Why Pakistan's Trade Policy Is Holding Back Its Exporters

Pakistan's Export Decline: The Numbers

Pakistan's export performance has deteriorated significantly over the past two decades. In 1999, exports of goods and services accounted for 15.4% of Pakistan's GDP.^[1] By 2020, that share had fallen to just 9.3%---a decline of nearly 40%.^[1]

This decline becomes more striking when compared to other emerging economies. Vietnam, which had exports at 50% of GDP in 1999, expanded that share to 84% by 2020.^[1] Even Bangladesh, a close structural peer, maintained exports at a higher share of GDP than Pakistan throughout most of the 2010s before converging during the COVID-19 pandemic.

The data shows a clear pattern: Pakistan's export share of GDP peaked around 2011 at 13.5% and then entered a sustained decline, falling to a low of 8.2% in 2017 before partially recovering.^[1]

According to gravity model estimates from World Bank researchers Mulabdic and Yasar (2021), Pakistan's "predicted" export potential---based on its economic size, location, and trading partner relationships---is approximately $88 billion. This suggests Pakistan is exporting roughly one-quarter of what comparable countries with similar characteristics would export.^[3]

The Tariff Puzzle: MFN Rates Fell, But Did Protection Rise?

Here we must address an apparent contradiction in the data.

Pakistan's statutory most-favored-nation (MFN) tariff rates have declined over the past two decades. In 2000, the simple mean MFN tariff stood at 24.1%. By 2022, it had fallen to 11.0%.^[2] This looks like trade liberalization.

Yet the World Bank's Swimming in Sand report claims that "import duties increased approximately 50% on intermediate goods in the manufacturing sector between 2012 and 2020."^[3]

How can both statements be true?

The answer lies in what the MFN data does not capture. World Bank tariff statistics reflect statutory MFN rates only. They do not include:

• Regulatory Duties (RD): Additional duties imposed by the Federal Board of Revenue, often on a temporary basis, that can range from 5% to 100% or more on specific products
• Additional Customs Duties (ACD): Supplementary charges applied on top of statutory rates
• Withholding taxes at import: Tax charges that increase the effective cost of imports

According to the World Bank analysis, it was these additional protective instruments---not statutory MFN tariffs---that increased substantially between 2012 and 2020. The result is that while headline tariff rates declined, the total protective burden faced by importing firms may have risen significantly, particularly for intermediate goods used in manufacturing.

This distinction is critical for policy. If policymakers focus only on MFN tariff schedules, they may miss the true cost of protection embedded in supplementary duties. The Swimming in Sand report draws on FBR statutory notifications to calculate total protection, revealing a pattern of increasing barriers that is invisible in standard tariff databases.

We cannot independently verify the "50% increase" claim from publicly available World Bank data. The verification log notes this as a LOW CONFIDENCE claim that requires access to FBR administrative records. We report it here with appropriate caveats, attributing it directly to World Bank analysis rather than presenting it as an independently verified fact.

How Pakistan Compares to Export Success Stories

Pakistan's tariff rates remain significantly higher than those of countries that have successfully expanded exports.

In 2022, Pakistan's simple mean MFN tariff was 11.0%.^[2] Compare this to:

Country	MFN Tariff (2022)	Exports (% of GDP, 2022)
Pakistan	11.0%	10.5%
Vietnam	3.7%	93.4%
Indonesia	5.8%	24.5%
Turkey	7.5%	38.1%
Bangladesh	12.9%	12.9%

Source: World Bank Open Data (TM.TAX.MRCH.SM.AR.ZS, NE.EXP.GNFS.ZS, 2022)^[1][2]

Vietnam stands out dramatically. Its MFN tariffs have declined steadily---from 12.3% in 1999 to just 3.7% in 2022---while exports surged from 50% to 93% of GDP over the same period.^[1][2] Vietnam's accession to WTO in 2007 and its aggressive pursuit of free trade agreements created powerful incentives for export-oriented manufacturing.

Indonesia and Turkey maintain tariffs roughly half of Pakistan's level while achieving export shares two to four times as high.

Bangladesh is an interesting comparator: its MFN tariffs are actually higher than Pakistan's (12.9% vs. 11.0%), yet its export share of GDP was also higher in 2022 (12.9% vs. 10.5%).^[1][2] This suggests that tariff levels alone do not determine export performance---other factors such as sector composition, exchange rate management, duty exemption schemes, and infrastructure also matter. Bangladesh's garment sector benefits from extensive bonded warehouse and duty drawback schemes that effectively neutralize tariff costs for exporters.

The Productivity Channel: Why Tariffs on Inputs Matter

The Swimming in Sand report advances a specific hypothesis: high tariffs on intermediate goods---the raw materials, components, and semi-finished products that firms use as inputs---reduce firm productivity and export competitiveness.

The mechanism works as follows:

1. Imported intermediates embody technology. When firms import machinery, specialized inputs, or components from global supply chains, they gain access to better production techniques and higher-quality inputs than may be available domestically.
2. Tariffs on intermediates raise costs. When tariffs increase the price of imported inputs, firms either pay more for the same quality or substitute to lower-quality domestic alternatives.
3. Downstream firms lose competitiveness. Higher input costs translate to higher production costs, which reduce profit margins or force higher prices that make exports uncompetitive in world markets.
4. The result is anti-export bias. When domestic sales face less tariff-induced cost inflation than export production (because domestic firms can pass costs to protected local consumers), firms have incentives to sell domestically rather than export.

Using firm-level data from Pakistan Stock Exchange-listed companies between 2012 and 2020, World Bank researchers estimated that a 10% increase in upstream tariffs explains 85% of the average productivity decline observed during that period.^[3]

They further estimate that a 1% increase in upstream protection reduces downstream firm productivity by 0.6%.^[3] This estimate uses an econometric methodology developed by Amiti and Konings (2007), which has been applied to study tariff-productivity relationships in Indonesia and other countries.^[5]

Important caveat: These estimates are based on analysis of publicly listed firms, which represent only about 13% of manufacturing value added. The relationship may differ for smaller, unlisted firms.

Small Exporters Bear the Heaviest Burden

One of the most policy-relevant findings from the Swimming in Sand analysis concerns the differential impact of tariff protection on small versus large exporters.

According to the World Bank firm-level estimates, small exporters experience a 9.4% productivity decline from upstream tariff increases, compared to only 3.4% for large exporters.^[3]

Why would small firms suffer more?

1. Less ability to absorb costs. Small firms have thinner margins and less capacity to absorb input cost increases without losing competitiveness.
2. Less access to duty exemptions. Pakistan operates several duty exemption schemes---including the Duty and Tax Remission for Exports (DTRE) and Manufacturing Under Bond (MUB) programs---that allow qualifying exporters to import inputs duty-free. However, these schemes require administrative capacity to navigate: filing requirements, documentation, and audits that impose fixed costs disproportionate to small-firm export volumes.
3. Weaker bargaining power. Large exporters may have negotiating leverage with domestic input suppliers or may be better positioned to substitute between domestic and imported inputs.

The World Bank report finds that duty exemption schemes are concentrated among large, established exporters. The result is a two-tier system: large exporters effectively pay zero or reduced tariffs on their imported inputs, while small exporters pay the full statutory rate plus regulatory duties.

Do Export Subsidies Work?

Pakistan has historically used direct export subsidies to support export industries, primarily through the Drawback on Local Taxes and Levies (DLTL) and Duty Drawback (DDT) schemes.

The World Bank evaluation of the DDT scheme---which provides cash rebates to exporters in eligible sectors, predominantly textiles---found modest impacts:

• Textile exports increased by an estimated 1.8% as a result of the DDT scheme.^[3]
• Fiscal cost was substantial: Each additional dollar of exports generated by the subsidy cost the government between 46 and 76 cents.^[3]

These are estimates from an econometric evaluation using difference-in-differences methodology, comparing eligible versus ineligible products and time periods before and after the scheme.

The report also notes that "traditional products (50% of exports) receive 80% of export subsidies."^[3] This raises concerns about whether subsidies are encouraging new export growth or simply supporting incumbent sectors that would export anyway.

Caveats apply: The DDT evaluation depends on assumptions about what exports would have been absent the subsidy. Alternative assumptions could yield different cost-effectiveness estimates. Additionally, indirect benefits---such as employment creation or learning-by-doing---are not captured in the dollar-for-dollar cost comparison.

The Exporter Productivity Premium

Do Pakistani exporters perform better than non-exporters? The firm-level evidence suggests they do.

Using data from PSX-listed firms, the World Bank analysis finds:

• Pakistani exporters are 20% more productive than firms serving only the domestic market, after controlling for sector.^[3]
• In textiles, the premium is even higher: exporters are 31% more productive than domestic-oriented textile firms.^[3]

This pattern---exporters being more productive than non-exporters---is observed across countries and time periods. It reflects two possible mechanisms:

1. Selection: More productive firms are better able to overcome the fixed costs of entering export markets.
2. Learning: Participation in export markets exposes firms to international competition and best practices, raising productivity over time.

The World Bank analysis cannot fully disentangle these mechanisms. But the finding supports the general case that export participation is associated with higher productivity, and policies that discourage exports may therefore limit productivity gains.