Pakistan’s Economic Standing in Jeopardy against India’s Trade Deals with the EU and the US
India has taken a significant leap in its trade history by bagging two crucial trade deals this year. First, there is the signing of what has been called the “Mother of all deals”, i.e., the India-EU trade deal. As one of the largest FTAs, the India-EU FTA provides zero-tariff access for over 90% of Indian exports, including textiles, leather, and automobiles. It addresses $33 billion of Indian exports and is expected to boost marine exports by reducing tariffs up to 26 percent. The deal came after a long period of 20 years of concerted efforts to arrive at a mutually beneficial common ground. It is a huge feat, with the comprehensive trade deal covering about 2 billion people and creating a combined market of nearly $27 trillion, accounting for around 25 percent of the global GDP.
Second is the India-US trade agreement, leading to normalisation of trade relations after a long period of tension. The agreement reduces tariffs to 18% for Indian products, helping restore New Delhi’s competitiveness in textiles and pharmaceuticals against its traditional trade rivals. The new trade deals stand to give India an edge in several sectors, including textiles, pharmaceuticals, machinery, steel, petroleum products, and electrical equipment.
Though these advancements have a certain positive economic impact for India, it is not a very comforting news for its neighbour Pakistan. Pakistan is concerned about its trade prospects and loss of competitive edge, and rightly so. The signing of the India-EU trade deal significantly diminishes the power of GSP+ conferred by the EU on Pakistan. Until now, Islamabad had an edge on India, especially in labour-intensive sectors like textiles and apparel, due to the GSP+ status. The status allowed Pakistan a duty-free access to the EU for nearly 66 percent of its tariff lines. On the other hand, Indian exporters faced duties of 9 percent to 12 percent on similar goods. In the post-deal era, around 95 percent of India’s labour-intensive exports (including textiles, garments, and footwear) now enter the EU duty-free. The trade deal has now effectively neutralised the hitherto beneficial effects of GSP+ on Pakistan by removing the price cushion that allowed its economy to remain competitive despite its higher energy costs and structural inefficiencies.
Thus, FTA is being regarded as “the mother of all problems” for Pakistan, as the relative advantage that Pakistan had hitherto been capitalising on seems to be eroding now. A concern that $9 billion worth of exports to the EU and around 10 million jobs are at risk, thus ending the “zero-tariff honeymoon” with the EU
In the context of the US-India deal, Pakistan currently faces an average tariff of 19% on its exports to the US: 1 percentage point higher than India, which again diminishes the relative advantages of Islamabad, especially in the labour-intensive textiles and apparel sector, where profit margins are already thin.
Now, Islamabad has landed in a situation where, unless the government invests in the economy by aligning energy, tax, and financing costs, it may incur heavy losses and exacerbate its developmental bottlenecks.
Nevertheless, the retention of Pakistan’s GSP+ status has always been in doldrums and there have been demands for withdrawal of the status, given that the implementation of 27 international conventions related to human rights, labour rights, and good governance has often been underwhelming. A 2025 EU monitoring missions have already raised concerns regarding electoral irregularities and human rights, leading to conversations on a possible temporary withdrawal of preference status.
This is an important economic lesson: Economies that do not invest in inclusive institutions and support extractive ones are bound to face economic precarity and unsustainable economic growth.
Though now Pakistan needs to cut its production costs, work on its efficiency, and diversify exports in order to remain relevant in the changing trade alignments, the ability to do so is very limited given the persistence of institutional inertia in the country. Years of political instability, bureaucratic inefficiency, elite capture, weak rule of law, and a lack of accountability have led to the degeneration of the institutions, stickiness, and even a rise in poverty and staggered development goals.
Thus, Indian trade deals are expected to have negative strategic implications for Pakistan, with the shift in trade dynamics making it more India-centric, thereby diminishing Pakistan’s bargaining power. In the meantime, as Islamabad is trying to focus on long-standing relations with the EU, the general consensus is that Pakistan’s unsustainable economic model, heavily reliant on preferential treatment instead of pure competitive efficiency, is in doldrums.
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