Analysis of the Factor Endowments and Agricultural Trade for Economic Cooperation in Northeast Asia

Abstract

Agricultural production factors, productivity and trade structures of China, Japan and Korea were analyzed. Their agriculture has mutual complementarity arising from differences in factor endowments as well as mutual competitiveness caused by similarities in production structure. Although agriculture of the three countries can be characterized by small-scale farming in common, the capital/labor ratio and the labor/land ratios are much different by country. As a result, Japan and Korea have advantages in producing labor saving and capital intensive products while China has advantages in labor intensive and capital saving products. Since agricultural productivity of factors such as labor, land and capital showed huge differences by country, mutually beneficiary development might be possible through the agricultural cooperation in the Northeast Asian region. Agricultural products of China, Japan and Korea can be classified into two groups of mutually competitive and complementary products. Regional cooperation in agriculture can be vitalized by combining production of mutually competitive products at certain levels in each country with internalizing trade of mutually complementary products. Unfortunately, however, agricultural exports are more and more competitive as the export similarity indices are high and degree of export competition is increasing in the region. For the regional agriculture, sharing markets in the region through establishing complementary systems of utilizing production factors would be better than seeking monopolistic rent or market domination through unlimited competition with each other. Price competition based on the concept of comparative advantage assumes production specialization. However, such kind of competitive advantage is likely to disappear when relative factor prices change as the national economy grows. Consequently, agricultural markets in the region might be dominated by any competitor outside the region. China, Japan and Korea are at different stages of economic development and have huge differences in income levels that would result in different consumer's tastes in each country. Accordingly, diverse measures of agricultural cooperation could be sought including continuous introduction of new products, differentiation of existing products, technological transfer, and production sharing among the countries in the region. If these measures for the cooperation could contribute to establishing systems for intra-industry division of labor in agricultural sector, social welfare will apparently increase through the trade creation and diversions in the region.