(Revised Synopsis)

Keio University

US-China-Japan Trilateral Forum

November 12,1997

With the rapid progress of economic globalization, adjustments of international economic structure also need to proceed at a rate greater than ever before. On the other hand, domestic adjustments usually require a fairly long time, giving rise to conditions that can readily lead to international economic frictions. The important point to note here is the fact that today's world is increasingly witnessing cases of frictions concerning institutions and systems deeply rooted in the history and customs of individual nation's own economic community.

The fundamental factor that always exerts a strong influence on the economic structural adjustments associated with globalization seems to be the change in relative prices. Changes in the exchange rate triggered by more active capital transfer can be cited as the most important factor in the relative price changes in the global economy in the 1980s and the 1990s. What merits more attention, however, is the more active overseas direct investment and the consequent creation of international production linkage. Kojima (1990) points out in his comprehensive analysis of globalization that economic globalization accelerated after the 1980s in particular due to the exponential expansion of global capital transfer including overseas direct investment. He further argues that while the enlarged free trade promoted under the GATT framework strengthened interdependence of the global economy, capital transfer, and especially direct investment and overseas local production, will unify the world more than trade does.

As is mentioned above, the global economy, having passed the stage where produced goods and services move rapidly across borders, has now entered the age of a "deeper unification," in which the production factors themselves such as capital and management resources are shifting on a large scale. On the other hand, the existence of "ordinary citizens" who cannot cross borders as freely presents the discrepancy of a nation's economic and social system itself in a more tangible form of "system frictions." An increased dynamism of the market economy as a result of the end of the Cold War between the East and the West contributed to expanding the contradiction in the institutions and systems of different nations.

Worth noticing is the generation of a number of new factors that could further complicate "system frictions." Firstly, as former centrally planned economics are seeking to adopt the market economy system, a new type of system frictions is emerging between market economies and transitional economies. Secondly, the progress in technological innovation symbolized by the communication and information revolution has brought about a paradigm shift in market competition, which poses problems that are essentially different from those conventionally encountered.

In the tide of the changing global economy, a new approach to system frictions is now called for.

1. Introductory Remarks

2. Economic Globalization and System Frictions

(1) Various Aspects of Globalization

(2) The Age of Global Capitalism

(3) Three Prototypes of System Frictions

3. Traditional System Frictions

(1) Torrential Export and Trade Frictions

(2) Problems Related to Import Barriers

(3) The Realities of Investment Frictions

4. System Frictions Concerning Structurally Transitional Nations

(1) Resource Allocations Through and Outside the Market

(2) Reform of the Legal Framework

5. Technology Changes and New System Frictions

(1) Paradigm Shift in Technology

(2) Changes in the Mechanism of Market Competition

(3) Competition and Collaboration in Social and Economic Systems