KARACHI:
The government introduced the National Tariff Policy (2025-2030), henceforth NTP, at the start of the fiscal year to streamline customs duties and eliminate the complex web of regulatory duties and additional customs duties. This should ultimately end the culture of regularly issuing Statutory Regulatory Orders (SROs) on regulatory and additional duties that create trade disruptions, policy uncertainty, and deter investors from making long-term growth strategies.
The purpose of the NTP is to transform the economy away from one that is inward-looking and driven by import-substitution strategies towards one that is better integrated into global markets, reporting higher levels of export competitiveness. The NTP will ensure greater productivity of domestic manufacturers as they innovate and compete on the global stage, rather than rely on government incentives and handouts to satisfy their meagre profit margins.
NTP will simplify the customs duty structure, making it more predictable and transparent. Customs duties will not only be reduced but also rationalised into four slabs set at rational intervals of five, replacing the current structure based on arbitrary numbers. This will help in negotiations of regional trade agreements with major trading partners, as it will provide more clarity in the customs duty structure. Eliminating complex regulatory and additional duties will also reduce delays at the border and cut documentation costs and times, which are particularly burdensome for smaller businesses.
Simplifying the customs duty code and reducing various tariffs will push for export-led growth by addressing the anti-export bias created by cascading tariffs. Lower tariffs can increase manufacturing competitiveness, attract investment in the industrial sector, improve consumer welfare, and promote integration into global value chains.
Although the NTP reduces tariffs, its major objective is to remove the complexity associated with the different categories of import taxes and bring predictability, transparency, and certainty in trade policies by eliminating arbitrary tariffs imposed through SROs. This will improve the business environment and help local businesses compete more effectively. It is also important to mention that complementary reforms to the broader business and economic environment are necessary to ensure that the objectives of NTP are achieved.
According to a recent set of data stories published by the Economic Advisory Group (EAG), raw materials, intermediate goods, and capital goods have often been the subject of import restrictions rather than consumer goods. Regulatory duties are commonly applied to textile inputs as well as imports of iron and machinery, reducing access to unfinished and capital goods that benefit manufacturing activities in Pakistan.
Overhauling the tariff structure will benefit the industrial sector, as it will not only ensure access to cheaper unfinished and capital goods but also reduce the time-consuming and costly documentation procedures and processes associated with international trade.
According to the World Trade Organisation’s Tariff Profiles published in 2024, the simple average MFN (most favoured nation) tariff in Pakistan was 10.3%, while the weighted average MFN tariff rate was 7.6%. More than 44% of MFN tariff lines for agricultural goods fall between 15% and 25%, while 35% of MFN tariff lines for non-agricultural goods are duty-free, and a similar percentage fall between 15% and 25%.
The majority of imports of agricultural goods, in terms of value, face MFN tariff rates between 0 and 15%. Lowering tariffs on agricultural goods can reduce trade-related distortions in the agricultural market. Similarly, although most imports of non-agricultural products report MFN tariffs below 5%, approximately one-third of non-agricultural imports face MFN tariffs of between 10% and 25%.
However, Pakistan has set a high bound rate for tariffs, with a majority of goods between 50% and 100%. This provides policymakers with high levels of “water under the tariffs bound rate.” The use of regulatory and additional customs duties further exacerbates the trading potential. In comparison, most imports into Vietnam face MFN tariffs of less than or equal to 5%. The same applies to most MFN tariff lines for non-agricultural products.
The final bound rate set by Vietnam on the majority of non-agricultural tariff lines is less than 10%. Therefore, by reducing maximum tariff rates, the NTP will improve certainty in tariff policymaking by reducing the “tariff water” associated with a high final bound rate.
The data stories published by the Economic Advisory Group also provide interesting insights into the tariff structure and the proposed changes. Approximately $25 billion worth of imports into Pakistan are duty-free. Considering the same import pattern in 2030, this figure will increase to $43 billion. However, it is important to note that only a small percentage of imports into Pakistan face customs duties of more than 20%.
Some products face exorbitant tariff rates, which will be lowered to a maximum of 15% in the next five years. Reducing tariff rates may increase imports of such products. However, it will also provide an opportunity not only to collect customs duties on products that previously faced prohibitive tariff rates but also to increase economic activity, as discussed earlier in this article.
It is important to note that a surge in fuel imports was a major driver of the soaring trade deficit in the previous balance-of-payments crisis. New technologies, particularly in the automotive sector, and the increasing solarisation of the power sector have reduced demand for fuel imports.
The inability of the manufacturing sector to compete globally, driven by poor efficiency and low productivity, remains a key factor that thwarts export growth. Exposure to foreign competition may force the manufacturing sector to innovate and improve efficiency and productivity, consequently increasing exports and earning much-needed dollar revenues to compensate for higher imports.
In essence, although the NTP reduces tariff rates on imports of several products, it will also bring certainty and reduce complexity in the tariff structure. With the elimination of regulatory and additional duties, which are often arbitrary and distort international trading activities, the NTP will improve the trading environment and increase overall competitiveness through a more transparent tariff regime. This is indeed a much-needed change, signalling that business will not continue as usual.
THE WRITER IS THE ASSISTANT PROFESSOR OF ECONOMICS AND RESEARCH FELLOW AT CBER, INSTITUTE OF BUSINESS ADMINISTRATION, KARACHI
