The Necessity of New Versions of Bilateral Trade Balances and COVID-19: The Nonlinear ARDL Approach for the USA and Japan
| Published date | 01 February 2025 |
| DOI | http://doi.org/10.1177/00157325231192180 |
| Author | Ismet Gocer,Serdar Ongan,Huseyin Karamelikl,Charles A. Rarick |
| Date | 01 February 2025 |
The Necessity of New
Versions of Bilateral
Trade Balances and
COVID-19: The
Nonlinear ARDL
Approach for the
USA and Japan
Ismet Gocer1, Serdar Ongan2, Huseyin Karamelikli3
and Charles A. Rarick4
Abstract
This study aims to reveal the need to reformulate new forms of Bilateral Trade
Balances (BTBs) for a country rather than a traditional BTB. This is because the
traditional BTB ratio, based on total exports and defined as the total exports/total
imports ratio, cannot classify and quantify a BTB based on its economic impact
content. It fails to classify because countries also export goods already imported
(denotes re-export) besides exporting their domestic goods produced within the
country (denotes domestic export). It also fails to quantify because, while domestic
goods undergo a value-added process within a country, re-exported goods do not.
In this context, for the first time, this study attempts to reformulate/reinvestigate
new forms of BTBs as production-related BTB, based on domestic export and non-
production-related BTB, based on re-export for the USA with Japan. Empirical find-
ings confirm the necessity and cruciality of the proposed methodology in this study.
JEL Codes: F10, F14
Keywords
Production-related bilateral trade balance, non-production-related bilateral
trade balance, Nonlinear ARDL Approach, the USA, Japan
Original Article
Foreign Trade Review
60(1) 109–136, 2025
© 2023 Indian Institute of
Foreign Trade
Article reuse guidelines:
in.sagepub.com/journals-permissions-india
DOI: 10.1177/00157325231192180
journals.sagepub.com/home/ftr
1 University of Strathclyde, Strathclyde Business School, Department of Economics, Glasgow, UK.
2 University of South Florida, Department of Economics, Tampa, Florida, USA.
3 Karabuk University, Department of Economics, Karabuk, Turkey.
4 International Business, College of Business Purdue University Northwest Hammond, Indiana, USA.
Corresponding author:
Ismet Gocer, University of Strathclyde, Strathclyde Business School, Department of Economics, 199
Cathedral Street, Glasgow, Scotland G4 0QU, UK.
E-mail: ismet.gocer@strath.ac.uk
110 Foreign Trade Review 60(1)
Introduction
The USA has been experiencing the most enormous and persistent trade deficits
with other countries since 1992, reaching a total of $16 trillion. On the other hand,
Japan, with a $1.99 trillion trade surplus with the USA, is one of these countries
in the same period (CB, 2021). Accordingly, periodic trade conflicts between the
USA and Japan were partly a consequence of Japanʼs high-level import penetra-
tion into the US markets (Cohen et al., 2002; Marlin‐Bennett et al., 1992; Sato,
1988; Thorbecke, 2008; Wickes, 2021). Therefore, these large trade deficits peri-
odically deteriorated the US-Japan economic relationships (Cimino-Isaacs &
Williams, 2020; Urata, 2020).
On the other hand, according to a survey conducted by Harvard University, while
47% of Americans believe that free trade leads to lower goods prices for US consum-
ers, 53% think that this causes job losses in the country (CAPS, 2018). These close
percentages clearly show that bilateral trade deficits and surpluses resulting from free
trade should eventually be based on economic impact contents for the countries con-
cerned. This means that the economic impact of a negative or a positive Bilateral
Trade Balance (henceforth, BTB) might become more important than solely a
countryʼs negative or positive BTB ratios. For instance, the final economic contribu-
tion of a production-related BTB, based on domestic export,1 might become lower for
a country than the final economic contribution of a non-production-related BTB,
based on re-export.2 In other words, for some goods, a non-production-related BTB
might contribute to a countryʼs economy more than a production-related BTB even
though the former does not undergo any value-added process in this country (Banerjee,
2019). Therefore, this complex structure requires creating new forms of BTBs rather
than using a traditional aggregated BTB ratio, based on total export only, since total
export includes domestic export and re-export. However, the lack of re-export data for
many countries does not allow policymakers-scholars to make more accurate estima-
tions in their trade policies-models. In this context, the USA is one of few countries
that collect this data separately since the share of US re-exports to other countries
came to 19.7% of total exports in 2020. As the fourth largest trade partner of the USA,
Japan is one of the countries involved, with a share of 11.5% (CB, 2021).
Therefore, in this study, we, for the first time, propose to reformulate and re-
investigate the BTBs of the USA with Japan in the forms of production-related
BTB and non-production-related BTB, based, respectively, on domestic export and
re-export separately. With these two forms of BTBs proposed, this methodology
will be capable of quantifying BTBs based on economic impact content as opposed
to total-export BTB. In this context, the main contribution of this study is to discover
concealed but potentially existing, actual impacts of independent variables on the
above-mentioned forms of BTBs since total-export BTB is not capable of detecting
them. Hence, this methodology might allow policymakers to compare such impacts
on negative-positive BTBs for the USA based on economic impact contents. This is
so because a BTB can be positive (trade surplus) but in the form of non-production-
related BTB, or a BTB can be negative (trade deficit) but in the form of production-
related BTB. It is obvious that the contribution of production-related BTB to the
economy will be larger than non-production-related BTB. Hence, this methodology
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