Exploring bilateral trade potential: A promising analysis

Abstract

Trade has been playing a significant part as an engine of growth for almost every nation on the globe. Each country attempts to have bilateral, regional, free trade, or preferential trade agreements to boost its economic growth and potential. The study focuses on investigating the bilateral trade potential of Pakistan with selected Organization for Economic Co-operation and Development (OECD) countries specifically with the United Kingdom, Japan, Australia, Sweden, Switzerland, and Norway, through Panel data analysis. The sample period is taken from the year 1982-2021. Variables used are economic growth (GDP), economic development (GDP per capita), the exchange rate (exr), inflation (inf), and foreign direct investment (FDI) are empirically researched on bilateral trade. Unit root test is applied to test the stationarity. Following the stationarity estimations descriptive analysis is conducted. Simple panel OLS regression, random and fixed effects are applied. Hausman is conducted and probability was found to be less than 0.05 therefore, the fixed effects model was found to be the most appropriate. A test for endogeneity was applied. As endogeneity was found to exist, further two-staged least square is applied for robustness. The fixed effects model in 2sls revealed no significance of Gross domestic product, Gross domestic product per capita, and inflation, while the exchange rate has a positive and significant relationship. Distinctive results are attained for foreign direct investment where a negative significant relationship is discovered. The findings suggest that for trade promotion the goal should be to keep the exchange rate low and FDI flows are not to be focused on the trade partners.