1. JSEPA: AN ECONOMETRIC EVALUATION
Assessing the Impact of the 2002 Japan-Singapore
Free Trade Agreement
Mark Chesney
Dr. Gordon Hanson
Special Topics in International Trade: IRGN 435
School of International Relations and Pacific Studies
University of California, San Diego
June 8, 2015
International Relations and Pacific Studies
University of California, San Diego
June 8, 2015
Abstract
Thirteen years after the signing of JSEPA—the Japan Singapore Economic
Partnership Agreement, the ensuing boost in trade witnessed between the two
nations has commonly been attributed to this policy act. Beneath the surface,
careful econometric measurement reveals that the impact of this free trade
agreement is not nearly as optimistic as politicians and business leaders would
hope. Regression coefficients show reductions of about 30% in the years
following JSEPA. With placebo tests turning up positive in the year 2000, it is
difficult to explain exactly from where the source of these trade losses come.

2. Mark Chesney
1
1. Introduction
JSEPA, the Japan Singapore Economic Partnership Agreement, is Japan's first free trade
agreement. It was signed by prime ministers Goh and Koizumi on January 13, 2002 in
Singapore, coming into effect on November 30, 2002. Beneath the surface of the signing and
enactment, talks over free trade between the two nations have begun as early as 1999.1
News of
the talks in the media prompted an important anticipation of free trade among the business
communities of both nations (see section 4: Econometric Challenges).
The greatest observed outcomes that chronologically followed this agreement were the
boosts in merchandise trade, private investments, and gross domestic product. In an overview of
Japanese exports to Singapore, the bulk of these industries are concentrated in machinery and
equipment. Meanwhile Singapore's exports to Japan are mostly in the services. Because so
much of this trade is intra-industry, the benefits of free trade come not just from tariff reduction
but from concessions in non-tariff costs.2
A snapshot of a breakdown of the bilateral trade
subsectors appears in Appendix A.
Trade agreements and their true impact have been a common subject for econometricians.
Treating the JSEPA as a treatment that began in late 2002 is the basis of this analysis. Of course
selection into JSEPA was not done randomly, as an ideal experiment would have it be. Rather,
JSEPA came out of a climate of easing economic relations between Japan and Singapore.
Further complicating the matter are agreements that followed JSEPA and fall into this time
frame. For example, the agreement between Singapore and New Zealand in 2000 was sure to
1
Terada, Takashi. The Making Of Asia’s First Bilateral FTA: Origins And Regional Implications Of The Japan–
Singapore Economic Partnership Agreement. Australia–Japan Research Centre: 2006.
2
Regional Trade Agreements. The Chinese University of Hong Kong. 2000. http://intl.econ.cuhk.edu.hk/rta/index.php?did=17

3. Mark Chesney
2
have potential impact on Singapore’s trade flows—and arguably on Japan’s too. By teasing
apart the data available on economic trade, this study intends to investigate any true impact that
can be attributed to this particular treaty.
2. Data
The data used in these gravity modeling is sourced from the World Trade Organization
(with pre-processing performed by Dr. Gordon Hanson). The raw data contain foremost dyadic
values of nominal trade flows in USD, which makes up the dependent variable selected for this
analysis. Also of primary importance are nominal GDPs and distances between pairs of 116
countries. The time range runs from 1984 to 2008.
Generated from these primary variables were input variables for the gravity models: log-
transformations of trade value, GDP product (of each importer and exporter), and distance.
Other major dummy variables were contiguity (sharing a land border), common official
language, historical colonial relationship, membership in the GATT or WTO, nation exporter,
nation importer, and exporter-importer pair.
Data Time Trends
Of critical importance is the underlying time trend of economic trade. To illustrate this
comparison of Japan and Singapore’s exports, two baseline comparisons are made. In addition
to the entire world export volume, a select comparison group was constructed. (The
methodology of the gravity-score matched set is described under the Model Specification section
of this report.)

4. Mark Chesney
3
Figure 1—Export Value Time Trends
The time trend of exports shows how our target countries are increasing in export values. This is
true not just of the world as a whole, but as well as the two target countries here, and the gravity
score matched set.
Figure 2—GDP Time Trends
The GDP time trend makes it apparent that while the world as a whole is climbing at a gradual
pace, Singapore has gone through leaps and bounds in this study time period. This can explain
the increases in trade that is seen, particularly those after JSEPA is signed.

5. Mark Chesney
4
3. Empirical Model Specification
A gravity model captures the effects due to trade liberalization under JSEPA on trade
volume. This model can take various forms; here it is as follows:
ln 𝑋 𝑑𝑜𝑡 = 0
+ 1
𝐽𝑆𝐸𝑃𝐴 𝑑𝑜𝑡 + 2
ln 𝑌𝑑 𝑌𝑜 + 3
𝐶𝑂𝑁𝑇𝐼𝐺 𝑑𝑜 + 4
𝐿𝐴𝑁𝐺 𝑑𝑜 + 5
𝐶𝑂𝐿 𝑑𝑜 + 6
𝐺𝐴𝑇𝑇
+ 7
ln 𝐷 𝑑𝑜 +  𝑜 𝐸𝑋𝑃𝑜 +  𝑑 𝐼𝑀𝑃𝑑 +  𝑃𝐴𝐼𝑅 𝑑𝑜 +  𝑡 +  𝑑𝑜𝑡
Variable List
 X: bilateral trade volume
 JSEPA: treatment of interest. JSEPA = 0 before 2002; JSEPA = 1 from 2002 onward.
 YdYs: multiplicative product of nation-pair’s gross domestic product.
 CONTIG = 1 if two countries share a land border (contiguity)
 LANG: common language
 COL: common colonial history
 GATT: whether origin and destination country both belong to the GATT or the WTO
 D: distance. Captures costs associated with transport (shipping duration, shipping risks,
communication, etc.)
 EXPo: exporting country in a pair (dummy variable)
 IMPd: importing country in a pair (dummy variable)
 PAIR are the country pair dummies. They capture the average trade between the source
and destination countries
 t: time trend, annual
Lastly, subscripts refer to: d (destination), o (origin), and t (time, year).
My gravity model specification consists of logarithm-transformed variables and binary
variables. The three log-transformed variables are annual total value of trade between a nation-
pair (in nominal US dollars), the multiplicative product of exporter and importer GDPs, and the

6. Mark Chesney
5
distance between the two nations. (As with Baier and Bergstrand3
, the distance is between two
countries’ economic centers, traced along great circles which are concentric with the earth’s
core.)
Binary variables are used to indicate whether the two nations share:
 a border
 a common official language
 a colonial power
 simultaneous membership in the GATT
 the treatment, i.e. the Japan-Singapore FTA. Simply put, this variable jpn_sgp2002 = 1
for panel observations on or after 2002 in which Japan and Singapore are trading.
Specifications of Model Variations and Explanation of Counterfactuals
I perform four variations of my gravity model. These variations are:
1. Controlling for time trends, by including dummy variables for each year
2. In addition to (1), controlling for cross-sectional variation, by including dummy variables
for each exporter nation, and each importer nation.
3. Controlling for the interactions of importer time trends and exporter time trends.
4. Controlling for fixed effects among nation pairs by creating dummies for each pair.
Regression (1) Treatment Effect: Time Trends
This specification contains time trends (year dummy variables). This estimates the
average impact that JSEPA has on trade in years following its ratification in 2002. This
treatment effect is compared to all other observations beyond the treatment: bilateral trade with
other countries (where trade is not between Japan and Singapore), in addition to Japanese-
Singaporean trade in years prior to 2002.
3
S.L. Baier, J.H. Bergstrang / Journal of International Economics 71 (2007) 72-95

7. Mark Chesney
6
One notable concern is that while this regression controls for the size of its nominal
economic activity (i.e. GDP), it does not control for specific, and quite possibly unobservable
traits of each nation. Traits specific to Japan as an exporter (or importer) could be unidentified
and yet crucial to the impact of trade with Singapore. I correct for this in the second regression.
Regression (2) Treatment Effect: Time Trends, Importer-Dummies, and Exporter-Dummies
This regression contains both time trends and dummy variables to control for each
importing country and each exporter. It controls for an exporter's trade on average, as well as
average imports per country. By this specification this regression estimates the impact that
JSEPA has on trade between Singapore and Japan, when compared to a) trade between the two
prior to JSEPA, b) trade between Japan and any other nations except Singapore, and c) trade
between Singapore and any other nations except Japan.
This regression is useful in controlling for the trade of each nation, whether as exporter or
importer, averaged over the 25-year time frame. To extend the explanatory power of the panel
data one step further, the next regression uses each year rather than averaging them.
Regression (3) Treatment Effect: Interaction between Time Trends and Importer/Exporter-
Dummies
This regression contains the interaction of time trends with dummy variables of each
importing and exporting country. In doing so, time trends that are specific to any nation are
capturing in this interaction term. However, the counterfactual for this regression still remains
very similar to that of the previous, and because of its complexity, it remains still too bulky in
discerning the effects of JSEPA on trade. The next regression helps to resolve this challenge.

8. Mark Chesney
7
Regression (4) Treatment Effect: Country-Pair Fixed Effects
This regression contains dummies for each pair of countries. In doing so, this regression
measures the effect of JSEPA on Japan-Singapore trade after JSEPA (i.e. 2002 to 2008)
compared to Japan-Singapore trade before JSEPA (1984 to 2001). Though the establishment of
causality from JSEPA on trade between Japan and Singapore is not certain, it is more plausible
in this variation than in previous regressions that rest upon more complex counterfactuals.
Comparison Group Construction: Gravity Score Matching
The country-pair fixed effects regression is conditional on the gravity model variables. In
the process of constructing this comparison group, the gravity score between Japanese-
Singaporean trade was 14.5. Holding Singapore constant as the importer, only the USA scores
within 0.25 of Japan’s gravity score as exporter to Singapore. Performing the same gravity score
matching with Japan as importer returns an array of nations: Austria, Belgium, Denmark,
Finland, Norway, Philippines, Poland, and Turkey. These are all included into the matched
comparison group.
4. Econometric Challenges
Even in the most sophisticated model variation, in which I compare country pairs on the
various gravity characteristics, there are always the danger of potentially confounding global
events that influence both trade between Japan and Singapore and their gravity characteristics.
Exporter capability and importer demand conditions are fundamental to the gravity
model. As much as exporter and importer fixed effects can aid in capturing these conditions,
they will never be accurate enough for us to be certain that causality is identifiable from the
JSEPA onto trade flows. Though the fixed effects by their nature do not change over time, these

9. Mark Chesney
8
true import and export conditions may change drastically, often in unobservable ways. This
caution is advised while interpreting econometric results.
Simultaneity bias and other similar forms of endogeneity may very well be present in this
analysis. As mentioned earlier, trade agreements are not exogenous because they are often
preceded by increases in trade flows. That is to say that two nations that initially trade very little
would have little incentive to form a trade agreement. No two nations randomly select
themselves into a trade agreement. Also mentioned is the great potential of anticipation for free
trade among business leaders. This could be expected to produce a reverse Ashenfelter’s Dip, or
an explanation of a placebo effect in years. Because improvements in bilateral relation can
influence trade, it is important not to credit the agreement disproportionately with advancing
trade.
5. Results
Table 1 shows the results of the four regressions discussed above. In column 1, the
regression barely takes advantage of the panel structure of the trade data. As a result, this naïve
model shows an impressive 2.066 log-point increase in trade. This amounts to exp(2.066) – 1 =
6.89 or a 689% increase in trade. Because this amount can appear questionable, we proceed to
column 2.4
4
The regressions with the entire world (N=251851) are not shown here, but they demonstrate the same effects as
seen in the gravity score matched comparison group.

10. Mark Chesney
9
Table 1—Panel Data Regression Analysis
(1) (2) (3) (4)
JSEPA
2.066*** -0.418*** -0.116 -0.373***
(0.0671) (0.0844) (0.0939) (0.0723)
Observations 2746 (all four regressions)
R-squared 0.74 0.90 0.92 0.95
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Notes: controls mentioned in model specification are included in regression but omitted from
table, as well as regression constant.
Column 2, controlling for importer and exporter dummies, shows a significantly reduced
correlation of trade in the years following JSEPA. This indicates a exp(-0.418) – 1 = 34%
reduction in trade. This is statistically significant to a high degree. Already the analysis shows
that trade outcomes may not be positive at all in the JSEPA years. Column 3, with time trend-
interacted importer and exporter dummies, is not statistically significant. This regression shows
a correlation that is not different from zero. Column 4 gives a very similar result to column 2—a
31% reduction in trade, to a high degree of statistical significance.
In light of the talks of free trade that preceded the actual signing, placebo tests are run to
check if the years leading up to JSEPA have a statistically significant change in trade volume.
We turn to those Falsification Tests now.

11. Mark Chesney
10
6. Falsification Tests
Placebo Test: 2000
In this falsification test, we conduct a regression while imagining that a free trade
agreement was established in the year 2000. Of course, talks were well under way in this year.
With this placebo, we test whether the “effects of JSEPA” are significant in 2000, two years
prior to JSEPA. Each regression (1 through 4) corresponds to the preceding set of four
regressions. The results are in Table 2.
Table 2—Test for Placebo Effects
(1) (2) (3) (4)
Placebo in 2000 2.131*** -0.309*** -0.0812 -0.287***
(0.189) (0.0955) (0.0853) (0.0778)
JSEPA -0.0631 -0.118 -0.0384 -0.118
(0.200) (0.110) (0.0979) (0.0895)
Observations 2746 (all four regressions)
R-squared 0.74 0.90 0.92 0.95
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Notes: controls mentioned in model specification are included in regression but omitted from
table, as well as regression constant.
What is most notable in this test is that the placebo effects are larger than those of
JSEPA. They are quite similar to the JSEPA coefficients of Table 1, and they are equally as
significant statistically as those of Table 1. As previously discussed, regression 1 has great
limitations in accuracy. However, regressions 2 and 4 show an interesting outcome: a reduction
of 27% and 25%, respectively, is correlated with the years from 2000 onward.

12. Mark Chesney
11
This is a rather puzzling observation. By the definition of the counterfactual assumption
in regression 4, column 4 shows that the years following 2000 have significantly lower levels of
trade between Japan and Singapore than in the 20th
century.
7. Conclusion
Without question, deeper analysis of the trade data is necessary to produce a more
conclusive answer to the question of impact on trade due to JSEPA. This gravity model raises
questions as to what the true impact can be. Having constructing a gravity score matched set of
countries, and controlling for the average trade between pairs of nations, this analysis suggests
that trade was on the decline in the years leading up to JSEPA.
Though this falsification test is a solution to some of the econometric problems
anticipated in this analysis, the econometric problems do not stop there. The placebo effects can
be reiterated in further analysis to see if any particular year preceding 2002 holds the greatest
correlation with a decrease—or increase—in Singaporean-Japanese trade. And as mentioned
before, this correlation does not imply causality, due to the endogenous nature of all trade
agreements.
Nonetheless, at face value this analysis shows that trade goes down in the years before
JSEPA, and when JSEPA is signed, there is no coinciding change in trade—2002 trade onward is
no different from zero. It is important for policymakers and business leaders to recognize that
the important factors that influence trade go deep beyond the mere signing of a trade agreement.

13. Mark Chesney
12
Appendix A
Japan's exports to Singapore: total of $20.1 billion, or 5.5% of its overall imports.
1. Electronic equipment: $4.8 billion
2. Machines, engines, pumps: $4.3 billion
3. Oil: $2.9 billion
4. Vehicles: $1 billion
5. Medical, technical equipment: $937.4 million
6. Gems, precious metals, coins: $837.7 million
7. Iron or steel products: $631.4 million
8. Plastics: $543.3 million
9. Iron and steel: $499.7 million
10. Other chemical goods: $366.9 million
Singapore's exports to Japan: total of $7.9 billion, or 1.0% of its overall imports.
1. Electronic equipment: $1.3 billion
2. Machines, engines, pumps: $1.2 billion
3. Pharmaceuticals: $1.1 billion
4. Medical, technical equipment: $707.7 million
5. Books, newspapers, pictures: $496.6 million
6. Plastics: $307.1 million
7. Other chemical goods: $269.5 million
8. Cocoa: $233.6 million
9. Cereal, milk preparations: $204.3 million
10. Oil: $188.1 million
Source: World’s Richest Countries.5
5
http://www.worldsrichestcountries.com/top_japan_exports.html