Daas Yochid,
The Shulchan Aruch doesn’t mention shok b’isha erva, because, as the Bais Yosef explains (Orech Chaim 75), that is only an example of a makom mechusa that I might have thought was not considered a makom mechusa (the Bais Yosef cites the very Rashba you cited). The way the Bais Yosef read the Gemara in Brochos, there is one klal, makomos that are normally covered are erva when uncovered. But it depends on what is normally covered and that will change based on the tznius standards of the time and place. This all presumes that the issur for krias shema parallels an issur of incidental histaklus (which is against the pashtus of the Gemara and the Shulchan Aruch). As you wrote, intentional histaklus is assur for even parts that are normally uncovered.
On the other hand, the Mishnah Berurah does understand the Gemara in Berachos to be delineating a base line of what must be covered, and that is why shok is singled out (albeit with a more meikel definition of shok). While the Mishnah Berurah’s position has become the presumption in the Yeshiva world, one can’t say that it is wrong to rely on the Shulchan Aruch.
The Gemara in Kesubos is setting forth the minhag of tznius (aka Daas Yehudis) at the time, which included arms. To break Daas Yehudis is certainly assur, but as a minhag its parameters can change over time. Short sleeves were common even in Bais Yaakov’s in the 40s.
My point is not that the MO communities that wear short sleeves and shorts are doing the best thing, but rather that they have solid halachic ground to rely upon.