Trade Balance Dynamics in Pakistan and Bangladesh: An Empirical Comparison

Trade is a central measure to enhance economic productivity in any economy. This research explores and contrasts the factors of Pakistan’s and Bangladesh’s trade balances. The effects of foreign direct investment, exchange rate, gross domestic product, and remittances on Bangladesh and Pakistan’s trade balances studied for time series data from 1978-2020 in this study. ARDL Bound test for cointegration is used for the analysis. Regression results revealed that both Bangladesh’s and Pakistan’s GDPs have a large positive influence on the trade balance, whereas foreign direct investment has a major, undesirable and significant influence on Pakistan’s and Bangladesh’s trade balance. This negative relationship in Pakistan is attributable to a variety of factors, including security concerns, political upheaval, many wars, corruption, and inefficient labour and capital usage. Exchange rate has a considerable detrimental influence on both Bangladesh’s and Pakistan’s trade balance, whereas remittances also have a big negative impact on both economies. Some of the suggestions have been that Pakistan and Bangladesh should strengthen their local currencies, raise tariffs on luxury imports, and improve domestic production to reduce reliance on foreign goods. Further research is needed to understand why FDI and remittances negatively impact their trade balances.