Impact of Tariff Reduction on Automobile Industry

1.  Setting the Stage

For decades Pakistan has been experiencing boom and bust cycles and been hamstrung by a foreign exchange constraint that requires a bailout from the IMF and restricting economic activ- ity each time the economy overheats. The economy invariably ends up at this crossroads every few years, back to square one and having to start all over again.

As part of its International Monetary Fund (IMF)-backed economic reform agenda, Pakistan has agreed to gradually open up certain sectors, including the automotive industry. Pakistan has embarked on a sweeping five-year tariff reform plan, unveiled in the federal Budget 2025–26, with the explicit aim of shifting from import substitution to an export-led growth model. In a nutshell, the reform aims to streamline the customs duty structure, reducing the number of slabs from five to four—0%, 5%, 10%, and 15%—and lowering the average tariff rate from 19% to approximately 9.5% by FY2030. Regulatory and additional customs duties across numerous tariff lines will also be phased out over the next three to five years. These reforms are designed to make Pakistan’s tariff regime more transparent, predictable, and regionally competitive.

For the automobile industry in particular, tariffs on Completely Built Units (CBUs) will be reduced from 20% to 15% over five years, while used-vehicle tariffs will start with a 40% surcharge above new vehicle rates in FY26, decreasing annually by 10% and ending at parity by 2030. The government also intends to abolish the “Fifth Schedule” exemptions and eliminate protectionist regulatory complexities. However, stakeholders in the industry have expressed concerns. Local OEMs caution that the sudden surge in used-car imports, potentially reaching 70,000–80,000  units annually,  could devastate domestic vehicle production  and reverse hard-won gains in local content, employment, and investment.

Concurrently, these tariff reductions support broader environmental goals: the government plans to introduce a carbon levy and incentives for electric vehicles (EVs), with aims to achieve 30% EV penetration among new vehicles by 2030. A proposed petrol-diesel levy may raise PKR 25–30  billion annually over five years that can fund EV infrastructure development.

Automobile manufacturers and assemblers in Pakistan have been operating for over 20 years behind protected tariff walls with a captive market and demand throttled by a booking system. Higher tariffs and an unfavourable exchange rate are the primary cause of price increases of vehicles. Now they are being asked to step out from behind their protected walls and compete with firms that operate outside Pakistan. Are the concerns of the local assemblers justified, or is it an aversion to change and the nudge towards competition? For the consumer, the change can be a welcome one; access to better quality, more choice, lower prices. The focus of the government on shifting from ICE to EV vehicles can receive a boost. This policy viewpoint will assess the potential gains and losses for each of these stakeholders in the economy.

2.  Impact Assessment

i.  Domestic Industry

There is no doubt that the reduction in tariffs for the automobile imports along with easing up the CBU vehicle import regulations will have significant impacts for the local automobile indus- try, but it does not mean that the impact will necessarily be one sided. On the contrary, there could be some positives gained from the reduction in tariffs while some new challenges will certainly arise as well. The probable impacts on the domestic industry as a result of the tariff reduction can be categorized according to increased competition, tariff induced cost reduction, improved vehicle affordability and labor market impact.

Increased Competition

Reduction in tariffs and easing up import regulations will increase the competition in the local automobile industry as a wider range of vehicles will be available for the consumers to pick from. As a result, some of the local industry players may face difficulties in adapting to the new circumstances and be forced to either limit their operations or even exit the industry. For others, this could be an opportunity to improve their products and maintain their share of the market.

Some of the new players with weaker local industry groups or smaller global brands are expect- ed to be on the suffering end and lose their market share. However, the older brands in Pakistan and the bigger global brands among the new entrants shall be able to deal with the new chal- lenge by adapting and competing with imported vehicles.

A similar scenario has been faced by the automobile industry on two occasions over the last two decades, which further supports that while some may suffer, others will benefit and improve. Firstly, following the ban on use of carburetor engines in Pakistan, Suzuki Alto was discontinued as the sales volumes were not high enough to invest in latest engine technology for the vehicle. However, Suzuki successfully managed to shift its Mehran and Cultus variants to engines com- plying with emission standards.

Secondly, global brands like Kia, Hyundai and Chevrolet entered the Pakistan market during early 2000s but were unable to sustain operations and exited as the local partner groups were not strong enough to compete and gain market share in a smaller market like Pakistan.

Thirdly, following the introduction of Automotive Development Policy 2016-21, many new players entered the Pakistan market. Though a few of them such as DFSK, Proton etc. were unable to make their mark in the local market, other brands of Korean and Chinese origin have made a great positive impact on the local industry. Following the entry of these new brands, not only have C-SUV category vehicles now been made available in Pakistan which were not locally sold before, but the consumers have also been presented with locally assembled hybrid vehi- cles, which have received great feedback from the consumers. Seeing this, the Japanese brands which have been operating in Pakistan for decades, have taken the challenge heads on and also adapted to the needs of the consumers and introduced their own C-SUVs and HEVs. Thus prov- ing, increased competition does not necessarily kill the existing players but instead is an oppor- tunity for them to adapt and improve.

Tariff induced Cost Reduction

The lowering of tariffs on automobiles must not be limited to just CBU vehicles, instead a similar reduction in tariff must be implemented simultaneously for CKD imports as well, to ensure a level playing field for the local manufacturing and assembling OEMs. Lowering of tariffs on the CKD imports translate into a reduction in the cost of production for the OEMs in Pakistan and therefore enable them to remain competitive in a market with increased competition from CBU vehicles.

Improved Vehicle Affordability

A large portion of the final sale price of the vehicles in Pakistan, whether locally assembled or imported as CBUs, consists of taxes. In case of CBU imports, the high import tariffs are the only source of taxation on the vehicle purchase whereas for locally assembled vehicles import tariffs on import of CKD as well as other taxes and charges such as sales taxes, FED, and now the NEV levy are charged which increase the on-road price for the consumer.

In recent years, when the taxes have remained high and production costs have also increased, vehicle affordability has becoming difficult for the general public. With reduction in import taxes on the CBU and similar reduction in import tariffs for the CKD kits as well, the prices of vehicles are expected to reduce. This will improve the vehicle affordability among the general public and possibly contribute to an increase in demand for the vehicles. As a result, the improved demand will certainly have a positive impact on the industry and vehicle ownership in the country.

Jobs Creation and Deletion

The number of employed labor in the automobile industry vary vastly, depending on who you include in the list. The automobile industry consists of the automobile OEMs, automobile parts vendor industry, sales and after sales services, and the secondary parts and services market. The total number of people associated in all these sub-industries are much larger, however, the real and foremost impact of any automobile policy changes is witnessed in the employment in auto- mobile OEMs, and the reduction in import tariffs will before anywhere else have a significant impact in the same.

Currently, the automobile OEMs directly employ approximately 10,000 people. These include both the employees involved in manufacturing processes, and other firm operations. Once the tariff reduction policy is implemented, these will certainly be a change in the workforce of OEMs, depending on how the industry and consumers react to the new policy. At worse, if not all, majority of the 10,000 jobs could be at risk if the local industry is unable to compete with the new and used imported CBU vehicles. This, however, remains the worst possible scenario as a result of the policy change. It is though expected that some jobs might initially be lost in the OEMs following the introduction of the policy but as the imported CBU vehicles businesses pick up, new businesses and jobs will also be created as a result of this policy. These would most likely be related to import services, sales and after sales services of CBU automobiles as well as auto parts in the secondary market.

The loss of jobs in the OEM industry in the short run might be off-set with job creation in the longer run if the OEMs are able to maintain their market share, compete against the imported CBU vehicles and the automobile market expands through increased ownership.

The exact net extent of the job loss and job recreation in OEM industry and new business and job formation due to increased CBU vehicle imports will depend entirely on how the OEMs perform under the new regulations and how the consumers react to the availability of a wider range of vehicles after easing up of import regulations and tariffs.

Transformation in the Industry

The automobile industry in Pakistan has on more than once occasion undergone significant transformations and technological updates as a result of regulatory changes and/or competi- tion. Following the introduction of AIDEP 2021-26, the automobile OEMs  in Pakistan have upgraded the safety and security features in line with the global standards, as mandated by the policy. Similarly, in accordance with environmental regulations, the automobile OEMs phased out the carburetor engines in 2010 and shifted to EFI engines. Similarly, when new players entered the Pakistan market following the ADP 2016-21, the older firms also adapted and intro- duced vehicles in the C-SUV category, HEVs and upgraded the features and specs in line with the competition and as per the consumer demand.

These instances from the last decade or two represent the automobile industry’s ability to upgrade and transform as per the needs of the market, be it through regulation or increased competition. While vehicles in Pakistan have significantly improved in terms of quality, features and specs, it is also a reality that they still lag behind many other countries. As a result, with easing of import regulations and reduction in import tariffs, consumers will have the option to choose from vehicles with better specs, features and quality. Such competition, as recent histor- ical instances show, will act more as an opportunity and much needed push for the local indus- try to improve their products rather than a challenge to their survival.