Potential for Pakistan – MERCOSUR Free Trade Agreement

The report titled “Potential for a Pakistan – MERCOSUR Free Trade Agreement” is part of the Market Access Series 2025-26 published by the Pakistan Business Council (PBC). The findings of this report are based on a multi-faceted review, incorporating stakeholder perspectives, in-depth industry analysis, and a study of trade impediments.

This report examines the potential of a Free Trade Agreement (FTA) between the Islamic Republic of Pakistan and the Southern Common Market (MERCOSUR). The bloc, comprising founding members Argentina, Brazil, Paraguay and Uruguay, along with its newest full member, Bolivia (accession completed in 2024), represents a major global economic force, with a combined market of over 282 million people and a total GDP of approximately $2.98 trillion in 2024.

Figure 1 shows the trade balance of MERCOSUR from 2020 – 2025.

Pakistan signed the trade framework agreement with MERCOSUR in 2006 with the aim of initiating negotiations to signing a Preferential Trade Agreement (PTA). However, the two sides could not make significant progress in that direction in subsequent years or significantly enhance bilateral economic cooperation.

In early 2019, Pakistan explored the possibility of moving toward a Free Trade Agreement (FTA) with the bloc, saying it could help bridge the trade deficit with the Latin American states, but the initiative once again did not progress far.

Trade volume is significantly low, with Pakistan’s share in MERCOSUR’s overall trade being less than 0.06%. The trade balance has consistently favored MERCOSUR, which primarily exports agricultural goods and machinery to Pakistan, while Pakistan’s main export to the bloc is textiles. Figure 2 shows Pakistan’s Bilateral trade with MERCOSUR from 2020 – 2024.

Figure 3 illustrates the significant untapped export potential for Pakistan within the MERCOSUR bloc, with Brazil standing out with an export potential exceeding $140 million, followed by Argentina at approximately $60 million. Pakistan’s exports to the bloc show steady and consistent growth. The total value increased from $174.52 million in 2022 to $209.41 million in 2024, a growth of nearly 20%.

Pakistan’s exports are heavily concentrated in textiles. The top 3 categories at the HS-02 level (Cotton, Other made-up textiles, and Knitted apparel) alone consistently account for one-third of Pakistan’s exports to MERCOSUR. Surgical Instruments (HS 901890), Inflatable Balls (HS 950662) and Truck/Bus Tires (HS 401120) were amongst the top export products at the detailed HS-06 level.

The report identifies Cotton (HS code ‘520100) as the top export, constituting the majority of MERCOSUR’s exports to Pakistan. In 2024, cotton exports ($169 million) represented 30.5% of all MERCOSUR exports to Pakistan. Soybean oil (HS code ‘150710’) is the second most important export product. Despite a dip in 2024, it remains a key commodity, highlighting MERCOSUR’s role in supplying Pakistan with essential food/edible oil products. Beyond this, MERCOSUR has successfully carved out niche roles in specific Pakistani markets such as Pepper (‘090411’) and Wood Pulp (‘470329’).

The report also provides a consolidated overview of India’s PTA with MERCOSUR and lessons Pakistan can learn from that. Pakistan must establish a clear strategy based on offensive and defensive interests, informed by the India-MERCOSUR precedent. Its offensive interests should focus on securing deep tariff preferences for its value-added textile and apparel sectors (HS 50-63), particularly home textiles, garments, and specific cotton fabrics, where India has gained little. For unique agricultural products like Basmati rice (HS 100630) and mangoes (HS 080450), Pakistan should aim for high preference margins or Tariff Rate Quotas (TRQs).

Services Trade Potential

The services trade relationship between Pakistan and the Southern Common Market MERCOSUR is currently negligible but poised for growth. It represents a large untapped frontier for Pakistan to diversify its exports beyond traditional goods and rebalance its trade deficit with the bloc.

Pakistan’s IT services exports are growing rapidly overall but remain negligible in MERCOSUR, despite the bloc’s large and growing IT import market. Uruguay, though a small market, serves as Pakistan’s current entry point, while Brazil offers the highest potential value. However, barriers like restrictive visa rules, data privacy laws, and language constraints hinder market access. Without a focused trade strategy, Pakistan risks missing a key opportunity to diversify exports and reduce its trade deficit with the bloc.

Barriers to Trade

1. Currency Volatility and Exchange Rate Considerations in MERCOSUR: Traders must account for Argentina’s high inflation and parallel exchange rates, which complicate financial dealings. The other member states maintain more predictable currencies, but the wide range of exchange rates (e.g., 1 USD = 5.4 BRL vs. 6,700 PYG) requires careful financial planning for Pakistani exporters and importers.
2. MERCOSUR’s Structural and Political Barriers to Trade: A major roadblock to trade expansion in MERCOSUR is the official rule of the Customs Union, which mandates that no single member country (like Brazil or Argentina) can sign its own Free Trade Agreements (FTAs) with non-bloc countries. Instead, all external trade agreements must be negotiated by MERCOSUR as a whole to protect the shared tax on imports (CET).
3. Textile Trade Barriers: The MERCOSUR bloc, anchored by Brazil stands as a global powerhouse in textiles and apparel. The domestic industry meets the vast majority of local textile demand itself. Consequently, the market opportunity for major textile exporters like Pakistan remains limited, as Brazil’s self-sufficiency creates a significant barrier to entry for external competitors.
4. Geographical Barrier: The great physical distance between Pakistan and MERCOSUR, over 13,000 kilometers, is a major barrier to trade. It causes two main problems: high shipping costs and long delivery times. The long shipping route results in freight costs that are 30-50% higher than those of competitors closer to the market, like those in Asia or the Americas. This makes Pakistani goods expensive in the region. Shipping times are long, often 65 to 90 days
5. Country-Specific Laws and Non-Tariff Barriers: Brazil’s tax and regulatory system is a major barrier. The main problem is a system of taxes that add up, making imported goods much more expensive. Beyond taxes, regulatory rules are a major trade barrier. Agencies like ANVISA for health products and INMETRO for technical standards have strict rules. These are time consuming requirements and can prevent products from entering the market.

Argentina uses government rules to protect its foreign currency and local businesses. A main method is requiring special import licenses for many goods, like textiles. Furthermore, the government often limits access to foreign currency, making payments difficult and risky for exporters. Heavy paperwork, having documents approved by an Argentine consulate, adds more delays and costs.

Recommendations

1. Primary Objective: Based on the analysis, it is therefore recommended that Pakistan adopt a calibrated approach by initially pursuing a limited-scope Preferential Trade Agreement (PTA) with MERCOSUR. This strategy would enable targeted access to key imports such as essential raw materials, energy products, and agricultural inputs, while safeguarding domestic industries from exposure to competitive pressures.
2. Systematically Dismantle Non-Tariff Barriers:

• Negotiate the terms of the “legal representative” requirement to provide more flexibility for exporters, such as shorter contract terms or clearer processes for changing representatives.

• Negotiate mutual recognition of Pest Risk Assessments (PRA) with SENASA and other regional bodies to unblock agricultural exports.
• The Government of Pakistan must urgently invest in creating internationally accredited certification bodies to overcome a major technical barrier.
• Given that textiles form the backbone of Pakistan’s exports, securing meaningful tariff concessions in this sector must be a negotiating objective, learning from the precedent set in the EU-MERCOSUR talks and the shortcomings of the India-MERCOSUR PTA.

3. Address Internal Policy Misalignment and Enhance Support:

• Review and align Pakistan’s own tariff policy to ensure it does not penalize export-oriented industries by making raw materials more expensive than finished goods.
• Pakistan must bolster its own cotton production. As the textile industry grows and consumes more cotton, it is important to become more self-sufficient. Policy should help local seed companies create high-yield, pest resistant cotton varieties. It must also leverage the 18% sales tax on local cotton to encourage, not hurt, domestic growers.
• Support should be provided for R&D to develop new products and adapt existing ones to specific foreign market trends, addressing the fundamental lack of innovation highlighted in the supply-push model.
• Support should be provided to industries in obtaining organic and eco-certifications to compete with rivals like India on the evolving standards of the South American market.

4. Leverage Immediate Opportunities and Facilitate Engagement

• Negotiations should immediately capitalize on the current liberal economic policies in Argentina to secure strong initial terms. Argentina’s market can serve as a gateway and a positive precedent for engaging with the wider MERCOSUR bloc.
• Actively work to streamline the visa process for Pakistani businessmen and support initiatives that improve Pakistan’s commercial image in South America.

5. Unlock Services Trade with MERCOSUR: Pakistan should immediately pursue a targeted strategy to unlock services trade with MERCOSUR.

• Upgrade the existing PTA discussion with a dedicated chapter on services to secure defined market access.
• Prioritize Mutual Recognition Agreements (MRAs) for qualified sectors (e.g., IT) and negotiate a bilateral visa facilitation agreement to ease the movement of professionals.
• To overcome the language barrier in the services sector, mandate the learning of at least one major foreign language (e.g., Spanish, Portuguese, Mandarin) during undergraduate studies. This will create a future workforce capable of building trust, understanding client needs, and directly accessing regional markets, drastically improving the competitiveness of Pakistan’s services exports.

The PBC is a private sector not-for-profit advocacy platform set-up in 2005 by 14 (now 100+) 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

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