Institut für Agrarpolitik und Landwirtschaftliche Marktlehre

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    Projecting EU agri-food exports amidst a free trade agreement - A study on dairy products in Japan
    (2024) Berndt, Marvin; Hess, Sebastian
    The export of dairy products is an important part of the marketing strategy for the German and European dairy industry, and contributes to overall revenue generation. Diversification of export markets is not only relevant for export-orientated companies, but is also important for political reasons as it reduces dependencies on certain markets and lessens the effects of potential trade conflicts. Japan is becoming an increasingly important market for exportorientated dairy companies, as domestic production is unable to meet Japanese consumers’ growing demand for dairy products. The EU-Japan Free Trade Agreement (JEFTA), which was ratified on 1 February 2019, opens up Japan’s previously closed market to European agri-food products, achieved by, among other things, lowering tariffs and introducing tariff rate quotas (TRQ). Dairy products in particular are given consideration in JEFTA, as five of the 25 TRQs introduced by Japan relate to them. The TRQ for cheese products stands out here, as it is the only TRQ that will increase beyond JEFTA’s implementation period in proportion to an increase in Japanese consumption. As a comprehensive and deep agreement, JEFTA has stimulated a large body of analyses that focus on various aspects of the potential impacts of the agreement’s full implementation. The analyses are primarily based on general computable equilibrium models (CGE), which are widely used in the analysis of free trade agreements but are subject to restrictions in terms of the data that can be used. The analyses confirm that JEFTA will have a positive influence on the development of European exports of agri-food and dairy products to Japan. However, the results of previous analyses are not satisfactory for exporters of dairy products or policymakers as important questions concerning the differentiated development of various dairy products, emerging or disappearing trade flows, and the accuracy of predictions made remain unanswered. This dissertation is dedicated to answering these outstanding questions. The first of the three research chapters, chapter 4, deals with the question of whether there will be differences in the development of future exports of various dairy products within the framework of JEFTA. This question arises because Japan has made different concessions to the EU with respect to the various dairy products under JEFTA, but dairy products have been aggregated in earlier analyses. A gravity model was used to analyse how the exports of 15 different dairy products from the EU to Japan will develop within the context of JEFTA. The analysis focuses on the effects of the TRQs granted by Japan for the export of EU dairy products. The results showed a differentiated development of future exports of dairy products: by 2033, EU exports of dairy products to Japan will increase by 82.1 % (compared with the three-year average in 2018) to USD 828 million. Exports under TRQs will increase from an initial USD 102 million in 2019 to USD 149 million in 2033, but the share of exports under TRQ will fall from 23.9 % to 17.9 %. Two thirds of the total increase in exports are accounted for by the product group “Other cheese”, which primarily includes hard cheeses such as Gouda. The extent to which future cheese exports can be increased essentially depends on how much the corresponding TRQ increases. When analysing future exports, it is important to bear in mind that exports not only change based on the volume of existing trade relations between countries (intensive margin), but that new trade relations can also emerge or disappear (extensive margin). Chapter 5 therefore analyses the extent to which the structure of EU agri-food exports, i.e. the number of agri-food trade flows of the individual EU member states, will change under JEFTA. For this purpose, an estimation procedure was developed based on the model of Felbermayr & Kohler (2010). Within the framework of this estimation procedure, predictions are possible that explicitly take into account the emergence and disappearance of trade flows between countries, i.e. changes in the extensive margin. With the full implementation of JEFTA in 2038, there is a slight decline in the volume of predicted EU agri-food exports if developments in the extensive margin are taken into account. However, the full extent of the changing trade structure only becomes clear when newly emerging and disappearing trade flows are considered separately. This shows that new trade flows to Japan of a total volume of USD 112 million emerge by 2038, while trade flows totalling USD 119 million disappear (compared with a forecast that does not take the extensive margin into account). Half of the trade flows that constitute this development are very small in volume, and account for less than USD 50,000. The export structure of dairy products from the individual EU member states is stable and shows only minor changes along the a extensive margin. The quality of the predictions about future exports is ensured by rigorously checking the validity of the selected variables of the econometric models. In chapter 6, the accuracy of the predictions of future EU agri-food exports to Japan made by gravity and CGE models is analysed using an out-of-sample comparison of the predictions of both models with actual exports to Japan in 2018. With regard to aggregated agri-food exports, both models generate statements that are close to the actual exports. For an aggregation of individual agri-food exports of EU countries by agri-food product, both models are more accurate than for an aggregation of exports by country. Variations in the statements of both models concerning actual exports in 2018 are due to differences in the results for exports of fewer products and countries. The changes in exports within the analysed CGE model rarely correspond to the actual changes in exports. The results for dairy products should be noted here, as both models are close to the actual exports of dairy products to Japan with their statements on future exports, and the change in dairy product exports within the CGE model is one of the few product groups that corresponds to the actual changes. Overall, this dissertation contributes to analyses of the impact of the implementation of JEFTA on exports of European dairy products to Japan in important ways. It shows that future exports will focus on cheese products, and that an increase in these exports will largely depend on the development of the tariff quotas granted by Japan. Compared with other agri-food products, the structure of European dairy exports is relatively stable, i.e. EU countries will export almost the same products at the time of full implementation of JEFTA as they export at the beginning of its implementation. Gravity and CGE models are suitable for making statements about future EU agri-food exports to Japan, especially in relation to dairy products.