Economic de-integration in North America and foreign direct investment from Japan

• Published in: Japan and the world economy Vol. 61; p. 101114
• Main Author: Hosoe, Nobuhiro
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.03.2022
• Subjects: Auto industry; Computable general equilibrium analysis; Economic de-integration; Foreign direct investment; Foreign direct investment; Computable general equilibrium analysis; Economic de-integration; Auto industry
• DOI: 10.1016/j.japwor.2021.101114
• ISSN: 0922-1425

We investigate, from the perspective of the auto industry, the impact of US steel and aluminum tariffs and the resumption of auto tariffs under the revised North American Free Trade Agreement, on trade in North America and foreign direct investment (FDI) from Japan. The results of our policy simulation analyses with a recursive dynamic computable general equilibrium model are as follows. Canada and Mexico, being alternative trade partners with the US and other countries, would benefit from US steel and aluminum tariffs. Due to the auto tariffs on intra-North America exports, Canada and Mexico would lose a large part of their windfall benefits from US steel and aluminum tariffs. Japan’s FDI in Canada and Mexico would fall sharply. As the de-integration of North American economies proceeded, Japan would increase its auto production and exports. The negative impact on Japan’s welfare, largely the result of US steel and aluminum tariffs, would be neutralized by the US abolition of tariffs on Japanese auto exports. •We examine impacts of economic de-integration in North America on the auto industry.•A dynamic CGE model with Japanese FDI is used to simulate three trade policy changes.•US Steel and aluminum tariffs would make Canada and Mexico alternative export bases.•A USMCA auto tariff on Canada and Mexico would reduce Japanese FDI to North America.•Japan would gain in production and lose in welfare from the economic de-integration.