Does the Exchange Rate Matter to Bilateral Trade between Pakistan and China? Evidence from Commodity Trade Data

Abstract

This study examines the bilateral trade patterns of Pakistan with China at the commodity level, from 1991-92 to 2017-18, a period of twenty-seven years. During the period, Pakistan has always been in deficit with China for overall trade and for all the commodities with the sole exception of the mineral products. The reason for doing bilateral trade analysis at the disaggregate level is that as not all the industries behave in the same manner to different factors therefore it is desirable to use disaggregate data for industries to assess the impact of variables considered in the study. This is the first study that has been conducted using the disaggregated data for bilateral trade between Pakistan and China. The main purpose of the thesis is to thoroughly study the effect of bilateral exchange rate changes on trade flows between Pakistan and China using the ARDL approach. The empirical findings show that the bilateral trade between Pakistan and China is highly sensitive to bilateral exchange rate changes in the short-run and the long-run. Thus, it suggests that if the bilateral exchange rate is aligned correctly to the market exchange rate it would improve the balance of trade of Pakistan for all the commodity groups. Same is the case of real GDPs of China and Pakistan. The increase in real GDPs stimulates demand for products covered in both countries. However, the exchange rate uncertainty and the net FDI from China are found to be less effective in impacting the trade balance between the two countries.