From the above figure we might say that China is posing a threat to the Japanese Economy by its intense competition. The intensity more or less came from the import substitution strategy in China. With this policy, China eventually learn to produce the imported goods domestically in which threatened the sustainability of the Japanese Economy, or to make it simple: Chinese products are everywhere in Japan! This might lure the Japanese Economy wouldn't it?
With the precedent fact, will the triangular agreement between Japan, Korea and China in the form of EPA (Economic Partnership Agreement) give benefit to Japan?
To answer this question, I made a projection based from series of quarterly data ranging from 1985 to 2004. The variables in the research consist of the Japanese GDP, the Japanese Export to China and the Japanese Export to Korea.
In the case of Korea, there is a positive impact both in the short and the long run. The export to Korea will boost the Japanese GDP in a one way or another for a stable period of time.
What about China then?
In the short run, the Japanese Export to China leads to an overshoot in the Japanese GDP, suggesting that in the long run the Japanese Export to China will loose its significance to the Japanese GDP due to the rapid learning curve of the Chinese production capacity in which eventually leads to a lesser dependency from the Japanese products.
But, it is important to note that the adjustment rate from the equilibrium error ,that concludes the overshoot in the short run, is very small suggesting that the positive effect from the export will last in a considerable time.
The same positive effect is true from the Chinese and the Koreans point of view
Thus, the institutionalization of trade among Japan, Korea and China is a very constructive way to built fundamental growth in the region. This preliminary study serves as a complementary research with regards to the previous one.
Another question might be raised based one the Bhagwati's spaghetti bowl effects. The EPA might serve as a form of Preferential Trade Agreement, which according to him is a stumbling block toward integration. But, as you can see from the EPA, it is initially driven from the GATT and the WTO and it is even moving towards beyond it. So The EPA is not even a PTA because of the uniqueness. So, would you mind cherish the EPA?
