Financial system development and trade relations

The Regional Comprehensive Economic Partnership (RCEP) marks a significant milestone in Asian economic integration, opening new opportunities for China and its trade partners. Although studies have documented trade patterns within the RCEP framework extensively, less attention has been paid regarding how financial sector development relates to trade liberalization to influence bilateral exchange. This study builds an integrated framework by drawing on international trade, financial intermediation, and institutional economics to examine these relationships. Analyzing panel data from RCEP member states from 2005 to 2022, we employ advanced econometric techniques, including two-way fixed effects and interaction models, to examine the dynamics between trade openness, financial development, and bilateral trade flows. The finding indicate that: (1) increased trade openness steadily drives bilateral trade between China and RCEP partners, robust to multiple specification checks; (2) the positive impact of trade liberalization on bilateral exchange is stronger in countries with more developed financial sectors, emphasizing financial development as an enabling factor; (3) the benefits of trade openness are not uniform—more significant gains are observed in economies characterized by lower transaction costs and stronger institutional frameworks. The findings suggest RCEP members should prioritize financial development and trade barrier reduction to benefit from regional integration. The study provides practical implications for policymakers seeking to strengthen their trade and financial sector reform approach within the RCEP framework.