Prime Minister Shehbaz Sharif’s announcement of tariff reforms marks a significant policy shift aimed at foster-ing export-led growth and attracting foreign investment.
The decision to cap customs duty at 15% and phase out Additional Customs Duty (ACD) and Regulatory Duty (RD) over the next four to five years signals a pro-industry and liberal trade approach.
The intent is clear and commendable: simplify the tariff structure, reduce input costs for domestic industries and make exports more competitive globally.
Fewer duty slabs and a maximum customs ceiling could help industries plan more effectively, promote industrialization and eliminate the distortionary impact of protectionist duties that have often benefited a few sectors at the cost of overall economic efficiency.
These changes could act as a catalyst for long-term capital inflows, job creation and technology transfer.
The potential ripple effect on employment and inflation, as claimed by the Prime Minister’s Office, could prove beneficial, particularly in stabilizing supply chains and checking cost-push inflation.
However, the economic trade-offs must not be overlooked.
In the short term, these measures could widen the trade deficit.
Lowering import duties without a corresponding rise in exports may increase imports, exert pressure on the current account and further strain foreign exchange reserves.
A phased reduction is prudent, but the timing must align with export competitiveness gains.
Additionally, the move could reduce government revenue from customs duties, a significant component of indirect tax structure.
With limited room to expand the tax net quickly, the loss in tariff revenue might force the government to increase taxation in other sectors that disproportionately could affect the lower-income population.
This could offset some of the intended welfare gains.
There is also the risk of misuse.
In the absence of strong regulatory oversight, cheaper imports might flood the market, undermining local manufacturers who are still struggling with high energy costs and inconsistent policy support.
To minimize these drawbacks, the government must synchronize tariff reforms with robust ex-port facilitation measures, such as subsidized financing and targeted support for value-added sectors.
Strengthening regulatory oversight to prevent market flooding and ensuring a gradual, data-driven implementation time-line will also be essential to protect local industries while transitioning to a more open trade regime.
