CTTN Research Grants Program: The CAREC and Its Neighboring Regions: A Diagnostic of the Intra-Bloc and Extra-Bloc Trade

Under the CAREC Institute CTTN Research Grants Program 2021, Amjad Masood and Junaid Ahmed from Pakistan Institute of Development Economics (PIDE) examined the dynamics of intra-CAREC trade flows and trade potential with the neighboring regions, namely, Russia, Europe, the Mediterranean, the Middle East, and South Asia. The findings show that CAREC-WC (CAREC without the PRC) has a higher comparative advantage in labor- and resource-intensive manufacturing sectors, which explains the overdependence of these countries on few export industries. Similarly, trade complementarity is analyzed between CAREC members, CAREC exporters, and the neighboring regions. Furthermore, the researchers examine the logistic performance and cost of exporting. They conclude that there is an opportunity for trade expansion indicated by the Trade Complementarity Index, however, the dismal logistic conditions dampen this opportunity.

For empirical analysis, they estimated a structural gravity model to examine the trade effect of regional trade agreements (RTAs) on bilateral exports of eight CAREC members, namely, Afghanistan, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Mongolia, Pakistan, and Uzbekistan between 2000 and 2019 years. The estimates show a positive and statistically significant trade effect of the RTAs on intra-bloc trade. However, the effect of RTAs is trivial for exports outside the CAREC region. The underlying reason is that there are only few trade agreements involving non-CAREC countries.

Regarding individual exporting countries of the CAREC region, the trade-facilitating role of RTAs is evident for Kazakhstan, Pakistan, and Uzbekistan. On the other hand, exports of Mongolia seem to divert more towards non-RTA member countries. The findings of this report have implications for several policy dimensions with respect to the export potential of the region.