How Does the Regional Comprehensive Economic Partnership Affect the Restructuring of Global Value Chains?

• Published date: 01 May 2023
• Author: Zijie Fan,Siyi Peng,Wenjie Hu
• Date: 01 May 2023
• DOI: http://doi.org/10.1111/cwe.12488

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 140–172, Vol. 31, No. 3, 2023

140

How Does the Regional Comprehensive

Economic Partnership Aff ect the

Restructuring of Global Value Chains?

Zijie Fan, Siyi Peng, Wenjie Hu*

Abstract

This paper quantifi es the way in which the Regional Comprehensive Economic Partnership

(RCEP) aff ects the restructuring of global value chains (GVCs). It incorporates an input–

output structure into a general equilibrium model, highlighting important differences

between intermediates and final goods. Using tariff reduction schedules for the RCEP

agreement and Asian Development Bank Multi-Region Input–Output database, it evaluates

the impact of the RCEP’s tariff cuts on vertical specialization and the GVC position index

of members. It shows that the RCEP signifi cantly increased vertical specialization and the

weighted average number of stages for members for primary factors of production and

final consumption, which led to more complex and longer production chains. This was

mainly due to the trade creation in intermediates imported from member countries and

those outside it. This is an important fi nding, distinct from traditional trade models without

an input–output structure.

Keywords: counterfactuals, GVC position index, RCEP, vertical specialization

JEL codes: E01, F14, F23, L14

I. Introduction

Regional trade agreements (RTAs) have become a central issue in recent years.

Numerous studies have emphasized the eff ects of trade and welfare but little attention

has been given to the eff ects of global value chains (GVCs). The success of RTAs has

changed the pattern of trade, with production stages being located in diff erent countries

*Zijie Fan, Associate Professor, School of Economics & Trade, Hunan University, China. Email: zijiefan@

hnu.edu.cn; Siyi Peng (corresponding author), PhD Candidate, School of Economics & Trade, Hunan

University, China. Email: pengsiyi@hnu.edu.cn; Wenjie Hu, Postgraduate Student, School of Economics &

Trade, Hunan University, China. Email: huwenjie0518@163.com. This work is supported by the National

Natural Science Foundation of China (No. 72173039), Natural Science Foundation of Hunan Province

(No. 2021JJ30156), Hunan Provincial Philosophy, Social Science Foundation Project (No. 17JD18), and

Major Projects of the National Social Science Fund of China (No. 18ZDA068).

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

How Does the RCEP Aff ect GVCs? 141

and restructured GVCs. Taking the Regional Comprehensive Economic Partnership

(RCEP) as an example, we study how RTAs aff ect the restructuring of GVCs.

On December 20, 2020, China, Japan, South Korea, Australia, New Zealand, and

the Association of Southeast Asian Nations (ASEAN) countries signed the RCEP and on

November 15, 2020,1 Australia and New Zealand announced that they had ratifi ed the

RCEP. On January 1, 2022, the RCEP agreement offi cially took eff ect.

As the world’s largest regional trade agreement, the RCEP will signifi cantly reduce

tariff s and provide new market access opportunities for members. Some goods’ tariff s

were cut to zero immediately; most goods’ tariff s will be eliminated gradually within 10

years, and tariff s on over 90 percent of goods will be phased out within 21 years. The

tariff concession commitment will greatly facilitate trade between members, bringing

about trade creation and trade diversion. With strong complementarities of supply chains

among RCEP members, the predicted trade creation will strengthen the manufacturing

capacity of “Factory Asia” and the potential trade diversion will probably reshape

GVCs. The main objective of our paper is to develop an expanded approach to modeling

the impacts of tariff shocks on GVCs and to supplement theoretical and empirical

research on the impact of RTAs on GVCs from a value-added perspective.

To do this, we need to address two main issues: fi rst, how to incorporate the primary

characteristics of GVCs (for example, the increasing trade in intermediates) into the

traditional trade model;2 second, how to construct a framework that unifi es input–output

structure and general equilibrium analysis. We develop a multi-sector, multi-country

general equilibrium model featuring distinct trade cost functions of intermediates and

final goods based on Eaton and Kortum (2002), thus enabling the model to be better

integrated with the elements of the input–output tables (IOTs). This work enables the

traditional trade model to analyze the impact of shocks on GVCs.

The first contribution of our paper is to highlight a crucial feature of different

trade shares between intermediates and fi nal goods and to incorporate the input–output

structure into the quantitative analysis framework of RTAs.3 The model enables us to

distinguish heterogeneous impacts from tariff cuts on intermediates and fi nal goods – an

important distinction. The trade share of fi nal goods is a function of production costs,

1The Association of Southeast Asian Nations (ASEAN) is a regional grouping that promotes economic,

political, and security cooperation among its 10 members: Brunei, Cambodia, Indonesia, Laos, Malaysia,

Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

2Our paper diff ers from Antràs and de Gortari (2020), which considered the structural features of production in

the model. We analyze how tariff shocks aff ect the trade of intermediates and fi nal goods through production

decisions that ultimately aff ect GVCs in a traditional model, and provide quantitative evidence accordingly.

3Johnson and Noguera (2012) showed that the intermediates have accounted for two-thirds of international

trade.

Zijie Fan et al. / 140–172, Vol. 31, No. 3, 2023

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

142

trade costs, and prices of fi nal goods. Tariff cuts will reduce trade costs, thus increasing

the trade share of final goods, all other things being equal. In contrast, the trade

share of intermediates is a function of production costs, trade costs, and the prices of

intermediates. Tariff cuts will decrease the prices of intermediates, thus increasing the

trade share of intermediates. Through input–output linkages, it also reduces costs of

reproduction and promotes the growth of exports on intermediates and final goods.

Theoretically, tariff cuts aff ect GVCs via changes in exports and imports. By comparing

the quantitative results between our model and the model in Caliendo and Parro (2015)

(the CP model), we further find that failure to distinguish the differences between

intermediates and final goods is another possible important reason why the welfare

eff ects of tariff liberalization are underestimated.

Our model takes into account the heterogeneity of the trade share across industries.

In our model, the trade share varies for intermediates from the same industry when it is

used as an input in the production of diff erent industries in a country due to the diff erent

trade costs. We can see this clearly from the Asian Development Bank Multi-Region

Input–Output (ADB-MRIO) database. The CP model, however, assumes that products

from the same industry have the same trade share regardless of the industry used in the

importing country, which is inconsistent with reality. By introducing the heterogeneity

of trade costs and trade shares across industries into the model, our model can portray

realistic industrial trade transactions between countries more accurately.4 With these

extensions, our model embeds the IOTs into the quantitative trade model, thus providing

a more accurate picture of the eff ects of trade shocks on GVCs.

Based on the changing equilibrium conditions, we obtained trade flows of

intermediates and final goods after tariff cuts and then calculated the value-added

matrix in IOTs. We constructed two indexes to measure vertical specialization (VS)

and GVC position, based on the methods developed by Hummels et al. (2001) and

Wang et al. (2017), respectively. Vertical specialization is the share of foreign value

added to a country’s exports. An increase implies that the country uses more imported

4Caliendo and Parro (2015) assumed that the share of trade in intermediates from sector r in country i used

by all sectors in country j ()πij

r was the same. That is, π π πsk

ij ij ij

rs rk r

= = ≠, . This assumption is too strong. As

is shown clearly in the IOTs, intermediates in the same industry of the exporting countries used by diff erent

industries in the importing country are diff erent. That is π π sk

ij ij

rs rk

≠≠, . There are diff erent trade fl ows of

intermediates from the same industry in a country to diff erent industries in the destination country, which,

to some extent, refl ect the diff erent trade costs across industries, that is k k sk

ij ij

rs rk

≠≠, . Diff erent industries

in the importing country may face the same tariff at the product level. Due to different industries having

diff erent compositions of imported products, the tariff levels faced by diff erent industries vary when weighted.

Although this paper only considers tariff cuts shocks, the heterogeneity of trade costs across industries is more

pronounced when considering nontariff barriers.