Tariff Policy: a bold step towards trade liberalization

The federal government has approved the National Tariff Policy (NTP) 2025–30, a transformative step toward trade liberalization. If implemented as planned—reducing the maximum customs duty (CD) to 15 percent and phasing out additional customs duty (ACD) and regulatory duty (RD) within four to five years—this could be Pakistan’s most significant trade reform to date.

The policy aims to dismantle the rent-seeking model that many industries rely on, enabling Pakistani firms to integrate into global value chains and ensuring only competitive players survive. Economic theory suggests that import tariffs create an anti-export bias, a claim supported by empirical evidence. In economies that lowered import tariffs, trade volumes grew, trade balances improved, and GDP and employment saw positive impacts.

However, no reform succeeds in isolation. The broader ecosystem must support it, with buffers to mitigate initial shocks. Reduced tax revenues, temporary job losses, and industry closures may occur as imports replace domestic production. Export growth will require time and investment, necessitating contingency plans during the transition.

Pakistan’s trade liberalization must avoid triggering a balance-of-payments crisis. With the State Bank of Pakistan (SBP) holding reserves covering only two months of imports, importers already face delays in opening letters of credit (L/Cs). Lowering tariffs could exacerbate this situation, as the SBP lacks sufficient buffers.

The exchange rate, as the first line of defence, must be allowed to adjust freely. If authorities resist this adjustment, administrative controls may resurface, and the Federal Board of Revenue (FBR) could impose higher consumption taxes, such as Federal Excise Duty (FED), undermining the reform. Disgruntled industrialists may also push for a rollback.

For success, the plan requires careful coordination. Authorities must align to allow currency adjustments in the initial phase. The FBR should enhance governance to broaden the tax base and offset revenue losses. The NTP, in its final form, is more ambitious than earlier drafts shared with the IMF, driven by the Prime Minister’s Office rather than external pressure. A phased approach—starting with liberalizing intermediate and capital goods, lowering income tax rates to incentivize investment, and later reducing tariffs on finished goods—could ease the transition.

This bold move signals a shift away from protectionism, challenging uncompetitive industries. While it may face resistance from influential industrialists, the government’s recent success in phasing out wheat support prices suggests it can withstand pressure. For industries, this is a wake-up call akin to the end of subsidized gas for captive power plants—a cold-water shock to build long-term resilience.

Yet tariff reductions alone are insufficient without addressing other import-stage taxes, such as high withholding tax (WHT) and sales tax rates, or consumption taxes like FED and GST, which discourage imports. Rationalizing these taxes is critical to curbing smuggling and the informal economy, but implementation is challenging.

The government must be prepared to manage the sunk costs of transitioning from protectionist policies, which have failed to boost exports in protected industries. The automobile sector, for instance, illustrates this inefficiency. Despite decades of protection, local assemblers have engaged in practices like transfer pricing, forcing auto part makers to buy overpriced raw materials from specific vendors. The 2016–21 auto policy increased local competition but failed to generate exports.

Under NTP 2025–30, auto assemblers face disruption. One player called it a “death warrant,” while a more established brand believes only competitive firms will survive. Some are exploring new energy vehicle (NEV) plants, though partnering with existing players for tool manufacturing may be more viable.

Industries like paper, board, polymers, tires, and mobile phones—particularly those supplying raw materials to local manufacturers—face existential threats. However, trade liberalization could foster new industries and entrepreneurship. Unlike protectionist regimes where policymakers pick winners, open trade rewards the most competitive, potentially spurring economic growth and easing taxation burdens.

Consumers stand to benefit from cheaper cars and other products, while exporters will face fewer barriers to global markets, reducing reliance on bureaucratic refund processes. Nevertheless, risks—such as policy reversal or economic instability—must be managed carefully to ensure the NTP’s success. Fingers crossed.

Copyright Business Recorder, 2025