so
for the foreseeable future. Two-way goods and services trade between Australia and Japan was
valued at AUD 60.3 billion in 2015-16. Goods exports to Japan stood at AUD 35.8 billion,
representing approximately 15 per cent of Australia’s total goods exports. In 2015-16,
Australia’s major exports to Japan included LNG (approximately AUD 16 billion), coal (AUD
11.2 billion), iron ore (AUD 4.7 billion), beef (AUD 1.8 billion), and copper ores and concentrates
(AUD 1.4 billion). Japan was Australia’s largest export market for beef, fish, fruit and vegetable
juices, animal feed, coal, liquefied propane and butane, aluminium, transmission shafts, dairy
products and natural gas. On the other side of the ledger,

Japan was Australia’s third largest source of imports in 2015-16. Major imports from Japan
included passenger vehicles (AUD 6.6 billion), refined petroleum (AUD 2.6 billion) and goods
vehicles (AUD 1.4 billion). Total bilateral trade in services over 2015-16 was valued at about
AUD 5.2 billion, mostly in the recreational travel, transport and education sectors. Australia’s
services exports to Japan were worth AUD 2.1 billion and services imports were valued at AUD
3.1 billion.

Ranking related to the trade openness of the four countries being under discussion:

Rank (Export) Rank (Import)

Country
2013 2014 2015 2016 2017 2013 2014 2015 2016 2017
Japan 1 1 1 1 1 1 1 1 1 1
Vietnam 4 4 4 4 4 4 4 4 4 4
Australia 3 3 3 3 3 3 3 3 3 3
Singapore 2 2 2 2 2 2 2 2 2 2

Rank: exports (% of GDP) Rank: Imports (% of GDP)

Country
2016 2017 2015 2016 2017 2013 2014 2015 2016 2017
Japan 4 4 4 4 4 4 4 4 4 4
Vietnam 2 2 2 2 2 2 2 2 2 2
Australia 3 3 3 3 3 3 3 3 3 3
Singapore 1 1 1 1 1 1 1 1 1 1

Rank (Trade to GDP ratio)

Country
2013 2014 2015 2016 2017
Japan 4 4 4 4 4
Vietnam 2 2 2 2 2
Australia 3 3 3 3 3

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 Singapore 1 1 1 1 1

Observations:

The trade-to-GDP ratio is an indicator of the relative importance of international trade in the
economy of a country. It is calculated by dividing the aggregate value of imports and exports
over a period by the gross domestic product for the same period. Although called a ratio, it is
usually expressed as a percentage. It is used as a measure of the openness of a country to
international trade, and so may also be called the trade openness ratio. It may be seen as an
indicator of the degree of globalization of an economy.

Other factors aside, the trade-to-GDP ratio tends to be low in countries with large economies
and large populations such as Japan and Australia, and to have a higher value in small
economies like Vietnam. Singapore has the highest trade-to-GDP ratio of any country.

Three factors strongly influence a nation’s level of trade:

 the size of its economy

 its geographic location
 its history of trade.

Large economies like Japan and Australia can do much of their trading internally, while small
economies like Singapore and Vietnam have less ability to provide what they want internally
and tend to have higher ratios of exports and imports to GDP.

Graphical Representation of the Effects of Japan’s Economic Partnership with the Three
countries:

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Japan is the 4th largest export economy in the world and the most complex economy according
to the Economic Complexity Index (ECI). In 2016, Japan exported $ 694 In 2016 the GDP of
Japan was $4.87 trillion and its GDP per capita was $43.30 thousand.

As per the Economic Partnership agreements with the 3 countries, Japan exported the most to
Singpaore, which as a highly developed and successful free-market economy, followed by
Australia and Vietnam.

JAEPA benefits Japanese consumers, farmers and food producers. Consumers enjoy lower
prices on Australian food imports, including Australian beef, dairy and horticulture products and

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gain a greater choice and wider access to high quality Australian products such as wine, cheese,
ice-cream and seafood.

Australia reliably produces and supplies clean, safe and high quality food products to Japan.
Under JAEPA, the cost of raw ingredients used by Japan's food processing industries and the
cost of key inputs to Japanese agriculture, such as imported animal feed used by Japan's
livestock breeding industries, is lowered. Thus imports from Australia are the highest when
compared to the other two countries.

Negative Trade Balance

30000000
in US$nThousand

25000000
20000000
15000000
10000000 Trade Balance
5000000
0
2010 2011 2012 2013 2014 2015 2016
Year

Throughout the seven years analyzed, Japan has gradually reduced its trade deficit significantly
with the three countries, with the main reason being the economic partnership agreements they
have drawn between themselves and the other countries. Thus, openness to trade had a positive
impact in the economy of Japan.

Trade Openness Indicator : GDP

250
200
Percentage of GDP

150 Singapore
100 Viet Nam

50 Australia

0 Japan
2010 2011 2012 2013 2014 2015 2016
-50
Year

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As previously mentioned, the trade-to-GDP ratio tends to be low in countries with large economies
and the very same has been found while analyzing the economic partnership of the three
countries with Japan.

Japan holding the larger and the most developed economy out of all the countries has the lowest
openness to trade ratio. Same is the case for Australia. While Singapore and Vietnam having
smaller economies, but being of one the fastest developing economies have the highest openness
to trade.

Findings

The economic openness and economic growth of a country are strongly associated. Economic
openness increases the domestic productive activities and enhances living standards for the
people of a country. The presence of trade barriers or restrictions create stumbling blocks towards
exchange of goods and services, thereby dwindling the domestic economic activities. A country
can realize economic openness through abolishing these trade barriers or restrictions that are
hampering free movement of goods and services. Changing domestic economic policies, a
country can achieve some degree of economic openness too.

The impact of removing barriers or restrictions in the exchange of goods and services is patently
obvious. Such measures actually stimulate domestic economic activities. A higher level of
productive activities in society lead to increased exchange of goods and services; that is,
enhanced international trade volume. There are several ways that explain how the increased
international trade between countries resulting from the elimination of trade restrictions or market
liberalization lead to increased productivity growth.

 It gives access to foreign intermediate inputs.

 It attracts foreign direct investments and technologies.
 It expands the size of the market, thereby helping firms to exploit the economies of scale.
 It facilitates the international diffusion of technical assistance and learning.
 It reduces the networking costs or cost of doing business.

And how can consumers or people be benefited from this economic openness?

Since the economies produce differentiated products, there is more verities products available for
consumers. Such varieties actually broaden the basket of goods. So that means that there is more
choices available for consumers that in turn generate more opportunities to maximize their
satisfaction.

 The increased competition resulting from the exploitation of economies of scale lowers
prices of goods.
 The increased productive activities generate more employment opportunities, thereby
contribute to reduce poverty.
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All these together either directly or indirectly stir up the economic growth of a country.

As a result, openness to trade let’s a country towards economic growth, for which Japan has
established numerous economic partnerships which helps to build a strong dominant and
sustainable economy.

References:

https://www.bilaterals.org/?-Japan-Vietnam-

https://english.vietnamnet.vn/fms/business/204107/vietnam-s-fpt-group-expands-
investment-in-japan.html

https://www.mofa.go.jp/region/asia-paci/vietnam/joint0610.html

https://www2.gsid.nagoya-u.ac.jp/blog/anda/files/2010/06/1_nguyen-tien-dung.pdf

https://data.worldbank.org/indicator/NE.TRD.GNFS.ZS?locations=JP

https://wits.worldbank.org/CountryProfile/en/Country/VNM/Year/2010/TradeFlow/Export/I
mport

https://wits.worldbank.org/CountryProfile/en/Country/VNM/StartYear/2000/EndYear/2016/
TradeFlow/Import/Partner/ALL/Indicator/MPRT-TRD-VL

https://www.mofa.go.jp/region/asia-paci/vietnam/data.html

https://www.vietnam-briefing.com/news/vietnams-key-ftas-asean-china-japan.html/

https://www.jetro.go.jp/singapore/jsepa.html

https://www.mofa.go.jp/region/asia-paci/singapore/data.html

https://www.mofa.go.jp/region/asia-paci/singapore/jsepa-9.pdf

https://wits.worldbank.org/CountryProfile/en/Country/VNM/StartYear/2010/EndYear/2016/
TradeFlow/Import/Partner/SGP/Indicator/MPRT-TRD-VL#

http://eresources.nlb.gov.sg/infopedia/articles/SIP_2017-11-01_095249.html

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https://aric.adb.org/fta/japan-singapore-economic-agreement-for-a-new-age-partnership

https://asialinkbusiness.com.au/japan/getting-started-in-japan/japans-imports-and-
exports?doNothing=1&fbclid=IwAR2CLPM-
vuOIcZM6XnUo112cx0y8fnZjM9W1nEPdLjPFMSaaoBvgxzoV7Nw

https://www.jica.go.jp/vietnam/office/others/pamphlet/ku57pq0000221kma-
att/Japan_Vietnam_Partnership_To_Date_and_From_Now_On_en.pdf

https://japan.embassy.gov.au/tkyo/ausjpn_relations.html

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