Trade creation versus trade diversion and general equilibrium effect in regional and bilateral free trade agreements of Pakistan

Abstract

Welfare of the world is a potent issue in world today. Countries tend to engage in trade agreements with their capacities to maximize their welfare. This study examines the industry level trade flows for the period 2003 to 2014 to measure the trade effects of all bilateral and regional free trade agreements of Pakistan. The analysis is conducted by not just using tariff data but also by using tariff preferences given to the members of bilateral free trade agreements (BFTAs) and regional trade agreements (RTA) whereas MFN tariff rate applied to non- preferential trading partners for each good while measuring the effects of trade creation and trade diversion. This study provides separate estimates of trade creation and trade diversion for all FTAs, SAFTA and BFTAs. It further provides separate estimates of trade creation due to general equilibrium effect of signing BFTAs and SAFTA and due to the elimination or concessions of tariffs given to BFTAs and SAFTA Partners. The study concludes that the effect of trade creation is significantly higher in magnitude as compared to trade diversion for all three cases of all FTAs, SAFTA and BFTAs of Pakistan.