Pakistan's international trade: The potential for expansion towards east and west

• Liberalisation of Pakistan’s overland trade to both the east and west offers an important opportunity for economic growth.
• This project sought to identify the barriers to Pakistan’s east-west trade and to explore the potential of their reduction for trade expansion.
• We found that undeveloped overland trade routes with China and policy-induced restrictions on trade with India have significantly reduced Pakistan's exports to and imports from these countries.

Recent developments present an opportunity for Pakistan to lower barriers to trade not only with India in the east but also a number of countries (including China) in the west and north, which are accessible via westward land routes. East-west liberalisation of Pakistan's international trade could lead to a large expansion in imports and exports, and have a major impact on Pakistan's economy.

To identify the trade effect of east-west barriers, we used a large data set to estimate a model that explains bilateral trade flows for most trading pairs in the world. We found that the cost of barriers to trade between Pakistan and both India and China are substantial. In the case of trade with India, policy restrictions are the most significant barriers. The most important barrier to trade between China and Pakistan is the high cost of land transportation. Our findings suggest a potential for substantial expansion of trade with China and India if these barriers can be reduced or removed.

Expanding trade with India would require improvement in relations to negotiate reduction of trade restrictions. The recent China-Pakistan Economic Corridor (CPEC) project provides an important opportunity to expand trade with China by reducing the costs of land transportation. CPEC will be more effective in stimulating Pakistan-China trade if it is well connected to large markets and production centres in different provinces in Pakistan.