Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/77678 
Year of Publication: 
2013
Series/Report no.: 
CESifo Working Paper No. 4319
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
The European Union and Japan have recently launched negotiations about a bilateral free trade agreement as means of economic stimulation, with trade as a driving force to create growth and wealth. Since customs duties are already low, the success of the liberalization process hinges on the potential elimination of non-tariff barriers. The purpose of this paper is to shed light on two possible liberalization scenarios, a less ambitious and a comprehensive trade liberalization. In contrast to classical studies our paper builds on the modern trade literature, accounting for the dominance of intra-industry trade between the two economies and the existence of heterogeneous firms. Furthermore, we model a search-and-matching labor market allowing us to quantify employment effects of trade liberalization. We find that a comprehensive liberalization increases Japanese GDP by 0.86 per cent, whereas the EU only experiences an additional 0.21 per cent of real GDP growth. Most of the growth in real GDP is due to firms' efficiency gains, while unemployment is only reduced by a small amount. Other world regions experience small reductions of GDP due to trade diversion effects.
Subjects: 
free trade agreement
intra-industry trade
gains from trade
JEL: 
F12
F13
F16
F17
Document Type: 
Working Paper
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