Bilateral Export and Import Determinants and Potential of Pakistan: A Gravity Model Approach

Abstract

The objective of this study is to analyze Pakistan’s bilateral export and import determinants and potential with major trading partners as well as border sharing countries. The study uses augmented gravity model and utilizes the panel data of thirty eight major trading partners of Pakistan from 2000 to 2013 at annual frequency. General to specific approach is used to determine the determinants with random effect model, while the final models are used to compute the trade potentials. Bilateral export determents of Pakistan are GDP of partner country, per capita GDP differential, distance, import openness of partner country, inflation rate in importing country, exchange rate, and common language. Pakistan has highest export potential with Switzerland and Hungary, while exhausted its potential with Sri Lanka, Bangladesh and UAE. Bilateral import determinants of Pakistan are GDP of home country and partner country, distance, export openness of the partner country, trade openness of Pakistan, and inflation rate in Pakistan. Pakistan has highest import potential with Norway followed by Philippines, Portugal and Greece, while Pakistan has exhausted its import potential with Malaysia, Indonesia and Kuwait. In case of border sharing countries, Pakistan has exhausted both export and import potential with China, while with India import potential is exhausted but export potential exists, and large export and import potential exists with Iran. Government must tailor policies to utilize the untapped export and import potential of Pakistan with trading partners as well as border sharing countries.