Region 
 

Karachi

Foreign Investment Façade

A Chinese firm has announced a $120 million investment in Pakistan’s tyre industry. However, beneath the surface of this ostensibly positive development resides a far more concerning question: are we building the tyre industry, or inadvertently dismantling it?

By M. Abbas Raza | May 2026


The use of higher tariffs as a tool to exert geo-political pressure would be economically prohibitive and would introduce significant trade, industrial, and policy uncertainties. If implemented, such measures would likely fall outside the established framework of the World Trade Organization. China’s export momentum is already weakening due to war-related cost pressures and emerging demand constraints in key global markets. Meanwhile, Pakistan is entering a triple-shock environment characterized by trade fragmentation, energy inflation, and investment realignment.

The movement from a rules-based system to a power-based trade regime would greatly undermine predictability for Chinese and global industry, causing (i) immediate contraction in bilateral trade volumes, and (ii) diversion of supply chains away from China. Chinese exporters may intensify market reorientation towards Asia, Africa, and emerging markets. Multinationals, if the policy environment is conducive, may accelerate their relocation to countries such as Pakistan and Vietnam. However, the risk of trade circumvention practices (such as transshipment and minimal processing to alter origin) would remain.

Although it is relevant for Pakistan, as it affords an opportunity to attract diverted investment, there are risks of becoming a conduit for circumvention of origin, inviting scrutiny or additional tariffs, and reducing the competitiveness of the indigenous industry. The industrial sectors most exposed include electronics, automotive components, textiles, chemicals, and industrial inputs.

A Chinese firm has announced an additional USD 120 million investment in Pakistan’s tyre industry. While foreign direct investment is essential for industrial growth, the government’s apparent inclination to maintain a “balanced” tariff regime, potentially coupled with selective concessions, risks inadvertently privileging a single, foreign-linked player. The investment, in principle, should be a moment of celebration. Pakistan needs foreign investment, technology transfer, and export diversification. But beneath the surface of this seemingly positive development lies a far more troubling question: Are we building an industry, or quietly dismantling one? Such policy asymmetry may distort the competitive landscape, undermining domestic manufacturers already burdened by high energy tariffs, arbitrary POL prices, and structural inefficiencies.

Over time, this may result not only in the displacement of indigenous industry but also in complex legal and economic implications under the WTO framework, particularly in relation to trade remedy disciplines, TRIMs obligations, and the application of Rules of Origin in export markets. Accordingly, it is essential to assess these dynamics in real time, drawing on empirical evidence and lessons from existing industries. In this context, the recent investment in Pakistan’s tyre sector provides a pertinent case study for evaluating the broader risks and policy challenges associated with such investment patterns.

The indigenous tyre industry in Pakistan already operates under significant structural disadvantages, such as higher input (energy and POL) costs, expensive financing, depreciating Rupee value, and adverse effects from under-invoiced tyres, clandestine imports, and smuggling. The industry outlook reveals that the indigenous industry and registered legal importers are at the mercy of the arbitrarily fixed high customs tariff rate and other taxes and duties.

Granting exclusive or preferential treatment to a foreign investor would create significant distortions within an industry already operating below optimal capacity utilization

Moreover, the domestic tyre manufacturing industry has not yet become internationally competitive in terms of quality and cost. These aspects are highly beneficial for the smugglers who are not only causing enormous revenue loss to the government, but are also pumping foreign exchange into illegal trade activities, and depriving consumers from getting legally imported, guaranteed tyres. The Economic Survey of Pakistan and market reports indicate that total domestic tyre demand is met by local production (17%), imports (25%), and smuggled tyres (58%).

Various tyres classified under HS Code 4011 attract high taxes and duties when legally imported and are subjected to (i) Customs duty 15% - 20%, (ii) Additional Customs Duty 2% - 4%, (iii) Regulatory Duty 20%, (iv) Sales Tax 18%, and (v) Withholding Tax 6%. Most imported raw materials, such as rubber, cords, steel fabrics, and bead wires, are subject to a zero customs duty rate. The high rate of taxes and duties accords high tariff protection to the domestic industry from imported tyres. However, this proved counterproductive, as the cost and ease of smuggling are much lower than the total incidence of taxes and duties on regularly imported tyres.

The high tariff protection is causing an annual loss of about Rs. 85 billion to the government. The analysis reveals that, on average, the smuggled tyre is about 40% to 45% cheaper in the domestic market than the legally imported tyre. As a result, regular importers and foreign suppliers fail to supply tyres of guaranteed quality to consumers.

Granting exclusive or preferential treatment to a foreign investor would create significant distortions within an industry already operating below optimal capacity utilization, largely due to the adverse impact of clandestine imports. Such policy-induced asymmetry undermines fair competition and risks accelerating the displacement of domestic producers.


Furthermore, these measures raise substantive legal concerns and may render the policy framework vulnerable to challenge under the World Trade Organization regime. In particular, provisions relating to the Agreement on Trade-Related Investment Measures (TRIMs), the application of Rules of Origin, and anti-dumping disciplines necessitate a high degree of regulatory caution. Accordingly, any tariff or investment policy must be carefully calibrated to preserve competitive neutrality, ensure WTO consistency, and safeguard the long-term viability of the domestic industry.

Pakistan must remain highly vigilant, as foreign investors may begin targeting other industrial sectors for investments structured on the same lines as those observed in the tyre industry

Through the investment of an additional $120 million in its tyre manufacturing Pakistan is positioning itself in global tyre markets, with exports to the United States and Brazil showing strong growth momentum. Credible sources indicate that Pakistan has emerged as the fifth-largest exporter of tyres to the United States and the seventh-largest to Brazil. This expansion is largely due to technology transfer, capital infusion, and operational expertise from strategic collaborations with Chinese investors.

However, such investment dynamics warrant closer scrutiny. Capital flows are driven by clear commercial and strategic incentives, not altruism. This raises a key question: Why are Chinese investors expanding production capacity in Pakistan rather than in their domestic market, especially given Pakistan’s high energy and POL costs and the fact that tyre manufacturing is not sufficiently labour-intensive to confer a meaningful cost advantage?
Moreover, this strategic choice appears counterintuitive in light of Pakistan’s structural constraints, including high and uncompetitive energy tariffs, volatile POL prices, and a domestic market in which undocumented or smuggled products hold an estimated share of over 50 percent. Against this backdrop, the viability assumptions underpinning such investments merit closer scrutiny, particularly in terms of expected returns, market-access arbitrage, and potential trade-policy leverage.

The grant of any preferential tariff treatment or fiscal incentives exclusively to Chinese investors, ostensibly to stimulate exports, could trigger scrutiny under the World Trade Organization framework, particularly the Agreement on Trade-Related Investment Measures (TRIMs). The TRIMs Agreement restricts the use of investment measures that distort trade or confer discriminatory advantages contingent upon export performance.

Accordingly, any policy regime that extends preferential tax rebates, energy tariff concessions, or regulatory facilitation selectively to foreign investors may be vulnerable to challenge on the grounds of inconsistency with multilateral obligations. Moreover, such differential treatment would raise legitimate concerns among existing domestic manufacturers, who could justifiably contest exclusion from comparable incentives on the grounds of competitive neutrality and non-discrimination.

The domestic industry and relevant trade bodies should be vigilant when assessing upcoming investments to determine whether they are genuine, long-term industrial commitments or are primarily structured to avoid disruptions from sudden, volatile tariff changes.

A Chinese investor operating in Pakistan could attempt to import key inputs (e.g., synthetic rubber, carbon black, steel cord, chemicals) from affiliated or related suppliers in China, artificially price them at low levels (potentially below normal value), and manufacture tyres in Pakistan at suppressed cost structures. This would enable it to sell aggressively in the international and domestic markets. Such a strategy could serve multiple objectives to (i) avoid direct anti-dumping exposure abroad, (ii) capture the domestic market, and (iii) strategically position using Pakistan as a base for future exports.

The authorities will have to be vigilant inconsideration of the fact that (i) anti-dumping framework, as dumping is generally assessed on finished products, not raw materials which are not even produced locally, this creates a regulatory grey zone, and (ii) the tax authorities and the SBP to check and control transfer pricing and related-party scrutiny as most of the inputs will be sourced from related Chinese entities. While welcoming investment, the government should also support domestic industry by reducing energy, financing, and logistics costs and by facilitating technology upgrades for indigenous firms.

The objective should not be to discourage foreign investment, but to ensure that such investment enhances rather than distorts the domestic industrial ecosystem. A balanced approach will allow Pakistan to (i) sustain export growth, (ii) protect domestic industry, and (iii) maintain compliance with international trade obligations.

Pakistan must remain highly vigilant, as foreign investors may begin targeting other industrial sectors for investments structured on the same lines as those observed in the tyre industry. The replication of such investment models could have serious adverse implications for the domestic industry, potentially leading to market displacement rather than genuine capacity enhancement. Pakistan’s signing of the Early Harvest FTA with China in 2006, without adequate due diligence, has already contributed to a persistent and widening trade imbalance, estimated at around 85% in China’s favour, leaving Pakistan with limited capacity to correct the structural asymmetry.

Read More