Risks to Pakistan’s Market Access to The European Union (EU)

The report titled “Risks to Pakistan’s Market Access to The European Union (EU)” is part of the Market Access Series 2024-25 published by the Pakistan Business Council (PBC).

EU Generalized System of Preferences (GSP) Plus

The EU’s Generalized System of Preferences (GSP), introduced in 1971, provides preferential market access to low-income and middle-income countries. It includes the Standard GSP, GSP Plus, and Every Thing but Arms (EBA). The GSP Plus program offers duty-free access on 66% of tariff lines.

The EU’s GSP Plus scheme, which began in 2014 with countries like Pakistan, Armenia, and the Philippines, has evolved over time, with some countries graduating and others joining later. In 2023, Pakistan, the Philippines, and Sri Lanka were the main beneficiaries, with Pakistan receiving the highest share of GSP Plus imports into the EU.

Figure 1: EU GSP Plus Beneficiaries Share in 2023

 

Pakistan’s reliance on the GSP Plus scheme has grown over the years, with the contribution of its preferential exports as a percentage of its total exports to the EU increasing from 64.6% in 2013 under the standard GSP to 78.1% in 2023. The overall imports from Pakistan under GSP Plus increased by 34.3% from 2014 to 2023, highlighting the scheme’s significant role in boosting Pakistan’s exports.

EU’s Top 10 GSP Plus Imports from Pakistan

The table below shows EU’s top 10 GSP Plus imports from Pakistan along with their share in the EU’s GSP Plus imports in 2023 and their import CAGR for 2019-23.

The highest exports, on average, have been apparel, leather articles and textile made-ups. Overall imports under GSP Plus have shown a negative CAGR of 0.61% in the last five years.

Table 1: EU’s top 10 GSP Plus imports from Pakistan along with their share in EU GSP Plus imports in 2023 and their CAGR for 2019-23

Export Product Dynamics Analysis

This report utilizes the Export Product Dynamics (EPD) Matrix to analyze EU imports from Pakistan in comparison to its imports from the global market.

In the EPD Matrix the quadrants are labeled as Lost Opportunity, Rising Star, Retreat and Falling Star. A Lost Opportunity is when items have a large share among world imports but the exporting country is not exporting those items in large amounts. A Rising Star is when certain items have a large share among the world’s imports and the exporting country also exports those items in sizeable amounts. Retreat is when items have a lower share among world imports and the exporting country also exports those items in smaller amounts. Falling Star is when items have a low share among world imports and the exporting country exports those items in large amounts.

By taking EU’s imports from the world on the X-axis and the EU’s imports from Pakistan on the Y-axis, the imports of different Pakistani products can be plotted and their performance can be viewed in relation to their demand in the European Union. To make the analysis simpler, products imported by the EU from Pakistan valued at more than Euros 10.0 Mn each were analyzed.

The analysis reveals that the majority of Pakistan’s exported items to the EU fall in the Retreat segment i.e., they are items which have a lower share among the EU’s total imports and Pakistan also exports these items in smaller amounts. Pakistan has not prioritized exporting products that are either in high demand or experiencing significant growth in the EU market. This lack of focus has resulted in missed opportunities to expand market share and establish a strong presence in products with growing demand in the EU.

Figure 2: EPD Matrix for EU’s Average Imports under the GSP Plus from Pakistan (2019-23), Euros, Millions

The report underscores a significant risk for Pakistan: a large portion of its key exports to the EU fall within the “retreat” category of the EPD matrix. This category indicates that both Pakistan’s exports to the EU and the EU’s imports from the world in these product lines are relatively low. If Pakistan continues to focus on these stagnant product lines, it risks facing severe challenges in the coming years. The growth potential in these sectors remains limited, and Pakistan’s exports to the EU may decline significantly over time, with minimal prospects for sustainable growth.

Risk Analysis of EU Imports from Pakistan

Pakistan has benefited from the EU’s GSP Plus scheme for the past decade, but its future qualification for the next GSP Plus program remains uncertain due to stricter qualification criteria.

While Pakistan may still be eligible for the standard GSP, the loss of GSP Plus status would result in higher tariffs. While the possibility exists for Pakistan to retain some preferential access under the standard GSP, it would be significantly less favorable compared to GSP Plus, which could harm its export competitiveness in the EU market.

Pakistan has greatly benefited from the EU’s GSP Plus scheme, with a notable increase in market shares across key product categories, especially in apparel and textiles. For example, undenatured ethyl alcohol (HS-220710) and men’s trousers (HS-620342) experienced significant growth, with HS-220710 showing a 20.6% CAGR from 2014 to 2023. Pakistan also dominates the EU market in several categories, with shares as high as 70% for products like footwear (HS-640399) and men’s trousers (HS-620343). However, some products such as bedlinen (HS-630232) and leather apparel (HS-420310) saw declines in market share, with HS-630232 losing 22% and HS-420310 dropping by 2.8% in the last decade. This indicates that, while Pakistan maintains a strong presence in the EU market, there are emerging challenges in certain sectors.

The risk of reverting to the Standard GSP scheme is considerable, as it would reintroduce non-zero tariffs on Pakistan’s exports, eroding their competitive advantage. Products like HS-220710 and HS-610342, which currently benefit from zero-duty access under GSP Plus, could lose significant market share. Moreover, products that were not previously exported under the Standard GSP, but became key exports under GSP Plus—such as HS-610342—would likely face reduced demand if tariffs are reinstated.

Recommendations

Diversify the Export Basket

To maximize benefits under the EU GSP Plus scheme, and to mitigate against the possible withdrawal of the GSP Plus scheme, Pakistan needs to diversify its export portfolio beyond textiles and leather goods. Non-traditional sectors such as organic chemicals, pharmaceuticals, and machinery hold untapped potential. Targeted investments in emerging product categories like knitted apparel and sportswear, which have exhibited positive growth trends, can further enhance Pakistan’s competitive edge.

Revitalizing Products in the EPD ‘Retreat’ Category

The dominance of Pakistan’s exports (valued at more than €40 million) to the EU in the “Retreat” category of EPD matrix, characterized by declining global demand and competitiveness, requires urgent action. Targeted market research can identify niche opportunities or emerging trends, such as shifting to eco-friendly alternatives in textiles, to better align with global preferences.

Engaging with international buyers to align product development with market trends and preferences can further enhance competitiveness.

Ensure Compliance with Revised GSP Plus Criteria

The updated GSP Plus framework for 2024-2034 is expected to incorporate additional conventions on environmental protection and labor rights, presenting both challenges and opportunities for Pakistan’s exports. Proactively aligning national policies with these expected enhanced standards and demonstrating measurable progress in governance, human rights, and labor conditions are critical to securing eligibility for the scheme beyond 2027.

Promote Sustainability in Exports

Additionally, the introduction of the EU Carbon Border Adjustment Mechanism (CBAM) necessitates immediate steps to enhance the sustainability of export-oriented industries. Pakistani exporters must invest in adopting greener production practices, energy-efficient technologies, and supply chain decarbonization to meet carbon compliance requirements.

Expand Geographical Reach in the EU

While Germany, Spain and Italy remain key trade partners, expanding into untapped EU markets in Central and Eastern Europe can unlock new growth opportunities. Tailored marketing campaigns, trade missions, and logistics support are necessary to penetrate these markets.

 

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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