Gains from trade: evidence from nineteenth century Japan

By Daniel M. Bernhofen (American University) & John C. Brown (Clark University). Excerpts:

"We focus on an unusual historical episode in 1859, which saw the forced imposition of an open trading regime on a Japanese economy that had long been in self-imposed conditions of ‘autarky’ or economic self-sufficiency.

In a series of studies, we have made use of this event as a natural experiment to examine the empirical validity of key predictions of the theory of comparative advantage and to quantify the gains from an open trading regime (Bernhofen and Brown, 2004, 2005 and 2016)."

"Consider a simple example. Assume the US is relatively abundant in arable land and relatively scarce in low-skilled labour compared with China. Now if wheat is relatively land-intensive and cloth is relatively labour-intensive, the economies’ relative market prices under autarky would reflect the relative costs of the resources – land and labour – used to produce these two goods. Relative to the price of cloth, the autarky price of wheat would be lower in the US than it would be in China.

Opening up both countries to trading with each other would provide an opportunity for the US to import cloth from China at a lower relative price than the price of domestically produced cloth. Importing cloth from China in exchange for exporting wheat would enable both the US and China to consume more of both goods relative to autarky.

Our US-China example illustrates the principle of comparative advantage for only two goods. In the case of many goods, the principle of comparative advantage can be generalized so that it still preserves the ‘spirit’ of the two-good formulation.

Following Alan Deardorff’s (1980) seminal formulation, the general law of comparative advantage implies an empirically falsifiable prediction: an economy should, on average, export goods with relatively low autarky prices and import goods with relatively high autarky prices."

"Market forces – Adam Smith’s notion of the invisible hand – will increase the potential for an economy to realise the benefits of trade by allocating an economy’s resources in the direction of comparative advantage. Hence, tests of these predictions can be viewed as tests of the efficacy of the market system.

All of these predictions require knowledge about market prices in a state of autarky, but such data generally do not exist. During the twentieth and twenty-first century, market economies have operated primarily with open trading regimes. Economies operating under conditions of autarky have been command or war economies. Nineteenth-century Japan offers an example of a market-based economy operating first under autarky and then under free trade."

"Japan’s opening to trade was involuntary and abrupt. Western military pressure and the British defeat of China in the First Opium War prompted Japan’s rulers to capitulate to western demands to open its markets."

"The treaties capped tariffs and export taxes at 5% of the value of goods and granted western merchants access to several ‘treaty’ ports"

"by the 1840s, Japan was a sophisticated market economy where primarily homogeneous products were produced under highly competitive conditions. Autarky price quotes from major commodity markets in Osaka and Tokyo supplemented with transactions-based price data from merchant, firm and farm account books and the records of the Dutch East India Company cover most of Japan’s traded goods."

"By 1869, the price of Japan’s main export – silk industry products – had doubled in real terms; many importables saw price declines of 30-75%."

"By the mid-1870s, the ratio of imports to GDP was almost 4%. Historians have shown that during our narrow time period of interest (1865-1876), traded goods were for the most part compatible with or substitutes for the goods produced during the late autarky period."

"the case of Japan fulfils all the critical assumptions and the condition that all other things remain equal needed for the comparison of autarky and free trade"

"in each trade year from 1868 to 1875, Japan exported products with relatively low prices during autarky and imported products that had relatively high autarky prices."

"for each year from 1865 through 1876 Japan was a net importer of its relatively scarce factor, such as land, and a net exporter of its relatively abundant factors, such as labour."

"Employing alternative assumptions from the historical literature about Japan’s GDP allows us to estimate the relative magnitude of these gains. For the early post-autarky period, we find that they were about 7% of GDP, which is higher than predicted by the new structural trade literature."