Analyzing Effects of the Regional Comprehensive Economic Partnership on FDI in a Firm Heterogeneity CGE Framework

Qiaomin Li

No 330179, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: The RCEP (Regional Comprehensive Economic Partnership) is a free trade agreement (FTA) that is currently under negotiation among China and 15 Asian countries. It is another mega FTA in the Asia-Pacific region after the Trans-Pacific Partnership (TPP). This paper investigates the potential effect of the RCEP on foreign direct investment (FDI) with a focus on China through a computable general equilibrium (CGE) model. The CGE model is built on the extended theory of firm heterogeneity to FDI, which is able to capture the intensive margin and extensive margin of FDI increase. The RCEP is simulated to impact on FDI through a direct effect of FDI liberalization and an indirect effect of trade liberalization. Simulation results show that the RCEP will encourage FDI to China through its trade effect and the direct FDI effect. While the competition from imports drives out the least productive foreign invested firms, the export expansion of firms using FDI will lead to an increase in foreign investment. In addition, the facilitation of trade in intermediate goods tends to promote vertical FDI. The direct FDI effect from investment liberalization will evidently promote FDI from partners. As for the welfare effect, China will gain US$103~214 billion, accounting for 1.08~2.24% of GDP.

Keywords: International; Relations/Trade (search for similar items in EconPapers)
Pages: 64
Date: 2017
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Citations: View citations in EconPapers (10)

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