Pakistan Institute of Development Economics


Pakistan’s Trade with China: What is the Potential Effect of CPEC? (Mahbub-ul-Haq Lecture)

I am delighted to address the annual general meeting and conference of Pakistan Society of Development Economists and contribute to the sub theme of the conference: Role of China Pakistan Economic Corridor (CPEC) in Promoting Economic Integration with Central Asia. CPEC represents a collection of projects which intend to improve Pakistan’s infrastructure. These projects will affect Pakistan’s economy in number of ways. Construction and upgrading of a network of highways and railways under CPEC will open an over land trade route between Pakistan and China. In my lecture, I will focus on the potential effect of this development on Pakistan’s trade with China. Neighbouring countries engage in considerable trade with each other using land transportation. Pakistan shares a common border with China, but there is essentially no overland trade between these countries because of unavailability of feasible outes for economical transportation of goods by land. There are well developed land routes between Pakistan and India, but high tariff and nontariff barriers arising from strained relations have significantly impeded Pakistan-India trade. Trade with other neighbouring countries, Afghanistan and Iran, has also been hampered by conflict in Afghanistan and strife in tribal areas and Balochistan. In earlier times, historically important trade route connecting India with Central Asia passed through what is now Pakistan. These routes are no longer used and Pakistan has relied largely on international trade by sea through the port of Karachi. As Nabi (2013) has pointed out, east-west trade expansion represents an important growth potential for Pakistan. Although significant progress has not been made in liberalising trade with India, CPEC provides an opportunity for Pakistan to expand its trade with China by land. Will CPEC have a significant effect on Pakistan’s overall trade with China? To address this question, I will present empirical evidence drawn from a research project undertaken with Antonio Marasco and Ijaz Nabi. * 1 Our approach is to use a large data set to estimate a model that explains bilateral trade flows for most trading pairs in the world. If Pakistan-China trade is subject to additional costs that are not accounted for in the model, then actual trade flows between these countries should be less than the prediction of the model. An important finding of our study is that both Pakistan’s imports from and exports to China are significantly less than the values predicted by the model. Higher transportation costs by land appear to be a plausible explanation of this result. Ehsan U. Choudhri < > is Distinguished Research Professor, Department of Economics, Carleton University, Canada. 1 See Choudhri, Marasco, and Nabi (2017).


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