Pakistan’s tariff structure has long been a topic of contention, both domestically and internationally. While intended to protect local industries and boost revenue collection, the country’s tariff policies have inadvertently stifled competitiveness, discouraged exports, and worsened the trade deficit.
Pakistan’s tariff structure has long been a topic of contention, both domestically and internationally. While intended to protect local industries and boost revenue collection, the country’s tariff policies have inadvertently stifled competitiveness, discouraged exports, and worsened the trade deficit.
At a time when economic recovery hinges on international trade and investment, a reform of the existing tariff system is critical for fostering economic growth and stability.
The current tariff system is designed with the intent of protecting local industries through high import duties and regulatory barriers. While this might seem beneficial in the short term, long-term effects are alarming. High tariffs discourage innovation and competition, leading to inefficiencies in production and ultimately limiting export potential. Pakistan exports only 10 per cent of its GDP -- a stark contrast to more export-oriented economies like Vietnam, which exports 100 per cent of its GDP. This low export-to-GDP ratio is indicative of deeper structural problems that high tariffs exacerbate.
Moreover, the tariff regime tends to penalise industries that rely on imported raw materials. Rather than nurturing domestic production, high tariffs raise costs for businesses that depend on foreign inputs, limiting their ability to compete both locally and globally. Pakistan’s manufacturing industries, particularly in textiles and automobiles, are prime examples of sectors that have been insulated from competition for too long. Local manufacturers often charge higher prices for lower-quality goods, stifling innovation and making it difficult to compete internationally.
According to the World Bank, nearly 50 per cent of Pakistan’s tax revenue comes from customs duties, much higher than regional peers like India, where customs revenue accounts for only 12 per cent. This over-reliance on border taxes distorts markets and creates inefficiencies, disincentivising exports and encouraging rent-seeking behaviour. As a result, Pakistan’s export basket remains heavily concentrated in low-value-added goods like textiles, while high-potential sectors like electronics and chemicals are underdeveloped.
Equally problematic is the lack of a coherent data-driven approach to tariff management. Pakistan’s tariff policy has historically been driven more by short-term revenue needs than by strategic economic goals. A more sophisticated approach -- one that leverages data to identify sectors ripe for export growth -- could help Pakistan shift toward a more dynamic, open economy. Countries like South Korea and China have successfully used targeted tariff reductions and free trade agreements to boost their competitiveness and attract foreign direct investment, a model that Pakistan could emulate.
By implementing tariff reforms that prioritise competitiveness and economic integration, the country can unlock its potential for growth and development
In addition, the issuance of Statutory Regulatory Orders (SROs) by the Federal Board of Revenue (FBR) has added to the complexities of Pakistan’s trade regime. While SROs are often used as quick fixes to adjust tariff rates or grant exemptions, they contribute to policy inconsistency and unpredictability. Businesses, both local and foreign, find it difficult to plan their investments in such an unstable policy environment, further dampening economic growth.
To move forward, Pakistan must adopt a more holistic approach to trade policy. The role of tariffs should be redefined from being a primary revenue-generating tool to one that promotes trade and industrial growth. Reducing import tariffs, particularly on intermediate goods and machinery, could enhance industrial competitiveness, allowing local businesses to integrate into global supply chains. Moreover, reforms should aim to balance protection for nascent industries with incentives for innovation and export growth.
On the global front, Pakistan’s participation in trade agreements like the China-Pakistan Economic Corridor (CPEC) offers significant opportunities for growth. However, without a robust tariff policy that complements trade agreements, these opportunities could be missed. Integrating trade and investment policies with a focus on export diversification could help Pakistan reduce its dependence on a narrow range of export goods and markets, thus making the economy more resilient to external shocks.
The future of Pakistan’s tariff policy should focus on fostering competitiveness, boosting exports, and creating jobs. High tariffs on finished goods should be replaced with policies that encourage industrial upgrading and investment in high-value-added sectors. Moreover, moving toward a low-tariff regime with a clear and predictable policy environment could attract foreign investment, stimulate innovation, and drive economic growth.
Pakistan stands at a crucial juncture. By implementing tariff reforms that prioritise competitiveness and economic integration, the country can unlock its potential for growth and development. However, without decisive action, the existing policy will continue to hinder progress, leaving Pakistan’s industries struggling to keep pace in an increasingly globalised world.
The writer is a research associate at SIA. He tweets/posts @Usamaabdulrauf and is available on LinkedIn: www.linkedin.com/in/usamaabdulrauf
