Impact of Trade Liberalization on the Japanese Agri-food Sectors: A General Equilibrium Analysis with Farm Heterogeneity and Product Differentiation

Manufacturing industries have attracted considerable research attention in state-of-the-art trade studies with findings of firm heterogeneity and product differentiation, à la Melitz. In contrast, it is widely assumed that agricultural sectors produce homogeneous goods. However, they do in fact produce new goods by product differentiation through breeding, food processing, quality-upgrading, and branding. In reaction to the recent globalization and increasing penetration of imported agricultural goods, the Japanese government has sought strategies to promote its domestic agri-food sectors by means of product differentiation and export promotion. In this computable general equilibrium study, we seek to identify means by which Japan’s agricultural sectors can survive in the globalized economy and increase their exports; we focus on strategies that incorporate product differentiation and farm/firm heterogeneity. Our simulation experiments show that agricultural trade liberalization would not increase Japan’s agricultural exports but would increase food exports; and that food trade liberalization would promote food exports and some agricultural exports. In both liberalization scenarios, trade liberalization would increase domestic agri-food production. This finding affords evidence of the relevance of product differentiation strategy (especially as applied to food processing and exportation) but not of agricultural export promotion strategy.