Exploring the Advantages and Disadvantages of the China–Pakistan Free Trade Agreement

• Published date: 01 May 2021
• Author: Mirajul Haq,Javeria Saeed,Muhammad Akram
• Date: 01 May 2021
• DOI: http://doi.org/10.1111/cwe.12364

©2021 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 83–103, Vol. 29, No. 3, 2021 83

*Mirajul Haq (corresponding author), Assistant Professor, International Institute of Islamic Economics (IIIE),

International Islamic University Islamabad, Pakistan. Email: haqmirajeco@gmail.com; Javeria Saeed, MPhil

Scholar, International Institute of Islamic Economics (IIIE), International Islamic University Islamabad,

Pakistan. Email: jaweriasaeed27@gmail.com; Muhammad Akram, Assistant Professor, International Institute

of Islamic Economics (IIIE), International Islamic University Islamabad, Pakistan. Email: muhammad.

akram@iiu.edu.pk.

Exploring the Advantages and Disadvantages of the

China–Pakistan Free Trade Agreement

Mirajul Haq, Javeria Saeed, Muhammad Akram*

Abstract

This paper e xplores whether the China–Pakistan Free Trade Agreement (FTA), which

entered into effect in 2007, has led to advantages or disadvantages for the participating

countries. It assesses the gains and losses associated with the agreement rigorously

using two different approaches. First, the revealed comparative advantage index is

calculated for 10 commodity groups. This identifi es the commodity groups in which the

participating countries have a comparative advantage. Second, trade creation and trade

diversion are estimated for overall imports and for the commodity-group level imports.

This analysis provides useful information about the commodity groups in which a

particular party to the FTA is experiencing an advantage or a disadvantage. The fi ndings

of the study show that China has an advantage in producing capital-intensive goods

whereas Pakistan has a comparative advantage in the production of primary and semi-

manufactured goods. The empirical fi ndings also indicate that, overall, the formation

of the bilateral free trade agreement between Pakistan and China enhances trade with

member countries as well as with nonparticipating countries.

Key words: gravity model, panel data, revealed comparative advantage, trade creation,

trade diversion

JEL codes: C10, C23, F14, F15

I. Introduction

Reciprocal trade agreements between two or more nations are known as regional

trade agreements (RTAs). They have a legal status under Article XXIV of the General

Agreement on Tariffs and Trade (GATT, 1994). An RTA is a reasonable approach to the

©2021 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Mirajul Haq et al. / 83–103, Vol. 29, No. 3, 2021

84

development of liberalized trade within a certain geographical area, which is intended

to intensify economic ties among the participating countries. Such agreements have

experienced rapid growth since the early 1990s. This is evident from the fact that, in

1980, only 15 agreements existed, whereas, at the end of 2019, 490 RTAs were listed

with the World Trade Organization (WTO).1 Among the RTAs, 270 (55 percent) were

free trade agreements (FTAs), 162 (33 percent) were economic integration agreements

(EIAs), and 30 (6 percent) were customs unions (CUs). The expansion of regionalism

around the world has caught the attention of economists and policymakers and currently

holds a central place in policy debates. However, the related literature on the subject

takes two contrasting views on the trade and economic effectiveness of RTAs for

member countries.

The proponents of regionalism have claimed that RTAs are always beneficial for

member countries because they are the most feasible way to address regional issues that

are outwith multilateral agendas. This group of studies has explored the positive impacts

of RTAs for trade, economic growth, and social welfare. However, these studies were

generally accompanied by the argument that the formation of unions is the building bloc

to the liberalization of global trade (Keuschnigg et al., 1996; Georges, 2008; Lambert

and McKoy, 2009; Park et al., 2009). Studies in support of regionalism also argue that

regional trade agreements reduce costs, and increase competition and policy cooperation

among participants, which in turn increases trade among them (Kono, 2002; Sarker

and Jayasinghe, 2007; Lambert and McKoy, 2009; Vollrath et al., 2009, among others).

Endorsing an optimistic view, some studies argue that regionalism is the right way to

enhance the growth and development of countries through the stimulation of FDI and

technological diffusion (Fox, 2004; Ando and Kimura, 2005; Nguyen and Ezaki, 2005;

Kim et al., 2011).

On the other hand, a pessimistic view claims that, in general, regionalism puts both

participating and nonparticipating countries at a disadvantage. This group of studies

(Clausing, 2001; Lee et al., 2008; Datta and Kauliavtsev, 2009, among others) argues

that regional integration has been regarded as a substitute for multilateralism, impeding

the liberalization of global trade. They believe that, in such situations, RTAs depress

multilateral liberalization and that, as a result, global trade becomes distorted. Some

others (Baldwin and Venables, 1995; Clarete et al., 2003; Kandogan, 2005; Carrere,

2006) argue that regionalism does not always have the same effects but varies from

bloc to bloc, depending on the period under consideration, the commodities, and

1This includes all fi ve categories of RTAs namely preferential trade agreements (PTAs), free trade agreements

(FTAs), customs unions (CUs), common markets (CMs), and economic unions (EUs).