$131b regional auto trade at risk

Pakistan stands on the edge of a $131 billion regional automobile trade corridor, where even a 5% share could yield $6.5 billion in annual exports — 70 times higher than current levels. With its strategic geography and a vendor base already validated by leading Japanese, Korean and European automakers, Pakistan has the ingredients to become a significant player. Yet, a new report warns that abrupt tariff changes and the normalisation of used-car imports threaten to derail the progress made by the country's auto-parts ecosystem.

The report by the Pakistan Association of Automotive Parts & Accessories Manufacturers (PAAPAM) highlights that Pakistan's auto-parts ecosystem has been built painstakingly over decades. It now consists of more than 1,200 Tier-1, Tier-2 and Tier-3 suppliers. The industry supports 1.83 million skilled jobs, including 300,000 directly in the sector, and anchors localised production worth more than Rs300 billion annually. These are savings the economy would otherwise lose to foreign exchange outflows.

Current levels of localisation substitute imports worth $1.25 billion each year, but PAAPAM warns this could unravel quickly if tariff structures are flattened before the industry reaches scale. The industry has invested more than Rs100 billion in plant and tooling, localising hundreds of parts from stampings and plastics to wiring harnesses and safety systems. Yet, volumes remain a serious constraint.

Motorisation in Pakistan stands at only 20 cars per 1,000 people, far behind India's 33, Vietnam's 46 and Thailand's 147. Low per-model volumes keep plants under-utilised and make it difficult to justify new localisation or export-oriented tooling. Pakistan's per-capita income remains under $2,000, well below the $2,500 threshold where mass motorisation usually begins, further limiting demand.

According to PAAPAM, the real issue is not industry under-performance but structural and policy failures. The country still lacks testing and homologation facilities, while energy and working capital costs remain uncompetitive. Used-car imports routinely cannibalise local volumes during downturns, weakening the industry further.

The report stresses that exports are not constrained by duties since exporters can already import raw materials at zero duty under the Export Facilitation Scheme. Instead, the bottlenecks lie in scale, credibility, security perceptions, access to finance and integration into global value chains.

Pakistan's current tariff framework was designed as a cascade to encourage localisation: lowest duties for raw materials, higher for non-localised parts, and the highest for completely built units. Used imports faced the strictest regime. This gave vendors an incentive to localise. However, recent steps towards tariff flattening have eroded these signals.

Assemblers can now import broad semi-knocked-down kits, including parts already made domestically, at the same duty rates as raw materials. Local vendors, meanwhile, pay around 15% duty on their inputs. This puts domestic producers at a disadvantage, as imported kits enjoy the same treatment as raw materials.

The stakes are high. Vendors who have sunk more than Rs100 billion in tooling for dashboards, wiring and suspension parts are running below capacity or standing idle. Used-car imports already capture about a quarter of sales in weak years, starving the industry of volumes. PAAPAM warns that if such policies continue, the local vendor base could collapse, leading to job losses, social unrest and the erosion of investor confidence in Pakistan's industrial foundation.

The report also challenges recommendations from the International Monetary Fund, which has urged Pakistan to flatten tariffs and legalise commercial used-car imports. PAAPAM argues that while tariff rationalisation is necessary, it must follow a cascading structure that encourages local value addition. Uniform low rates and open used-car imports, it warns, dismantle localisation incentives and push domestic producers into direct competition with five-year-old imported vehicles.

Pakistan's auto sector has already proven its resilience. Nearly four decades of vehicles on the road have created a large aftermarket for parts and services. But weak enforcement and informal imports continue to divert this opportunity away from documented suppliers.

The report underlines that automotive margins remain modest compared to other sectors, with small volumes, high fixed costs and policy volatility eating into profitability. The industry is not excessively protected; it is constrained by a lack of predictable policy.

The macroeconomic risks of premature liberalisation are significant. If localisation unravels, Pakistan will replace a self-sustaining industrial ecosystem with a surge in consumer imports. This will add pressure to the balance of payments and reduce fiscal revenues. The country cannot afford a permanent $1 billion import shock, nor can it easily replace the 1.83 million livelihoods tied to the sector.

PAAPAM concludes that Pakistan faces a clear choice. On one side lies predictable reform, where inputs remain cheaper than finished goods, used-car inflows are regulated, testing facilities are developed, and auto-financing is leveraged to unlock demand. On the other side lies abrupt liberalisation, which risks undoing decades of investment, destabilising jobs, and closing the door to exports.

If Pakistan is serious about achieving its ambitious export targets, the report emphasises, then protecting and scaling its auto-parts industry must be central to industrial policy.