The upcoming budget is expected to mark a shift in Pakistan’s economic direction, from an inward-looking, protectionist stance to a more outward-orientated, globally competitive approach. Such a transition is complex and will take time to deliver tangible results, so it is natural for questions and concerns to arise.

Foremost among them is whether these reforms are truly necessary and what risks they pose if domestic industries face unfair competition from dumped or heavily subsidised imports. This article seeks to explain the rationale behind these long-overdue reforms, highlight their potential benefits, and outline the safeguards in place to protect vulnerable sectors during the adjustment process.

Over the past two decades, Pakistan’s export performance has remained largely stagnant. As a relatively closed economy with one of the lowest trade-to-GDP ratios in the world, the country has not only been losing its share in global export markets at an estimated rate of 1.45 per cent per year but has also been experiencing deindustrialisation. In contrast, peer economies that have progressively liberalised trade and integrated into global value chains have consistently expanded their export share. As a result, they have achieved sustained industrial growth and prosperity.

Pakistan’s outdated tariff system has dragged the economy down, shielding inefficiency, stifling innovation, and cutting us off from global markets

Boosting exports is the only sustainable path forward. Yet, Pakistan’s tariff structure undermines this goal. International experience shows that when developing economies lowered import tariffs across the board, they became more competitive, integrated into global markets, and saw a marked rise in industrialisation and exports. In fact, during the 1990s, when Pakistan pursued tariff liberalisation, industrial activity picked up and exports grew at double-digit rates. However, as reforms stalled, so did export growth.

In order to provide cheaper inputs to our industrial sector, we continue with a system of special exemptions. While larger firms can avail themselves of such schemes, small and medium enterprises (SMEs) face greater challenges, as they often source inputs from the local market. It is not only import duties but also higher withholding taxes for commercial importers that worsen the bias against SMEs. There is no realisation that SMEs represent approximately 90pc of businesses and contribute 40pc to the country’s GDP, and 30pc to total exports. The sector also employs an estimated 80pc of the non-agriculture labour force in Pakistan.

Furthermore, in an effort to monitor special exemptions, bureaucratic oversight has expanded significantly. Institutions such as the Engineering Development Board and the Federal Board of Revenue track the input-output ratios of imports and production for industries benefiting from these exemptions. While this approach was common in countries like India in the previous century, it has since been abandoned in favour of more market-orientated systems. In Pakistan, however, the value of such exemptions has risen sharply in recent years, creating an uneven playing field that disadvantages smaller firms.

During the 1990s, when Pakistan pursued tariff liberalisation, industrial activity picked up and exports grew at double-digit rates

High tariffs not only suppress exports; they also exacerbate poverty. Countries such as Vietnam, China, and Turkey have successfully used tariff reforms to lift millions out of poverty. In contrast, Pakistan continues to rely on regressive indirect taxes, which disproportionately impact low-income households by eroding their disposable income and purchasing power. As a result, Pakistan’s poverty levels remain significantly higher than those of its peer economies.

Finally, high tariffs have created strong incentives for smuggling, with its estimated volume now exceeding $6 billion annually. Beyond eroding government revenue now estimated to be roughly $70-90bn, this illicit trade undermines legitimate businesses and fuels the informal economy.

A common concern is how vulnerable industries will be protected from a potential surge in imports as tariffs are rationalised. To address this, the government has established a high-level committee, chaired by the finance minister, to identify sectors at risk and develop targeted strategies to ensure their sustainability during the transition period.

In addition to the dedicated committee, Pakistan has a range of trade defence instruments to protect domestic industries from harmful import surges. While anti-dumping duties (imposed on imports sold below fair market value) and countervailing duties (used to offset foreign subsidies) are well-known, safeguard measures offer a more flexible and responsive option. These measures can be applied to address import surges that threaten local industries, regardless of whether dumping or subsidies are involved. They can be implemented swiftly, through quotas or additional duties for a limited period, either proactively by the government or upon the request of an affected industry.

Pakistan’s outdated tariff system was dragging the economy down. It has shielded inefficiency, stifled innovation, and cut us off from global markets. It fuelled the informal economy and encouraged smuggling. Without reform, we would have remained stuck in stagnation, dependent on the International Monetary Fund’s bailouts and locked out of international supply chains.

The writer is a Senior Fellow at the Pakistan Institute of Development Economics. He has previously served as Pakistan’s Ambassador to the World Trade Organisation and as the FAO’s Representative to the United Nations in Geneva

Published in Dawn, The Business and Finance Weekly, June 10th, 2025