Trade Agreements and Export Creation: An Empirical Analysis of Pakistan’s Exports at Industry Level

Abstract

This paper examinespatternsof export creation and diversion by analyzing Pakistan’s trade agreements at the two-digit industry level for all 88 export-oriented industries. We compare the net change in exports with nine free trade agreement (FTA) partners and the top15 partners with most-favored nation (MFN)status. We find that 45 industries account for USD4.1 billion inexport creation across all Pakistan’s FTA partners.Here, net exports increase after FTAs with both FTA and MFN partners. Conversely, export diversion worth USD137million occurs in 10 industries with all FTA partners as net exports to FTA partners rise while net exports to MFN partners fall. In the same manner, we find that net exports in 33 industries declined by USD500 million with FTA and MFN partners. The totalnet exports addition after FTAs was USD3.5 billion or,on average,USD350 million annually,accounting for about 1.4 percent of Pakistan’s total annual goods exports. On average, Pakistan has successfullycreatedexports in half itsexport-oriented industries, althoughhighly subsidized industries exhibit either export diversion or a net decline with both MFN and FTA partners. A difference-in-differenceanalysis shows that exports to China and Mauritius rose significantly while the remainingseven FTA partners did not have a significant increase in exports after the FTAs were implemented. In view of these findings, wesuggest revisiting the policy of export subsidies.