Tariff reform is necessary—but Pakistan’s auto industry remains sceptical

Pakistan’s National Tariff Policy 2025–30 is bold, clean, and on paper long overdue. By collapsing a messy duty structure into four slabs (0 percent, 5 percent, 10 percent, and 15 percent) and committing to phase out Additional Customs Duties and Regulatory Duties, the government is signalling a decisive shift toward a more open economy.

The ambition is clear: bring average tariffs down to 6 percent by 2029–30, reduce anti export bias, and push Pakistani industry toward global competitiveness.

But there is a difference between direction and timing. And right now, the timing deserves far more scrutiny especially for sectors like automobiles.

Pakistan’s auto industry is often criticized, not without reasons, for high prices, limited choice, and periodic supply shortages. Yet beneath that surface lies a more complex reality. Over the past decade, the sector has built an installed capacity of nearly 500,000 vehicles a year, supported by a vendor base of over 500 parts manufacturers. It directly and indirectly employs hundreds of thousands.

And yet, it is still not globally competitive.

Domestic demand, even in good years, has hovered around 250,000–300,000 units, well below installed capacity. Localisation remains uneven strong in older models, but shallow in newer platforms, especially in high value components like engines and electronics. In short, the industry has scale potential, but does not have scale reality. This distinction matters. Because tariff liberalisation assumes that domestic firms are either already competitive or close enough to become so under pressure. Pakistan is neither.

Consider the cost structure. Since 2018, the rupee has depreciated by more than 50 percent, sharply increasing the cost of imported inputs. Interest rates have spent long periods in double digits. Energy tariffs remain among the highest in the region. Add regulatory unpredictability and security related costs, and local manufacturing begins at a disadvantage that tariffs alone cannot offset.

In such an environment, rapid tariff compression does not create competition; it risks creating collapse.

Economic theory does support reducing protection over time. But it also assumes policy consistency, open competition, and the absence of artificial constraints on production. Pakistan’s history offers little comfort on any of these fronts. Tariff regimes have shifted frequently. Policies have reversed midstream. Investment cycles have been disrupted.

It is difficult to invest for the long term when the rules change in the short term. This is precisely the concern raised by the Pakistan Business Council during its 2024 “Dialogue on the Economy” consultations. The message from industry was not a rejection of reform, but a warning against haste. Liberalisation without stability, they argued, risks weakening industry rather than strengthening it.

The automotive sector illustrates another problem with the current approach: complexity.

Car manufacturing is not a simple assembly business. It depends on deep supply chains, technical capabilities, and coordinated investments across dozens of components. Countries that succeeded Thailand, India, even China did not leap to low, flat tariffs overnight. They used cascading tariff structures to encourage localisation: low duties on inputs, higher on finished goods, and clear, time bound pathways toward export competitiveness.

Flatten that structure too quickly, and the incentives to localise weaken. Vendors struggle to survive. Assemblers revert to imports. The ecosystem stalls before it matures. Pakistan cannot afford that outcome.

This is not an argument for indefinite protection. Consumers have paid the price of inefficiency for too long. But neither is it an argument for speed at the expense of strategy.

The real question is whether Pakistan wants to be a manufacturing economy or merely a market.

If it is the former, then tariff reform must be sequenced, not rushed. Protection, where it exists, must be conditional and time bound but also credible. Policy must remain stable long enough for firms to invest in scale, technology, and localisation. And most importantly, structural disadvantages, energy costs, financing constraints, regulatory friction must be addressed alongside tariff reductions.

Otherwise, the burden of adjustment will fall disproportionately on domestic industry, while imports unencumbered by these constraints fill the gap.

Tariff reform is necessary. Few would dispute that. But reform that ignores ground realities is not reform; it is risk.

Pakistan’s auto sector stands at an inflection point. With the right sequencing, it could evolve into a competitive, export oriented industry. With the wrong one, it could shrink into irrelevance.

The difference will not lie in the tariff slabs themselves but in whether policymakers recognise that liberalisation is not just about lowering barriers. It is about building the capacity to survive without them.

Copyright Business Recorder, 2026