Third-Country Exchange Rate Volatility and Pakistan-China Trade at the Commodity Level

This study examines the impact of exchange rate volatility on China-Pakistan trade flows from 1980 to 2020. Using data from 42 import industries and 34 export sectors, bilateral trade between China and Pakistan is analyzed, with the US as the third country. Cointegration analysis reveals a strong relationship between Pakistan-China trade flows and exchange rate volatility. The yuan/dollar exchange rate negatively affects 22 import and 24 export industries in Pakistan, while the rupee/dollar exchange rate negatively impacts 31 import and 17 export industries. Findings suggest that the exchange rate volatility of the third country hampers bilateral trade between Pakistan and China.