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

Abstract

AbstractThis paper explores 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 identifies 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 findings 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 semimanufactured goods. The empirical findings 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.