Analyzing Pakistan's Export Performance to China Under the FTA: Does Tariff Recession Matter?
Zeeshan Iqbal
College of Economics and Management, Beijing University of Technology, Beijing 100124 China.
Shahzad Ahmad
College of Customs Administration, School of Government, University of International Business and Economics, Beijing, China
Imad Ahmad
College of Customs Administration, School of Government, University of International Business and Economics, Beijing, China
DOI: https://doi.org/10.59429/ff.v3i1.12000
Keywords: Gravity model; China-Pakistan; free trade agreements; tariff recession.
Abstract
The China-Pakistan FTA, contracted in 2006, has significantly influenced the dynamics of bilateral trade among China and Pakistan. Established on aggregated panel data of 150 commodities from 2007 and 2023, this paper examines the effect of tariff reduction and trade facilitation costs of Pakistani exports to China according to the offer list offered by China. The gravity model and advanced econometric techniques are used, and it has been identified that the FTA and trade reduction models positively affected Pakistan's export trajectory. Additionally, trade improvements were initiated by reducing trade facilitation costs for Exports and imports per container. The recommendations in this study considered ways to best realize the advantages of the FTA by decreasing trade barriers and capitalizing on industrial competitiveness, along with the Belt and Road Initiative (OBOR), especially for Pakistan, to promote their domestic industries. Such results provide policymakers with insights for improving bilateral trade ties and resolving the current trade imbalance.
References
1.J. E. Anderson, “The Gravity Model,” Annu Rev Econom, vol. 3, no. 1, pp. 133–160, 2011, doi: 10.1146/annurev-economics-111809-125114.
2.J. E. Anderson and E. van Wincoop, “Gravity with Gravitas: A Solution to the Border Puzzle,” American Economic Review, vol. 93, no. 1, pp. 170–192, 2003, doi: 10.1257/000282803321455214.
3.A. Masood, S. Ullah, Y. Tahira, and M. Aslam, “Impact of China-Pakistan Regional Trade Agreement on Pakistan’s Exports: An Analysis Using Gravity Trade Model,” Pakistan Journal of Applied Economics, vol. 31, no. 1, pp. 99–112, 2021.
4.S. Shabir and R. Kazmi, “Economic Effects of the Recently Signed Pak-China Free Trade Agreement,” THE LAHORE JOURNAL OF ECONOMICS, vol. 12, no. Special Edition, 2007, doi: 10.35536/lje.2007.v12.isp.a9.
5.T. Chaudhry, N. Jamil, and A. Chaudhry, “Pakistan ’ s Experience with the Pak istan – China FTA : Lessons for CPEC,” The Lahore Journal of Economics, vol. 22, no. September, pp. 1–24, 2017.
6.S. H. Shah, M. A. Kamal, and D. L. Yu, “Did China‐Pakistan free trade agreement promote trade and development in Pakistan?,” International Journal of Finance & Economics, vol. 27, no. 3, pp. 3459–3474, 2022.
7.R. C. Feenstra and G. H. Hanson, “Foreign direct investment and relative wages: Evidence from Mexico’s maquiladoras,” J Int Econ, vol. 42, no. 3–4, pp. 371–393, 1997, doi: 10.1016/s0022-1996(96)01475-4.
8.S. L. Baier and J. H. Bergstrand, “Do free trade agreements actually increase members’ international trade?,” J Int Econ, vol. 71, no. 1, pp. 72–95, 2007, doi: 10.1016/j.jinteco.2006.02.005.
9.F. Peng, L. Kang, T. Liu, J. Cheng, and L. Ren, “Trade Agreements and Global Value Chains: New Evidence from China’s Belt and Road Initiative,” Sustainability, vol. 12, no. 4, p. 1353, 2020, doi: 10.3390/su12041353.
10.T. Theresa, N. Jamil, and A. Chaudhry, “Pakistan’s Experience with the Pakistan–China FTA: Lessons for CPEC,” THE LAHORE JOURNAL OF ECONOMICS, vol. 22, no. Special Edition, pp. 1–24, 2017, doi: 10.35536/lje.v22.isp.a1.
11.G. Grossman and E. Helpman, “The Politics of Free Trade Agreements,” National Bureau of Economic Research, 1993. doi: 10.3386/w4597.
12.P. I. Levy and B. P. I. Levy, “A Political-Economic Analysis of Free-Trade Agreements,” vol. 87, no. 4, pp. 506–519, 2014.
13.S. L. Baier and J. H. Bergstrand, “Do free trade agreements actually increase members’ international trade?,” J Int Econ, vol. 71, no. 1, pp. 72–95, 2007, doi: 10.1016/j.jinteco.2006.02.005.
14.2023 Shafiq et al., “ANALYZING THE CHINA-PAKISTAN FREE TRADE AGREEMENT: IMPLICATIONS AND LESSONS FOR PAKISTAN’S FUTURE FREE TRADE AGREEMENTS,” Russian Law Journal, 2023, doi: 10.52783/rlj.v11i6.4188.
15.A. Masood, S. Ullah, Y. Tahira, and M. Aslam, “Impact of China-Pakistan Regional Trade Agreement on Pakistan’s Exports: An Analysis Using Gravity Trade Model,” Pakistan Journal of Applied Economics, vol. 31, no. 1, pp. 99–112, 2021.
16.J. S. Wilson, C. L. Mann, and T. Otsuki, “Trade facilitation and economic development: measuring the impact,” World Bank Policy Research Working Paper, vol. 2988, no. 2005, pp. 841–869–841–869, 2003, [Online]. Available: http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID636350_code384013.pdf?abstractid=636350&
17.B. Hoekman and B. Shepherd, “Who profits from trade facilitation initiatives? Implications for African countries☆,” Journal of African Trade, vol. 2, no. 1–2, p. 51, 2015, doi: 10.1016/j.joat.2015.08.001.
18.M. Saeed, “The WTO Trade Facilitation Agreement : Implications for Pakistan ’ s D omestic Trade Policy Formulation,” The Lahore Journal of Economics, vol. 19, no. September, pp. 439–460, 2014.
19.Q. H. Hamid Mukhtar, “A CRITICAL ANALYSIS OF CHINA-PAKISTAN FREE TRADE AGREEMENT: LEARNING EXPERIENCES FOR PAKISTAN WITH RESPECT TO ITS FUTURE FTAs,” Global Journal of Politics and Law Research, vol. 7, no. 9, pp. 863–871, 2017, [Online]. Available: (www.eajournals.org)
20.M. S. Irshad, “Pakistan-China Free Trade Agreement (PCFTA) Treaty Model: Capability, Prospects and Disputes,” SSRN Electronic Journal, 2015, doi: 10.2139/ssrn.2690798.
21.A. R. Malik, “The Pakistan-China Bilateral Trade: The Future Trajectory,” Strategic Studies, vol. 37, no. 1, pp. 66–89, 2017, doi: 10.53532/ss.037.01.00231.
22.J. Du and Y. Zhang, “Does One Belt One Road initiative promote Chinese overseas direct investment?,” China Economic Review, vol. 47, pp. 189–205, 2018, doi: 10.1016/j.chieco.2017.05.010.
23.L. Ali, S. J. Shah, K. BiBi, S. Khan, J. Mi, and M. Shah, “The Potential Socio-Economic Impact of China Pakistan Economic Corridor,” Asian Development Policy Review, vol. 5, no. 4, pp. 191–198, 2017, doi: 10.18488/journal.107.2017.54.191.198.
24.H. Khan, Y. Chen, and L. Lv, “Does the China–Pakistan free trade agreement benefit the vegetable exports of Pakistan? A gravity estimation,” Front Sustain Food Syst, vol. 8, 2024, doi: 10.3389/fsufs.2024.1362910.
25.T. Zhai, “Environmental Challenges, Opportunities, and Policy Implications to Materialize China’s Green Belt and Road Initiative,” Sustainability, vol. 13, no. 18, p. 10428, 2021, doi: 10.3390/su131810428.
26.A. Deardorff, “Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?,” National Bureau of Economic Research, 1995. doi: 10.3386/w5377.
27.A. Abbas, A. Rauf, and S. Mumtaz, “Evaluating the effect of tariff and non-tariff barriers on exports in the pre and post China-pak free trade agreement (FTA) period,” NUST Journal of Social Sciences and Humanities, vol. 9, no. 2, pp. 156–173, 2023.
28.M. Malcolm, “Do local exports impact congressional voting on free trade agreements?,” Econ Lett, vol. 154, pp. 31–34, 2017, doi: 10.1016/j.econlet.2017.02.018.
29.F. J. Contractor, “Assessing the economic impact of tariffs: adaptations by multinationals and traders to mitigate tariffs,” Review of international business and strategy, vol. 35, no. 2/3, pp. 190–213, 2025.
30.M. Zreik, “The Belt and Road Initiative: Vision, Objectives, and Complexities,” in Qatar’s Role in China’s Belt and Road Initiative: Bridging Two Economic Titans, Springer, 2025, pp. 25–54.
31.J. A. Frankel and D. Romer, “Does Trade Cause Growth?,” American Economic Review, vol. 89, no. 3, pp. 379–399, 1999, doi: 10.1257/aer.89.3.379.
32.M. H. Pesaran, “Testing Weak Cross-Sectional Dependence in Large Panels,” Econom Rev, vol. 34, no. 6–10, pp. 1089–1117, 2015, doi: 10.1080/07474938.2014.956623.
33.M. H. Pesaran, “A simple panel unit root test in the presence of cross‐section dependence,” Journal of Applied Econometrics, vol. 22, no. 2, pp. 265–312, 2007, doi: 10.1002/jae.951.
34.A. Chudik and H. Pesaran, “Large panel data models with cross-sectional dependence: a survey,” 2015.
35.B. H. Baltagi, Q. Feng, and C. Kao, “A Lagrange Multiplier test for cross-sectional dependence in a fixed effects panel data model,” J Econom, vol. 170, no. 1, pp. 164–177, 2012, doi: 10.1016/j.jeconom.2012.04.004.
36.J. E. Anderson and E. van Wincoop, “Gravity with Gravitas: A Solution to the Border Puzzle,” American Economic Review, vol. 93, no. 1, pp. 170–192, 2003, doi: 10.1257/000282803321455214.
37.M. H. Pesaran, “A simple panel unit root test in the presence of cross‐section dependence,” Journal of Applied Econometrics, vol. 22, no. 2, pp. 265–312, 2007, doi: 10.1002/jae.951.
38.R. C. Feenstra and G. H. Hanson, “Foreign direct investment and relative wages: Evidence from Mexico’s maquiladoras,” J Int Econ, vol. 42, no. 3–4, pp. 371–393, 1997, doi: 10.1016/s0022-1996(96)01475-4.
39.J.-F. Arvis, Y. Duval, B. Shepherd, and C. Utoktham, “Trade costs in the developing world: 1995-2010,” ARTNeT working paper series, 2012.
40.J. Du and Y. Zhang, “Does One Belt One Road initiative promote Chinese overseas direct investment?,” China Economic Review, vol. 47, pp. 189–205, 2018, doi: 10.1016/j.chieco.2017.05.010.
41.J. S. Wilson, C. L. Mann, and T. Otsuki, “Trade Facilitation and Economic Development: A New Approach to Quantifying the Impact,” World Bank Econ Rev, vol. 17, no. 3, pp. 367–389, 2003, doi: 10.1093/wber/lhg027.
42.F. Peng, L. Kang, T. Liu, J. Cheng, and L. Ren, “Trade Agreements and Global Value Chains: New Evidence from China’s Belt and Road Initiative,” Sustainability, vol. 12, no. 4, p. 1353, 2020, doi: 10.3390/su12041353.
43.S. L. Baier and J. H. Bergstrand, “Do free trade agreements actually increase members’ international trade?,” J Int Econ, vol. 71, no. 1, pp. 72–95, 2007, doi: 10.1016/j.jinteco.2006.02.005.
44.B. Hoekman and B. Shepherd, “Who profits from trade facilitation initiatives? Implications for African countries☆,” Journal of African Trade, vol. 2, no. 1–2, p. 51, 2015, doi: 10.1016/j.joat.2015.08.001.
45.A. L. I. H. SALEEM, “TRADE DEFICIT WITH CHINA: REALISING GAINS FOR PAKISTAN,” INSTITUTE OF REGIONAL STUDIES ISLAMABAD, vol. 38, no. 3, pp. 99–114, 2020.
46.S. H. Shah, M. A. Kamal, and D. L. Yu, “Did China‐Pakistan free trade agreement promote trade and development in Pakistan?,” International Journal of Finance & Economics, vol. 27, no. 3, pp. 3459–3474, 2022.
47.C. M. A. van der Ven, “Trade, development and industrial policy in Africa: the case for a pragmatic approach to optimizing policy coherence between industrial policy and the WTO policy space,” Law and Development Review, vol. 10, no. 1, pp. 29–80, 2017.
48.A. Abbas, A. Rauf, and S. Mumtaz, “Evaluating the effect of tariff and non-tariff barriers on exports in the pre and post China-pak free trade agreement (FTA) period,” NUST Journal of Social Sciences and Humanities, vol. 9, no. 2, pp. 156–173, 2023.