A review of pakistan’s free trade agreements

Muhammad Abdur Rehman

Free Trade Agreements (FTAs) are important for enhancing trade by reducing tax and tariff barriers between countries. Pakistan has signed numerous trade agreements to improve trade since 2000. According to the Ministry of Commerce, Pakistan had 15 FTAs in effect or under negotiation as of 2024.  While exports grew to US$30.76 billion, imports increased rapidly to US$80 billion from 2003 to 2024.  This review examines key bilateral and preferential trade agreements from 2003 to 2024. 

Pakistan’s trade agreements vary in scope, structure, and impact on international commerce. These FTAs are comprehensive arrangements to eliminate or substantially reduce tariffs, quotas, and other trade barriers across most economic sectors. However, Preferential Trade Agreements (PTAs) are more limited in scope, offering reduced tariffs on specific products or sectors.

The Generalized System of Preferences Plus (GSP+) differs fundamentally from a unilateral arrangement in which the European Union (EU) grants preferential tariff treatment to developing countries. Furthermore, Pakistan has a Trade and Investment Framework Agreement (TIFA) with the United States (US), which serves as a consultative mechanism rather than a market access tool and does not contain specific tariff reduction commitments between the US and Pakistan.

Pakistan signed FTAs, PTAs, GSP+, and TIFA with China, the US, the EU, Malaysia, Sri Lanka, Turkey, Indonesia, Iran, and Uzbekistan between 2003 and 2024. 

The following discussion presents a graphical representation that illustrates the increase in trade since the implementation of FTAs. A detailed analysis of the trade performance of each participating country follows this. Subsequently, the discussion identifies general patterns of trade deficits and surpluses, as well as notable exceptions, across the dataset. Finally, it includes a product dependency chart, accompanied by an explanation of observed trends and a set of recommendations designed to enhance trade performance without exacerbating trade deficits.

Pakistan’s 2007 FTA with China increased trade from US$4 billion to US$17.8 billion by 2024, although Pakistan faces a US$11 billion trade deficit. China represents 23% of Pakistan’s trade while Pakistan accounts for less than 1% of China’s, creating asymmetry that grants China significant leverage. 

The 2005 TIFA with the US expanded trade from US$2.3 billion to US$8 billion, with Pakistan maintaining a US$2 billion surplus. It represents 10% of Pakistan’s trade but only 0.3% of the US global trade. This surplus exists due to US policy supporting developing economies, although the export potential is limited, as textiles constitute 60% of exports.

The EU’s GSP+ scheme, introduced in 2014, is expected to increase Pakistan-EU trade from US$10 billion to US$15 billion by 2023. Pakistan enjoys a US$3.4 billion surplus, with trade representing 19% of Pakistan’s total exports but only 0.2% of the EU’s total exports. The status can be suspended during biannual reviews. Furthermore, textile exports to the EU account for 76% of total exports, indicating a lack of diversity. 

Pakistan’s 2007 Free Trade Agreement (FTA) with Malaysia nearly doubled the trade volume to US$4 billion, although Pakistan faces a US$1 billion deficit. Malaysia represents 5% of Pakistan’s trade while Pakistan accounts for 0.8% of Malaysia’s, giving Malaysia greater leverage. 

The 2012 FTA with Indonesia increased trade sevenfold to US$3.5 billion, resulting in a US$3.2 billion deficit for Pakistan. Indonesia represents 4.5% of Pakistan’s trade while Pakistan accounts for less than 0.7% of Indonesia’s, granting Indonesia significant leverage. 

Turkey’s 2016 agreement with Pakistan increased trade to US$ 1.1 billion, resulting in a US$0.5 billion deficit for Pakistan. Turkey’s exports primarily include machinery and chemicals, whereas, Pakistan’s exports are more limited, focusing mainly on textiles and agriculture. 

Iran’s 2004 PTA modestly increased trade to US$1.5 billion, with Pakistan maintaining a US$0.5 billion deficit, plus unofficial oil smuggling worth an additional US$1 billion. Iran’s international isolation has constrained trade potential. Iran’s international isolation has constrained bilateral trade potential, making Pakistan relatively important. 

The 2005 FTA with Sri Lanka increased trade to $0.5 billion, with Pakistan maintaining a US$0.3 billion surplus. It represents less than 1% of Pakistan’s trade but 4% of Sri Lanka’s. 

Pakistan enjoys trade surpluses with several countries without formal agreements. Trade with Afghanistan declined from US$2.5 billion in 2010 to US$1.5 billion by 2023, with Pakistan maintaining a surplus of approximately US$ 700 million. Pakistan also has a US$631.4 million surplus with Bangladesh and a US$45 million surplus with Tajikistan. 

These trade balances show a specific pattern. Pakistan typically maintains a trade deficit with larger economies, such as those with advanced technological capabilities and sophisticated industrial bases, like China, Malaysia, and Indonesia. Pakistan imports high-value machinery that its domestic industries cannot produce efficiently.

Conversely, Pakistan enjoys trade surpluses with smaller economies with less developed industrial infrastructures. These trading partners, primarily Bangladesh, Central Asia, and Yemen, import Pakistani textiles, agricultural products, surgical instruments, sports goods, and light-manufactured items. Pakistan’s comparative advantages in these sectors allow it to maintain positive trade balances with these economies, though the overall volume of this trade remains relatively low.

The US and EU represent notable exceptions to these patterns. Pakistan maintains trade surpluses with these larger economies despite their technological superiority. This anomaly likely stems from a deliberate geopolitical calculation rather than natural economic forces.

By the GSP+ and TIFA, these Western powers have created economic dependency, accounting for over 50% of Pakistan’s export market. However, Pakistan represents less than 1% of their total trade volume.

This dependency is compounded by Pakistan’s limited export diversification, with textiles accounting for 60% of exports, followed by rice at 10%, resulting in a significant reliance on a few key sectors.

Pakistan can significantly strengthen its geoeconomic and geopolitical leverage by expanding into economic markets across Africa, Central Asia, and Southeast Asia. It will enhance the existing trade surplus while reducing overdependence on any single economic bloc, such as the US and the EU.

Pakistan needs to diversify its export economy to ensure long-term stability. Sectors such as pharmaceuticals and automotive parts have an established industrial base but currently make minimal contributions. With targeted investment, they can reduce over-reliance on textiles and unlock access to new global markets.

Value-added exports would further increase Pakistan’s foreign exchange earnings. This applies to agricultural commodities, minerals, and leather goods, where processing can multiply the export value several times over.

By establishing concrete trade targets for ambassadors and diplomatic missions, Pakistan can transform its foreign service into a commercial force. Evaluating diplomatic performance partly based on trade outcomes would incentivise proactive market development and problem-solving for exporters. This approach has proven successful in countries like South Korea and Turkey, where commercial diplomacy drives export growth.