Trade Relations Between Pakistan, the European Union, and the United Kingdom: Historical Context and Current Status

Pakistan's trade relations with the European Union (EU) and the United Kingdom (UK) have developed over time, origin of these trade relations can be traced back to 1971, when the country gained entry to European markets through the Generalized System of Preferences (GSP), which enabled Pakistan to export textiles, cotton, agricultural and other goods to Europe at reduced tariff rates.

The EU-Pakistan Trade and Sustainable Development Agreement (2012) enhanced bilateral trade ties and created a framework for cooperation in trade, labour rights, and environmental sustainability, it further reinforced the EU-Pakistan Cooperation Agreement (2004) and the EU-Pakistan 5-year Engagement Plan (2012), which aims to align Pakistan’s trade practices with global standards by fostering improvements in labour rights and environmental sustainability, while encouraging Pakistan to adopt international conventions on governance and transparency.

In 2019, Pakistan and the European Union took a major step forward in their partnership by launching the Strategic Engagement Plan (SEP). This comprehensive framework outlines a path for deepened cooperation across various sectors, including trade, security, education, and sustainable development.

What is the Generalized System of Preferences (GSP)?

The GSP is an initiative introduced by United Nations Conference on Trade and Development (UNCTAD) in 1971 to boost up the economic development of developing countries. The main purpose of it is to provide these countries with preferential access to developed markets by reducing or eliminating tariffs on a wide range of products, which leads to the development of industries and increases exports as well as overall growth in the economies of countries trying to develop their economies. At present, more than 70 Asian, African and Latin American countries use the GSP to enter markets that import more than 6,000 products.

GSP’s Impact on Pakistan’s Major Sectors

The GSP played an important role in revolutionizing Pakistan’s economy and exports, textile and agriculture sector became a major beneficiary. By the late 1980s, textiles made up almost 50% of Pakistan's total exports to the EU, this increase in exports enabled Pakistan to strengthen its position as a top textile exporter globally and agricultural sector also experienced a transformative boost under GSP, by the 1990s, Pakistan became one of the leading exporters of Basmati rice to Europe, while Pakistani fruits and vegetables secured a consistent presence in European supermarkets.

GSP+ Status

In 2014, Pakistan achieved milestone by securing GSP+ status with the EU, which allowed the country to export goods to the EU without paying tariffs on 66% of its products. This deal gave Pakistan’s trade with Europe a major boost, especially in the textile sector, which is the Pakistan’s largest export industry to the EU. By 2023, textiles and clothing made up 73.2% of Pakistan’s total exports to the EU, and by 2024, this share had increased to 75% and experts expect this trend to continue into 2025.

The EU is Pakistan’s second-largest trading partner, accounting for 15.3% of the country’s total trade in 2023. Meanwhile, Pakistan is the 47th largest trading partner of the EU, contributing 0.2% to its total trade. The majority of Pakistan’s imports from the EU are machinery, transport equipment (23.9%), and chemicals (19.8%). While GSP+ brings significant trade benefits, it also comes with key responsibilities. To maintain this status, Pakistan must uphold international standards on human rights, labour rights, and environmental sustainability. In addition, regular reviews are carried out to ensure ongoing compliance with these commitments.

GSP+ Review

The GSP+ Review process ensures that Pakistan continues to meet the human rights, labour rights, and environmental standards set by the EU. This review mechanism is crucial for keeping trade benefits in line with international norms, thus ensuring that Pakistan remains on track with its commitment to sustainability and governance while enjoying the privileges offered under GSP+.

Trade Relations Between Pakistan and the United Kingdom (UK)

Pakistan's trade relationship with the United Kingdom has a deep-rooted history that dates back to the colonial era. During British rule, the economic ties between the two regions were primarily shaped by trade, with Pakistan, then part of British India, exporting raw materials like cotton, jute, and agricultural products to Britain. This relationship continued after Pakistan gained independence in 1947, and the UK remained a significant trading partner throughout the 20th century. Over the years, the trade focus shifted towards sectors like textiles, agricultural goods, and later, the diversification into technology and services.

Pre-Brexit Trade Relations

Before Brexit, Pakistan’s trade relationship with the UK was governed by the broader EU trade agreements, particularly under the GSP. Pakistan benefited from preferential trade terms that allowed it to export a variety of products, especially agricultural exports, such as rice and citrus fruits, along with textiles, gained significant access under these favorable terms.

However, after the UK officially left the EU in 2020, it was no longer bound by the EU's trade agreements, including the GSP+ system. This necessitated the renegotiation of bilateral trade terms between Pakistan and the UK.

Post-Brexit Trade Relations

Following Brexit, the UK and Pakistan signed a new Trade Agreement in 2021 to ensure the continuity of trade relations. This deal was crucial in maintaining the preferential market access that Pakistan had previously enjoyed under the EU framework. The new UK-Pakistan agreement replicated many of the benefits Pakistan had received from the EU's GSP+ but tailored them to the specific circumstances of a post-Brexit UK.

The 2021 UK-Pakistan Trade Agreement ensured that Pakistan’s exports, including textiles, rice, garments, and agricultural products, continued to have preferential access to the UK market with low or zero tariffs. The agreement also supported the growth of new industries like technology, pharmaceuticals, and digital services, helping Pakistan expand its export base. Additionally, it encouraged UK investment in sectors such as infrastructure, energy, and technology.

To maintain this access, Pakistan agreed to meet international standards on human rights, labour rights, and environmental sustainability, aligning its trade practices with global norms and fostering long-term growth and reforms.

In addition to the trade continuity deal, negotiations for a Free Trade Agreement (FTA) between Pakistan and the UK have been underway. The FTA aims to build on the existing trade agreements and further reduce tariffs, expand market access, and promote long-term investments between the two countries.

Current Status of UK-Pakistan Trade

Trade between the United Kingdom and Pakistan totaled £4.4 billion in the first half of 2024, a 1.6% rise over the same period in 2023. This £71 million increase highlights the bilateral trade's consistent, albeit small, growth trajectory. Even though this growth might not seem like much, it shows how resilient the trade relationship is and how both countries can benefit from wider economic prospects.

UK exports to Pakistan increased by 7.2% in Q2 2024, amounting to £2.1 billion. The increase in exports is an indication that British products are gaining markets in Pakistan, especially in machinery, pharmaceuticals, and technology. These sectors are gaining traction as Pakistan’s industrial and technological sectors expand, offering a wider range of opportunities for UK exporters.

On the other hand, exports to the UK amounted to £2.3 billion but decreased by 2.8% in 2023. Though Pakistan's exports declined, the UK is an important market for the country, mainly for textiles and agriculture products. However, external market challenges and evolving supply chains have impacted these traditional sectors. Nevertheless, Pakistan's textile and agricultural exports continue to dominate its trade with the UK.

FDI Trends

Foreign direct investment (FDI) between the UK and Pakistan reflects promising trends. The outward stock of UK FDI in Pakistan was £2.3 billion in 2022, concentrated in infrastructure, energy, and technology sectors. At the same time, Pakistan’s investment in the UK increased by a large 323.8%, reaching £89 million.

While this is still a small amount compared to the total FDI the UK receives, the significant increase indicates growing interest in investing in Pakistan, particularly in areas like high-tech and manufacturing.

What Lies Ahead for Pakistan’s Trade with the EU and the UK?

Despite the fact that the textiles continue to be a key component to Pakistan's exports, the country’s sustainable success depends on diversifying its economy by exploring new sectors such as technology, green industries, and pharmaceuticals to enhance its global presence. The rising interest in foreign direct investment (FDI) from the UK, particularly in infrastructure and technology, signals a growing opportunity for Pakistan to strengthen its industrial base and create jobs.

Looking ahead, Pakistan’s trade ties with the European Union (EU) and the United Kingdom (UK) hold strong potential. The GSP+ status, along with the 2021 UK-Pakistan Trade Agreement and other related agreements, establishes a strong basis for maintaining preferential access to EU and UK markets. Nonetheless, in spite of these encouraging outlooks, political uncertainty in Pakistan continues to pose a challenge. The country’s capacity to handle political turmoil, uphold policy stability, and carry out required economic reforms will be vital in establishing its role as a dependable trade partner for the EU and the UK.

Disclaimer:*
*This blog offers a general overview of Pakistan's trade relations with the European Union (EU) and the United Kingdom (UK). While every effort has been made to ensure the accuracy of the information, it is intended for informational purposes only. For more detailed analysis, expert opinions, or specific advice tailored to your needs, please contact us at info@qureshiandqureshi.com