Intermediate Import Demand Under Liberalized Fta Regime With China : A Case Study For Pakistan

Abstract

With the emerging trend of globalization in the world, Pakistan also took the advantage and entered in signing trade agreements with neighbouring countries. These agreements used to strengthen the economic welfare and gain from trade. This study attempts to evaluate the impact of Pak-China Free Trade Agreement (FTA) on import demand at dis-aggregated level of intermediate goods using time series data from 1990 to 2023. For analyzing this impact of FTA on import demand, we developed two models, one model with only FTA dummy and the other model with an interaction dummy of FTA with relative import price. In this study we employed the ARDL bound testing approach developed by Pesaran (2001) and found cointegration relationship among the variables. Long run result findings show that all the variables including FTA dummy influencing import demand more significantly and positively in first model, whereas in second import demand is highly elastic with respect to GDP, but less elastic with relative import price. The positive result for relative import price is different, which may be in this case of sectoral import demand of intermediate goods. It empathizes the needs of intermediate goods as a necessary goods to meet the production requirements irrespective of import prices.Whereas foreign exchange reserves only significant with FTA dummy model but insignificant in the interaction dummy (FTA with relative price) model. Long run result indicates that FTA has favorable effect on imports when economy adjust fully. In short run, we found FTA impact is insignificant in the current period but significant in the lagged period.in both the models. The value of real GDP is highly elastic in the long run which means that as GDP grows, the import demand for intermediate goods will also grow in Pakistan. Because the intermediate goods comprises of industrial inputs used in production. As policy recommendation, Pakistan should produce those goods that will increase exports rather than in domestic consumer goods, otherwise there will be a high trade deficit in the economy.

Keyword : bilateral trade, China, FTA, Cointegration, Disaggregate import demand

JEL Classification : F14; F15; C22