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

Figures & data

Table 1. Pakistan total imports and exports to world and China (million US$)

Year	Pak export to China	Pak import from China	Pak export to World	Pak import from World	Total trade deficit	(%) Pak import share China	(%) Pak export share in China
1992	540	420	7,351	9,423	−2,072	4.46	7.35
1993	599	436	6,720	9,545	−2,825	4.57	8.91
1994	340	475	7,400	8,931	−1,531	5.32	4.59
1995	121	515	8,029	11,515	−3,486	4.47	1.51
1996	118	574	9,365	12,189	−2,824	4.71	1.26
1997	158	584	8,758	11,650	−2,892	5.01	1.80
1998	422	154	8,514	9,333	−819	1.65	4.96
1999	446	180	8,424	10,207	−1,783	1.76	5.29
2000	550	244	9,028	10,864	−1,836	2.25	6.09
2001	487	289	9,238	10,191	−953	2.84	5.27
2002	698	236	9,913	11,233	−1,320	2.10	7.04
2003	259	957.33	11,930	13,038	−1,108	7.34	2.17
2004	300	1,488.8	13,379	17,949	−4,570	8.29	2.24
2005	435	2,349.4	16,051	25,357	−9,306	9.27	2.71
2006	506	2,914.9	16,930	29,825	−12,895	9.77	2.99
2007	613	4,164.3	17,829	32,590	−14,761	12.78	3.44
2008	726	4,738	20,323	42,329	−22,006	11.19	3.57
2009	997	3,780	17,523	31,668	−14,145	11.94	5.69
2010	1,435	5,247.7	21,410	37,807	−16,397	13.88	6.70
2011	1,678	6,470.6	25,383	44,012	−18,629	14.70	6.61
2012	2,619	6,687.6	24,567	44,105	−19,538	15.16	10.66
2013	2,652	6,626.3	25,121	44,647	−19,526	14.84	10.56
2014	2,252	9,588.4	24,706	47,434	−22,728	20.21	9.12
2015	1,934	11,079	22,188	44,219	−22,031	25.05	8.72

Source: Author’s own calculation based on UN COMTRADE statistics.

Table 2. Demonstrates the variables, expected signs and data sources

Variable	Value	Sign	Source
Bilateral trade volume	USD thousands		UN Comtrade Database/Pakistan Bureau of Statistics
Gross domestic product (GDP) Pakistan, partner	USD thousands	+	World Development Indicators (2016)
Distance (TC)	Kilometer	−	CEPII and  http://www.indo.com/distance/
Inflation Pakistan (i), partner (j)	Proxy (% of GDP deflator)	−	World Development Indicators (2016)
Trade openness (trade/GDP) Pakistan, partner	Ratio	+	UN Comtrade Database/Pakistan Bureau of Statistics, World Development Indicators (2016)
Religion (Dummy), (Islam)	0,1	+	CIA (The World fact book)
Language (Dummy), (English)	0,1	+	CIA (The World factbook)
Common border/adjacency (Dummy)	0,1	+	World atlas website  http://www.worldatlas.com/
WTO (dummy)	0,1	+	World Trade Organization
Preferential trade agreements (PTAs) dummy	0,1	+	Asia Regional Integration Center https://aric.adb.org/fta-country

Table 3. Pesaran’s (2004) CD test

Variables	Pesaran’s CD test	Prob.
Bilateral trade volume	43.20	0.00
Product of GDPs	82.19	0.00
Inflation	39.48	0.00
T-openness Pakistan	84.85	0.00
T-openness partner	9.92	0.00

Source: Authors’ compilation from STATA 14.0.

Table 4. Results of gravity model (dependent variable: total trade of Pakistan with FTA partner country)

Independent variable	EGLS^a	REM	Two-stage EGLS^a	GMM^a,b	Tobit	PPML^c
Constant	−19.93***	−14.06***	−17.62***	−19.93***	−17.62***	−12.45***
	(0.655)	(2.99)	(0.96)	(0.65)	(1.13)	(1.40)
Product of GDPs	0.83***	0.59***	0.77***	0.83***	0.77***	0.65***
	(0.013)	(0.05)	(0.02)	(0.01)	(0.02)	(0.04)
Trade cost	−0.2***	0.25	−0.21***	−0.2***	−0.21**	−0.15**
	(0.056)	(0.31)	(0.08)	(0.05)	(0.08)	(0.07)
Inflation	−0.1**	−0.1***	−0.19***	−0.07***	−0.19***	−0.20***
	(0.029)	(0.03)	(0.06)	(0.03)	(0.04)	(0.04)
T-openness Pakistan	2.61***	2.93**	4.29**	2.61***	4.29**	6.98**
	(0.711)	(1.25)	(1.91)	(0.71)	(1.86)	(1.42)
T-openness partner	1.01***	0.70***	0.79***	1.01***	0.79***	0.70***
	(0.115)	(0.23)	(0.18)	(0.11)	(0.21)	(0.15)
Religion	0.78***	0.55*	0.62***	0.78***	0.62***	0.31***
	(0.062)	(0.60)	(0.06)	(0.06)	(0.13)	(0.11)
Language	−0.22***	0.21	−0.19***	−0.22***	−0.19	−0.20**
	(0.057)	(0.56)	(0.06)	(0.06)	(0.12)	(0.09)
Border	1.61***	2.53***	2.04***	1.60***	2.04***	0.51***
	(0.140)	(0.77)	(0.17)	(0.14)	(0.19)	(0.15)
WTO	1.26***	0.18*	1.16***	1.26***	1.16***	0.01**
membership	(0.122)	(0.19)	(0.11)	(0.12)	(0.17)	(0.13)
Trade agreements	−0.80***	−0.32**	−0.80***	−0.8***	−0.81***	−0.05
	(0.097)	(0.14)	(0.17)	(0.10)	(0.13)	(0.13)
Diagnostic test
R-squared	0.87	0.43	0.72	0.87	–	0.88
SE of regression	1.31	0.87	1.38	1.31	1.38	–
F-statistic (Prob.)	389.623	43.67	154.35	–	–	–
	(0.00)
Durbin-Watson	0.56	1.11	0.49	0.56	–	–
Mean absolute error	1.06	0.55	1.08	1.06	1.08	–
Bias proportion	0.00	0.00	0.00	0.00	0.00	–
Variance proportion	0.08	0.03	0.08	0.08	0.08	–
Pseudo log-likelihood	–	–	–	–	–	−77,860,401

Source: Authors’ estimation.

Notes: ***, **, and * indicate significant at 1%, 5% and 10% respectively.

^a White cross-section standard errors & covariance.

^b With Cross-section weights.

^c Dependent variable in level.

Figure 1. Results for Pakistan’s trade potential with China.

Source: Authors estimation based on gravity equation 4 results.

Figure A. Pakistan’s trade with world and FTA countries and percentage share (US$ million).

Source: Authors’ own calculation based on UN Comtrade database and ITC trade map 2017.

Appendix A1. Pakistan’s free-trade agreements with Regional trading blocs and specific countries

Signed	In effect	Trading blocs	Countries
2003–07	2008–01	Economic Cooperation Organization (ECO)	Afghanistan, Azerbaijan, Iran, Kazakhstan, Kyrgyzstan, Pakistan, Tajikistan, Turkey, Turkmenistan, Uzbekistan
2006–07	2009–06	MERCOSUR Preferential Trade Agreement	Argentina, Brazil, Pakistan, Paraguay, Uruguay
2006–05	2011–08	Preferential Tariff Arrangement-Group of Eight Developing Countries (PTA-D8)	Bangladesh, Egypt, Indonesia, Iran, Malaysia, Nigeria, Pakistan, Turkey
2004–01	2006–01	South Asian Free Trade Area (SAFTA)	Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka
Signed	In effect	Country
2006–11	2007–07	China
2012–02	2013–09	Indonesia
2007–11	2008–01	Malaysia
2007–07	2007–11	Mauritius
2002–08	2005–06	Sri Lanka
2003–06	2003–06	USA
2004–04	2006–09	Iran

Source: Asian Regional Integration Center, Asian Development Bank.

Appendix A2. Pakistan’s historical trade share with FTA countries in terms of US$ million

Country	Exports			Imports
	1995	2005	2015	1995	2005	2015
Afghanistan	20	1,064	1,722	15	53.2	957.3
Argentina	10	35	53	65	69	441
Azerbaijan	5	2	42	0.001	1.1	0.04
Bangladesh	155	142	700	36	37	60.2
Brazil	58	12	56	108	323	260
China	121	435	1,934	515	2,349.5	11,079
Egypt	46	52	134	37	124.6	125.41
India	40	337	312	82	576.7	1,669.3
Indonesia	108	68	141	119	684	2,041.8
Iran	125	178	32	191	363	261
Kazakhstan	8.12	10	13	2.1	1	3.7
Kyrgyzstan	0.05	2.1	1	0.001	0.04	0.06
Malaysia	47	67	186	988	731	991
Maldives	1.4	3	8	0.2	3.4	3
Mauritius	16.55	34	22	2.1	1	61
Nepal	3	3.6	2.3	0.5	2.6	0.4
Nigeria	11	51	50	1	11	33
Paraguay	2.2	4.1	8.7	0.07	0.5	4.4
Sri Lanka	56	154	260	51	59.2	72.2
Tajikistan	4.7	2	4	1.3	7.4	0.1
Turkey	80	299	235	70	186.8	205.2
Turkmenistan	2.1	1	8.2	0.4	11.5	14.7
United States	1,230	3,979	3,661	1,093	1,531	1,916.8
Uruguay	0.8	3	15	0.24	1.4	3
Uzbekistan	36	2.3	2	3.4	11.6	1.2
Total	8,029	16,051	22,089	11,515	25,357	43,795

Source: Authors’ compilation based on UN COMTRADE data 2017.

Appendix A3. Pakistan trade composition with the world in the year 2015 (US$ million)

HS-code	Product group	Imports	HS-code	Product group	Exports
27’	Mineral fuels	10,030	52’	Cotton	4,040
84’	Machinery	4,069	63’	Textile articles	3,760
85’	Electrical machinery	3,802	61’	Articles of apparel-clothing (knitted)	2,360
72’	Iron and steel	2,552	62’	Articles of apparel-clothing	2,127
39’	Plastics	1,933	10’	Cereals	1,942
29’	Organic chemicals	1,864	42’	Leather	688
15’	Animal/vegetable fats and oils	1,853	25’	Salt-sulphur-stones	508
87’	Vehicles other than railway	1,745	41’	Raw hides and skins	425
31’	Fertilizers	1,008	08’	Edible fruit and nuts	415
12’	Oil seeds and oleaginous fruits	785	90’	Optical, photographic, precision	369
All	Total	43,989	All	Total	22,089

Source: Authors’ compilation based on UN COMTRADE data 2017.

Appendix A4. Pakistan trade composition with China in the year 2015 (US$ million)

HS-code	Product group	Imports	HS-code	Product group	Exports
85’	Electrical machinery	3,364	52’	Cotton	1,262
84’	Machinery	2,940	10’	Cereals	167
72’	Iron and steel	1,061	22’	Beverages	88
29’	Organic chemicals	636	26’	Ores, slag and ash	71
54’	Man-made filaments	556	25’	Salt, sulphur, stone	48
73’	Articles of iron or steel	525	03’	Fish and Crustaceans	46
87’	Vehicles other than railway	398	41’	Rawhides and skins	42
39’	Plastics	364	74’	Cooper and articles thereof	28
55’	Man-made staple fibres	307	08’	Edible fruit and nuts	27
31’	Fertilizers	300	63’	Textile articles	27
All	Total	13,680	All	Total	1,935

Source: Authors’ compilation based on UN COMTRADE data 2017.

Appendix A5. Descriptive statistics of variables used in gravity equation

	Mean	Median	Maxi-mum	Mini-mum	Std. Dev.	Jarque-Bera	Probabi-lity	Sum	Sum Sq. Dev.
Bilateral trade	10.85	11.11	16.38	0.69	2.61	10.14	0.00	6,514	4,068
Product of GDPs	36.26	36.22	43.02	30.26	2.61	9.71	0.01	2,1758	4,097
Trade cost	8.02	8.1	9.66	5.92	1.06	23.46	0.00	4,814	679
Inflation	4.4	4.35	10.34	−1.23	1.68	0.52	4.88	2,643	1,699
T-openness Pakistan	0.31	0.32	0.38	0.24	0.03	0.05	0.97	187.9	0.55
T-openness partner	0.55	0.44	1.92	0.12	0.34	459.6	0.00	328	69
Religion	0.6	1	1	0	0.49	100.7	0.00	360	144
Language	0.28	0	1	0	0.45	123	0.00	168	120.96
Border	0.16	0	1	0	0.37	395.9	0.00	96	80.6
WTO membership	0.68	1	1	0	0.48	108.49	0.00	407	130.9
Trade agreements	0.34	0	1	0	0.47	104.96	0.00	205	134.95

Pesaran, M. H. (2004), General diagnostic tests for cross section dependence in panels, IZA Discussion Paper No. 1240, Retrieved from: http://repec.iza.org/dp1240.pdf

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