The mechanism of rules of origin in regional free trade agreements will affect regional value chains. This paper estimates the economic effect of rules of origin under oligopoly market assumption, and finds that the inaction of RCEP will lead to an increase in the import volume from member countries for auto firms, and export trade shares will reallocate from noncompliant firms towards compliant firms under RCEP. The reallocation effect will squeeze markups charged by big firms, lowering average markups in destination markets. It concludes that RCEP will exert a pro-competitive effect among member countries which are chosen as destination markets.

Unlike other regional free trade agreements, RCEP allows auto manufacturers to accumulate their value of originating materials. The origin of final goods can be determined under RCEP by considering the 15 member countries as one economic region. If the RCEP member country processes intermediate inputs originating from other member countries, the intermediate inputs will be regarded as originating from the processing country. And the auto production member country can accumulate the previous material value of other member countries when calculating the value of originating materials of auto goods. All 15 member countries can collaborate as trade partners in the auto industry. The restriction of rules of origin in RCEP calls for over 40% value of originating materials from member countries. The material value components from any RCEP member country can be accumulated in the material value of the final production member country.

This paper uses empirical analysis and quantitative models to highlight the impact of rules of origin in RCEP on market competition. The results show that compliant firms with the restriction of rules of origin in RCEP will reallocate import shares towards member countries with preferential tariff treatment. Small compliant firms will primarily choose to export to member countries when they import intermediate inputs mainly from member countries. Big auto manufacturers as noncompliant firms will gain less trade shares due to variable trade costs, while small auto compliant manufacturers will gain more trade shares in destination markets with preferential tariff treatment. The average markups charged by export firms will decrease due to the reallocation of trade shares.

This paper contributes to the existing literature regarding market competition. It incorporates oligopoly market assumption into the quantitative analysis, which is insightful for negotiation among feasible mechanisms in regional free trade agreements. The analysis can be extended to industries other than auto, and the economic effects exerted by various regional free trade agreements can be compared.