An empirical analysis of Pakistan’s bilateral trade and trade potential with China: A gravity model approach

Abstract

The decades-long history of friendly relationship in both countries bore the fruits in the form of Pakistan–China free-trade agreement (PCFTA) in 2006. This paper aims to estimate Pakistan’s bilateral trade potential with China by employing gravity model of trade in a panel data set covering the period 1992–2015. In an attempt to obtain unbiased results we have utilized various estimation methods as suggested by the recent empirical literature on gravity equation to acquire the maximum variation in results. The results from EGLS, REM, two-stage EGLS, GMM, Tobit and PPML have shown that Pakistan’ bilateral trade with all FTA partner countries is positively affected by GDPs, religion, WTO, trade openness in both countries and the common border; whereas negatively affected by geographical distance and inflation. It is also stated that common language and (Trade Agreements) PTA found to be pessimistically exaggerated bilateral trade of Pakistan with FTA partners. The overall PTA effect is negative and highly significant albeit we have found immense trade potential of Pakistan in case of China by most of the estimation techniques. The industry of Pakistan and exporters should adopt new measures to boost and diversify the exports to China and to bring about a reasonable equality in mutual trading relations.