Welfare Effects of Regional Trade Agreements: A Gravity Model-Based Study of RCEP and AfCFTA
Economists often use the gravity model to examine how regional trade agreements affect trade flows and economic welfare. This model predicts trade between countries based on their economic sizes and distances. Researchers apply it to study mega-regional deals like the Regional Comprehensive Economic Partnership (RCEP) and the African Continental Free Trade Area (AfCFTA). These agreements aim to reduce tariffs and barriers. They also promote deeper integration across large regions.
RCEP brings together 15 Asia-Pacific countries. It covers a huge share of global GDP and population. Studies using gravity and general equilibrium models show positive welfare gains for most members. South Korea often records the largest benefits. Australia, Japan, New Zealand, and ASEAN countries also gain significantly. China experiences smaller but still positive improvements in trade and welfare.
Moreover, RCEP lowers trade costs through tariff reductions and better rules. As a result, intra-regional trade rises. Real wages increase across member countries. Services liberalization adds extra gains because services trade responds strongly to lower barriers. Some models estimate welfare increases of up to 1 percent or more in certain scenarios, with larger effects over time as supply chains adjust.
However, gains vary by country. Smaller or less developed members sometimes benefit more in percentage terms due to greater market access. Non-members may face trade diversion. Their exports to RCEP countries can decline slightly. Overall, global welfare still rises because trade creation outweighs diversion.
In contrast, AfCFTA aims to unite 55 African countries. It creates one of the world’s largest free trade areas by population. Gravity model estimates suggest it can boost intra-African trade by 19 to 24 percent or more. This increase comes mainly from tariff elimination and reduced non-tariff barriers.
Furthermore, AfCFTA generates welfare gains for the continent as a whole. Trade creation helps consumers access cheaper goods. It also supports producers through larger markets. Yet gains remain modest in many simulations. GDP may rise by less than 1 percent in some countries. Tariff revenue losses affect governments in the short run. South-South trade faces challenges such as similar production structures and weak infrastructure.
Additionally, researchers combine gravity models with computable general equilibrium (CGE) frameworks. These approaches capture both direct trade effects and indirect impacts on production, employment, and prices. For AfCFTA, welfare improvements often concentrate in countries with low initial intra-African trade. Trade facilitation measures, such as faster customs and better logistics, amplify the benefits far more than tariff cuts alone.
Both agreements show clear trade-creation effects inside the blocs. However, they also create some trade diversion from non-members. RCEP delivers larger absolute welfare gains because of higher baseline trade volumes and deeper supply chain integration in Asia. AfCFTA holds greater long-term potential for structural transformation in Africa. It can shift economies toward manufacturing and services if countries invest in infrastructure and reduce non-tariff barriers.
Nevertheless, several challenges limit full benefits. Implementation gaps, political hurdles, and infrastructure deficits slow progress, especially in Africa. Complementary policies matter greatly. These include investment in roads, ports, digital systems, and skills development. Without them, welfare gains stay smaller than expected.
In summary, gravity model-based studies confirm that RCEP and AfCFTA improve welfare for participating countries. RCEP provides quicker and larger gains due to Asia’s established trade networks. AfCFTA offers important opportunities for African integration but requires stronger support measures. Policymakers should focus on reducing non-tariff barriers and building productive capacity. This approach will help maximize welfare effects and ensure more inclusive growth across both regions. Future research can track actual outcomes as these agreements mature.