An Analysis of Spillover Effects of China’s Exchange Rate on Textile, Clothing and Related Exports of Pakistan in Third Countries

Abstract

This study assesses the spillover effects of China’s real exchange rate changes on exports of competitor products (textile, clothing and related goods) from Pakistan in third countries. China being the largest exporter of textile and clothing goods (China’s exports of textile, clothing and related goods worth $267 billion out of world’s total textile and clothing goods exports of $836 billion. Thus, have more competitive consequences for Pakistan (whose share is 2.7%) than any other country. We utilized identification strategy to examine spillover effects of exchange rate. We took disaggregated data of 20 products—textile, clothing and related items—varying across exporters-importers-time, over the period of 2000-2017. We estimate two different indices of competition (i.e., Count-Based index and Value-Based index) between China and Pakistan vis-à-vis five importing countries. We employed fixed effects regression technique to control all observable and unobservable effects varying across exporter-importer-time. Regression results indicate existence of spillover effects or beggarthy-neighbour/prosper-thy-neighbour of China’s real exchange rate on exports of Pakistan. In a nutshell, “ceteris paribus”, the estimation of β coefficient suggests 10% depreciation of Chinese bilateral exchange rate causes Pakistan’s exports to fall by 0.39% (CBI) and 0.009% (VBI), in presence of competition. In simple words, China is gaining from depreciation of its currency whereas; Pakistan’s exports are getting hurt in process. Relaxing assumption of “ceteris paribus”, with inclusion of subsidy as a control variable above effect reduces. And with inclusion GDP, GSP+ and Pakistan’s real effective exchange rate as control variable in model the effect crowds out. Based on these conclusions, the study connotes important implications for policy making, i.e., authorities concerned must take essential measures, to enhance/boost economic activity in order to save exports from foreign influences.