Untapped Potential: Assessing Pakistan-China Trade Using a Gravity Model Framework

Abstract

This study assesses untapped trade potential between Pakistan and China using an augmented gravity model on panel data (1990-2025), revealing Pakistan's exports underperform predictions by 28-35% despite CPEC's $62 billion investments and PCFTA tariff reductions. Poisson PPML estimation yields theoretically consistent elasticities exporter GDP (0.87), importer GDP (1.05), distance (-1.18) with CPEC generating 73% trade creation and NTMs imposing 27% drag (40% of total gap). Sectoral analysis identifies agriculture (48% untapped), textiles (32%), and minerals (25%) as priority sectors. Robustness across GMM, sub-periods, and HS2 disaggregation confirms findings. Counterfactual simulations project $1.2 billion export gains (42% uplift) from NTM harmonization, logistics optimization, and PCFTA Phase III, halving the $25 billion 2025 deficit. Results inform Pakistan's 2026-2030 Export Policy, aligning with SDGs 8/17 while advancing BRI-South Asia gravity literature.