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Purpose Pakistan’s natural endowment of labour and land is suitable for labour-intensive agriculture and manufacturing sector. This study aims to investigate international trade competitiveness of Pakistan in 14 major industries of agriculture and manufacturing sector, accounting more than 85 per cent of total export receipts. Design/methodology/approach The competitiveness of Pakistan in selected industries of agriculture and manufacturing sectors from 2003 to 2014 is investigated using the revealed comparative advantage (RCA) index, introduced by Balassa (1965) on HS data collected from the United Nations Commodity Trade database. The obtained indices in this study are then subjected to panel regression analysis to investigate the effect of domestic productivity growth and real exchange rate on international trade competitiveness of major industries. Findings The results show that the agriculture sector of Pakistan has higher comparative advantage in raw cotton, cereals, raw leather and fruits. The raw cotton shows the highest competitiveness of 54.46 which is followed by cereals (17.13), leather (9.83) and fruits (1.97). The RCA of the manufacturing sector shows that textile (54.85), carpets (10.72), sports goods (2.18) and beverages (1.47) have higher competitiveness. The RCA, in relatively capital-intensive industries, shows a high disadvantage. The trend analysis shows distorted competitiveness in labour-intensive, textile, carpet and footwear industries. The results of panel regression analysis show that the domestic productivity growth and real exchange rate depreciation have a significant positive impact on the international competitiveness of selected industries. The study urges Pakistan to make its macroeconomic environment investment-friendly and encourage investment in deteriorating labour-intensive industries. Practical implications Globalisation has significantly increased international competition, and Pakistan is losing its competitiveness in labour-intensive industries owing to lack of domestic value addition and development efforts. The major problem with the productivity of these industries is the lack of proper infrastructure, acute energy crisis, lack of domestic and foreign investment and overvaluation of real exchange rate. The domestic investors are shifting their capital either to other domestic sectors and/or other investment-friendly countries. Policymakers in Pakistan should address the problems of these important labour-intensive industries. The government needs to understand macroeconomic uncertainties and make investment-friendly policies to encourage domestic and foreign investment. The future studies should perform in-depth research to identify both microeconomic and macroeconomic variables responsible for deterioration in competitiveness of major labour-intensive industries in the agriculture and manufacturing sectors of Pakistan. Originality/value This study is a comprehensive examination into the nature and pattern of international competitiveness of Pakistan in 14 important industries of the agriculture and manufacturing sector which has seldom been investigated empirically. The obtained indices in this study are also subjected to panel regression analysis to explore the effect of domestic productivity growth and real exchange rate depreciation on the international competitiveness of Pakistan.

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Pakistan is facing a chronic trade deficit due to highly concentrated nature of its international trade. The exports are dependent on the few lower value added agriculture and manufacturing industries, and are directed toward few trading partners. The highly concentrated nature of exports result in higher vulnerability and dependence of the economy. Pakistan signed regional and bilateral free trade agreements for diversification of its exports and markets. These free trade agreements significantly distorted the trade balance due to relatively lower specialization level of Pakistan. The trade theories and empirical studies urge achievement of competitive specialization in diversified exports and markets. This study attempts to investigate the macroeconomic behavior of export flow and export potential of Pakistan with its bilateral trading partners employing the augmented gravity model using panel data from 40 trading partners for the period 1991-2011. The dependent variable is merchandise exports flow, which is explained by the domestic supply capacity, demand potential of trading partners, relative price level and binary variables for free trade agreements, common language and common border. The model is then used to investigate potential markets for exports by Pakistan and provides a framework for export and market diversification. The annual data for this study is available in Statistical Year Book of Pakistan, World Development Indicators and International Financial Statistics. The results show that Pakistan’s export is positively determined by its supply capacity and partner country’s demand potential as well as market size, whereas negatively determined by the geographical distance. The domestic supply capacity shows the highest possible effect. The relative price shows significant positive, but less elastic impact. The common language shows significant positive impact while common border shows negative impact. The free trade agreements of Pakistan show negative insignificant impact. The result of export potential shows that the Pakistan has higher export potential with India, Philippines, Japan, Singapore, Malaysia and Indonesia, in Asia. Morocco, Egypt and Tanzania, in Africa. New Zealand and Australia, in Oceana. Hungary, Austria, Switzerland, Finland, Norway, Denmark and Sweden, in Europe. The Europe emerged as the most potential region for Pakistan’s exports. The policy implications of this study are that Pakistan needs to develop and diversify its industries targeting market fundamentals of potential economies, and revisit its regional and bilateral free trade agreements with a view to improving the trade balance and achieving sustainable economic development.