Start:Main Column

Masahiro Endoh, Professor, Faculty of Business and Commerce

Analyzing “Regional Trade Agreements” and the economic activities of an ever-globalizing world

Since the 1990s, a considerable number of “Regional Trade Agreements”, which promote the liberalization of trade between two or more nations, have been signed in various regions around the world. In Japan, Economic Partnership Agreements (EPA) and the Trans-Pacific Strategic Economic Partnership (TPP) have become a hot topic of economic and political debate. We asked Professor Masahiro Endoh about his pioneering research in the field of Regional Trade Agreements.

*Position titles, etc., are those at the time of publishing.

Masahiro Endoh

Masahiro Endoh, Professor, Faculty of Business and Commerce

B.A., Faculty of Business and Commerce, Keio University, 1991. M.A., Graduate School of Business and Commerce, Keio University, 1993. Withdrawal from the Doctoral Program with the completion of course requirements, Graduate School of Business and Commerce, Keio University, 1996. Associate Professor, Otaru University of Commerce Department of Commerce, 1996 - 1999. Associate Professor, Faculty of Business and Commerce, Keio University, 1999. Professor, Faculty of Business and Commerce, Keio University, 2007.
Overseas Experience: Visiting Professor, Institut d’Etudes Politiques de Paris, France, 2001. Visiting Fellow, Economic Growth Center, Yale University, USA, 2003 - 2005.
Publications: “An Economic Analysis of Regional Trade Agreements” (Winner of the “Keio Award”, 2010).
Ph.D. (Business and Commerce)

Theoretical and Empirical Research on the Influence of Regional Trade Agreements

Prof. Masahiro Endoh
Prof. Masahiro Endoh

─ The TPP is currently a controversial topic of debate. Regional Trade Agreements such as the TPP are your specialist field; please describe for us why you chose this as your topic of research.

I always had an interest in business because my family ran a small retail store, so I decided to study Business and Commerce when I entered university. As an undergraduate, my interests lay in the field of industrial economy. When I entered my third year, I joined a seminar class on “International Economics” in which we looked at cross-border economic transactions. While studying international economics, I developed a strong interest in international trade, particularly in trade policy and its effects.
Regional Trade Agreements (RTA) were of particular interest to me because of their dynamic nature resulting from the meeting of economic theory with geographical factors. At the time, there were very few existing RTAs and it was a fairly low-profile field of research. However, as the number of RTAs increased worldwide in the 1990s, I decided to make them my focus because I felt that there was valuable research – both theoretical and empirical – to be done on the reasons why each country forms RTAs and how these agreements affect the amount of trade and the economic benefits. From then onwards, my research was consistently focused on RTAs, both throughout my studies as a postgraduate student and as a postdoctoral researcher.

─ Why did the number of Regional Trade Agreements increase around that time?

In 1995, the World Trade Organization (WTO) was established to replace the General Agreement on Tariffs and Trade (GATT), which up until then had been the longstanding international agreement for regulating international trade. The GATT and the WTO have played a role in decreasing trade tariffs, in creating international trade regulations such as the prohibition in principle of restrictions on import quotas, and in resolving trade-related disputes.
The GATT and the WTO were both created to promote comprehensive multilateral trade liberalization, but as the number of member states and hence the number of issues for discussion increase, negotiations, which are carried out in rounds, have begun to drag on with little progress towards forming agreements. As a result, it has become more common for countries to form RTAs that cover non-contentious fields with countries that are geographically close, as opposed to multilateral agreements that require a long time to be decided.
Once an RTA is formed between a certain group of countries, the countries that are not part of the new agreement invariably either join the agreement or form new agreements in order to prevent the economic disadvantages that may result from being left outside. This is what is known as “domino theory”, thought to be one of the factors causing the increase in the number of RTAs.

─ Please describe the content of your research.

When an RTA is established, the countries within the agreement experience economic benefits, while at the same time the economic welfare of the countries outside the agreement decreases.
RTAs allow for the reduction or abolishment of trade tariffs, making it possible to lower the cost of products and services. This in turn leads to an increase in demand and expansion of the market. These are the economic benefits of RTAs. For you and I, there are merits such as being able to purchase products that were previously too expensive. An expanding market and increasing competition promotes technological innovation and at the same time increased productivity resulting from the propagation of technology through trade. Moreover, direct foreign investment from companies that set up business in other member countries and other injections of foreign capital bring about such benefits as new employment opportunities and increased wages.

At Yale University as a Visiting Fellow
At Yale University as a Visiting Fellow

However, in addition to these positive effects, because RTAs are limited to liberalizing the trade between two nations or in a certain area, they also bring about the negative effect of stagnating the trade activity of the countries in the areas not included in the agreement. Moreover, if the countries which enter into RTAs decide that the RTAs offer greater economic benefits than the WTO negotiation rounds, the liberalization of world trade under the WTO will not progress, and this in turn will produce negative effects for the economies of the countries not within an RTA.
I analyzed the European Economic Community (EEC), the Latin American Free Trade Association (LAFTA), and the Council for Mutual Economic Assistance (CMEA, also referred to as Comecon,) the trade framework for socialist nations centered around the former Soviet Union and Eastern European nations). I looked at how the forming of RTAs affects the amount of trade within member countries, and whether or not the amount of trade between member countries and nonmember countries decreases. My analysis revealed that in the case of the CMEA, trade within the countries of the CMEA increased whilst trade between CMEA countries and outside countries decreased, and in the case of the EEC, not only trade within the EEC but trade between member and nonmember countries increased significantly. I found that the LAFTA had very little effect on the trade among member countries.
My other research also indicated that there are countries that prefer liberalizing trade with a limited number of countries under RTAs as opposed to worldwide trade liberalization, and therefore an increase in the number of RTAs leads to stagnation in the WTO negotiation rounds.
These research results introduced new angles to traditional research on RTAs successfully, which considered to be an excellent academic achievement.

PAGE TOP

Integrating the WTO and Regional Trade Agreements and promoting the liberalization of trade

─ You received the “Keio Award” for the publication “An Economic Analysis of Regional Trade Agreements.”

“An Economic Analysis of Regional Trade Agreements” was published in 2005, as the culmination of my research up until that point. I put together my findings on the estimation of trade creation effects which increase trade in the countries within the RTA and of trade diversion effects which decrease the trade between RTA and the outsider, factors which encourage countries to form RTAs, the relationship between national governance and RTAs, and frameworks for RTAs which do not give negative economic effect on the countries outside of the agreements. In addition, I included my policy plan concerning RTAs. In particular, my work on the relationship between RTAs and the quality of national governance was academically well received as a relatively new area of research. I used governance data of more than 100 countries, which had been organized by a certain NGO into certain indicators such as freedom of political action, freedom of belief, and economic freedom. Using this data, I carried out empirical analysis on the relationship between the quality of governance and RTAs.
In countries where the quality of governance is low, the governments have very close relationships with certain corporations, industries, and interest groups which support governments, and therefore they pursue trade liberalization in a way that it advances supporters’ interest. As a result, these countries opt for RTAs, which allow for the liberalization of trade with specific countries and in certain fields, as opposed to WTO negotiation rounds, in which a large number of countries and a large number of fields are the subject of discussion. This hypothesis was also supported statistically.

At the WTO Headquarters
At the WTO Headquarters

─ In recent years, interest in Regional Trade Agreements involving Japan has risen. What are your thoughts on this?

Although I see some benefits in RTAs, I do not necessarily agree with them entirely. RTAs are positive in the sense that they lead to the liberalization of trade with the other countries in the agreement, but they also bring about the negative effect of creating discrimination against the countries outside of the agreement. There are certain aspects of RTAs that are problematic, as they promote an ethos of “liberalism on the one hand, protectionism on the other”. There is a risk that the government of a country at any given time may allow the protectionist aspects to take precedence.
However, that does not mean to say that I am completely opposed to RTAs. Despite the fact that RTAs have the conflicting elements that I mentioned above, essentially I support the increase of cross-border transaction through trade. In terms of Japan’s current situation, I think it is necessary to push ahead with the EPA and TPP. Moreover, RTAs are highly valued for their role in setting precedents and creating rules in fields where discussions at the WTO are not coming together.
In this case, it is necessary to make sure that we do not obstruct the promotion of a multilateral liberal trade system under the WTO. It is my wish that regional agreements like the RTAs do not place a burden on the negotiation rounds at the WTO, which are more international and diverse. In order to ensure this, the articles of RTAs should be compatible both with the WTO agreements and universal in an international context.

─ How do you envision the future of the WTO?

The WTO has the tasks of “rule making” – creating international rules for the promotion of the liberalization of trade through the negotiation rounds – and “rule monitoring” – solving disputes through panels. It is my opinion that for the WTO these two tasks go hand in hand, and they are both indispensable.
Recently the WTO is aiming to “integrate” with Regional Trade Agreements as opposed to simply “coexisting” with them. I too believe that the WTO and the RTAs need to be implemented successfully alongside each other.

PAGE TOP

Incorporating Globalization and Income into the Scope of Research

Prof. Masahiro Endoh

─ What is the most interesting or the most appealing aspect of your research?

I became interested in studying international economics as an undergraduate because you can get a full view of the economic activities of the world as a whole looking at each country’s transactions of money, products, and services. I am attracted to the wide scope and high potential of such an outlook.
RTAs incorporate elements of both protectionism and liberalism. As a researcher, it is interesting to have these two conflicting elements as they give depth to my work.

─ Please tell us about the themes you would like to look at in the future.

First of all, I would like to continue my research on RTAs. In the present day, with multinational corporations increasing in number and the production networks of companies taking on a variety of forms, the units for analysis have changed, such that we have gone from analyzing countries, to looking at industries, and then individual corporations. As we must carry out analysis on a more micro level and from a wider variety of perspectives, it is necessary to develop new methods.
Another theme that I would like to research is “globalization and our income”. I would like to carry out theoretical and empirical research into the effects that increased activity in trade and financial transactions with foreign countries has on the quality of life of the average citizen.
I would also like to analyze, from the point of view of international economics, the effect that the world economy has on certain regions of Japan – in Hokkaido, for example, where I was based for three years as a researcher.

*This article appeared in "Kenkyu Saizensen" (Jul. 4, 2012) of Keio University Japanese Website.