Regional Economic Integration and Agricultural Trade

Abstract

The author analyzes the economic impact of regional integration on agricultural trade. Using a simple Krugman-type model with product differentiation, he derives two propositions about regionalism's impact on trade flows: 1) The higher the degree of pre-integration protection, the greater the impact of regional integration. 2) The lower the degree of product differentiation, the greater the impact of regional integration. Taken together, the two propositions predict that regionalism has more impact on agricultural trade than on manufacturing, because the initial level of protection is higher and the degree of product differentiation is lower for agricultural products. He tests these propositions against actual data for two incidents of European Community expansion: Greece's admission to the EC in 1981 and that of Spain and Portugal in 1986. The data generally support the theory. After the theoretical and ex post analysis, the author applies the model to examine the possible ex ante impact of the Asia Pacific Economic Cooperation (APEC) free trade agreement on Japanese rice imports, an issue on which (despite heated emotional debates) there have been no major studies. It is the popular belief in Japan that when the Japanese rice market is liberalized, Japanese rice production will be wiped out. The author's simulation results suggest that the impact of partial liberalization of Japan's rice market would be relatively minor, but total liberalization would have a profound impact on Japanese rice production.