Publication Number: 3466

Report Title: International Economic Review: Analysis of Japan’s Recent Foreign Investment Trends; Why is the U.S. Trade Deficit with China so Big?; The Return of Dependency Theory: Is Primary Commodity Specialization Bad for Development?

Author's name(s): Diane Manifold, Michael Barry, Rodney D. Ludema

Date Published: October 2001

Report Description/Introductory Text: In “Analysis of Japan’s Recent Foreign Investment Trends” there are few formal restrictions on foreign direct investment (FDI) in Japan and in recent years the government has taken steps to address remaining investment-related impediments. Nonetheless, the level of foreign investment in Japan remains low and is less than that for Japanese FDI abroad. Japan experienced a surge in FDI in recent years due to structural changes to the economy, with major investments in finance/insurance, telecommunications, and petroleum.

“Why is the U.S. Trade Deficit with China so Big?” Whereas U.S. trade deficits have arisen in general when U.S. investment spending exceeds U.S. domestic savings—due in recent years to the attractiveness of the U.S. economy to foreign investors, the comparatively lower savings rate of U.S. consumers, and until recently U.S. federal budget deficits—several other factors affect the U.S.-China bilateral trade deficit in particular. These include China’s high savings rate, differing measurement of entrepot trade through Hong Kong, China’s tariff and nontariff trade barriers, trade diversion between China and other Asian countries, and the Chinese government’s recent use of trade policy to boost slow domestic spending in China.

“The Return of Dependency Theory: Is Primary Commodity Specialization Bad for Development?” In the 1970s, most economists became disenchanted with dependency theory–and its consequent import substitution policies–for lack of evidence that specialization in primary commodities was damaging to a country’s economic development. The anti-globalization movement of current times appears to be more willing to believe such dependency theories without supporting evidence. Whereas commodity dependence may indeed correlate with fluctuating terms of trade, it is neither clear that commodity prices are in fact trending down nor whether living standards would be necessarily depressed if they did. Although other reasons–such as bad economic policies–may be more at fault, it is nonetheless true that primary commodities have not fared well on export markets in recent years and that such countries’ external debt have been high.

Topics Covered: USITC, foreign direct investment (FDI), Japanese investment, U.S. trade deficit, dependency theory, import substitution policies, primary commodities

Countries: United States, Japan, China, Hong Kong

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