RCEP, global value chains and welfare effects: a quantitative analysis based on the distinction between intermediates and final goods

We quantify the trade and welfare effects of RCEP. Using a quantitative multi-country and multi-sector trade model that distinguishes key characteristics between intermediates and final goods, we illustrate the heterogeneous impacts of RCEP on trade and welfare. RCEP has trade creation effects within members but has trade diversion effects for non-members. There are substantial welfare gains within RCEP, but the decomposition results indicate that the sources of welfare gains differ, with China and ASEAN countries mainly originating from growth in the volume of trade, but at the cost of the deterioration in terms of trade. Trade liberalization in service also contributes to welfare gains, mainly from intermediates trade. India’s accession to RCEP improves the welfare of itself and its members, while its terms of trade deteriorate. We also find that with distinctions between intermediates and final goods, the heterogeneous effects of the two can be captured. Moreover, our model predicts more significant welfare gains than a model without input-output networks and sectoral linkages.