Tariff protection hurts consumers

Open competition forces firms to invest in productivity and innovation, not rent-seeking

KARACHI:

As the announcement of the budget for the upcoming fiscal year, FY27, draws near, lobbies and special interest groups representing their respective industries and trade associations make a push for favourable fiscal policies to policymakers.

Although the main focus is to lower taxes, which is indeed a valid contention, and increase subsidies and handouts in return for a promise of higher industrial growth, many industry representatives wary of competition from imported goods also lobby for higher customs duties, regulatory duties and other forms of internal taxes on imports to increase the price of competing imported goods.

The higher the price of imported goods, the lower the quantity demanded and consequently lower the competition for local producers in the domestic market. Therefore, analysis on the performance of key industries and the impact of government policies becomes increasingly common as the new budget approaches.

The auto industry, which struggled during the recent economic downturn in Pakistan, has reported significant growth in 2026. The advent of new cars, such as electric vehicles, and new variants of SUVs, crossovers and hybrids have provided major impetus for the auto industry. Total sales are likely to reach 300,000 in this fiscal year, which is reportedly the highest volume of sales since 2018.

However, the composition of carmakers in the market has significantly changed since then. In 2018, the three Japanese automakers dominated the Pakistani automobile market, contributing to more than 80% of total sales. This has changed in recent years as Chinese and Korean carmakers have penetrated the domestic market.

With the new auto policy set to be implemented at the start of the next fiscal year, the sales of cars in Pakistan are not only likely to rise, but the composition is likely to further tilt towards the Chinese carmakers as their capabilities and efficiency in manufacturing electric vehicles will give them a clear advantage over their counterparts.

Consumer preferences regarding better quality, modern designs and competitive pricing are taking precedence, as they should. Consumers today have greater choice of varieties available in the market than they did a decade ago. Hence, the recovery in the auto industry is accompanied by greater dynamism in the market as new manufacturers are increasingly capturing a larger share.

However, even though sales in the auto industry are recovering from the slump of recent years, car ownership, at 11 per 1,000, is dismal. It is more than 22 per 1,000 in India and 173 per 1,000 in China. India had an average of more than 4.5 million cars sold in recent years, with Maruti reporting more than 180,000 sales in April 2026. Similarly, Indonesia, with a population slightly higher than that in Pakistan, had an average of more than 1 million cars sold in recent years.

The low sales and the low per capita car ownership rates in Pakistan are worsened by high inflation and taxes, a weak currency and restrictive import policies via high import duties. This results in uncompetitive prices of products, both finished and unfinished goods, across the supply chains in the industry.

The National Tariff Commission introduced the National Tariff Policy 2025-2030 which is set to transform the tariff structure on imports in Pakistan. It aims to liberalise the imports of several products by capping customs duties at 15% and eliminating the complex web of regulatory duties and additional duties. These are often imposed via statutory regulatory orders, which create significant distortions in the domestic market.

Policymakers also plan to phase out high surcharges on imported used cars, while increasing the sales of electric vehicles. The market composition of the auto industry is likely to evolve with the new policies. However, unfortunately, the increased competition and the availability of new cars threaten the sales and viability of traditional manufacturers, hence their resistance to change by pushing to keep the status quo.

It is often promulgated by those favouring tariff protection that lower tariffs do not necessarily increase exports. However, higher tariff rates are not only a tax on exports as they create anti-export bias, but they also tend to artificially inflate prices of otherwise cheaper imports that could benefit the economy vis-a-vis higher consumer welfare.

Imports allow firms to discover the most effective prices in global markets, especially if the goods are imported from more competitive markets that are major suppliers to the world market. Therefore, as highlighted by Nobel laureates Philippe Aghion and Peter Howitt, imports can drive much-needed competition within an industry. This fosters innovation, compelling firms to make productivity-enhancing investments rather than relying on rent-seeking lobbying to guarantee their profit margins.

Further, cheaper imports are not necessarily driving the balance-of-payments deficit; it is rather the over-dependence on imported fuel and the volatility in its prices, making it even more important for this transition towards electric vehicles and more fuel-efficient cars.

Lastly, the increased import competition in the market creates a 'selection effect', which boosts aggregate performance in the industry. It not only lowers prices in the industry but forces the least productive firms – which often pay the lowest wages and struggle to make profits – out of the industry.

A more dynamic industry that is open to competition, where the least performing firms are replaced by better performing counterparts, improves national welfare. This allows new innovative products to be added and old redundant products to be dropped.

Average productivity levels increase as firms become more competitive and more innovative with newer products that are more efficiently produced and more beneficial to consumers. This also leads to higher wages in industries as better performing firms offer higher wages to their workers. The share in capital investments by more productive firms also increases, leading to higher overall returns in the industry. Thus, it is imperative to bring about this dynamism in the business sector driven by more openness towards competition.

The focus should now shift towards implementing complementary reforms that improve the business environment, allowing both the easier entry of productive firms and exit of redundant firms, rather than neutralising the efforts of policymakers introducing more dynamism and innovation in the economy via the national tariff policy.

For instance, investments in improving human capital and the quality of research and development by ensuring better skill-based training will not only be a boon for industries but also ensure a more adaptable workforce to the changing business environment across industries.

THE WRITER IS AN ASSISTANT PROFESSOR OF ECONOMICS AND RESEARCH FELLOW AT CBER, IBA