The historic decision of the voters in the United Kingdom (UK) to quit the European Union – a process also known as Brexit – can potentially have a major negative impact on Pakistan’s exports. Pakistan’s exports to the UK are currently governed by the Generalized Scheme of Preferences (GSP) Plus scheme of the EU, and this will change once Brexit is put into effect which is expected in 2019. This PBC Study analyzes the feasibility of a free trade agreement (FTA) between Pakistan and the United Kingdom (UK), post-Brexit, and advocates that Pakistan take a proactive approach to initiate negotiations leading to the signing of an FTA with the UK.
Pakistan benefits from a positive and growing balance in its merchandise trade with the UK. The UK is Pakistan’s fourth largest market for exports. 85% of Pakistan’s exports to the UK consist of other made-up textile articles, articles of apparel, cotton and articles of leather. All these products currently enjoy duty-free access to the UK under the GSP+. The UK is also Pakistan’s 15th largest source of imports. Major imports from the UK include iron and steel, machinery, electrical/electronic equipment, other made-up textile articles, and miscellaneous chemical products.
The GSP+ scheme currently provides 96% Pakistani exports preferential market access to the UK. A sudden increase in tariffs to MFN rates due to removal of GSP+, coupled with the expected depreciation in the Sterling’s value is likely to have a disastrous impact on Pakistan’s exports to the UK.
Continuation of the GSP+ or a similar arrangement is therefore important to maintain the current level of merchandise exports by Pakistan to the UK. However, the growth rate of the exports covered by the GSP+ is expected to become slower with time as Pakistan narrows in on its potential to export to the UK. Moreover, the remaining 4% products that are not covered by the GSP+ are faced with a decreasing trend in the UK’s global imports and thus have a bleak outlook for growth.
While Pakistan’s potential to import from the UK ($18.7 billion) is twice its potential to export to the UK ($9.1 billion), the sheer distances between the two countries and market preferences may not result in the actual achievement of these numbers, even in the presence of an FTA. Moreover, in products with high import potential for Pakistan, the tariffs applied by Pakistan on the UK are close to the tariffs applied by Pakistan to its current FTA partners.
Pakistan’s trade in services with the UK is skewed in favor of the latter. In FY 2015, Pakistan exported $353 million services to the UK and imported $525 million services from the UK, resulting in a $172 million trade deficit for Pakistan. Both exports and imports were concentrated in transport services, other business services, and government goods and services. Pakistan could potentially increase its travel and transport exports to the UK and its financial services and other business services imports from the UK.
The Pakistan Business Council (PBC) is a private sector not-for-profit advocacy platform set up in 2005 by 14 (now 60) of Pakistan’s largest businesses. The PBC’s research-based advocacy supports measures which improve Pakistani industry’s regional and global competitiveness. More information about the PBC, its members, objectives, activities and a soft-copy of this report can be found on our website: www.pbc.org.pk