Determinants of Revealed Comparative Advantage and China Pakistan Economic Corridor

Abstract

In the study we have find determinants of RCA and its impact on CPEC. The objective of the study is to find determinants of Revealed Comparative Advantage. With the help of these determinants we can improve the sectors of Pakistan from which Pakistan can gain more from the project of CPEC. It can maximize our gains of trade with China and other nearby countries. We have calculated RCA for Pakistan and China by using the commodity wise data of Pakistan and China and total merchandise trade of these countries and World as a whole. We have made framework of export demand function. In which dependent variable is RCA and independent variables include Inflation, FDI, World GDP, GDP, Trade openness and Exchange rate for each sector. The data is collected for the years 1984 to 2015 for sectoral  exports. The data is divided into two samples. One sample is from the year 1984 to 2015. The sectors covered in the sample period include Agriculture, Fuel and mining, Food, Manufacturing and Office and telecom. Second sample is from the years 1990 to 2015. The sectors covered in the sample period include Agriculture, Automotives, Chemicals, Clothing, Fuel and Mining, Food, Iron and Steel, manufacturing, machinery, Office and Telecom and textile.  The results of this study indicate that Pakistan can get a lot of advantages from CPEC and ONE ROAD ONE BELT policy of China by specializing in food, agriculture, clothing, textile and fuel and mining because Pakistan has comparative advantage in the exports of these products over China. The results  of regression analysis indicate that Pakistan may boost up its advantages from CPEC by introducing investment friendly policies especially  for foreign investors. Effective management of exchange rate may also be helpful for Pakistan in improving balance of payments and earn foreign exchange earnings. The findings also suggest that policy of trade liberalization or trade openness may be helpful in improving trade balance if Pakistan can effectively manage specialization in the sectors in which the country has revealed comparative advantage.