Minor Assignment # 1
Assessing Bilateral Trade of Pakistan with China and USA:
A Gravity Model Approach
Yasir Mehmood
PhD Development Economics (Weekend Program)
Roll No. NUML-16B-F25-40951
Instructor
Dr. Samina Farooq
Department of Economics
NATIONAL UNIVERSITY OF MODERN LANGUAGE
October, 2025
Contents
Introduction.................................................................................................................................................3
Significance of study...................................................................................................................................4
Research question........................................................................................................................................4
Research objectives.....................................................................................................................................4
Contribution/ (this is a part of Significance of study)..................................................................................4
Reference....................................................................................................................................................5
Introduction
Pakistan's bilateral trade with major world leading economies like China and the United States is
essential in the molding of its external sector performance as well as economic growth. While
China has appeared as the major trading partner of Pakistan, especially after the commencement
of CPEC, the United States still remains a leading export partner especially in textiles and
apparel. The analysis of trade dynamics with these two diverse economies is important - as one
being a regional partner and second is leading global economies - to assess Pakistan's trade
potential and policy direction.
The study applies the gravity model to analyze bilateral trade flows between these countries.
This model suggests that trade is determined by the size of the countries' economies and the
distance between them, along with other influencing factors. The model applies to evaluate the
determinants of Pakistan's trade with China and the USA, also comparing the relative strengths
and constraints in each relationship. This will also help policymakers identify opportunities for
trade expansion, address structural barriers, and design strategies to enhance Pakistan's global
trade competitiveness.
Giving a theoretical justification for applying the gravity model investigate that economic and
cultural proximity significantly increases trade between Pakistan and its regional trading
partners, while larger distances restrict the trade (Javed Iqbal 2020). The regional corporation
such as membership in SAARC and ECO have positively contributed toward the intensity of
trade, but the overall potential is underutilized because of political instability, infrastructural
constraints, and low complementarity in production process.
The study indicates that the GDP of China & Pakistan positive impacts on trade, while
geographical distance and trade hurdles are the main restrictions to increasing the size of trade.
The analysis concludes that trade between Pakistan and China is below its potential, suggesting
important opportunity for growth under the CPEC framework (Xin, & Arshad, 2018).
The overall trade capacities between Pakistan, China, and the USA are well predictable, an
analytical gap exists as assessing the comparative studies. Prevailing literature emphasizes the
relationship in segregation or within border or regional studies, missing a comparative analysis
that uses an econometric framework The main question is still persistence that to what extend the
gravity model explain the effects of trade relationship of Pakistan, USA and china existing
geographical differences cultural dissimilarity affect the trade volume or otherwise. Now the
question is does gravity model explain the trade relationship of Pakistan and neighboring
strategic and trade partner China differently than the faraway economic partner of USA.
Significance of study
This research gives a comparative econometric analysis of Pakistan's trade with two global main
powers. To check the strength of Gravity Model in explaining trade dynamics between a
developing country and developed economies with immensely diverse strategic (China) and
economic (USA) relationships.
Research question
Question # 1: Does distance component of gravity model justify the actual trade in
explaining the differential impacts of Pakistan's bilateral trade relationships with its
strategic neighbor, China, and its major non-neighboring economic partner, the United
States?"
Question # 2: is for impact of mass (population effect on trade?
Question # 3: Despite geographical and cultural dissimilarities, which relationship offers
greater potential for enhancing Pakistan's trade benefits, and why?
Research objectives
The primary objective of this research is:
To employ a comparative Gravity Model framework to empirically analyze and contrast
the determinants of Pakistan's bilateral trade with China and the United States.
To specify and estimate an enhanced Gravity Model of trade for Pakistan, incorporating
core variables (GDP, distance, population) and policy variables (exchange rate, trade
openness, labor endowment).
To identify the key strategic factors (both economic and geopolitical) that explains the
differences in trade dynamics with each partner.
To derive policy recommendations for Pakistan to strategically leverage these
relationships to achieve sustainable economic growth and macroeconomic stability.
Contribution
It is tried to address comparative, analysis of under developing economies with developed
economy (USA) and try to analyze the impact of gravity model on developing and developed
economies.
The article provides an important test of the power of the Gravity Model in a novel framework
of a strategic (Pakistan-China) partnership that seeks to mitigate distance versus traditional
economy oriented (Pakistan-USA) partnership where distance is influenced with greater
magnitude.
The results of the study will demonstrate how to manage for a developing country in an
increasingly multipolar world, providing information and tools today that are needed to take
advantage of trade opportunities with both locally and abroad with high probability.
Reference
Irshad, M.S., Xin, Q., Hui, Z., and Arshad, H. (2018d). An empirical analysis of Pakistan’s
bilateral
trade and trade potential with China: A gravity model approach, Cogent Economics & Finance,
Vol, 6. Issue,1. pp, 1-18. [Link]
Iqbal, J., & Nosheen, M. (2020). Economic & Cultural Distance & Regional Integration. The
Pakistan Development Review, 59(2), 243-273.