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Who is Trading well with China? A Gravity and Constant Market Share analysis of Exports of Pakistan and ASEAN in the Chinese Market
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August 2021
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Global trade suffered a significant contraction in 2020 as a result of the COVID-19 pandemic, and its growth is expected to remain below the pre-pandemic trend. Did the relative importance of countries in the world trade network change as a result of the pandemic? The answer to this question is particularly important for the Association of Southeast Asian Nations (ASEAN) countries because of their relative importance in world trade as well as their strong trade linkages with China, where the COVID-19 virus originated. This paper examines how the world trade network has changed since the COVID-19 pandemic, with a particular focus on ASEAN countries. Tracking the changes in centrality from January 2000 to March 2021, we find no evidence for most ASEAN and major trading countries that centrality changed significantly after the pandemic began. Our results suggest the resilience of the trade pattern for these countries.
International trade, an important economic activity, has affected the human environment in varying degrees since its beginning. This research will carry out calculations and analyses on Pakistan-ASEAN bilateral and technological trade flows at a disaggregated level over 1995-2018. The current study found that medium-tech, high-tech, and low-tech trade flows, enhance economic growth in Pakistan and ASEAN, negatively impacting geographical distance by all technological trade flows. Similarly, the proportional element endowment confirms the Hecksher-Ohlin hypothesis. Yet, the perspective argues that countries with high production levels can exchange faster than their countries with lower output levels. Due to the variety in consumers" taste, increased similarity yields increased technological trade volumes, highest values received by medium-tech trade flow, and total bilateral trade flow. Depreciation in exchange rates showing a positive sign for total bilateral trade, low-tech trade, and high-tech trade, whereas unenthusiastic in the case of medium-tech trade flow between Pakistan-ASEAN nations. Free trade agreement and WTO membership will also foster trade activities in conscientious and economic association in ecumenical. Pakistan trade patterns are different from ASEAN trade patterns, which increased the opportunity to enhance business activities.
The Association of Southeast Asian Nations (ASEAN) has been leading economic integration within many structural changes in the world economy. ASEAN, established in 1967, has promoted regional economic integration since 1976. It started to work toward realizing the ASEAN Free Trade Area (AFTA) in 1992 and the ASEAN Economic Community (AEC) in 2003. ASEAN finally established the AEC at the end of 2015. The AEC is the most developed and advanced economic integration in East Asia. ASEAN is deepening the AEC for the next goal, AEC 2025. ASEAN also led East Asian cooperation initiatives, including ASEAN+3 and ASEAN+6, and ASEAN+1 FTAs. ASEAN proposed the Regional Comprehensive Economic Partnership (RCEP) and led the RCEP negotiations. Currently, rising protectionism and the US–China trade friction has great negative impacts on ASEAN and East Asia. Furthermore, the outbreak of COVID-19 has done great damage to ASEAN and East Asia. ASEAN is responding to the COVID-19 pandemic and strengthening the AEC steadily amidst growing protectionism and COVID-19 pandemic. The RCEP agreement was finally signed in November 2020. The RCEP is the first East Asian mega FTA. The RCEP has great meaning in ASEAN and East Asia. ASEAN secured ASEAN centrality in East Asian economic integration. The AEC and the RCEP will become more important amidst rising protectionism, and during and in the post-pandemic era.
This paper empirically investigates the role of institutional framework in promoting bilateral trade through a regional trade agreement (RTA), namely the South Asian Free Trade Area (SAFTA), using an institutions-augmented gravity model. Poisson Pseudo Maximum Likelihood (PPML) estimation technique is used (performed) for a panel of 11 countries over the period 1996-2015. The initial estimation results suggest that this RTA is not effective in promoting regional trade in South Asia. Further empirical analysis reveals that SAFTA contributes significantly to bilateral trade when the impact of institutions is controlled for. The key policy lesson emerging from the analysis is that, given weak institutional structure, a regional agreement may not produce the desired results. Successful trade reforms depend on the institutional framework of the countries involved. Therefore, government should develop institutions to reap the potential benefits of RTAs. Keywords: Institutions, Regional Integration, Bilateral Trade, South Asia, PPML
This paper examines the bilateral trade flows between Pakistan and China
with a particular focus on the trade of agricultural goods. It observes the trends
and characteristics of China-Pakistan trade relations after both countries signed
the China-Pakistan Free Trade Agreement in 2006. We use the trade
complementarity index, revealed comparative advantage index, trade integration
index, and export similarity index to empirically analyze trade complementarity
and competition of thirty-five agricultural products. Furthermore, we investigate
the future prospects of the agriculture sector by calculating indicative trade
potentials of top agriculture products. The findings of this study show that there
exists competition and complementarity for few products; however,
complementarity is strong. The indicative trade potentials show that Pakistan
has higher export potentials in products rice, seafood, and cotton, which
however have not reached up to their potentials due to the various barrier and non-barrier tariffs. Thus it is important that these challenges are addressed in order to
increase the bilateral trade in the future.
Taiwan and Association of Southeast Asian Nations (ASEAN) do not have any diplomatic ties, but they have enjoyed significantly economic benefits, especially bilateral investment and trade cooperation. Over the period 2000–2017, trade between Taiwan and ASEAN had significantly focused on manufactured goods embodied with high-skill and technology-intensive content. Using gravity model with a PPML (Poisson pseudo-maximum-likelihood) estimator, this article explores determinants of bilateral trade flows between them at both aggregate and sectoral levels. We found that economic scale and per capital income of ASEAN have much stronger effects than those of Taiwan at both aggregate trade and the degree of manufacturing. Results also show that bilateral trade between Taiwan and ASEAN has been efficiently performed over recent decades, except for cases of Myanmar and Cambodia. Hence, a dynamic approach should be taken by both sides to promote bilateral trade relations in future.
Nonlinear measurement of gravity model with PPML regression technique has become admired for modeling international trade flows since it approves a better accounting for zero flows and excessive values in distribution tail. In the present study, we have endeavored to investigate the bilateral trade milieu of Pakistan with 198 trading cohorts over the time epoch (1992-2016) 25 years and to stumble on latent markets in case of Pakistan's bilateral trade. The empirical results revealed that market size, bilateral exchange rates, income differential, common religion, border, and trade agreements positively influence bilateral trade volume while bilateral distance and landlocked countries showed a negative relationship towards bilateral trade of Pakistan with rest of the world. The outcome also illustrates that the trade pattern of Pakistan hinges on the Heckscher-Ohlin (H-O) theory, therefore, can be explained by the dissimilarity in factor endowments whereas the WTO membership does not have any influence on bilateral trade of Pakistan. Pakistan owns satisfactory potential to enhance its bilateral trade with nearly 102 countries. The highest potential lies with countries Saudi Arabia, Malaysia, Somalia, Hong Kong, Iran and USA whereas actual trade has exceeded with countries like China, Oman, Spain, UAE, Germany, and the UK. Hence, there is need to address all measures to improve bilateral trade with potential countries moreover per se Pakistan can perhaps decrease or handle the trade discrepancy by targeting these economies, to bring about a reasonable quality in mutual trading relations.
Since the 1950s, we have known that the presence of zero-valued dependent variables can seriously bias econometric estimates whether the zeros are included or excluded. Yet the widely-used gravity model is frequently estimated on samples that include large fractions of zeros. An influential paper by Santos Silva and Tenreyro – based on simulations that include no economically-determined zeros – concludes that the bias problems resulting from zeros and those resulting from heteroscedasticity and nonlinearity can be solved using the Poisson Pseudo-Maximum-Likelihood (PPML) model including the zero values. This paper begins by adapting the Santos Silva and Tenreyro experimental design to include economically-determined zeros to see whether this conclusion continues to hold. With this design, it finds that alternative estimators have lower bias than PPML. Changing to a Monte Carlo design that replicates the much-higher real-world frequency of predicted values near zero restores the finding of lower bias with the PPML estimator. The results highlight the need for very careful design of Monte Carlo experiments when evaluating alternative estimators of the gravity model.
What are the major determinants of China’s meat exports flows? In addressing this question, we propose a commodity-specific gravity model. This study has employed a unique dataset of 20 years (1997–2016) for China’s pork exports flows to its 31 regular trading partners to estimate the commodity-specific gravity model. The PPML and Heckman selection models are simultaneously estimated to confirm the robustness of the findings. The results reveal that GDP, exchange rate, common language, and country land area are the significant factors affecting the Chinese pork exports flows. Moreover,
China’s WTO membership, the ‘Belt & Road’ Initiative, and the common borders have a positive significant impact on its exports of pork.
The purpose of this study is two fold. First, to estimate the impact of institutional and non-institutional arrangements on bilateral trade, and second to analyse the impact of SAFTA on bilateral trade in the short as well as in the long run. The empirical analysis which is based on the panel of eight South Asian countries, comprising data over the period i.e. 1975–2013 is conducted using fixed effects model along with Pooled Mean-Group (PMG) estimator for estimating the short and long-run relationships. The analysis has shown that trade agreements including South Asian Free Trade Area (SAFTA) and the Most Favoured Nation (MFN) are not effective in promoting trade, due to low institutional quality and stringent non-institutional arrangements, including high tariff along with low physical infrastructure. Further empirical analysis has shown that both SAFTA and MFN can only contribute to bilateral trade significantly, if complemented by institutional framework. As a policy lesson, to improve the trade ties between India and Pakistan, improvement in physical as well as soft infrastructure is required. Any trade agreements between the two, including MFN can only be effective, when it is supported by a well-defined and enforced institutional framework that ensure the implementation of policy reforms needed to reduce tariff rate and remove non-tariff barriers.
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.
Pioneering domestic environmental regulation may foster the creation of new eco-industries. These industries could benefit from a competitive advantage in the global market place. This article examines empirical evidence of the impact of domestic renewable energy policies on the export performance of renewable energy products (wind and solar PV). We use a gravity model of international trade with a balanced dataset of 49 (for wind) and 40 (for PV) countries covering the period 1995–2013. The stringency of renewable energy policies is proxied by installed capacities. Our econometric model shows evidence of competitive advantage positively correlated with domestic renewable energy policies, sustained in the wind industry but brief in the solar PV industry. We suggest that the reason for the dynamic difference lies in the underlying technologies involved in the two industries.
Nowadays China is considered to be the fastest growing country among the developing countries economy of the world. To get the contribution of free trade area in encouraging China’s exports that affects positively the Chinese economy, this paper investigated and analysed the volume of China’s trade in the last fifteen years (2000-2014). The aims of this study are to analyse and examine the role exports flows of China, and to examine the relationship between exports flows and free trade area agreement based on ACFTA membership of China since 2002. The exports flows from China to 200 countries are examined in order to see how more China exported to other member countries in helping this economic cooperation to achieve its objectives of promoting trade. Through the use of the gravity model and panel data techniques, it was found out that the relationship between China Exports and Gross Domestic Products of trading partners is positive with the increase in percentage of 85 percent while the Gross Domestic of China increases with 37 percent. Country’s export sector is a very important factor in its economic development especially in developing countries.
China and Pakistan have years long history of friendly relations. Two countries decided to get fruit of these friendly relations for mutual economic development and cooperation in terms of trade relations by signing Pakistan-China free trade agreement (PCFTA) in 2006. Pakistan normally exports different agricultural products to China while imports high-tech products, chemical products and household appliances. Agriculture sector is backbone of Pakistan's economy and a major source of employment and export earnings. Exports of Pakistan are highly concentrated in agricultural products like sugar, cotton, rice and fruits. This study contains ex post facto analysis of Pakistan-China free trade agreement (PCFTA) on agricultural exports of Pakistan using theoretically justified gravity model. Panel data set containing disaggregated trade data of 110 trade partners of Pakistan for the period dating from 2001 to 2014 analyzed using Poisson Pseudo Maximum-Likelihood (PPML) version of gravity model by using Stata software 14.0. Data on export of all agricultural products of Pakistan were collected from United Nations Commodity Trade Statistics (UN Comtrade) database while the data regarding different macro economic factors like GDP, Population, Exchange rate etc. was extracted from World Bank Development Indicators (WDI) database. Data regarding distance, common border, common language and colonial ties was obtained from website of Centre d'Etudes Prospectives et d'Informations Internationales. The results suggest that PCFTA has very strong trade creation effect on agricultural exports of Pakistan. It has helped in exponential increase in agricultural exports of Pakistan to China and paved the way to promote friendly relations of two countries for further economic cooperation.
Regionalism in South Asia, through formation of regional and bilateral trading agreements, dates back to mid 1990s. The objective of this study is to assess the effects of various forms of trade agreements on bilateral trade of South Asia. Gravity model of international trade was used as the analytical tool and the effects of the World Trade Organization (WTO), Regional Trade Agreements (RTA) such as SAFTA, EU, ASEAN, BIMSTEC and NAFTA, and Bilateral Trade Agreements (BTA) were estimated. Three types of BTAs were included; between two South Asian countries, between a South Asian country and a country not in the region, and between two non-South Asian countries. Distance between the trading partners, sharing of common language, and colonial ties were the remaining explanatory variables included in the models. Cross sectional data covering 2555 bilateral trade for the year 2012 were used for the estimation and the data were extracted from the gravity databases of the Asia Pacific Research and Training Network, the World Bank and the WTO. The models were estimated using Ordinary Least Squares including importer and exporter fixed effects. The results of the estimation suggest that sharing of a common language, sharing a common colony, and membership of WTO positively and significantly affect export values and the effect of geographical distance, as expected, on the same has a negative effect. The memberships in BTA and RTA have mixed effects. Among RTAs used in the study, only the coefficient for EU is statistically significant. SAFTA, ASEAN, BIMSTEC and NAFTA do not show significant effects on bilateral trade. The effects of all BTAs are positive and significant and they indicate that BTAs within South Asia enhance its regional trade greater than the BTAs with non-members. These results suggest that proliferation of BTAs within South Asia helped in expanding regional trade.
This study uses a theoretically justified gravity model of trade to examine the impact of the ASEAN-China Free Trade Agreement (ACFTA) on exports, focusing on trade creation and diversion effects. The model is tested on a sample of 31 countries over the period dating from 1995 to 2010 using aggregated and disaggregated export data for agricultural and manufactured goods and within manufactures for chemical products, as well as for machinery and transport equipment. In order to obtain unbiased estimates, multilateral resistance terms are included as regressors and the endogeneity bias of the FTA variables is addressed by controlling for the unobserved specific heterogeneity that is specific to each trade flow. A Multinomial PML is also applied to solve the zero trade issue and the presence of heteroskedasticity. The results indicate that ACFTA leads to substantial and significant trade creation. Using disaggregated data, the significant and positive relationship between exports and ACFTA is confirmed in the case of both agricultural and manufactured goods, as well as in the case of the most important manufacturing industries, namely, chemical products and machinery and transport equipment.
This paper attempts to estimate Pakistan’s trade potential, using the gravity model of trade. Panel data for the period 1981-2005 across 42 countries is employed in the analysis. The coefficients obtained from the model are then used to predict the country’s trade potential worldwide as well as within specific trading regions. The results reveal that Pakistan’s trade potential is highest with countries in the Asia-Pacific region (the Association of Southeast Asian Nations [ASEAN]), the European Union (EU), the Middle East, Latin America, and North America. Specifically, the maximum potential exists with Japan, Sri Lanka, Bangladesh, Malaysia, the Philippines, New Zealand, Norway, Sweden, Italy, and Denmark. Therefore, Pakistan should explore ways and means to further improve its trade relations with the countries concerned, and also concentrate on ASEAN, the Middle East, and the EU to increase its market share as far as possible. The volume of trade between Pakistan and other members of the South Asian Association for Regional Cooperation (SAARC) and Economic Cooperation Organization (ECO) is very low, despite the existence of significant potential. The main obstacles to this end are the political and social tensions among neighboring countries, particularly between Pakistan and India, which are the main players of SAARC. The same obstacles exist in the case of the EU and NAFTA, where Pakistani exports are adversely affected by political considerations.
This paper assesses whether a bilateral FTA raises the growth rates of the two countries engaging in the FTA. A nonparametric matching approach, which imposes no specific functional forms and can be applied to a broad range of data structures, is employed to estimate the FTA effect on the growth. We find that FTAs exert insignificant effects on aggregated growth from one to 10year period after launch, but detect a significant upward trend in the gap between the growth rates of per capita GDP within a bilateral FTA. This implies uneven FTA effects across countries within an FTA.
This paper examines the determinants of export flows of countries in the ASEAN Free Trade Area (AFTA) through estimations of panel data using a gravity model. In particular, the paper employs the Hausman-Taylor (HT) estimation for a country panel data of thirty-nine countries during the period 1988–2002 based on a two-way error component form of the gravity model. The estimations show that export flows increased proportionately with GDP, and that the formation of AFTA has resulted in significant trade creation among its members. Finally, the paper suggests that trade facilitation policy can play an important role in setting the stage for AFTA’s transition to a Free Trade Area.
among different trade partners. Fourthly, the dynamics of international trade flows determined, in part, by the entrance of new players, mechanically affects individual countries' market shares. Therefore, the analysis of the export performance of a country should be put in perspective by analysing long periods in order to identify trends and comparing with a set of benchmark countries. This discussion is relevant for the Portuguese economy because export market shares have been showing a disappointing path over the last decade. In a small open economy like the Portuguese, dete- riorations in export performance tend to hinder economic growth and thus contribute to the real per ca- pita income divergence against the euro area observed in the last years. This article analyses the evolution of Portuguese market shares in world exports over the 1968-2006 period, in comparison with other Southern European countries and Ireland and taking into account the impact of product and geographical composition on the aggregate results. For this purpose, we use a constant market share methodology as proposed by Nyssens and Poullet (1990). The total change in the market share of Portuguese nominal exports is decomposed into three main additive and analyti- cally interpretable terms: a market share effect, taking into account the effective changes of share in each product/geographical market, and two additional terms that analyse how the geographical and product composition of Portuguese exports affected developments in the overall market share. Other applications of the constant market share methodology to Portuguese exports can be found in Abreu and Manteu (1993), Cabral (2004) and Cabral and Esteves (2006). In ECB (2005) an analysis of this type for euro area exports is included.
The study deals with trade benefits from the free trade agreement of the SAARC countries. It assesses the trade potential and trade creation with member and non-member countries. The gravity model has been used to measure the bilateral trade flows and to assess the trade effect for member and non-member countries. Two analyses estimate the gravity model. The first analysis is based on cross-sectional data to capture the trade effect individually each year; and the second analysis utilises the pooled data to measure the overall trade effects and trade flows for the period 2003 to 2008. The results from the two approaches show that estimated coefficients are consistent with the model assumptions. Both analyses show that the regional trade agreement of the SAARC countries could divert the trade for member countries as well as for the non-member countries. However, trade volume will increase only if the major partners (Pakistan, India, and Sri Lanka) sign regional trade agreements.
Gravity equations have been widely used to infer trade flow effects of various institutional arrangements. We show that estimated gravity equations do not have a theoretical foundation. This implies both that estimation suffers from omitted variables bias and that comparative statics analysis is unfounded. We develop a method that (i) consistently and efficiently estimates a theoretical gravity equation and (ii) correctly calculates the comparative statics of trade frictions. We apply the method to solve the famous McCallum border puzzle. Applying our method, we find that national borders reduce trade between industrialized countries by moderate amounts of 20-50 percent.
This research examines the intensity, magnitude and direction of trade bilaterally between (the CARs) in1995-2017. The analysis uses indices of export-import intensity and trade complementarity. The results of study show that Pakistan is a valuable trading partner to the region and on average experience greater export intensity rather than import intensity, depicting the fact that Pakistan has enjoyed intensity in overall trade and was relatively more specialized rather than CARs during the period of this analysis. Pakistan mainly exported cereals, oil and pharmaceutical products while imported cotton, iron and steel etc. The greater value of complementarity index indicates that Pakistan has exported most of these products to the countries which have high demand. The findings of intense trade relation between Pakistan and CARs suggest that Pakistan has an opportunity to exploit its resources, diversify exports and increase its trade relations with the region by signing free trade agreements.
By using statistical tools of revealed comparative advantage, trade complementarity, constant market share, and stochastic frontier gravity model, this study inspects the export performance and trade potential of Pakistan in the Central Asian region. The range of the study is from 2003 to 2017. The study finds that Pakistan has the highest comparative advantage in pharmaceutical merchandises with the central Asian region as a whole, while it has a very low level of trade complementarity. Yet, a massive trade potential is existing between Pakistan and Central Asian countries, especially with Uzbekistan followed by Turkmenistan. The results also show that GDP, trade openness, distance, exchange rate, and tariff rate are the prime determinants of Pakistan's export to the Central Asian region. The empirical analysis also indicated that "behind the bor-der" factors confine the exports of Pakistan from reaching to its potential level. Therefore , Pakistan needs to sign a free trade agreement at the earliest and should focus to secure full tariff concessions on its top exported products.
This paper analyses the trade creation and trade diversion effect of ASEAN-India Free Trade Agreement (AIFTA) on agricultural trade among the member countries. Data on 50 countries with five major FTAs for the period 2005–2014 were used. Gravity model by ordinary least square and Poisson Pseudo-Maximum Likelihood (PPML) methods was estimated. The PPML method corrects the problem of zero trade and heteroscedasticity in the regression model. Analysis shows a pure trade creation effect of AIFTA, MERCOSUR, and EU-15 in the time fixed effect model. Under the time and country fixed effect model, AIFTA, SAPTA, and NAFTA have stronger trade creation effect than trade diversion effect. These results suggest that agricultural sector can be pushed for further trade liberalisation in the FTAs.
The paper examines the impact of two main instruments of economic diplomacy — regional integration and commercial diplomacy on export flows among African states. We test whether there is any evidence of a trade‐off or complementary interaction between these two instruments in trade facilitation using the gravity model for 45 African states over the period 1980–2005. The results show that bilateral diplomatic exchange is a more significant determinant of bilateral exports among African states compared to regional integration. We also find that the trade–stimulating effect of diplomatic exchange is less pronounced among African countries that shared membership of the same regional bloc.
The international trade of Pakistan is highly concentrated on a few goods and markets. This study investigates macroeconomic behaviour of trade flow and explores potential trade markets for Pakistan using an augmented gravity model on a large panel of 47 cross-sections from 1980 to 2013. The result of standard gravity variables shows consistent findings with statistically significant t-statistics, whereas augmented variables reveal that relative price has a positive impact with lower price elasticity. The result of binary variables shows that Pakistan’s trade is more with countries having the same language, whereas lower trade is observed with bordering countries. The result of South Asian Free Trade Agreement (SAFTA) revealed ineffectiveness of regional integration on the creation of trade for Pakistan, whereas, bilateral free trade agreements (BFTAs) have created considerable trade. The finding of trade potential revealed exhausted potential with major trading partners and there is a need for greater trade diversification from exhausted to potential countries. It has higher untapped potential with Nepal, Iraq, India, Philippines and Jordan, respectively, in Asia, whereas European countries have the highest potential. The results concluded that Pakistan can diversify its trade from exhausted to potential countries through individual BFTAs and multilateral free trade agreements. South Asian countries should address their disputes and revisit SAFTA aiming to improve regional trade and growth.
Please cite this article as: Kabir M., Salim R., Al-Mawali N., The gravity model and trade flows: Recent developments in econometric modeling and empirical evidence. Economic Analysis and Policy (2017), http://dx. Abstract The existing trade literature on the gravity model is extensive. This paper aims to present a survey of the current gravity model by taking stock of the existing knowledge on the major theoretical and empirical aspects of the gravity model in the context of trade flows. It also analyzes issues of panel data econometrics and identifies the critical areas of empirical methods and data. Attention has been paid to the more recent developments in the subject while discussing the estimation procedures applied in the literature. Finally, the paper suggests several directions for future studies and provides guideposts for policy makers. Abstract The existing trade literature on the gravity model is extensive. This paper aims to present a survey of the current gravity model by taking stock of the existing knowledge on the major theoretical and empirical aspects of the gravity model in the context of trade flows. It also analyzes issues of panel data econometrics and identifies the critical areas of empirical methods and data. Attention has been paid to the more recent developments in the subject while discussing the estimation procedures applied in the literature. Finally, the paper suggests several directions for future studies and provides guideposts for policy makers.
Trade liberalization is the removal of tariff and non-tariff barriers in trade, basically international. This has significant macroeconomic and distributional effects. The Heckscher-Ohlin Trade Theorem is the basic theoretical foundation of trade liberalization. The Stolper-Samuelson Theorem, Factor Price Equalization Theorem, and Rybczynski Theorem also have made contribution in the theory of trade openness.
Several studies exist in analysing distributional impacts of trade openness. These studies have cross-country comparisons, country-specific partial analysis, and general equilibrium analysis. Although it does not have any robust conclusion, general system approach is more comprehensive in studying different facets of trade integration. More recent studies reveal that trade liberalization of the developing world is growth enhancing; however, economic restructuring is deemed essential in making the impacts pro-poor.
Pakistan is facing a chronic trade deficit due to highly concentrated nature of its international trade. The exports are dependent on the few lower value added agriculture and manufacturing industries, and are directed toward few trading partners. The highly concentrated nature of exports result in higher vulnerability and dependence of the economy. Pakistan signed regional and bilateral free trade agreements for diversification of its exports and markets. These free trade agreements significantly distorted the trade balance due to relatively lower specialization level of Pakistan. The trade theories and empirical studies urge achievement of competitive specialization in diversified exports and markets. This study attempts to investigate the macroeconomic behavior of export flow and export potential of Pakistan with its bilateral trading partners employing the augmented gravity model using panel data from 40 trading partners for the period 1991-2011. The dependent variable is merchandise exports flow, which is explained by the domestic supply capacity, demand potential of trading partners, relative price level and binary variables for free trade agreements, common language and common border. The model is then used to investigate potential markets for exports by Pakistan and provides a framework for export and market diversification. The annual data for this study is available in Statistical Year Book of Pakistan, World Development Indicators and International Financial Statistics. The results show that Pakistan’s export is positively determined by its supply capacity and partner country’s demand potential as well as market size, whereas negatively determined by the geographical distance. The domestic supply capacity shows the highest possible effect. The relative price shows significant positive, but less elastic impact. The common language shows significant positive impact while common border shows negative impact. The free trade agreements of Pakistan show negative insignificant impact. The result of export potential shows that the Pakistan has higher export potential with India, Philippines, Japan, Singapore, Malaysia and Indonesia, in Asia. Morocco, Egypt and Tanzania, in Africa. New Zealand and Australia, in Oceana. Hungary, Austria, Switzerland, Finland, Norway, Denmark and Sweden, in Europe. The Europe emerged as the most potential region for Pakistan’s exports. The policy implications of this study are that Pakistan needs to develop and diversify its industries targeting market fundamentals of potential economies, and revisit its regional and bilateral free trade agreements with a view to improving the trade balance and achieving sustainable economic development.
There are claims that China's influence on ASEAN is direct in that she has encouraged more exports to flow into her huge markets and changed trade flows among member countries. Demand and supply are thus deemed to have become more China-centered. This study therefore explores the plausibility of China as a ‘factor’ that influences bilateral intra-ASEAN 5 trade flows through demand (exporting country) and supply (importing country). The results imply that China's integration in the region increases the size of the key ASEAN member economies export market. There is also no indication that import sourcing from China by ASEAN 5 countries reduces export expansion within the latter. The results accord with the fact that although China has become an important export destination and an import source for individual ASEAN 5 countries, this has not reduced intra-ASEAN 5 trade.
This study surveys the literature on the relationship between international trade and economic growth, and succinctly reviews the role of GATT/WTO in fostering free trade. Most studies support the gains of trade and recognise the substantive contributions of GATT/WTO in fostering free trade; the evidence is, however, not ubiquitously unambiguous. The macroeconomic evidence provides a dominant support for the positive and significant effects of trade on output and growth, while the microeconomic evidence lends larger support to the exogenous effects of productivity on trade, as compared to the effects of trade on productivity. The GATT/WTO remains surrounded by barriers to trade and avowed preferences for preferential trade agreements. The strength of the argument for the gains of trade needs to be evaluated in juxtaposition with several methodological and measurement issues that surround the trade-growth empirics. Most studies focus on partial equilibrium analysis of trade policy and ignore the general equilibrium aspects of macroeconomic policy. It is difficult to disentangle the effects of trade policies from those of other macroeconomic policies and unequivocally interpret the observed correlations between trade policies and economic growth. Trade is one of the several catalysts of productivity and growth and hence its contribution is contingent on its weight in economic activity.
This paper analyzes the developmental trade-offs involved in multilateral versus regional-bilateral strategies of integration into the international economy. I contrast the regulations that guide policy in the areas of trade, investment, and intellectual property in the World Trade Organization (WTO) and in regional-bilateral agreements between the US and developing countries. Both strategies of integration feature similar trade-offs, in that developing countries gain increased market access and opportunities for specialization in exchange for diminished space for use of industrial policy instruments to create new productive capacities. However, the trade-offs are intensified in the case of regional-bilateral agreements: countries receive more market access, but in exchange make significantly deeper concessions regarding the management of inward investment and intellectual policy. I argue that countries whose integration into the international economy is guided by their obligations as members of the WTO still have opportunities to implement industrial strategies that are designed to alter comparative advantages and achieve upward mobility in the international economic order, but the obligations under the regional-bilateral strategy greatly circumscribe these options. The paper thus points to the need for new terms of reference in the debate over 'policy space' in the international political economy. In analyzing contemporary development strategies, the most useful contrast is not between the alternatives that countries have under the WTO and the alternatives that countries had in the past under the WTO's predecessors, but between a constraining multilateral environment and even more constraining regional and bilateral environments that condition increased market access on the sacrifice of the very tools that countries have historically used to capture the developmental benefits of integration into the international economy.
China's increasing integration with the global economy has contributed to sustained growth in international trade. Its exports have become more diversified, and greater penetration of industrial country markets has been accompanied by a surge in China's imports from all regions-especially Asia, where China plays an increasingly central role in regional specialization. Tariff reforms have been implemented in China since the 1980s; and, with its recent WTO accession, China has committed itself to additional reforms that are farreaching and challenging. Sustained implementation of these commitments would further deepen China's international integration and generate benefits for most partner countries.
This paper uses a gravity model to assess ex-post regional trade agreements. The model includes 130 countries and is estimated with panel data over the period 1962-1996. The introduction of the correct number of dummy variables allows for identification of Vinerian trade creation and trade diversion effects, while the estimation method takes into account a potential correlation between some of the explanatory variables and the bilateral specific effects introduced in the model, as well as a potential selection bias. In contrast to previous estimates in cross-section, results show that regional agreements have generated a significant increase in trade between members, often at the expense of the rest of the world.
Gravity type models are very popular in analysing economic phenomena related to the flow of goods and/or services. As these models are frequently used for policy analysis, especially to investigate the effect of trading blocs, for example, it is quite important to get the econometrics 'right' and avoid unnecessary mistakes in the modelling process. The purpose of this paper is to suggest an alternative specification of the gravity models tailored for 'world models' and large data sets and, also, a testing procedure to check one of the basic assumptions of these models. In a recent short paper Matyas (1997) proposed to incorporate into the specification of the gravity models proper local (export), target (import) country and time specific effects. It can be shown that without these effects the parameter estimates of the model can lead to incorrect inference as their values may artificially be inflated or deflated by this misspecification. Matyas (1997) assumed that these effects were observable from the data and therefore adopted a fixed effects specification. In some instances, however, when the number of countries in the data set is large, for example, this is not a parsimonious approach and it would be better to take these effects into account as non-observable random variables. In this case all structural parameters of the model are assumed to be the same across the complete sample. It is then quite important to test the homogeneity of the data, that is whether it is correct to assume that for all countries and all time periods the parameters of the model are unchanged. Here we propose some easy-to-carry-out homogeneity tests in order to check the overall stability of the parameters of interest.
In this paper, we generalise the constant market shares (CMS) framework, with particular attention to the underlying theoretical conditions required for diagnostic interpretation. The approach is applied to the analysis of the export performance of the Australian processed food sector in South-East Asia over the period 1980-2003. We conclude that the usefulness of CMS analysis for evaluating a country's international trade performance depends upon the empirical validity of the aggregation assumptions implicit in the diagnostic interpretation. Copyright 2006 The Author
Journal compilation 2006 Australian Agricultural and Resource Economics Society Inc. and Blackwell Publishing Ltd .
In the present study we conduct constant market share analysis of the imports and apparent consumption of the manufacturing industries of four major economies-Korea, Japan, Taiwan and the USA. Additionally, the current study disaggregates import penetration in manufacturing, including sectors with relatively high technological requirements. Statistical tests of the significance of changes in import penetration in manufacturing industries are also conducted. The real growth of exports and apparent consumption in the two largest OECD markets is decomposed into: (i) the commodity composition effect; and (ii) the competitiveness effect. Finally, we examine the significance of trade policy for changes in import penetration in Japan and the USA. Copyright 2004 East Asian Economic Association.
- E E Leamer
- R M Stern
Leamer EE and Stern RM (1970) Quantitative International Economics. Boston: Allyn and Bacon.
ASEAN overtakes eU to become China's top trading partner in Q1 2020
- A F Medina
Medina AF (2020) ASEAN overtakes eU to become China's top trading partner in Q1 2020. ASEAN
Briefing.