Keiretsu and relationship-specific investment: implications for market-opening trade policy

This paper considers the implications of relationship-specific investment within keiretsu for policies aimed at opening the Japanese market for intermediate goods, such as auto-parts, Both VIEs applied to parts and VERs restricting Japanese exports of autos cause the keiretsu to import a wider range of parts, but of a relatively unimportant type, such as seat covers, Since keiretsu investment and output fall, the total value of US parts exports may actually fall. For a given value of these exports, a VIE is less costly for US consumers and Japanese producers, but a VER is preferred by US automakers. (C) 2002 Elsevier Science B.V. All rights reserved.