Japan has reached an agreement with Chile that “two governments will work toward putting the FTA into effect”l. The free trade agreement ensures that Chile and Japan are committed to building both social and political relations with each other and are willing to trade openly. By trading, both Japan and Chile can exceed their production possibility frontier because they can produce, beyond what is present within their respective boundaries. Although there are several consequences associated with the Free Trade Agreement, ultimately, the free trade agreement aids Japan and Chile in economic development.
The free trade agreement allows goods and services to be moved freely while each respective country retains its sovereignty (Figure 2). With the free trade agreement proclaiming that “Chile’s copper and other metal ores” and “Japanese’s industrial products” are tariff-free, both countries are attempting to resort to the theory of comparative advantage. As Chile is a developing country, rich with raw materials with many primary industries, while Japan is a developed country with many secondary industries, each country can depend on one another and assign themselves specific tasks which match a country’s capabilities.
In this scenario, Chile takes the role of supplying raw resources to Japan while Japan takes the role of converting the resources of Chile into refined products. This process, called specialization by task, will increase the efficiency as each country is focused on completing a specific task and in the long run, become increasingly more efficient. As efficiency increases, the output will increase as well because more products are produced effectively.
As these products are produced effectively, the result would ultimately be products being made that can now be sold cheaper than the global prices because of the high output with high efficiency. This would allow Japan to be more competitive on the global market as they can sell their goods cheaper than other countries while returning the same as the out of profit as other countries would receive.
However, by agreeing to free trade, there are several consequences for domestic suppliers because there is a lack of protection from foreign competition and protectionism. For example, “among agricultural and fisheries products, the average 17.6 percent Japanese tariff on bottled Chilean wine will be eliminated over 12 years”4. Japanese domestic producers will not be able to compete effectively with their foreign counterparts because Chilean products will be as cheap as or cheaper than Japanese products. This would cause levels of unemployment to rise unless government intervention is implemented through taxes, subsidies, quotas, embargos, or tariffs. This would cause foreign products to be sold at a much higher price than domestic goods and encourage consumers to buy domestic goods more than foreign goods. Furthermore, by free trade, countries become completely dependent on each other and discourage a diversified economy. For example, with the “Japanese tariff on Chilean salmon and trout abolished over 10 years”5, the domestic fishing industry in Japan would decline inevitably, and potentially, the Japanese fishing industry may not exist in the future.
Also, the free trade would continue the trend of encouraging Japan to continue to import Chile’s products. It is reported that “Japan’s exports to Chile grew 21.6 percent from the previous year to 126.4 billion yen while Japan’s imports from Chile jumped 49.2 percent to 843.6 billion yen.”6 As the number of export products exceeds the imports, there is a current account surplus.
There is potentially an appreciation for Chile’s currency because Japanese importers are willing to buy their goods and there is more added demand for Chile’s currency. On the other hand, Japan’s imports from Chile exceed export. Thus, they suffer a current account deficit which can lead to potential depreciation, where Japan’s currency value drops, with potentially a decrease in the gross domestic product, the total of goods and services produced by a nation. However, the statistics focus on the exports and imports between Chile and Japan and do not portray the full picture of Japan’s economy as their gains are made from selling their imported goods to outside countries.
Overall, the free trade agreement with Japan and Chile promotes specialization and aids both countries in economic growth albeit the consequences of the rislevelsevel of unemployment in specific industries.