Tariff reform: pain is no longer optional, but progress might be
This is certainly not Pakistan's first attempt at tariff reform, but it might be its last real chance to get it right. The federal cabinet has now approved the National Tariff Policy 2025–30, which proposes to phase out regulatory and additional customs duties and compress the entire tariff structure into four slabs, with a maximum rate capped at 15 percent. If implemented, it would mark the most far-reaching tariff reform in over two decades.
Pakistan's so-called "industry" has long survived on the crutches of regulatory duties, SROs, cascading slabs, and discretionary waivers. The outcome? Firms that are rent-seeking, protected, uncompetitive, legacy-bound, and scale-averse. What passes for manufacturing in Pakistan often imports inputs, adds marginal value, and survives by selling to a captive, protected domestic market.
This is not just a productivity problem. Over decades, it has also become a mindset problem. Pakistani firms are not wired to think globally because they have never been made to compete globally. Tariffs have become a substitute for ambition. The proposed tariff reform challenges this mental model—and it should.
But let us also not be naive. Every tariff reform plan in Pakistan's history has run into the same trap: imports rise instantly, exports take time. Trade deficits widen. The BoP comes under pressure. The political economy buckles. Reforms are rolled back. We have seen this movie in the late 1990s, again in 2008, and again post-2016. Each time, what begins as liberalization ends in retreat.
This happens not because traditional economic theory does not apply to Pakistan, but because transition is mismanaged. In a country permanently hovering at the edge of external default, reform without insulation is suicide. If tariff reform is to survive, it must be sequenced not only by product category, but by foreign exchange dynamics. Do not liberalize everything at once. And do not assume time will be kind. It rarely is.
Even if some firms do try to compete post-reform, they are not fighting fair. The dominant segment of Pakistan's trading class—undocumented, under-invoicing, sales tax-evading, and income tax-invisible—systematically undercuts the formal sector. When duties fall, they import en masse, misdeclare values, and continue operating outside the tax net.
The result: even the most earnest of Pakistani manufacturers—struggling with the burden of documentation, formal taxation, and now Federal Excise Duty proposed on even broader number of product categories—cannot compete. Reform, without parallel crackdowns on misdeclaration and under-invoicing, becomes a subsidy for the worst actors.
Yet, for all these pitfalls, this is precisely the moment to push through. If 2025 represents anything, it is a narrow macro window: inflation is down, primary and current account surpluses are within reach, global oil prices are subdued, and multilateral patience is not yet exhausted. This is not a permanent condition. If reform is to come, it must come now.
And let us be honest—if wheat farmers could be thrown into shock therapy without liquidity backstops, so can the industrial seths of DHA and KDA. If the rural economy can survive a sudden withdrawal of state protection, urban industry can too. Fairness demands it.
There is one non-negotiable: the exchange rate must become the first line of defense. When tariff cuts increase import appetite, the exchange rate must be allowed to adjust. A weaker rupee will dampen import demand naturally, without administrative controls. Trying to defend the currency for optics—whether to signal 'stability' or contain imported inflation—will only force the central bank to reintroduce trade suppression. And then it is back to square one.
Lastly, do not expect firms to suddenly become globally competitive while treating them like street vendors. An 18 percent GST, multiple indirect taxes, and now even FED on documented businesses makes reform incoherent. You cannot liberalize the trade side while suffocating the same firms fiscally by charging up to 40 - 45 in income taxes. If the goal is to redirect firm focus from domestic to global markets, then profitability must first be made possible.
For this tariff reform agenda to stand even a remote chance of survival, four conditions must hold:
Stagger the reform: phase it across product types, starting with intermediate and capital goods. Let the exchange rate adjust: it is our best ally against import surges. Fix Customs governance: without cracking down on under-invoicing and GST evasion, reform will reward informality. Reform fiscal policy in parallel: industry cannot compete with a 35 percent plus effective tax burden.
None of these are easy. But the alternative is status quo—an industry that cannot export, a state that cannot tax fairly, and a reform process that dies before it begins.
Reform is no longer optional. But pain will be. Progress, as always, is still up for negotiation.
Copyright Business Recorder, 2025
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