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Abstract

This study evaluates the impact of the Indonesia–Pakistan Preferential Trade Agreement (IPPTA) on bilateral trade using the gravity model of international trade. Annual time series data from 1990 to 2023 are analysed through unit root testing, bounds testing, and Autoregressive Distributed Lag (ARDL) estimation to examine both short- and long-run effects. The model includes four variables: bilateral trade, GDP of Indonesia and Pakistan, geographical distance, and a dummy variable for IPPTA to compare trade performance before and after the agreement’s implementation. The results indicate that Indonesia’s GDP has a positive and statistically significant impact on bilateral trade in both the short and long term. In contrast, Pakistan’s GDP has a significant impact only in the long term. Geographical distance, though commonly considered a trade barrier, shows a significant positive effect in the long run, indicating improvements in trade infrastructure. However, contrary to expectations, the IPPTA dummy variable exhibits a negative and statistically significant effect in both the short and long run, suggesting potential trade diversion, limited utilization, or transitional disruptions after the agreement’s enforcement. These findings imply that macroeconomic growth and improved connectivity are more consistent drivers of bilateral trade than trade agreements alone. Preferential agreements require strong institutional frameworks and complementary policies to produce tangible trade benefits. This study is limited to the Indonesia–Pakistan bilateral case and excludes variables such as interest rates, disaggregated product-level trade data, and services trade due to data constraints. Future research should incorporate broader economic indicators and sectoral trade breakdowns to deepen the understanding of trade agreement effectiveness.

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