ISLAMABAD: The recently concluded Free Trade Agreement between the European Union and India poses substantial challenges to Pakistan’s economy, particularly by undermining its preferential access in the European market. Finalized on January 27, 2026, after nearly two decades of negotiations, the deal provides India with immediate zero-tariff entry for most goods, including textiles and apparel. This development neutralizes Pakistan’s advantage under the Generalized Scheme of Preferences Plus (GSP), which has enabled duty-free exports for nearly 80 percent of its shipments to the EU. Analysts warn that without prompt countermeasures, Pakistan risks significant market share loss, foreign exchange erosion, and employment disruptions in its dominant textile sector.
Pakistan’s textile and garment industry forms the backbone of its export economy, accounting for a major portion of shipments to the EU, valued at around $6.2 billion in recent data, slightly ahead of India’s $5.6 billion despite the latter facing tariffs up to 12 percent. The EU represents approximately 24-27 percent of Pakistan’s total exports, making it the largest single destination. The FTA eliminates this tariff differential, allowing Indian exporters—benefiting from greater vertical integration and higher value addition—to compete more aggressively on price. Industry experts estimate potential declines of 5-10 percent in Pakistan’s EU textile market share, translating to annual losses of $450 million to $900 million.
The agreement exacerbates existing vulnerabilities in Pakistan’s export structure, which remains heavily reliant on low- to medium-value textiles rather than diversified or high-tech products. With India’s enhanced competitiveness, Pakistani goods face risks of price undercutting in segments like garments, hosiery, and knitwear. This shift could accelerate sourcing patterns toward India, particularly as buyers prioritize cost efficiencies in a post-pandemic global supply chain environment. Furthermore, the GSP scheme, instrumental in boosting Pakistan’s EU exports by over 100 percent since 2014, expires in December 2027, amplifying the urgency of the challenge.
Indirect repercussions may extend to Pakistan’s exports to the United States, its second major market. Although the EU-India deal does not directly affect US tariffs, intensified competition in Europe could strain Pakistani manufacturers’ capacity and resources. Redirected efforts to retain EU share might limit expansion in the US market, where Pakistan already faces competition from other regional players. Broader economic pressures, including potential foreign exchange shortages from reduced EU earnings, could constrain investments needed for US-oriented diversification.
To mitigate these adverse effects, the Pakistani government has launched multifaceted efforts focused on diplomatic and policy interventions. High-level inter-ministerial meetings, chaired by senior officials including the Deputy Prime Minister and Foreign Minister, have reviewed strategies to strengthen EU economic engagement. Islamabad is actively seeking an extension or enhancement of the GSP framework beyond 2027, emphasizing its mutual benefits and Pakistan’s compliance with associated conventions on labor, human rights, and governance.
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Officials have engaged bilaterally with EU member states and institutions in Brussels to safeguard trade interests. Prime Minister Shehbaz Sharif has reiterated commitment to deepening ties, highlighting GSP as a win-win mechanism. Upcoming initiatives include the first high-level EU-Pakistan Business Forum scheduled for April, aimed at promoting trade enhancement. Exporters urge structural reforms, such as reducing energy costs, providing tax relief, streamlining export procedures, and offering incentives to shift toward higher-value products.
Long-term countermeasures require accelerating industrial upgrading and diversification. Enhancing productivity through technology adoption, improving supply chain efficiency, and aligning with EU sustainability standards could help sustain competitiveness. Negotiating a comprehensive bilateral trade framework with the EU would provide more permanent tariff relief, reducing reliance on conditional preferences. These steps, if implemented swiftly, could transform the challenge into an opportunity for economic resilience.
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