Was Pakistan ever an open economy?
Pakistan's National Tariff Policy 2025-30 is now in its second year of implementation. Yet questions persist about whether tariff reforms were necessary, whether the underlying data were reliable, and whether reducing import duties will benefit the economy. These are legitimate questions. But before judging the reforms, we must address a more fundamental issue: was Pakistan genuinely an open economy, or had decades of protectionism weakened its competitiveness and export potential?
Much of the confusion appears to stem from a misinterpretation of the tariff indicators published by the World Trade Organisation (WTO). These indicators are useful, but they must be understood in context. Headline figures on applied customs duties do not necessarily capture the full burden of protection created by Pakistan's regulatory duties (RDs), additional customs duties (ACDs) and other import taxes. Nor does a relatively low trade-weighted average tariff necessarily mean that an economy is open to international competition.
The distinction is important. A trade-weighted average reflects tariff rates weighted by the value of actual imports. Products imported in large quantities, such as petroleum, edible oil and machinery, have a greater influence on the average, while goods facing prohibitively high duties, such as cars and consumer goods, account for a relatively small share of imports precisely because those duties discourage their importation. A proper assessment must therefore examine not only average tariffs but also tariff peaks, additional duties and the overall tax burden on imports.
The evidence from government ministries, international financial institutions and independent researchers leaves little doubt that Pakistan needed to address its restrictive trade regime.
In 2019, the then government's National Tariff Policy for 2019-24 acknowledged the extent of Pakistan's tariff protection. It noted that Pakistan had the highest weighted average tariff among 70 countries with annual exports exceeding $20 billion. It also observed that, while all 20 of the fastest-growing export economies had reduced import tariffs during the preceding decade, Pakistan's tariffs had increased by 11%. While successful export economies were opening up to international competition, Pakistan was moving in the opposite direction.
The case for reform, therefore, did not originate with the current policy. For years, multilateral institutions, Pakistani think tanks and academic researchers had identified high import taxes as a major reason for the country's persistently weak export performance. The World Bank placed Pakistan among the world's most protected economies, ranking it seventh on the Overall Trade Restrictiveness Index. It highlighted how a complicated tariff structure, comprising customs duties alongside additional customs duties, regulatory duties and other measures, distorted investment decisions and favoured heavily protected industries over more competitive businesses. The Asian Development Bank (ADB) similarly identified persistently high tariffs and an increasingly complex tariff structure as important factors behind Pakistan's poor export performance.
The WTO's 2022 Trade Policy Review provides further evidence. More than 40% of Pakistan's tariff lines carried duties exceeding 15%, a threshold commonly used to identify tariff peaks. The corresponding proportions for peer countries were considerably lower. If the total burden of regulatory and additional duties were also included, this figure would have been much higher.
The Economic Advisory Group, comprising independent Pakistani economists, highlighted another striking distortion. In 2023, trade-related taxes accounted for more than 40% of Pakistan's total tax revenue, compared with a global average of approximately 5%. The need for tariff reform, therefore, was not based on questionable data or an arbitrary preference for liberalisation. It was recognised by successive governments and supported by a substantial body of national and international research.
When the current reforms were debated in 2024-25, dire predictions were made. Critics warned that reducing tariffs would devastate domestic manufacturing, severely damage government revenues and trigger a balance-of-payments crisis. Some estimates suggested that the Federal Board of Revenue (FBR) could lose more than Rs2,000 billion annually in import-related revenue.
Fifteen months into the reform process, the evidence does not support the predicted doomsday scenario. Although it is still too early to assess the full impact of the five-year National Tariff Policy, Pakistan's manufacturing sector has recorded growth of more than 6.5% after years of weak performance. Pakistan now has its highest-ever foreign exchange reserves and its balance-of-payments situation is positive for the first time in over two decades. Exports typically take time to respond to changes in trade policy, but they recorded growth of 10% in the first quarter of the current financial year.
These developments should be interpreted cautiously. Manufacturing growth, export performance and the external account are influenced by many factors beyond import tariffs. Nevertheless, one conclusion is already warranted: the predicted collapse of manufacturing and the anticipated balance-of-payments crisis have not materialised.
Tariff liberalisation is not about opening the economy indiscriminately or abandoning domestic industry. It is about changing the incentives that shape investment and production. Businesses should be encouraged to compete through productivity, technology, quality and innovation rather than depend indefinitely on high import barriers.
No country can build a competitive export economy by insulating its industries indefinitely from international competition. Successful industrialisers have followed different paths and used different policy instruments, but integration with international markets has been central to their long-term success.
The National Tariff Policy should ultimately be judged by whether it helps Pakistan raise productivity, expand exports and create sustainable employment. These outcomes will take time, and the government must remain willing to correct implementation problems as evidence emerges.
But the starting point for this debate must be the facts. Pakistan's trade regime was not as open as some suggest, and the case for reform was established long before the current policy was introduced. The real choice is not between protecting Pakistani industry and opening the economy. It is between protecting industries from competition indefinitely and helping them become competitive enough to succeed in the world.
THE WRITER IS A SENIOR FELLOW WITH THE PAKISTAN INSTITUTE OF DEVELOPMENT ECONOMICS. PREVIOUSLY, HE SERVED AS PAKISTAN'S AMBASSADOR TO THE WORLD TRADE ORGANISATION