Brexit and the Likely Impact on Pakistan UK Trade

This Study by the Pakistan Business Council (PBC) titled “Brexit and the Likely Impact on Pakistan — UK Trade” is part of the PBC’s Market Access Series 2020 — 21.

In 2019, the UK imported goods worth $1.7 billion from Pakistan making the UK an important export destination for Pakistan. This Study attempts to answer the following questions:

• What will be the UK’s trade regime especially for Pakistan following Brexit?
• How is the UK’s trade regime likely to impact Pakistan’s exports to the UK — in the near,  medium term?
• What is the likely trend in Pakistan’s exports to the UK in the near, medium term?
• How can Pakistan increase its presence in the UK market post-Brexit?

In June 201 6, the UK electorate in a referendum narrowly decided that the UK should exit the European Union (EU) and … take back control…”. The term used for the UK’s exit from the EU is Brexit.

The UK’s Trade Regime Post-Brexit: The UK will formally exit the EU at the end of 2020 unless there is an agreement to extend the departure date as talks continue on what is called the “Divorce Deal”. So far what we know about the UK’s trade regime post-Brexit are:

• In the absence of a trade deal with the EU, imports to and from the EU will be subject to normal or MFN tariffs.
• The UK in the interim transition period will continue with the existing EU non-tariff barriers including compliance and testing requirements pending the setting-up of its own national standards
• The EU’s bilateral trade agreements will no longer apply to trade between the UK and the EU’s partner countries and the UK will look to negotiate its own trade agreements with its major trading partners
• All EU unilateral trade benefits such as GSP, GSP+ and EBA (Everything but Arms) will continue in the transition period as the UK reviews these unilateral trade concessions.

The UK’s Trade Regime for Pakistani Imports: In the post-Brexit period the UK has committed to Pakistan & other developing countries the following:

• The EU’s unilateral concessions such as GSP+ will continue post the UK’s exit from the EU. However, there is a likelihood that these will be reviewed subsequently keeping the UK’s economic and strategic objectives in mind
• The EU’s compliance requirements will continue to apply for imports from Pakistan under the UK’s new trade regime pending the development of the UK’s own national standards.

Likely Trends in Pakistan’s Exports to the UK: There are forecasts to suggest that the UK’s GDP will contract between 1 and 4.5% in the post-Brexit period. Based on past trends in Pakistan’s exports in periods where the UK has seen a contraction in its economy, the following are the likely trends in Pakistan’s exports to the UK post-Brexit:

• Historical data suggests that there is a “lag effect” of one year between a slowdown in the UK’s economy and the impact of this slowdown on Pakistan’s exports. This suggests that in the near-term there will be no major drop in Pakistan’s exports to the UK. This analysis does not take into account the “Covid-19 affect” on consumption in the UK.
• There is expected to be no major drop in Pakistan’s exports to the UK primarily because of the very low contribution of Pakistan to overall UK imports (0.25%). In addition, the nature of Pakistan’s exports the UK which are mostly products with low levels of sophistication reduces the likely impact on demand from a reduction in consumer buying power.

PBC’s Recommendations for Policy Makers & Industry: While Pakistan will continue to benefit from GSP+ in the near term, this benefit might not continue in future. The major recommendations coming out of this Study are:

• In the transition period after the UK exits the EU, policy makers in Pakistan need to monitor the new rules for trade that will be framed by the UK post the transition period. For Pakistan of special importance will be the Non-Tariff Barriers like compliance and testing that the UK might introduce for imports including those from Pakistan.
• Pakistan will need to lobby with the UK government to ensure that the current duty-free access granted by the EU GSP Plus scheme continues.
• Pakistan also needs to monitor if the UK will continue with duty-free access for Pakistan’s competitor countries and if it will extend these to countries such as India which are currently not eligible for duty-free access.
• Though it appears that there will be no major drop in exports, this is primarily due to the low level of sophistication of Pakistan’s exports, this needs to change.
• To ensure that Pakistan derives the maximum benefit from its initial duty-free access to the UK market, Pakistan needs to put in place a policy framework that promotes the manufacture and exports of products which have large and increasing demand e.g. apparel of man-made fiber and more products which have a higher level of sophistication than what is currently being exported to the UK.

The PBC is a private sector not-for-profit advocacy platform set-up in 2005 by 74 (now 83) of Pakistan’s largest businesses. PBC’s research-based advocacy supports measures which improve Pakistani industry’s regional and global competitiveness. More information about the PBC, its members, objectives and activities can be found on its website: www.pbc.org.pk