Extensive margin effects following the Japan-EU free trade agreement: analysing future developments in the agri-food sector

Purpose. This study develops a model to predict and analyse the potential impacts of the Japan-EU Free Trade Agreement (JEFTA) on EU-Japan agri-food trade by focusing on the extensive margin of trade. The model identifies emerging and disappearing trade flows and evaluates their implications for the future total trade volume between the two regions. This was done in order to obtain trade volume predictions that are more disaggregated for agri-food products than in previous studies. Methodology / approach. The extensive margin model by Felbermayr and Kohler (2010) is used in conjunction with an econometric gravity trade model to create a new two-step forecast procedure. This procedure can be used to predict the emergence of new trade flows between the two countries, as well as their disappearance. Results. Aggregate changes in the extensive margin appear modest, but significant changes occur when new and disappearing trade flows are being considered separately. Overall, EU agri-food exports to Japan are predicted to increase by USD 2127 million by 2038. When emerging and disappearing trade flows are expressly considered, the predicted increase of EU agri-food exports is USD 7 million lower. Behind this overall change in the forecast is a much greater change at the level of individual trade flows: emerging trade flows are estimated to contribute USD 112 million in new exports to Japan by 2038, while disappearing trade flows total to USD 119 million. The majority of these changes are characterised by trade flows of less than USD 50,000 each. Originality / scientific novelty. This study presents a methodological advancement in trade forecasting by integrating the extensive margin model by Felbermayr and Kohler (2010) with an econometric gravity trade model in a two-step prediction process for the Japan-EU Free Trade Agreement. Detailed findings on emerging and disappearing trade flows indicate that previous forecasts based on more aggregate data may overlook crucial developments at the level of individual agri-food products. Practical value / implications. The findings emphasise the importance of considering the extensive margin in FTA evaluations. Policymakers and firms may misjudge trade opportunities without accounting for new and disappearing trade flows, highlighting the need for comprehensive sectoral trade strategies.