Trade Policy Uncertainty, Competition, and Markups of Chinese Agricultural Firms: Evidence From the China‐ASEAN Free Trade Agreement

ABSTRACT Chinese agricultural exporters display a persistent tendency toward low price‐cost markups. This study investigates the determinants of this phenomenon by examining the role of Regional Trade Policy Uncertainty (RTPU), with a particular focus on the impact of the China‐ASEAN Free Trade Agreement (CAFTA). Emphasizing the pro‐competitive effects of regional trade agreements (RTAs), we develop a theoretical framework grounded in a mathematical model and employed firm‐level data from the Annual Survey of Industrial Firms and Chinese Customs Database for the period 2000–2013. The empirical results indicate that CAFTA significantly reduces RTPU, which in turn lowers firm markups by intensifying competition in export market and promoting economies of scale effects. These are more pronounced among smaller firms in the food manufacturing sector and producers of lower‐quality agricultural goods. Furthermore, the reduction in RTPU enhances resource allocation efficiency within the agricultural export sector by narrowing the dispersion of markups across exporters. This paper contributes to understanding the “black box” of markup formation in agricultural export by identifying a novel mechanism—RTA‐induced competition—that helps explain the persistently low markups of Chinese agricultural exporters. Our findings provide firm‐level evidence on how RTAs foster regional competition, amplify the benefits of regional trade, and improve resource allocation efficiency. These insights offer valuable policy implications for the design and refinement of RTA strategies.