The curious case of Pakistan's tariffs

Pakistan’s FY25-FY26 tariff schedule tells a story far more consequential than the routine annual adjustment of customs duties. Embedded in the data is a clear collision between two competing economic philosophies, unfolding in real time.

On the one hand, the government appears to have finally internalised a long-standing critique of Pakistan’s trade regime: that excessive duties on inputs have crippled manufacturing competitiveness and entrenched an anti-export bias. 

On the other hand, it continues to cling to a deeply familiar instinct, protecting finished goods producers behind ever-higher tariff walls. The result is a contradictory tariff structure that simultaneously gestures towards reform while reinforcing the very distortions that have kept Pakistan trapped in low productivity, high prices and stagnant exports.

To understand why this matters, one must first acknowledge what the tariff data gets right. For decades, Pakistan’s manufacturing sector has been suffocated not by a lack of entrepreneurial talent or industrial ambition, but by the sheer cost of inputs. 

Raw materials, intermediate goods and industrial components were routinely taxed at rates that made local production more expensive than importing finished products. This inverted tariff structure penalised value addition and rewarded trading over manufacturing. The FY25-FY26 data suggests a decisive and welcome break from that legacy.

The most striking feature of the new tariff schedule is what can only be described as a ‘Sankey revolution’, a mass migration of tariff lines downward into lower duty slabs. Thousands of items that were previously taxed at 3.0%, 11%, or even 20% have now flowed into the zero-duty category. 

As a result, the zero slab has become the single largest tariff band, housing 3,117 tariff lines. This is not cosmetic tinkering. It is a structural shift in the cost architecture of Pakistani manufacturing.

From a trade economics perspective, this move directly targets the cost of doing business. By reducing or eliminating duties on intermediate goods, the government is attempting to dismantle the anti-export bias that has long plagued the economy. Exporters compete on thin margins in unforgiving global markets; every additional rupee embedded in input costs erodes their competitiveness. Lowering tariffs on raw materials and components is, therefore, textbook reform. It aligns Pakistan’s tariff structure more closely with the logic followed by successful exporting economies, where inputs are cheap, accessible and globally integrated.

This rationalisation also reflects an implicit recognition that tariffs are not merely revenue instruments; they are signals. By zero-rating inputs, the state is telling manufacturers that value addition is finally being prioritised over mere import substitution. If sustained and complemented by other reforms, this shift has the potential to improve productivity, encourage scale and make Pakistani goods more price-competitive abroad. In isolation, this aspect of the tariff reform deserves genuine credit.

However, this is only half the story and unfortunately, the less problematic half. While the base of the tariff pyramid is being liberalised, the peak is becoming stickier, higher and more distortive. In several high-value sectors, such as automobiles (particularly CBU imports), ceramics, home appliances and rubber products such as tyres, the tariff burden has not declined. In some cases, it has increased. The data suggests that effective protection on auto CBUs, for instance, has moved from roughly 81% to nearly 88%. This is not a marginal adjustment but a reinforcement of one of the most protectionist regimes in the region.

What emerges, therefore, is a deeply contradictory policy stance. The government is giving domestic manufacturers zero-duty access to their inputs, thereby improving margins and lowering production costs. 

Simultaneously, it is raising or maintaining high tariffs on finished goods from abroad, effectively guaranteeing domestic market share. This combination dramatically increases the Effective Rate of Protection (ERP), the true measure of how insulated an industry is once both input and output tariffs are accounted for.

In plain terms, the message to industry is unmistakable: here is cheaper raw material, and do not worry, we will not let anyone compete with you either. This is not industrialisation. It is rent-seeking, refined and intensified. High ERPs do not reward efficiency, innovation, or global competitiveness; they reward lobbying capacity and political access. Firms protected in this manner face little pressure to improve quality, reduce prices or invest in technology. The Pakistani consumer pays the price through higher costs and fewer choices, while the economy pays through lost export potential.

The export implications of this policy mix are particularly troubling. Protected domestic markets create a powerful disincentive to export. Why should a firm struggle to earn a 5.0% margin in Europe, subject to stringent standards and fierce competition, when it can enjoy a comfortable 25% or 30% margin in Lahore under tariff shelter? 

This logic has played out repeatedly in Pakistan’s industrial history. Sectors that were meant to be ‘infant industries’ decades ago have grown old behind protection, yet never matured into globally competitive players.

This brings us to the central structural flaw: Pakistan continues to use tariff policy as a substitute for industrial policy. Tariffs are a blunt instrument. They can shape incentives at the margins, but they cannot, on their own, build competitive industries. In the absence of a coherent industrial strategy, one that sets clear objectives, timelines, and performance benchmarks, tariffs become permanent crutches rather than temporary training wheels.

A brief look at regional comparators underscores this failure. Countries that successfully navigated the infant industry phase did so with discipline, not indulgence. Protection, where granted, was conditional, time-bound and relentlessly linked to performance. 

Firms were pushed to export, upgrade technology, and eventually compete without state shelter. In Pakistan, by contrast, protection has been open-ended and unconditional. Industries are protected not because they are becoming competitive, but because they are politically entrenched.

Correcting this trajectory does not require abandoning tariff reform; it requires completing it. First and foremost, sunset clauses must become non-negotiable. High tariff protection in sectors such as automobiles and ceramics must come with explicit expiry dates written into policy. The government must credibly signal that protection is temporary. 

A clear glide path, such as a mandatory 10% reduction in duties starting in year six, would fundamentally alter incentives. Firms would know that survival depends not on lobbying, but on preparation.

Second, protection must be explicitly linked to export performance. If a sector enjoys tariff protection exceeding 20%, it should face mandatory export targets tied to market size and protection duration. Failure to meet these targets should trigger automatic reductions in protection. 

After a decade of shelter, an industry that cannot sell its products globally is not an infant; it is a liability. This approach would realign private incentives with national objectives and ensure that consumers are not indefinitely taxed to subsidise inefficiency.

Finally, tariff rationalisation cannot succeed in isolation from the energy economy. Pakistan can reduce import duties to zero, but if electricity remains priced at 16 cents per kilowatt-hour compared to regional averages closer to nine cents, manufacturing competitiveness will remain elusive. 

Energy is not a peripheral issue; it is the single largest input cost for many industries. Without reforms in energy pricing, wheeling, and market access, tariff reform risks becoming an accounting exercise rather than a competitiveness strategy.

The FY25-FY26 tariff data, taken as a whole, reflects a government caught between reformist intent and protectionist reflex. The rationalisation of input tariffs is a genuine and overdue step forward. But the persistence and in some cases intensification of output protection threatens to neutralise those gains. 

Pakistan does not suffer from a lack of policy announcements; it suffers from a lack of policy discipline. Until tariff policy is embedded within a credible industrial strategy, one that rewards performance, enforces timelines and prioritises competitiveness over comfort, the collision of these two philosophies will continue. And once again, reform will stop just short of transformation.

The writer is a trade facilitation expert, working with the federal government of Pakistan.

Disclaimer: The viewpoints expressed in this piece are the writer's own and don't necessarily reflect Geo.tv's editorial policy.

Originally published in The News