Who Gains from CPEC in Pakistan: A Household Level Analysis?

Abstract

The standard Stolper-Samuelson theorem of international trade states that liberalization of trade leads to rise in the income of unskilled labour. Therefore, the poor unskilled labours are the largest beneficiary of trade liberalization. As Pakistan has comparative advantage in producing unskilled labour-intensive goods, hence it is reasonable to expect that trade reforms such as CPEC would be pro-poor. The study therefore aims to provide micro-econometric prediction of the likely impact of Pakistan-China trade relations on household welfare. In the first stage study calculated SITC 2-digit average annual tariff rates for various identified comparatively advantageous manufacturing industries by employing the UNCTAD TRAINS database. Tariff measures in the second stage matched to the PSLM survey data to represent the tariff for the industry in which the household head and other members are employed. After matching Tariff, measures at the two-digit level, to the PSLM survey data for 2005-06 and 2013-14, to represent the tariff for the industry in which the household labour force is employed, the study examines the effect of tariff on household income. We assumed that it might not be uniform across households engaged in different sectors/industries after trade liberalize with China. The study applies pseudo-panel econometric technique to the repeated cross-section dataset of PSLM in order to analyze the impact of trade on household labour earnings by time. The analysis suggests that higher tariff rates are associated with higher incomes for households employed in that sector. So tariff reductions may reduce income and decrease welfare in case Pak-China trade agreement reduce tariff barrier. In other words, if trade liberalization occurs, households affiliated to the industries that experience large tariff reductions would see a decline in their incomes.