The International Growth Centre (IGC)

Date : Apr 2013 - Jun 2013

<div><p>Executive Summary Neighboring countries engage in considerable trade with each other using land transportation. Pakistan shares a common border with two large emerging economies, China and India. However, the land route accounts for only a small fraction of the total trade between China and Pakistan. This is because, until recently, there were no feasible low cost land routes for transportation of goods between the two countries. There are well developed land routes between Pakistan and India, but high tariff and nontariff barriers arising from strained relations have significantly impeded Pakistan-India trade. Trade with other neighboring countries, Afghanistan and Iran, has also been hampered by conflict in Afghanistan and strife in tribal areas and Baluchistan. Historically important east-west trade routes connecting India with central Asia and China passed though Pakistan. These routes are no longer used and Pakistan has relied largely on international trade by sea through the port of Karachi. Expansion of east-west trade presents a great opportunity for Pakistan to increase its economic growth (Nabi, 2013). There has been much interest in exploring the effect of trade liberalization with India (Pakistan Business Council report, 2013). The recent China-Pakistan Economic Corridor (CPEC) project has also stimulated interest in the potential for the expansion of overland trade with China.</p> <p>Pakistan faces high barriers to international trade across its eastern as well as western and north-western borders. Historically important east-west trade routes connecting India with central Asia and China passed though Pakistan. However, strained relations with India, war and political instability in Afghanistan, lack of development of transportation infrastructure for land routes to China, and strife in tribal areas and Baluchistan have impeded Pakistan’s trade towards east and west. Expansion of east-west trade presents a great opportunity for Pakistan to increase its economic growth (Nabi, 2013). There has been much interest in exploring the effect of trade liberalization with India. The recent China-Pakistan Economic Corridor (CPEC) project has also stimulated interest in the potential for trade expansion with China. The object of this research project is to examine the effect of barriers to Pakistan’s eastwest trade, and explore the potential for trade expansion available from reduction in these barriers. The project was divided into three phases. In the first phase of the project, we assembled a large data set required to estimate the modern versions of the Gravity model of international trade. The second phase estimated these versions and identified the effect of eastwest trade barriers on Pakistan’s bilateral trade flows with its neighbors, in particular India and China. Our results show that barriers to overland trade with China, and policy-induced restrictions on trade with India have substantially reduced bilateral trade with these countries. Our estimates of the Gravity model were utilized in the third and final phase to examine the potential for trade expansion available from lowering of trade barriers to Pakistan’s trade with China and India. This phase examined the impact of lower transport costs via CPEC on trade with China, and of reduction of tariff and nontariff barriers on trade with India</p></div>