The political economy of Japan's Tariff Policy : a quantitative analysis

Abstract

This thesis uses quantitative techniques in an attempt to identify the underlying determinants of nominal and effective tariff protection of manufacturing industry in Japan. The two alternative models of tariff policy formation in Japan -- the national income maximization model (Japan Inc.) and the income redistribution model -- are well suited to cross-sectional regression analysis because they make completely contradictory predictions about the relationship between tariff protection (and exemption from tariff cuts) received and industry comparative advantage. Expressing the predictions of the opposing models in terms suitable for quantitative testing is straightforward because each of the models uses the same set of easily observable industry structural characteristics to serve as proxy measures for present and expected future comparative advantage. Because the models are in agreement with regard to what constitutes the set of important explanatory variables, but make clear-cut and unambiguously contradictory predictions about the direction of correlation between each of these independent variables and the dependent variable (tariff levels or changes in tariff levels), a cross-sectional study can be used to determine which, if either, of the models has the greater explanatory power. The empirical results strongly contradict the prediction of the income maximization model that tariff protection is given to industries which are at an increasing comparative advantage. That is, the correlations between tariff protection received and the proxies for comparative advantage were all significantly negative. However, the contention of the income redistribution model that tariff protection i s given to industries at a high and increasing comparative disadvantage was supported (could not be rejected with any degree of statistical confidence). Thus, the evidence suggests that tariff protection in postwar Japan has served the goal of income redistribution rather than that of national income maximization. The fundamental determinant of tariff protection received by an industry appears not to have been its potential for developing and maintaining international competitiveness in the future; rather tariff protection tended to be granted to industries at a high and increasing comparative disadvantage. Specifically, between 1965 and 1975 tariff protection in Japan clearly discriminated in favor of industries that added little value to their inputs, had low levels of worker productivity and low rates of productivity increase, were unskilled labor intensive, and had low economies of scale, rates of growth, and international competitiveness. The results of these regressions are very similar, in both direction and strength of association, to those resulting from previous application of these techniques to the analysis of tariff policy formation in other industrial economies.