Introduction

On November 15, 2020, after nearly a decade of negotiations, Australia, China, Japan, New Zealand, and South Korea as well as the ten ASEAN countries signed the Regional Comprehensive Economic Partnership (RCEP), the largest regional free trade agreement (FTA) to date, accounting for a third of the world’s population and 30% of the global gross domestic product (Ministry of Trade and Industry Singapore 2020). On January 1, 2022, the RCEP went into effect, following the ratification of the agreement by six ASEAN signatories (Brunei, Cambodia, Laos, Singapore, Thailand, and Vietnam) and five non-ASEAN signatories (Australia, China, Japan, New Zealand, and South Korea).Footnote 1 Hailed as a modern and comprehensive FTA, the RCEP not only covers further liberalization of tariff and non-tariff barriers to trade in goods and services, but also increases trade facilitation and enhances the overall business environment through regulations relating to intellectual property protection, government procurement practices, and e-commerce among its member countries.

With the ongoing U.S.–China trade war and broader diplomatic strains between the world’s two largest economies, the RCEP promises to raise total trade among the 15 member countries by $428 billion by 2030 (Petri and Plummer 2020). Who will likely capture these gains? Existing studies have used general equilibrium models to simulate the effect of RCEP for various member and non-member countries (e.g., Li et al. 2016; Li and Moon 2018; Li and Li 2022). While useful, these macroeconomic analyses do not help us understand the behaviors of individual firms that drive the vast majority of international economic activities in today’s globalized world. Which firms will benefit more from the RCEP?

Traditional theories in international political economy (e.g., Milner 1989) generally hold that export-oriented firms are the winners from trade liberalization, while import-competing firms are categorically worse off. The “new new trade theory” paradigm (e.g., Melitz 2003) focuses on heterogeneity across firms to show that it is usually the more productive firms that export and consequently benefit from trade liberalization. However, these general patterns may no longer hold today in a world increasingly connected by global supply chains (GSCs), whereby raw materials, parts, components, and services move across national borders multiple times before being made into final products that are sold on world markets.

Engaging recent research on the global production networks and value chains by economists (e.g., Blanchard et al. 2016; Johnson and Noguera 2012; Orefice and Rocha 2014) as well as political scientists (e.g. Kim et al. 2019; Osgood 2017, 2018; Zeng and Li 2021), this paper argues that the preferential tariff and nontariff benefits provided by FTAs are more crucial for firms embedded in GSCs, due to the constraints of supply chain networks, the disruption of which, whether due to geopolitical tensions or to a global pandemic, will likely be more detrimental than for firms without supply chain linkages, which can more easily divert their trade in the absence of established buyer–supplier relationships. This suggests that GSC integration can generate new distributional effects from trade liberalization, even among exporters, between those more heavily dependent on foreign value added in their intermediate or final exports and those less dependent on intermediate goods trade in their production activities.

More specifically, owing to improved access to the necessary production materials and intermediate inputs, firms whose products are manufactured with foreign value added should be more likely to tap into the benefits offered by FTAs with countries with which they have strong supply chain linkages. In addition, compared to producers of intermediate or final products who only serve the domestic market, businesses whose products are incorporated into the production of goods and services in partner countries should also be more likely to benefit from FTAs that increase their ability to effectively compete in foreign markets with suppliers from elsewhere. In other words, firms with substantial backward supply chain linkages (i.e., having a high level of foreign content in the production or export of their products) or forward supply chain linkages (i.e., having a high level of their products incorporated in foreign production or exports) should be able to reap the largest benefits from FTAs with countries with which they have supply chain linkages and should be better equipped to capture the gains from trade in an integrated global economy.

This paper’s empirical analysis leverages an original survey of more than 500 Chinese firm managers in 2017, when the RCEP negotiations were underway. The survey asked a series of questions about the firms’ trade profile, including the types of products they import and/or export and the countries with which they trade. Answers to these questions are used to construct measures of their supply chain linkages with RCEP countries. Additionally, managers were asked to evaluate whether or not the RCEP would have a positive impact on their business. Consistent with the theoretical expectations, the findings demonstrate that higher degrees of supply chain linkages with RCEP member countries make a firm more likely to anticipate a positive impact from the agreement.

The remainder of this paper is organized into five sections. The Global supply chains and the differential benefits of FTAs section theorizes the differential benefits of FTAs for firms with varying degrees of supply chain linkages with FTA member countries. Survey design section details the survey design, sampling schemes, and characteristics of the sampled firms. Measuring supply chain linkages section describes the construction of supply chain measures using questions from the survey. Data analysis section presents the main findings of the data analysis. The Conclusion section concludes with discussions of the study’s theoretical and policy implications.

Global supply chains and the differential benefits of FTAs

Over the past few decades, the growing fragmentation of production across national borders has given rise to the phenomenon of global supply chains, whereby international trade now links domestic and foreign suppliers in a series of complex interactions. Such trade is increasingly influenced by the international strategies of firms that undertake foreign direct investment, outsourcing, and other production-related activities in locations offering the necessary raw and intermediate materials at the most competitive prices or with the best quality (Zeng and Li 2021).Footnote 2 The rising share of intermediate and capital products in global trade volumes is accompanied by the decline in traditional trade, with each country producing finished products that are exported to one another.

Firms can participate in global supply chains in two ways that reflect their upstream and downstream links in international production chains, as illustrated in Fig. 1. Backward GSC participation refers to the value added of inputs that were imported to produce intermediate or final goods/services to be exported (WTO n.d.). This is the sourcing side in the GSC, represented by the solid arrows in Fig. 1, where a firm in home country B imports intermediates from partner country A to produce its exports to partner country C.

Fig. 1
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An Illustration of Forward and Backward GSC Participation

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Forward GVC participation refers to the domestic value added contained in intermediate goods or services exported to a partner economy that re-exports them to a third economy as embodied in other products (WTO n.d.). This is the supply side in GSC participation, represented by the dashed arrows in Fig. 1, where domestic value added contained in inputs sent by a firm in home country B to partner country C are further processed and exported through supply chains to the rest of the world.

Parallel to the rise of global supply chains is the proliferation of FTAs, including regional trade agreements, preferential trade agreements, and custom unions (Baccini 2019). According to data from the World Trade Organization (WTO), the number of FTAs in force has increased from just two in 1958 to 348 in 2021 (WTO 2021). Two features distinguish FTAs from traditional multilateral trade liberalization under the WTO. First, FTAs offer preferential tariffs to their member states beyond traditional most-favored-nation (MFN) tariffs (Bhagwati 2008). Second, on nontariff issues, FTAs contain provisions that are often much stronger than those embodied in multilateral agreements, such as ones addressing trade-related investment measures, trade-related intellectual property rights, services, and public procurement (Horn et al. 2010).

How does a free trade agreement alter the distributional consequences for firms with and without GSC linkages? To answer this question, it is useful to start by unpacking the different (dis)incentives for firms to make use of the FTAs available to them. Additional tariff reductions between partner countries are the most immediate benefits of an FTA. But taking advantage of these benefits is not without costs for the firm (Bernard et al. 2012; Cruz et al. 2018; Dai et al. 2018; Kawai and Wignaraja 2011). Such costs include the complex rules-of-origin (ROO) requirements firms must follow to qualify for preferential tariffs, which involve calculating and certifying the domestic content of the goods they export. Other ROO-related issues, such as obtaining adequate documentation and dealing with administrative procedures, can lead to time delays, which, in turn, add to firms’ overall business costs.

For firms without substantial supply chain linkages, these costs may outweigh the potential benefits from tariff reduction. In many cases, the difference is small or even negligible between the tariffs codified in the FTA and the MFN tariffs under the WTO or other existing preferential arrangements—after all, tariffs are lower-bounded by zero. Furthermore, not being dependent on suppliers or clients in specific geographic locations shaped by the supply chains means that these firms can simply divert trade to other markets if not taking advantage of the FTAs makes their products less competitive. These considerations partly explain why FTA usage globally is very low—only 23% of the 1665 firms from 30 countries in a 2016 survey said they were “fully utilizing all free trade agreements available in [their] country and applicable to [their] products” (Thomson Reuters and KPMG 2016, p. 11).

Conversely, firms embedded in GSCs have more incentives to make use of FTAs despite the additional administrative and business costs. First, in the case of backward supply chain linkages—that is, when a firm uses foreign inputs for the production of either intermediate or final goods—preferential tariffs will reduce the costs of inputs and therefore of its products. Since these inputs, such as raw materials or high-value components, frequently constitute an integral part of the production network and cannot be easily substituted at a competitive price by sourcing from either domestic or other foreign markets, the gains from lower tariffs can be substantial. Additionally, if these firms, in turn, sell their products to other partner countries, they can benefit from the lower import tariffs on their exports. This double saving has the potential to increase the firm’s competitiveness in both domestic and international markets.

Second, in the case of forward supply chain linkages—that is, when a firm’s domestic value added ends up in the production and exports of foreign intermediate or final goods—preferential trade liberalization will lower import tariffs in the destination countries, which, in turn, reduces the costs of its products and therefore increases its competitiveness in markets of FTA partner countries. The revenues from increased sales and tariff savings can accrue to either the domestic producers or the foreign clients, but since forward-linked firms are more likely to be at the lower end of the value chain, FTAs would enable these firms to offer a larger share or even all of the gains to their foreign buyers as a means to foster and maintain their partnerships, especially if the latter are considering the relocation of their supply chain networks to countries with cheaper labor and production costs.

Third, FTAs often go beyond tariffs and cover a range of behind-the-border issues—such as intellectual property rights protection, investment regulations, and contract enforcement—that are particularly attractive to firms that export knowledge-intensive products or services to countries with a weak regulatory framework. An FTA’s trade facilitation provisions can also provide important means of reducing the burden for businesses that need to move their goods across multiple borders. In addition, FTAs can facilitate tariff-jumping foreign direct investment (FDI) (Blonigen et al. 2004), allowing firms to expand into markets previously or newly closed due to high tariffs or antidumping duties, by investing and relocating their production to partner countries that have FTAs with those countries. Last but not least, the potential of FTAs to attract FDI into the home country also creates opportunities for firms embedded in GSCs to climb up the value chain, moving from OEM (original equipment manufacturer) to ODM (original design manufacturer) and even to OBM (original brand manufacturer) as they form joint ventures with their technologically more advanced partners.

The above discussions should lead us to expect that firms with strong supply chain linkages with an FTA partner, either forward or backward ones, should be more likely to anticipate benefits from the FTA, ceteris paribus. In the remainder of the paper, I test this argument empirically in the context of the recently signed RCEP using an original firm-level survey in China.

Survey design

To empirically examine the differential benefits of free trade agreements as a function of the firm’s degree of supply chain linkages with partner countries, I designed and implemented an original survey in China between April and June 2017.Footnote 3 While the RCEP was still being negotiated at the time of the survey, it is reasonable to expect that firms would already have been following the agreement carefully and may even have made some adjustment in anticipation of future trade liberalization, should the negotiations conclude successfully. This expectation is backed by theoretical work on forward-looking firms’ decisions concerning entry, exit, export, and innovation (Costantini and Melitz 2008) and empirical studies demonstrating that firms are able to adjust well in advance of final FTA ratification (Gulotty and Li 2020), leading to significant anticipatory effects on trade flows: on average, countries experience a 25% increase in trade 4 years before FTAs enter into force (Baccini and Urpelainen 2014; Magee 2008). Furthermore, as Dür et al. (2014) argue, these anticipatory effects are largest for “modern” FTAs such as the RCEP, with more ambitious agreements having larger anticipatory effects.

The survey was administered by a marketing research firm in China and targeted firm managers, defined as those holding managerial positions, such as general managers, vice presidents, directors, and chief executive officers (CEOs). The company used a variety of methods to recruit these people into the subject pool, mostly by inviting managers who had previously enlisted the company to help with their own marketing research.Footnote 4 Importantly, the marketing research company was only responsible for subject recruitment, not the design of the questionnaire, which was distributed as a link directing the respondent to an external website, where the survey was hosted.

When the survey was in the field, the company sent out batches of invitations to a random sample of the manager pool to reach the target sample size of 500. With such an “opt-in” method of subject recruitment, all of the potential respondents that met the inclusion criteria were eligible to take part in the survey, and the survey link expired once a preset number of responses was reached. This sampling procedure made it difficult to calculate response rate as in traditional surveys, since the invitations were rolled out in phases rather than based on a predetermined size. In total, 569 firm managers successfully completed the survey.

The sampled firms come from 27 of the 34 provincial-level administrative units in China. The ones not represented are Hainan, Hong Kong, Inner Mongolia, Macau, Ningxia, Qinghai, and Tibet. The top four provinces are Guangdong (19.6%), Shanghai (13.4%), Beijing (12.5%), and Jiangsu (7.9%). More than half of the firms (57.1%) were founded in or after 2000. The majority of the firms are private (60.3%), followed by state-owned firms (16.9%), foreign-invested firms (14.4%), joint ventures (6.7%), and collective firms (1.8%). In terms of the sectoral composition, the majority of the firms are in manufacturing industries (35.8%), followed by the machinery (17.1%), textile (7.9%), basic metal (5.5%), and rubber and plastic (4.8%) industries. With regard to size, 34% of the firms have more than 500 employees, 29.4% employ between 201 and 500 employees, and 7.1% have fewer than 50 employees. These firms are also fairly engaged in international trade and investment, with about a third (30.6%) owning a facility or having investments in another country. Additionally, 50% and 73.1% of the firms reported having imported and exported in the past year, respectively.

Table 1 presents the comparisons between the survey sample and over 300,000 “above-scale” industrial firms (defined as all state-owned enterprises [SOEs], as well as non-SOEs with sales exceeding 20 million RMB) in the Chinese Firm-level Industrial Survey (CFIS), conducted annually by the National Bureau of Statistics.Footnote 5 Though not drawn from a probability-based sample, the sampled firms, especially those that reported over 20 million RMB in sales, are comparable to the population of such firms in China in terms of their geographical location, ownership, size (measured by sales), and, to some extent, industrial breakdown.

Table 1 Sample comparison
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The outcome measure is based on the following question in the survey: “The Regional Comprehensive Economic Partnership Agreement (RCEP) is a large-scale trade agreement. If the RCEP can be successfully signed, what impact will it have on your company’s business?” The responses are plotted in Fig. 2. In total, 235 of the 569 sampled firms (41.3%) replied that the RCEP would have a “positive impact,” and another 89 (15.6%) thought that the impact would be both “positive and negative.” Only one firm suggested that the RCEP would only have a “negative impact,” and 45 (8.9%) mentioned that the agreement would have “no impact” on their business. The remaining 199 firms either had no opinion (1.6%) or had not heard about the agreement (33.4%). Overall, the pattern is generally consistent with the logic of forward-looking firms and suggests that the majority of the firm managers in the sample had been paying attention to the RCEP and were already thinking about its potential effects. It is worth noting that a significantly larger proportion of firms that do not engage in imports and/or exports had no opinion or had not heard of the agreement. This suggests that the forward-looking firms tend to be those that are internationally oriented.

Fig. 2
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Firm Evaluation of Anticipated Effects of RCEP. Source: Author’s Survey

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Measuring supply chain linkages

To capture the firms’ supply chain linkages with RCEP member countries, the survey provided a list of countries both within and outside the RCEP membership and asked each firm manager whether or not the firm had sold products abroad (exported) or purchased goods from abroad (imported) from any of these in the last year.Footnote 6 Based on their answers to both questions, firms are divided into four types in Table 2. Out of the 569 firms, 176 (30.9%) are “non-traders,” having neither exported nor imported to RCEP countries in the previous year. Another 36 (6.3%) are “exclusive importers,” having imported products from RCEP countries to be either directly sold or used in the production of goods for the domestic market. Both types of firms do not have direct supply chain linkages with RCEP countries, as they do not engage in exports, though they might indirectly become part of the supply chains of exporters if they supply inputs for their production. Nevertheless, given that these firms conduct their business exclusively within the Chinese border, the theoretical discussion above suggests that they are less likely to expect benefits from RCEP than the next two types of firms.

Table 2 Trade profile of sampled firms with RCEP countries
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Firms that engage in exports are more likely to be directly embedded in GSCs, depending on what they sell to foreign markets. The 188 “exclusive exporters” (33%) that reported having exported but not imported in the previous year will have forward supply chain linkages with RCEP countries as long as they do not exclusively export final goods, with the linkage being stronger the more the firm exports intermediates and raw materials. These firms may also have backward supply chain linkages with RCEP countries if the inputs they use from exclusive importers contain foreign materials.

Finally, the remaining 169 firms (29.7%) reported having both exported and imported. Like exclusive exporters, these “traders” can have forward supply chain linkages with RCEP countries as long as they supply intermediates and raw materials to foreign producers. They can also have backward supply chain linkages with RCEP countries if their exports of final products contain imported parts and components, which can be from their own imports or from their suppliers that use imported materials. The processing firms ubiquitous in China fall into this category.

The above classification based on the import and export profile of firms provides a crude measure of the sample firms’ supply chain linkages with RCEP countries. For example, firms that only export final products are lumped together with firms that primarily export intermediate products and raw materials, but the former have no forward supply chain linkages, though it is possible that such firms can have backward linkages through their use of inputs sourced from domestic importers. Overall, therefore, it is reasonable to assume that exporters on average should be more embedded in GSCs than importers and firms not engaged in trade.

For firms that export to RCEP countries, it is possible to construct a more fine-grained measure of supply chain participation using a second set of questions in the survey that tap their degree of forward and backward supply chain linkages. First, the survey asked firms that have exported to indicate the share of intermediate products or raw materials in their exports. This value is then multiplied by the firm’s exports as a share of its total sales. The resulting quantity—the share of a firm’s intermediate exports in sales—can be regarded as an approximate measure of a firm’s degree of forward supply chain linkages.Footnote 7 Using a concrete example to illustrate, let us consider two textile firms in the sample: an SOE in Shandong (firm ID 13) and a foreign-invested firm in Beijing (firm ID 569). Both firms reported having exported in the previous year, which accounted for 30% and 80% of their respective annual sales. However, 50% of the exports of the Shandong firm were intermediate products, compared to only 10% in the case of the Beijing firm. The resulting forward GVC linkage of these firms is 15% and 8%, respectively. In other words, even though the Beijing firm exports more, it has weaker forward GVC linkage. This can be validated by examining the two firms’ primary products: cotton yarn (Shandong) and shirts (Beijing).

Second, the survey asked firms that had purchased goods from abroad the share of imported parts and components in their final products. These final products are either exported or sold on the domestic market, but only the former count toward the firm’s backward supply chain linkages. To compute this measure, I first calculate the share of a firm’s final exports in sales, which is then multiplied with the share of imported parts and components in final products to obtain the share of a firm’s final exports with foreign content in its sales, under the assumption that the final products for both foreign and domestic markets have the same amount of foreign content. Once again, to illustrate the calculation of this measure using two concrete examples from the survey, I use an SOE in Fujian (firm ID 118) and a private firm in Hebei (firm ID 132), both of which make electrical equipment. The Fujian firm reported that 39% of its annual sales were from exports, 27% of the exports were in intermediate goods, and imported intermediates accounted for 43% of its final products. For the Hebei firm, the three numbers are 42%, 32%, and 39%, respectively. The resulting backward supply chain linkage is 12.2% and 11.1%, respectively, because the latter reported a lower percentage of imported intermediates in the final products.

Figure 3 plots the distribution of the forward and backward supply chain measures for firms that export to RCEP countries. In the left panel, nearly a third of these firms only sell final products and thus do not have forward supply chain linkages, compared to firms who export more intermediate goods, including a few that almost exclusively export intermediates that may end up in products sold to RCEP countries. The right panel plots the measure of backward supply chain linkages for firms that both import and export (by definition, exclusive exporters do not have backward supply chain linkages). Like the measure of forward supply chain linkages, the distribution is skewed, with nearly half of the firms not using any of the imported parts and components for the final products they export. The theoretical discussion suggests that firms with higher forward and/or backward supply chain linkages should be more likely to have a favorable view of the RCEP.

Fig. 3
figure 3

Supply Chain Linkages with RCEP Countries in the Sample Firms. Note: Forward supply chain linkages are calculated for firms that export to RCEP countries (N = 357). Backward supply chain linkages are calculated for firms that both export to and import from RCEP countries (N = 169). Source: Author’s Survey

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Data analysis

I use the following equation to estimate the effects of global supply chains on firm evaluation of the potential benefits of the RCEP:

$$\mathit{\ln}\frac{p}{1-p}=\alpha +\beta G\mathrm{S}C+\theta X+\epsilon$$

The dependent variable is the firms’ responses to the question probing the likely impact of the RCEP, transformed into a binary measure, with “1″ indicating “positive impact” and “0″ otherwise.Footnote 8 The logit link function is used to model the probability of “positive impact” as a function of the covariates. The key independent variable (GSC) is the different measures of supply chain linkages described in the previous section. The vector X includes the following control variables that may influence the likelihood of the firm anticipating benefits from the RCEP (see Appendix 1 for the summary statistics and correlation matrix).

Firm size

Previous studies (e.g., Melitz 2003; Thacker 2000) have shown that larger firms are more likely to possess competitive edges in international markets, due to their greater ability to take advantage of economies of scale. Two measures are used to capture firm size. First, the number of employees the company employs across all locations is a categorical variable, from “fewer than 10 employees” to “more than 500 employees.” Second, the volume of the firm’s sales (in RMB) in the past year is measured on an eight-point scale, from “less than 5 million” to “200 million or more.”

Productivity

Theories of firm heterogeneity and trade (e.g., Bernard et al. 2007; Eaton et al. 2011; Melitz 2003) suggest that trade liberalization should raise average industry productivity through the reallocation of resources within the industry, leading highly productive firms to expand to enter the export market, less productive firms to produce only for the domestic market, and the least productive firms to exit the market. This logic suggests that more productive firms should expect to benefit disproportionally from preferential trade liberalization. Firm self-assessment of their productivity relative to that of other companies in the same industry is used to code this variable on a five-point scale—“significantly less productive,” “somewhat less productive,” “about the same,” “somewhat more productive,” and “significantly more productive.”

State ownership

Previous studies (e.g., Blanchard and Matschke 2015; Milner 1989) suggest that multinational corporations may be more likely to benefit from trade liberalization due to the costs that protectionism may impose on their intra-firm trade. In contrast, state-owned enterprises often have better access to financial support and enjoy preferential policies from the government, which make it easier for them to forgo the potential benefits from the FTA. To account for this possibility, I include a dummy variable for a firm’s ownership type that equals “1” if a firm is an SOE and “0” otherwise.

Region

Finally, I include two dummy variables corresponding to coastal and central provinces to account for the fact that firms in these provinces are more internationally oriented and thus more likely to take advantage of the RCEP.

Results

Table 3 presents the results from three logistic regression models with robust standard errors. Also included in all models but not reported are industry fixed effects to account for unobserved industry-specific heterogeneity. Model 1 includes the full sample of firms and the crude measures of supply chain linkages with RCEP countries, based on the firms’ reported import and export profiles, with the non-traders as the omitted baseline category. Consistent with the theoretical explanations, the coefficient estimates of the exclusive exporters and trading firms are both positive and statistically significant. Substantively, the average predicted probabilities of reporting a positive expected impact from the RCEP are 0.32 for the exclusive importers and non-traders, 0.44 for the exclusive exporters, and 0.54 for the trading firms.

Table 3 Global value chains and positive evaluation of the RCEP
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The fact that trading firms that both import and export and thus have more supply chain linkages are the most likely to expect a positive impact from the RCEP suggests that even among exporters traditionally understood as the main beneficiaries of trade liberalization, those that are more embedded in the GSCs expect to benefit even more. This can be further ascertained in Models 2 and 3, which take advantage of the more fine-grained forward and backward supply chain linkages with RCEP countries, respectively. Because these measures only apply to firms that export, the exclusive importers and non-traders are excluded from the analysis, leading to smaller sample sizes. Note that the sample size in Model 3 is even smaller, as the measure of backward supply chain linkage only pertains to firms that both import and export with RCEP countries. As expected, the effects of both forward and backward supply chain linkages are positive and statistically significant.

Figure 4 plots the predicted probabilities of a firm expecting a positive impact from the RCEP as a function of the forward and backward supply chain measures. These are calculated using the results from Models 2 and 3, with the rest of the control variables held at their mean or median. In both panels of Fig. 4, a firm with neither forward nor backward supply chain linkages with RCEP countries has about a four-in-ten chance of reporting that the RCEP would have a positive impact for its business, similar in magnitude to the results from Model 1. However, raising the forward and backward supply chain linkages to the highest value in the sample increases those probabilities substantially to 0.74 and 0.98, respectively.

Fig. 4
figure 4

Supply Chain Positions and Positive Evaluation of the RCEP. Note: The predicted probabilities and 95% confidence intervals are calculated using estimates from Models 2 and 3 in Table 1, with the control variables held at their mean or median

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Turning to the control variables in the models, I highlight two findings. First, consistent with existing studies, firm productivity is positive and statistically significant across all three models, indicating that the productive firms are more likely to report a positive impact. Second, the effect of firm size is ambiguous. The coefficient estimates of the two measures of firm size—employee and sales—have opposite signs, though they only reach statistical significance in the sample of trading firms (Model 3). However, given that the two measures are highly correlated (Spearman’s rho = 0.61), the combined effect is not significant. This suggests that firm size may not be as important a factor when it comes to the firm’s ability to benefit from the RCEP.

Conclusion

This paper has set out to examine the distribution of benefits from FTAs among firms with varying degrees of supply chain linkages with partner countries in the RCEP. Using an original survey of Chinese firms during the RCEP negotiations, I show that the more backward and forward supply chain linkages with RCEP countries a firm has, the more likely it is to anticipate a positive impact from the RCEP. These results suggest that the growing fragmentation of global production networks requires us to move beyond traditional theories of trade liberalization characterized by a simple dichotomy that pits export-oriented against import-competing firms.

The findings of this paper also contribute to the “new new trade theory,” which demonstrates that only the largest and most productive firms engage in international trading activities (Antràs and Helpman 2004; Bernard et al. 2007; Melitz 2003). While this study confirms these insights on firm heterogeneity with respect to productivity, the fact that the effects of supply chain linkages hold even among exporters suggests that another important dimension driving firm preferences is what products firms trade and what position they occupy in the global supply chains.

Although the survey was conducted in 2017, there is reason to believe that the conclusion should still hold today in a world rocked by the global pandemic and increased tensions between China and the United States. If anything, ongoing disruptions in the global supply chains would elevate the importance of regional supply chain integration, in turn amplifying the potential gains for firms already embedded in the supply chain networks of their FTA partners, as well as those actively seeking to create stronger and more resilient supply chains during these uncertain times.

Do GSC-embedded firms actually benefit from the RCEP now that the agreement has entered into effect? Because the firms responded to the survey on the basis of anonymity, it is not possible to go back and check whether the positive impacts they had anticipated have materialized. Nevertheless, there is suggestive evidence that this may indeed be the case. According to official reports, on the day RCEP went into force, the China Council for the Promotion of International Trade and its local branches issued 158 RCEP certificates of origin for 69 firms in 12 provinces across the country, mostly involving textile, chemical, and medical products, i.e., intermediate goods that form an integral part of the GSC. They included a backward-linked firm in Ningxia that produces methionine and a forward-linked firm that produces fabrics, both exporting to Japan (Gao and Feng 2022).

What broader policy implications can we draw for RCEP member countries hoping to benefit from an agreement that “enables businesses to consolidate their production across participating countries, leading to cost- and time-savings” (Ng 2020)? One key finding of this study is that such benefits may not accrue to firms equally, and those more deeply embedded in the supply chain networks with RCEP partners are more likely to capture such gains in trade. Therefore, when designing policy instruments and support programs to help firms tap the opportunities provided by the agreement, policymakers may want to cater to the different needs of firms, depending on their GSC positions, instead of using a “one-size-fits-all” solution.