Micro‐to‐Macro Gains From Regional Trade Agreements: Evidence From RCEP

ABSTRACT We assess how the Regional Comprehensive Economic Partnership (RCEP)—the Asia–Pacific's largest trade agreement—affects trade and welfare when firms differ in productivity. Using a widely applied firm‐level trade framework, we quantify how lower tariffs and easier market entry reshape which firms export, the volume of trade and the gains for member economies. Most benefits arise because more productive firms start exporting and expand, while less efficient producers shrink or exit. This reallocation towards high‐productivity firms raises overall efficiency, with stronger effects in sectors that face limited import competition. Beyond the familiar gains from higher trade volumes and better international prices, RCEP delivers additional benefits from greater product variety and from domestic productivity improvements driven by firm entry and exit. Malaysia, Vietnam and Cambodia benefit the most from RCEP, with welfare gains of 22.2%, 5.73% and 2.37%, respectively, while China, Japan and South Korea gain relatively less, at 0.37%, 0.50% and 0.49%, respectively. The magnitude of tariff reductions primarily underlies these welfare changes. The shape parameters of productivity distribution also have a non‐negligible impact on welfare outcomes, and the relative productivity dispersion between domestic and foreign firms matters as well when the shape parameters are allowed to vary across countries. Our results highlight that ignoring firm dynamics tends to understate the agreement's welfare effects.