Asia Pacific Management Review 28 (2023) 45e51

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Asia Pacific Management Review

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Trade potential of Pakistan with the South Asian Countries: A gravity model
approach
Shah Masood a, Nabila Khurshid a, *, Maqsood Haider b, **, Jamila Khurshid c, Arif Masih Khokhar d
a
Department of Economics Comsats University Islamabad, Pakistan
b
FATA University, F.R Kohat, Khyber Pakhtunkhawa, Pakistan
c
Department of Business Administration, University of Poonch Rawalakot AJ&K, Pakistan
d
Department. of Business Administration, Federal Urdu University, Islamabad, Pakistan

a r t i c l e i n f o a b s t r a c t

Article history: The current study investigates the trade potential of Pakistan with South Asian countries using an
Received 8 April 2021 augmented Gravity Model approach. The model used latest ESCAP dataset with base year 2016. Results
Received in revised form show that simple average tariff imposition and GDP of partner countries positively impact the trade value
31 December 2021
of Pakistan, whereas simple average tariff imposition bilaterally harms the trade volume of the reporting
Accepted 8 February 2022
Available online 25 April 2022
country. Statistically, a one percent change in the tariffs rate will decrease 0.3 percent in Pakistan's total
trade. Moreover, a one percent increase in the GDP of the partner countries will increase Pakistan's total
trade by 0.5 percent. We also found that common language, landlocked, and distance significantly impact
Keywords:
Trade potential
Pakistan's total trade. This research recommends South Asian countries to revise the tariff rates and other
South Asian countries non-Tariff barriers to boost trade and connectivity for the better future of the inhabitants of South Asian
Gravity model countries.
RTA © 2022 The Authors. Published by Elsevier B.V. on behalf of College of Management, National Cheng Kung
Tariffs University. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/
GDP licenses/by-nc-nd/4.0/).

1. Introduction
The political economy of globalization gives stimulus to inter-
national trade and mass production. Countries are connecting
themselves in various economic and trade agreements to boost
economic and trade activities (Anderson et al., 2017; Khan et al.,
2018; Helpman, 1984; Ahmed et al., 2021; Malik et al., 2018; Van
Bergeijk & Brakman, 2009). Trade Liberalization and regional
trade have a positive impact on growth, but literature shows a
mixed impact on income distribution, especially in case of Pakistan
(Iqbal et al., 2018; Khan et al., 2021). The world's largest trade and
strategic block European Union comprises 27 countries excluding
the United Kingdom, which has improved the standard of living
and economic well-being of the masses of the incumbent countries
through great interaction in trade and political affairs (Iqbal et al.,
* Corresponding author.
** Corresponding author.
E-mail addresses: smkakar92@gmail.com (S. Masood), nabilakhurshid@comsats.
edu.pk (N. Khurshid), dr.haider@fu.edu.pk (M. Haider), drjamilakhurshid@upr.edu.
pk (J. Khurshid), arif.khokhar@rocketmail.com (A.M. Khokhar).
Peer review under responsibility of College of Management, National Cheng
Kung University.
2017; Khan, 2020). Moreover, North America Free Trade Agree-
ment (NAFTA) is another huge regional trade agreement among the
USA, Canada, and Mexico which also resulted in high economic
integration and trade creation. Similarly, in Asia various Regional
Trade Agreements.
(RTAs) have been signed like SAFTA (South Asian Free Trade
Agreement). But unfortunately; the member states could not utilize
the benefits it manifests in its initial drafts due to various political
and ideological issues. From the last few decades, global trade has
experienced a great shift in the dwindling of trade restrictions by
emerging, advanced, and transition economies to great extent. This
trade liberalization resulted from two approaches. First from the
multilateral agreements such as General Agreement on Tariffs and
Trade (GATT) and the second is from the formation of regional trade
agreements or trade blocks by a few nations among themselves
(Carbaugh, 2007).
Historically, in the South Asian countries for increasing trade
and regional cooperation, in December 1985 seven South Asian
countries formed an association namely, South Asian Association
for Regional Cooperation (SAARC). Moreover, in 1993 an agreement
was signed between the South Asian nations for the promotion of
trade by name of the South Asia Preferential Trade Agreement

https://doi.org/10.1016/j.apmrv.2022.02.001
1029-3132/© 2022 The Authors. Published by Elsevier B.V. on behalf of College of Management, National Cheng Kung University. This is an open access article under the CC
BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
S. Masood, N. Khurshid, M. Haider et al.
(SAPTA). Sahoo and Bhunia (2014) compared the percentage of
trade among major regions of the world and concluded that South
Asian trade among each other is 5 percent whereas trade between
North America Free Trade Agreement (NAFTA) is 52 percent and
intra-regional trade between Association of Southeast Asian Na-
tions are 26 percent. As small countries gain more, using gravity
models, due to preferential trade liberalization (Srinivasan &
Canonero, 1995). Rajapakse and Arunatilleke (1997) concluded
while using the same model that if we reduce trade restrictions the
is a huge potential for improving trade among Sri- Lanka and other
SAARC countries. Therefore, the current study has been conducted
to estimate the true potential of trade between Pakistan and other
South Asian countries.
The rationale for conducting this study is to empirically analyze
the trade potential between the South Asian countries as it is host
to the second-largest economy of Asia, India, which has a closed
border with most other South Asian countries. Due to various
strategic, demographic, and consumers benefits, it is the need of
the hour to promote regional trade in South Asia. As South Asian
region is the second-worst affected region due to high poverty after
the African region. Similarly, water security, climate change poses a
great threat to the breadbasket of the inhabitants of the region.
Therefore, if the incumbent countries reduced trade diversion ob-
stacles would be beneficial to reduce poverty and unemployment.
The Uniqueness of this study is two folds. First, we have used the
Comprehensive Gravity model of Trade in which the dataset is
designed as such for the researchers and policymakers to estimate
the impact of various variables on overall trade, both exports, and
imports. On contrary, other Gravity models of trade have not only
limited variables but estimate the impact either on exports or
import as a dependent variable, but not on the overall trade. Sec-
ondly, the Comprehensive Gravity model of trade has additional
policy indicators and bilateral trade variables, which investigate the
potential trade market using actual and predicted values of exports
and imports among trading partners. Similarly, this study also
incorporated the latest available data for the variables under
consideration.
2. South Asian Countries: An overview
Pakistan is situated in a geostrategic position in South Asia. It
has a vital location because it can connect to other South Asian
countries along with the Central Asian countries which are land-
locked geographically. The rest of the South Asian countries are
Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, and Sri
Lanka. The formation of the regional economic bloc has become an
important route for the economic growth of nations. South Asia is
the region with a population of 1.2billion. Pakistan, India, and
Bangladesh have greater economies as compared to other South
Asian countries. According to World integrated Trade Solution
(WITS) country profile, Pakistan's total export to Asian countries is
2385650 in thousands of US$ out of a total 23,748,680.25 in thou-
sands of US$ in 2019 which is 10.05% of the total export. The greater
share of Pakistani export in South Asian countries goes to
Afghanistan (14.48%), followed by Bangladesh (8.42%), India
(5.35%), and Sri Lanka (3.51%). Pakistan has a minimal share of its
exports to other South Asian countries like Nepal, Maldives, and
Bhutan. Apart from this, the close borders with India and
Afghanistan have also not achieved their potential.
Similarly, according to Atlas (2018), Pakistan imported from
Asian countries in 2018. Statistically, it is depicted that out of our
total imports of $61 billion, the huge amount of $45.6 billion is
flowing to Pakistan from Asian countries where the major share is
from China (36.71%) following by UAE (16.01%), Saudi Arabia (5.8%),
Indonesia (5.42%), Qatar (5.29%), and India (5.13%). Unfortunately;
46
Asia Pacific Management Review 28 (2023) 45e51
except for India, Pakistan has no greater import more than the
percent from other South Asian Countries. Consequently, there is a
huge potential among these countries to go for trade creation
rather than trade diversion.
The studies of Shahab and Mahmood (2013); Akhtar et al. (2009)
and Irshad et al. (2018) showed that Pakistan has a comparative
advantage in their fruit exports especially for dates and mangoes,
which resulting in a potential increase in higher export earnings.
Both, South Asian Free Trade Area (SAFTA) and the Most Favored
Nation (MFN) have not been active in promoting trade for Pakistan.
They also highlighted several reasons, some of which include poor
institutional quality, severe non-institutional arrangements, high
tariffs, and low physical infrastructure (Iqbal & Nawaz., 2017).
Different factors affect the export performance on the integration of
the Preferential Trade Agreement (Regional and Bilateral trade
agreements) of Pakistan. While the bilateral trade agreements with
China, Iran, and Malaysia seem favorable for exports of Pakistan and
indicated potential growth as well as Alam (2018). Nasir and Hassan
(2011) study various factors important for attracting foreign direct
investment and examine the role of economic freedom,
investment-friendly climate, trade openness, market size, and ex-
change rates in South Asian countries.
Furthermore, Pakistan's total exports to South Asian countries
have been depicted in Table 1. In 2019 Pakistan's total exports to
South Asia were 10.05% of its total exports, in which the largest
export partner was Afghanistan (4.97%) percentage of total export
followed by Bangladesh and Sri Lanka (3.33%) and (1.36%) per-
centage of total exports respectively. Ironically, with India, Paki-
stan's export is just 0.27 percent of its total export to South Asia.
Similarly, Pakistan's total imports from South Asia in 2019 were
3.51 percent of its total imports. Its largest import partner in South
Asia was India which accounted for 2.01 percent followed by
Afghanistan (1.285) and Sri Lanka (0.129%). Thus, it has been
cleared from these facts and figures that Pakistan has huge trade
potential with South Asian Countries. Particularly, with its close
neighbors with which, it has close cultural and religious proxim-
ities. Therefore, to tap these trade potentials Pakistan and its
trading Partners should devise a favorable trade policy based on
strong empirical facts and figures.
3. Research methodology
The exploration is about the trade potential of Pakistan with
South Asian countries. To find the trade potential we used the
gravity model of trade. The gravity model uses variables GDP, dis-
tance, RTA, imports and exports of the reporting and partner
countries, common language, tariffs and non-tariff measures, and
many other variables concerning trade. The value of trade is directly
related to the mass (GDP) of the economy and indirectly related to
the distance between them. In short, trade is directly proportional
to the product of the GDPs of economies and indirectly proportional
to the distance between them.
3.1. Theoretical foundations of gravity model
Since 1969, a continuous effort has been made for the theoret-
ical foundation of the gravity model. Anderson (1979) was the
pioneer for the incumbent development under the common as-
sumptions of constant elasticity of substitutions (CES) and product
differentiations by origin and place. In addition to Anderson's
development, Bergstrand's literature on gravity also adds worth to
the gravity model theoretical background (Bergstrand, 1989, 1990).
He gave microeconomic bases to the model and also established a
relationship between bilateral trade and trade theory while
including the supply side of the economy. According to his
S. Masood, N. Khurshid, M. Haider et al. Asia Pacific Management Review 28 (2023) 45e51

Table 1
Pakistan exports and imports to South Asian Countries, 2019.

Reporting country South Asian countries Exports Thousands of US$ Percentage to total Exports Imports Thousands of US$ Percentage to total imports

Pakistan Nepal $19337 K 0.081% $320 K 0.000639%

Pakistan India $66306 K 0.279% $1,008,553 K 2.01%
Pakistan Sri Lanka $322,915 K 1.36% $64,848 K 0.129%
Pakistan Afghanistan $1,180,107 K 4.97% $643,188 K 1.285%
Pakistan Bangladesh $790,699 K 3.33% $41,454 K 0.082%
Pakistan Maldives $6,286 K 0.026% $33.44 K 0.000066%
Pakistan Bhutan $0.32 K 0.000040 $250 K 0.000499%
Pakistan Total $2385650 10.05% $1758646 3.51%

Source: World Integrated Trade Solution (WITS) country profile

assumption products are differentiated by the origin of the country
and consumers differentiate products by their preferences. Simi-
larly, gravity models can result from various international trade
theories like the Heckscher-Ohlin model, Ricardian model, new
trade theories, intra-industry trade, and monopolistic competition
(Helpman & Krugman, 1985; Helpman, 1987; Deardorff, 2007, pp.
7e32 and Anderson & Van Wincoop, 2003). Furthermore, the
gravity model is consistent with various trade models such as
increasing return to scale, Heckscher- Ohlin (HO) model, Ricardian
model, and many others (Deardorff, 2007, pp. 7e32). Similarly,
Evenett and Keller (2002) revealed that the HO model and Ricar-
dian Model of trade are enough to support the gravity model. Be-
sides, Yotov et al. (2016) explain the popularity and success of the
gravity model through five broad arguments such as depicted in
Fig. 1 given below. Intuitional model, Strong Theoretical Founda-
tion, General Equilibrium, Predictive Power and Flexible Structure.
The theoretical relationship of the gravity model has been depicted
in Fig. 1.
3.2. Gravity model
Tinbergen (1962) suggests that the size of the bilateral trade
pattern between any two countries can be determined by the
gravity equation, derived from Newton's theory of gravitation.
Economists use the gravity model to analyze trade-related issues.
The gravity model of trade tells us about the magnitude of
bilateral trade. It is based on the size of economies and the distance
between them. The volume of trade between the two countries is
determined by the GDP of countries, the distance between coun-
tries, and some other parameters. The gravity model is not only
based on empirical data but also theoretical (the strong observed
relationship between the economy's size and volume of its trade
flow). The volume of trade has a direct relation to the product of the
size of two economies in terms of their GDP and indirect relation
with the distance between them. If the GDP of both economies is
large then it will have a beneficial effect on trade and therefore, the
volume of trade will increase. If the distance between two

Figure: 1. Gravity model theoretical background.

Source: adapted from Yotov, Piermartini, and Larch (2016: 12)

47
S. Masood, N. Khurshid, M. Haider et al. Asia Pacific Management Review 28 (2023) 45e51

economies is more it will harm trade, then their value of trade will Table 3
be less. The gravity model is not good for economies with a dif- Trade simulations used in this study.

ference in their GDPs. The trade potential of Pakistan with countries
in the Asia Pacific region, the European Union, the Middle East,
Latin America, and North America. Pakistan's trade volume with
these countries is low due to political and regional tensions (Gul &
Yasin, 2011; Malik & Chaudhary, 2012; Waheed & Abbas, 2015).
The comprehensive Gravity Model of Trade has been frequently
used by policymakers and researchers to estimate the impact of
various variables on total trade flow, net export, and net Imports
differences. Compare to the basic gravity model this model dataset
includes additional variables such as infrastructure, behind-the-
border trade cost, doing business index, and many others. The
dataset has been taken from the world bank ranging from 1995 to
2016 for more than 200 countries. As for the range of data is con-
cerned, it is the latest updated one and we take the year 2016 as a
reference year for our study. In this model of Gravity additional
variables such as traditional tariffs, trade facilitation behind the
border, GDP of partner and reporting countries, GDP of per capita
and GDP growth, etc. Similarly. In this model, the independent
variables can also include exports, imports, and total trade whereas
in the basic gravity model we have only imports and exports as
dependent variables. Therefore, this model is more comprehensive
than the basic gravity model. The dependent and independent
variables for this study are mentioned in the following equation.
Ln (Yij, t) ¼ b1þ b2ln (GDPj) þ b3ln(dist) þ b4ln
(tariffji) þ b5(RTA) þ b6(comlangethno) þ b7(landlockednessj) þ εij(1)
The variables are explained as follow:
Ln (Yij, t) denoted natural log of total trade it includes net ex-
ports and imports of country i to country j in the US $.
Independent variables are:
1. GDPj or Gross domestic product of j country in US $ (country j
denotes the trading partner).
2. Distj ¼ distance between country i and j in nautical miles.
3. comlangethno ¼ common language between country i to country
j (dummy).
4. Landlockedj ¼ landlocked-ness of the partner country j
(dummy)
Importantly, the main critical variable trade policy variable
includes:
1. Tariffsji ¼ Simple average tariffs of country j to country i.
2. RTA ¼ Regional Trade Agreements between country i and j
(dummy)
And “ε” is the error term and “t” denotes time duration whereas b’s
are the parameters. Similarly, the above-mentioned variables have
been described in Table 2 in detail. As in the Gravity model, we usually
incorporate the GDP of both reporting and trading partners but if we
Simulations Descriptions
Simulation 1 Pre-Shock Trade potential based on regression results
Simulation 2 Post-Shock trade potential based on decreasing simple tariff
rates by 50% and GDP of Partner countries increases by 5%.
want to incorporate the GDP of reporting country as well then, we
have to take the product of GDP of Reporting and Partner countries
which might give us the unrealistic results and endogeneity issue as
there are great variations in the economic mass of the South Asian
countries concerning Pakistan. Therefore, we intentionally drop this
variable. in the Gravity model, we usually incorporate the GDP of both
reporting and trading partners but if we want to incorporate the GDP
of reporting country as well then, we have to take the product of GDP
of Reporting and Partner countries which might give us the unrealistic
results and endogeneity issue as there are great variations in the
economic mass of the South Asian countries concerning Pakistan.
Therefore, we intentionally drop this variable.
3.3. Policy simulation
The policy simulation used in this study is mentioned in Table 3.
In the first simulation, our model automatically estimated the re-
sults of trade potential with existing tariffs and GDP level without
altering the policy shock while in the second simulation the study
has changed the level of tariffs and GDP growth level.
The rationale for decreasing the tariff rate to 50 percent by the
reporting country is due to the average tariff rate of ASEAN coun-
tries 3.50 percent where the tariff rate between the South Asian
countries is 5.9 percent (Government of Pakistan, 2019). Similarly,
the GDP growth in South Asian countries is on average 5 percent
therefore the study gave a shock to the GDP variable by 5 percent.
4. Results and discussions
When we selected the concerning dependent and independent
variables and run the gravity regression through ESCAP Trade An-
alytics Portal the results are depicted in Table 4 where all the in-
dependent variables show significant results. Table 4 reported the
outcomes of regression results, which showed the impact of inde-
pendent variables on the dependent variable. The independent
variables such as common language, Landlockedness, the natural
logarithm of the distance between the reporting and partner
countries, the Gross Domestic Product of the partner country, and
the tariff imposed by the reporter country on partner countries.
The result shows that if the partner countries' GDP increases by
1%, it brings a significant positive impact on Pakistan's total trade
which will increase by 0.58%. It is because income increases in
partner countries, it will consequently increase the demand for
imported goods. In the case of distance, the result shows that if the

Table 4
Table 2 Regression results.
Description of variables.
Variable Coefficient Std. error t-statistic p-value
S # Variables Description
comlangethno 5.710 0.318 17.940 <0.001***
1 Ln (GDPj) Natural log GDP (current GDP) US$ of j landlockedj 5.936 0.260 22.815 <0.001***
2 Ln (dist) Log of Distance Simple distance (most populated cities, km); Ln(dist) 4.757 0.196 24.263 <0.001***
3 Comlangethno 1 if a language is spoken by at least 9% of the population in Ln (GDPj) 0.586 0.0552 10.629 <0.001***
both countries Ln(tariffji) 0.344 0.154 2.238 0.029**
4 Landlockedj 1 if j is landlocked RTA 1.531 0.252 6.069 <0.001***
5 Ln (Tariffsji) simple Tariff of j charging partner i comlangethno 5.710 0.318 17.940 <0.001***
6 RTA 1 if regional trade agreement in force
Source: Author's Simulation

48
S. Masood, N. Khurshid, M. Haider et al. Asia Pacific Management Review 28 (2023) 45e51

partner countries' distance increases by 1% then it decreases Paki- Table 5

stan's total trade by 4.757%. It means those countries with which Existing trade potential before giving shock (Simulation 1).

Pakistan has a close border have a high potential for trade as Partner Ln(tradeij) Ln(tradeij)^ Estimated trade to actual ratio
compared to those countries with which Pakistan has a large dis- Afghanistan 21.471 21.489 1.001
tance. Surprisingly, the coefficient value of common language is Bangladesh 20.445 20.612 1.008
negative, and it inversely impacts Pakistan's total trade by 5.71%. India 21.402 21.343 0.997
Similarly, if the trading partner is a landlocked country means it has Maldives 16.168 16.347 1.011
Nepal 14.804 15.197 1.027
no access to seawater, which will bring a negative impact on
Sri Lanka 19.615 20.098 1.025
Pakistan trade by 5.936%. It is because a large amount of world
Source: Author's Simulation
trade has been done through the sea. Further, the landlocked
country will prefer to trade with its closed partner with which it
has a border along with access to water. In the South Asian coun-
tries, Afghanistan has one of the cheapest routes to sea through Estimated tradeij
Pakistan to the Arabian sea. Moreover, Central Asian countries, TPi ¼
Actual tradei
which are in natural resources can also link their trade to the world
through the land route of Afghanistan and Pakistan. Similarly, the where TP denotes Trade potential between Pakistan (i) and South
main variable of our study we the South Asian countries bilaterally Asian countries (j) TPij > 1 shows potential for trade expansion.
reducing tariff rate at least equal to the ASEAN countries will TPij < 1 shows exceeding trade potential.
greatly bring positive impacts on overall trade. if the partner's
countries increase the tariff rate by 1 percent it will reduce the total
4.2. Pre-shock trade potential based on regression results
trade of Pakistan by 0.344%. it is because tariff works as a trade
(simulation 1)
diversion, and it increases the price of the imported goods and
consequently the consumer decreases his demand due to a price
Based on the results mentioned in Table 4 the study determined
increase. If there are more Regional Trade Agreements (RTA) among
the trade potential of Pakistan between South Asian countries. It
South Asian countries like SAFTA will bring positive results on
helps us to compare actual values of trade with predicated values of
Pakistan's total trade. If South Asian countries engage in another
trade and consequently, we estimated the actual trade ratio. The
RTA, it will increase Pakistan trade by 15.3%. The new RTA will be
result is shown in Table 5 where [Ln(tradeij)] shows the actual value
beneficial and will act as trade diplomacy to reduce political ten-
of trade, [Ln(tradeij)] ^ shows the predicated value of trade and the
sions, particularly between the two rival countries, India and
last column shows the estimated actual trade ratio. It has been
Pakistan. As the coefficient value of RTA is depicted as 1.15 or 15%. If
noticed that the trade potential between Pakistan and South Asian
there is another RTA between South Asian countries it will increase
countries is greater than one, which means there is great potential
trade among them by 15%. Similarly, WTO also stresses for RTAs
for trade expansion.
rather than bilateral FTAs. Furthermore, the incumbent countries
can also establish common custom unions to boost trade activities
in the region. As commonly, in trade language, distance and land- 4.3. Trade potential after calibrating trade simulation (simulation
lockedness play a vital role. As the values of the incumbent vari- 2)
ables are slightly higher than expected. The basic reason for the
highest values of language, distance, and landlocked is due to few After estimating the trade potential, Table 5 is based on the
countries' selections in our study. As Gravity models promised regression results. Similarly, the study then calibrated trade simu-
more efficient results if we have larger sets of data and more lation where the incumbent study decreases the tariff rate by 50
countries in our analysis. As in South Asia, we have few countries, percent and increases the Gross Domestic Product (GDP) of part-
therefore the coefficient values of language, distance, and land- ners' countries by 5 percent; we get the result for the potential
locked show high values. trade among the respective economies. The justification for
The standard error shows the spread of data points around the decreasing the tariff rate to 50 percent by the reporting country is
fitted line called Standard Error. So, in the case of the above vari- due to the average tariff rate of ASEAN countries being 3.50 percent
ables, the distance between the fitted line and data points are where the tariff rate between the Asian countries is 5.9 percent
depicted Table 3 as; comlangethno (0.318%), landlocked (0.260%), (Government of Pakistan, 2019). Similarly, the GDP growth in South
distance (0.196%), GDPj 0.0552%, tariffji 0.154%, and RTA 0.252%. Asian countries is on average 5 percent therefore the study gave a
On the other hand, to assess the significance of coefficients the shock to the GDP variable by 5 percent. The result for trade po-
p-value shows that the common language, landlockedness, per- tential has been shown in Table 6, where there is a lot of
centage of distance variable, ln GDP, and RTA variable is significant improvement and room for trade between Pakistan and South
at 1% significant level while ln (tariff- Pakistan imposing on South Asian countries. There is a large trade potential between Pakistan
Asian countries) is significant at 5% significant level. and all trading partners except the Maldives and Sri Lanka which

Table 6
4.1. Trade simulation and trade potential between Pakistan and Trade simulation and trade potential between Pakistan and South Asian countries.
South Asian Countries
Simulations Simulation 1 results Simulation 2 results % change
Partner Ln(tradeij) Ln(tradeij)^ projected Dln(tradeij)^
One of the pertinent aspects of the ESCAP Trade Analytics Portal
Afghanistan 21.489 22.500 1.011
is the option of estimating trade potential after the post-estimation
Bangladesh 20.612 21.780 1.168
process. Trade potential is the ratio of estimated trade and actual India 21.343 22.623 1.280
trade between reporting (Pakistan) and partner countries (South Maldives 16.347 17.228 0.881
Asia). This trade simulation tells us how gaps, improvement, and Nepal 15.197 16.357 1.160
growth in trade still exist between the concerned countries. The Sri Lanka 20.098 21.007 0.909

equation for trade simulation is as follows: Author's simulation.

49
S. Masood, N. Khurshid, M. Haider et al.
means that there is a high trade potential still exist but for the
Maldives and Sri Lanka, the trade potential is less than one (0.88%
and 0.90%). It is because with Sri Lanka Pakistan has free trade
agreement and we have already achieved the trade potential
whereas the Maldives whose economy greatly relies on the blue
economy so have less acquittance with Pakistan's economy.
Furthermore, the incumbent shocks to tariff rates and the GDP of
partner countries will result in the creation of trade. The highest
trade potential is with India (1.280%) following by Bangladesh and
Nepal (1.16%) each and then Afghanistan which is also a landlocked
country greatly relay on Pakistan has a trade potential of 1.0
percent.
Table 6 can depict simulation-2 as quite better than simulation
one because simulation two has resulted in an impressive outcome
of trade volume. From the table, we can conclude that all south
Asian countries have the highest potential growth in trade volume
when Simulation e 2 is implemented. It seems to be a minor
change in percentage however when it is transformed to monetary
value; it is equivalent to millions. The 16.8% and 28% trade creation
are still appreciable because of the similar export and import basket
of the incumbent countries. Pakistan, India, and Bangladesh have
stiff competition in textile and other exported products while the
major chunk of their imports comprises oil which they all import
from the middle east.
5. Conclusion and recommendations
This research considers the trade potential of Pakistan with
South Asian countries using a partial general equilibrium approach.
The concepts of globalization and political economy are also dis-
cussed with elaborated examples showing how trade impacts the
overall outlook and boosts its relations in the international com-
munity. The research methodology adopted in this paper is based
upon the gravity model. This model encompasses the trade
agreements of Pakistan with other countries, particularly with the
neighboring South Asian nations. Not only does it help to under-
stand the facts and figures of trade and economic growth, but it also
includes an insight into the GDP growth of each of the concerned
country. The gravity model parameters are size, GDP growth, and
distance between the countries, to name only a few. We incorpo-
rated a comprehensive model of gravity from the ESCAP analytics
portal. This model helps to visualize the economic position of
Pakistan in South Asia and its potential to grow in the region
financially. The model's findings illustrate that there is huge trade
potential between Pakistan and South Asian countries. Afghanistan
(1.011%), Bangladesh (1.618%), India (1.280%), Maldives (0.881%),
Nepal (1.160%), and Sri Lanka (0.909%). The largest potential is with
India because we have no FTA with India while the lowest potential
is with Sri Lanka as with which we have already achieved trade
potential because Pakistan has FTA with Sri Lanka. In short, it is the
need of an hour; to devise a multilateral trade agreement among
South Asian countries to improve the economic well beings of
billions of people.
According to the findings of the incumbent study, we recom-
mend the concerned authority devise a multilateral trade agree-
ment (MTA) or regional trade agreement (RTAI among South Asian
countries to increase trade and production. If we have another RTA
like South Asian Free Trade Agreement (SAFTA) it will increase
Pakistan trade by 1.5 percent. Moreover, as the average GDP growth
rate of South Asian countries is 5 percent, it will also positively
impact Pakistan's trade flows. In addition to RTA, Pakistan should
do FTAs individually with concerned countries as there is huge
trade potential between Pakistan and other South Asian countries.
Particularly, with India, the trade potential value is 1.2, greater than
another country mentioned in the incumbent study. There are
50
Asia Pacific Management Review 28 (2023) 45e51
various reasons for FTA with India. First, it is the fast-growing
economy in Asia and the second-largest economy in Asia. Sec-
ondly, the trade cost between Pakistan and India is very low due to
the closed border. Strategically, Pakistan and India should settle
their political issues through trade diplomacy, benefiting billions of
populations.
To sum up, a detailed sketch of Pakistan's economic relations
with South Asian countries has been presented in this paper
considering already established literature as well as facts and fig-
ures. The concepts of globalization and political economy are dis-
cussed with elaborated examples showing how trade impacts the
overall outlook of a country and boosts its relations in the inter-
national community.
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