The Role of Trade Agreements in Trade Creation or Trade Diversion: A Case of Pakistan

Abstract

International Trade agreements are the source of trade creation or trade diversion. In the case of trade creation, it helps to rapid, sustainable economic development. This study assesses the trade creation and diversion effect for the notified trade agreements of Pakistan. This manuscript is based on an augmented gravity model with robust theoretical multilateral resistance terms. The model analyzes the impacts of trade agreements by using panel data over a period from 1962 to 2020. Making use of Poisson Pseudo maximum likelihood (PPML) family models with fixed effects, time-specific and dummy variables, it removes the issues of Jensen’s inequality E(lnXij ) ≠ lnE(Xij), heteroscedasticity, and zero-trade errors. This study's outcomes confirm that the trade agreements of Pakistan positively impact trade and exports. It can be concluded from this study that notified trade agreements of Pakistan are a source of trade creation. It further suggests that Pakistan should continue to pursue trade agreements with countries with complementary economies and focus on previously signed mutual agreements that are still not in force.