Trade liberalization widens trade and, on average, have direct and substantial positive impacts on economic growth (Busse and Koniger, 2012). These effects usually come from an increase in productivity growth while some effects coming through the investment channel. However, benefits from trade depend upon the level of development, trade specialization, and time (Golley, 2004). Pakistan is a developing country and currently facing huge current account deficits. Its exports are stagnant over a couple of years while imports showing a continuous upward trend (Khan et. al 2018). The policy focus has been shifted towards the increase in export to overcome the burgeoning export-import gap. Pakistan like many developing economies, has, therefore, joined various regional and bilateral trade agreements in the hope of raising their trade performance to achieve economic growth.
Pakistan and the United Kingdom have shared traditional strong economic cooperation since the creation of Pakistan (Samir, 2017). The UK accounted for 22% of the total EU exports from Pakistan in 2017 (Figure 1). Pakistan’s current trade with the UK is governed by EU GSP plus status which allows Pakistan to export its commodities at preferential rates. United Kingdom is the largest export market for Pakistan in the EU and Brexit could make Pakistan lose its GSP plus rates for exports reaching the United Kingdom which can have serious implications for already dwindling exports and trade deficit.
Many studies have identified the economic impact of the UK-exit from the European Union. For Instance, studies of Noor et al. (2016) consider the impact on Bangladesh, Dhingra et.al (2016) and Minford (2019) on the United Kingdom, Wilson (2017) considers the impact on emerging Economies, Anderson and Strutt (2015) examines the impact on Asia, Africa, and Latin America, Morales et. al (2018) on China, Hosoe (2018) on European Union, Yu et.al (2017) on Denmark, Roy and Mathur (2016) for India and Kawasaki (2018) for Japan. It is pertinent to mention that Brexit will have a more negative impact on the trade relation of the UK with countries with which the EU has preferential trade arrangements like Pakistan. There are 3 major types of Preferential arrangements as awarded by the EU; Everything but Arm3, Generalized Scheme of Preferences (GSP) plus4 and Standard GSP5. Pakistan was granted a Generalized Scheme of Preferences (GSP) plus status by the EU in December 2013 (Iqbal et.al 2016). Brexit has economic implications for export-driven economies like Pakistan.
Table 1 below illustrates Pakistan’s Top export Items to the UK and tariffs applied by the UK under GSP Plus and the preferential or Most Favoured Nation (MFN) tariff. The UK share in Total Exports of Pakistan is 7.6 Percent. Pakistan is a typical developing country with no such export diversification. The top 3 products made up around 80 percent of Pakistan’s exports to the UK (Table 1). These items included products from the textile industry such as made-up textile articles, articles of clothing, accessories, and articles of not knitted clothing. Without GSP + scheme, the MFN tariffs, if applied, would be considerably higher. It will be tough for Pakistan to compete with competitors like China, Bangladesh, Vietnam, and India with this much high tariff on Textile products.
Table 1
Pakistan Top Export Items to UK and Tariff Applied by UK (Million US Dollars)
HS 2 Digit Code
|
Product Label
|
Pakistan Exports to UK
|
Share in Total Exports to UK
|
Share in Total Exports of the World
|
Tariff Applied by UK (GSP +)
|
Tarif Applied by UK (MFN %)
|
|
All Products
|
1558
|
100 %
|
7.6 %
|
|
|
|
Top 5 Products
|
1333
|
85.6 %
|
9 %
|
|
|
63
|
Other Made-up Textile articles, worn, clothing…
|
575
|
37 %
|
2.8 %
|
0 %
|
10.10
|
61
|
Articles of Apparel and clothing accessories knitted
|
357
|
23%
|
9.4 %
|
0 %
|
11.7
|
62
|
Articles of Apparel and clothing accessories ….
|
286
|
18.4 %
|
12.2 %
|
0 %
|
11.30
|
52
|
Cotton
|
68
|
4.4 %
|
3 %
|
0 %
|
6.10
|
42
|
Articles of leather, Saddlery and harness, travel goods, bags…
|
47
|
3 %
|
1.33 %
|
0 %
|
4.6
|
Source: Author calculation based on ITC and Samir (2017)
With this backdrop, this research adopted a new global economic trade model using the latest Social Accounting Matrix of Pakistan to quantify the impact of Brexit on Pakistan's economy. First, this research quantifies the economic implications of BREXIT by implementing MFN tariffs for Pakistani exports destined for the UK and duty-free exports to (EU-UK). Secondly, this research also studies the impact of a potential Free Trade Agreement (FTA) between the UK & Pakistan in the post-Brexit era.
3The special arrangement for least developed countries, providing them with duty-free, quota-free access for all products except arms and ammunition (https://ec.europa.eu).
4It slashes these same tariffs to 0% for vulnerable low and lower-middle income countries that implement 27 international conventions related to human rights, labour rights, protection of the environment and good governance (https://ec.europa.eu).
5This is for low and lower-middle income countries. This means a partial or full removal of customs duties on two third of tariff lines.