Global Trade Potential and the Analysis of Facilitation Indicators for Pakistan

Abstract

Traditionally the economy of Pakistan is characterized by a narrow trade base and chronic trade deficit. Trade diversification is one of the challenging issues that the country is supposed to cope with. The lack of diversification by products and markets and higher concentration in relatively low value-added products has posed a significant risk for export earnings. Another important obstacle to improving trade/export performance is higher trade cost due to a lack of international connectivity and trade facilitation. Trade Facilitation is one of the major policy tools which can effectively reduce cost and time through simplification, modernization, and harmonization of trade processes hence can increase trade flows. It may also contribute to an increase in export diversification. Considering the significance of diversification and facilitation for trade expansion, the present study has comprehensively examined the trade/export potential in goods and services by countries and regions for Pakistan as well as assessed the effects of trade facilitation. To perform the analysis, the gravity model has been estimated through OLS and PPML estimation methods, however, the PPML method is a preferred method as it estimates the model in multiplicative form thus dealing with zero trade flows and also providing consistent estimates in the presence of heterogeneity. The study has also used Access Market Additional Frontier (AMAF) to identify the product groups with higher trade potential. The study has used panel data across 101 trading partners to compute the trade/export potential in goods and services, while 97 countries were included to evaluate the impact of LPI on trade/exports. Findings suggest that Pakistan has tremendous potential to exhaust by diversifying its trade both in goods and services towards new destinations, particularly towards non-traditional trading partners. According to the regional distribution of trade/export potential in goods maximum potential lies within Latin America followed by Africa, SAARC, NAFTA, Transition Economies, EU-EEA, CAR, Middle East, ASEAN, and ECO. Product-wise potential on the basis of the AMAF approach has been identified in manufactures goods, misc. manufactured articles, food and live animals, and chemicals. The trade/export potential in services has been indicated within ECO followed by the Middle East, Africa, SAARC, Transition economies, EU-EEA, Latin America, and ASEAN. With regard to logistics, we found a considerably positive effect of the overall LPI of Pakistan and its partner countries on exports relative to overall trade. Amongst various sub-components, we found that ease of arranging competitively priced shipments both in Pakistan and its partner country, ability to track and trace consignment in Pakistan and quality of trade and transport logistic in partner country may have a significant impact on exports. Overall Present study has reaffirmed DRSML QAU 8 that there is substantial potential for trade/export expansion both in goods and services. However, there are certain chronic as well as contemporary issues which require to be addressed. In order to enhance export growth, Pakistan is required to improve competitiveness and level of diversification in the export base. The findings of the study reveal that improvement in LPI (a proxy for trade facilitation) is fundamental for improving the country's export competitiveness and foreign market expansion. Pakistan has initiated several types of trade policies from import substitution to export-led strategy and now following STPF, but instead of focusing on effective implementation of these policies by addressing the structural issues, the country has focused on short-term export stimuli. Therefore, the main focus should be on the effective implementation of long-term trade policies. The present study has determined various important factors which can play a crucial role in stimulating trade/exports of goods and services. The government should give due attention to these factors while formulating trade policies.