Trade policies: a barrier to prosperity

Questions continue to loom on the lack of international trading activities in Pakistan as it enters its 80th year of independence. According to the World Bank's World Development Indicators, exports of goods and services from Pakistan surpassed $40 billion in 2025, the highest in its history. Imports of goods and services into Pakistan were reported at $70 billion in 2025.

However, exports barely touched the 10% mark as a percentage of GDP in recent years, while imports hovered around the 20% mark. Both these figures suggest a low level of participation in global trade, which policymakers have now realised to be the biggest threat to economic security as export-led and trade-focused policies are pursued to revive economic growth.

In 1995, exports as a percentage of GDP for Pakistan were at 16.2%, while imports as a percentage of GDP hit 19.4%, resulting in a trade deficit of approximately 3.2%. Pakistan reported its highest level of exports as a percentage of GDP in the last 60 years, at 17.3%, in 1992. Imports as a percentage of GDP hovered around the 20% mark as well. However, the values collapsed in 2000, when Pakistan was hit by international sanctions following the nuclear missile tests in 1998 and the change of the government in 1999.

Exports as a percentage of GDP decreased to below 10% in 2000, while imports plummeted to the 12% mark around this period. While imports did recover in the mid-2000s, reporting 22% in 2008, exports as a percentage of GDP did not increase beyond 13.5%, which was reported in 2011. Pakistan reported its lowest exports as a percentage of GDP since 1972 in 2017, at a dismal 8.2%, highlighting the significant challenges faced in terms of exporting goods from the country. The low levels of trade as a percentage of GDP, accompanied by poor economic performance, have renewed the call for export-led growth.

In comparison, the global average of exports as a percentage of GDP was 19.4% in 1992, which increased to 23.4% in 2000 and surpassed 30% in 2022. Although there were instances when this value fell due to global macroeconomic shocks, the general trend is upward as the world became better integrated in the 2000s. The average for East Asia and Pacific was around 17% in the early 1990s, similar to the value reported by Pakistan. It was 21.4% in 1999. However, since then the region has taken full advantage of the opportunities offered by opening their economies and increasing participation in global trade. The average peaked at 36% in 2007.

The Great Recession reversed the increasing trend. Since 2020, the trend has again continued to increase as it surpassed 32% in 2025. The South Asian region is a relative laggard in terms of these values. The MENAAP region, which now includes Pakistan, has reported higher values, mainly due to the high proportion of oil-exporting countries.

Pakistan has typically set one of the highest tariff rates in the region on its imports as gauged by the Most Favoured Nation (MFN) tariff rates applied on imports – rates applied on imports from World Trade Organisation (WTO) members with which it does not have a preferential trading agreement. According to data extracted from the World Integrated Trade Solution, Pakistan reported average MFN rates of 42% in 1996. Although this did drop to 8.4% in 2023, it was still higher than that applied by larger comparators such as India, Thailand, Vietnam and Indonesia.

Considering the level of accessions into free-trade agreements (FTAs) as borrowed from CEPII's gravity dataset, Pakistan had zero percentage of its imports covered by regional trade agreements (RTAs) in 1996, similar to Bangladesh and India. Turkey already had 56% of its imports covered by FTAs in 1996. The East Asian export powerhouses lacked RTAs as well, with Thailand, the Philippines, Malaysia and Vietnam all reporting coverage of less than 5%. Pakistan diverged from its regional comparators by 2023.

More than 82% of imports into Vietnam are covered by an RTA, while it exceeds 60% for Thailand, Indonesia, Malaysia and the Philippines. The South Asian countries are laggards, with 16-25% of their imports covered by RTAs. Approximately a quarter of imports into Pakistan are covered by an RTA, primarily due to the Pakistan-China FTA. However, it is important to note that India has recently aggressively pursued FTAs with the EU and other countries, likely increasing the coverage of RTAs on its imports.

The consequences of high tariffs and low accession rates into RTAs have had an adverse impact on the economy. Pakistan has one of the lowest gross fixed capital formations as a percentage of GDP in the world, suggesting poor investment rates. At 13% in 2025, it is below the average of 34% for East Asia and Pacific and 31% for South Asia. Looking at import data distributed across the different stages of production, at 13.8%, capital goods constitute the smallest percentage share of total imports. The share of capital goods in total imports into Vietnam is 44%.

In addition, the change in per capita imports of capital goods between 1996 and 2003 is only 60%, compared to almost 3,600% for Vietnam and 1,100% for India. Further, the lack of inflows of capital goods also limits the number of supplying countries that could provide Pakistan with increased variety of machinery and equipment. Lack of investment in the form of capital goods prevents domestic industry from building capabilities to domestically produce consumer goods as well. This lack of investment is driven by poor trade policies, which are heavily dependent on tariffs and other instruments of trade protection.

Pakistan is reshaping its trading strategies with the National Tariff Policy 2025-2030 as it not only streamlines its customs duty slabs but also makes them less complex and lowers the cost of doing business, mostly for smaller businesses that cannot access the concessions offered to established traders. Smaller firms that seek to participate in exporting activities find high tariffs burdensome as refunds and rebates are not easy to attain.

Lowering customs duties and eliminating regulatory and additional customs duties will propel the economy forward. It is time to break the status quo of high tariffs and revive manufacturing capacities. With the reshaping of the trade policy and its framework, the discussion must now shift towards solving several of the non-tariff structural and policy-related challenges that keep exports low.

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