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

Abstract

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.