Are the U.S. Exports to and Imports from Japan Cointegrated?

Are the U.S. Exports to and Imports from Japan Cointegrated?

The size and duration of the U.S. bilateral trade deficit with Japan has raised concern from both politicians and the general public. This paper seeks to investigate the behavior of this deficit by conducting stationarity tests on the deficit and tests for long-run relationships between U.S. exports to and imports from Japan. We show that, if an endogenously searched break is properly accounted for, exports and imports are cointegrated with a coefficient of one, and the deficit appears to be stationar y. Thus, in contrast to the public`s perception, we conclude that the U.S.-Japan trade deficit may not be “too large.” (JEL Classifications: F14, C22)