The greater the initial level of protection, and the lower the degree of product differentiation, the greater an impact regional integration will have—so regional integration will have more impact on agricultural trade than on manufacturing.
Goto 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:
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 EC expansion: Greece's admission to the European Community in 1981 and that of Spain and Portugal in 1986. The data generally support the theory.
After the theoretical and ex post analysis, Goto applies the model to examine the possible ex ante impact of the 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. Goto'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.
This paper—a product of the Commodity Policy and Analysis Unit, International Economics Department—is part of a larger effort in the department to. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Grace Ilogon, room N5-032, telephone 202-473-3732, fax 202-522-3564, Internet address gilogon@worldbank.org. (60 pages)
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