Liberalization vs. Protectionism: Rethinking Pakistan’s Auto Industry

Pakistan’s auto industry is once again under the spotlight, facing a pivotal policy shift that could redefine its future. The International Monetary Fund (IMF) has proposed lifting the ban on commercial imports of used vehicles (up to five years old) and gradually slashing high import duties. This has sparked a national debate: Should Pakistan open its doors to greater competition, or continue protecting its still-maturing local industry?

The Tariff Maze: Why Cars Cost So Much

Pakistan operates one of the most intricate and protectionist auto tariff regimes in South Asia. While intended to nurture local manufacturing, it has significantly contributed to soaring vehicle prices and limited consumer choice.

• CKD Kits (Locally Assembled Vehicles): Subject to combined taxes and duties exceeding 40%—including customs duties, regulatory duties (RDs), additional customs duties (ACDs), and sales tax—these costs inevitably pass on to consumers.
• CBU Imports (Completely Built Units): Fully assembled vehicle imports attract high duties that vary widely depending on engine displacement and vehicle category—ranging generally between 50% to over 100%. For example, smaller engines may face duties starting around 25%, while larger engines and luxury models can see total tax burdens reaching up to 475%. These steep tariffs effectively price out most consumers and discourage foreign competition.
• Auto Parts: Even manufacturers trying to localize production face steep protection rates—some up to 98%—on critical parts not yet produced domestically, increasing inefficiencies and cost burdens.

The IMF Prescription: Reforming for Efficiency

The IMF’s proposed reforms are part of a broader fiscal and trade modernization strategy. Key elements include:

As part of its economic reforms, Pakistan plans to phase out regulatory duties (RDs) and additional customs duties (ACDs) on auto sector inputs. This step aims to lower manufacturing costs, simplify the complex tax system, and align it with global trade norms—ultimately fostering a more competitive and investment-friendly environment.

In tandem with duty elimination, the government is implementing a broader tariff rationalization strategy. The target is to reduce the weighted average applied tariff from 10.6% in FY25 to 7.4% by FY30.

Additionally, in a bid to increase consumer access and affordability, Pakistan will allow commercial imports of used vehicles (up to five years old) starting FY26. These imports will initially be taxed at 40% above new vehicle rates, with a 10% annual reduction planned each year until parity is reached by 2030. This shift could significantly reshape the automotive landscape by enhancing market dynamics and consumer choice.

Pro-Liberalization: Time to Break the Oligopoly

For proponents of liberalization, these reforms are long overdue. Pakistan’s auto market has long been dominated by a handful of companies, resulting in limited product diversity, delayed deliveries, and some of the highest car prices in the region.

Why Liberalization Makes Sense:

• Lower Prices: Greater supply and competition from imports could force price corrections across the board.
• Expanded Consumer Choice: More variety, better features, and global quality standards could finally reach Pakistani buyers.
• Reduced Inflationary Pressure: More affordable vehicles can help offset the broader cost of living crisis.
• Global Trade Alignment: Rationalizing tariffs brings Pakistan closer to WTO norms and improves investor confidence.

Pro-Protectionism: Safeguard What We’ve Built

On the other side of the aisle, local manufacturers and industry stakeholders—particularly the Pakistan Association of Automotive Parts & Accessories Manufacturers (PAAPAM)—warn that liberalization without a safety net could wipe out hard-earned industrial progress.

Why a Gradual Approach is Critical:

• 5 Million Jobs at Risk: The automotive sector supports a vast ecosystem of workers, from factory floors to supply chains.
• $5 Billion in Investments: Assemblers and part-makers have invested significantly in local production capacity and infrastructure.
• 76% Capacity Utilization: Even with current protections, plants are operating below full capacity. Flooding the market with imports could worsen this.
• Risk of De-Industrialization: A rapid policy shift could reduce local production to mere assembly—or worse, closure.

A Balanced Roadmap Forward

This shouldn’t be an either-or decision. There’s room for a smart, phased strategy that balances liberalization goals with domestic industry needs.

A phased reduction in tariffs over five to seven years is recommended to allow local automotive industries time to adapt. Targeted import policies should permit fuel-efficient and electric vehicles while maintaining higher duties on luxury CBUs, balancing environmental goals with local industry protection.

To boost domestic manufacturing, tax breaks and incentives should be linked to increased local parts production and export targets. Supporting R&D, standardization, and regional export opportunities will further strengthen innovation and the global competitiveness of local assemblers.

Reform, Not Ruin

The debate over liberalization versus protectionism isn’t new—but it is urgent. Consumers deserve better, more affordable vehicles. At the same time, Pakistan’s economic backbone—its manufacturing sector—cannot be sacrificed for short-term relief.

A strategic, data-driven, and inclusive approach can unlock the full potential of Pakistan’s auto sector, turning reform into resilience.