Dr. Ikramul Haq & Abdul Rauf Shakoori
The global trade environment has reached a decisive turning point, shaped by slowing economic growth, rising trade barriers, and shifting patterns of production and exchange in 2026. According to the United Nations Conference on Trade and Development (UNCTAD), global growth is expected to remain subdued at 2.6 percent in both 2025 and 2026, a pace insufficient to generate strong trade momentum or sustained investment flows.
Developing economies outside China are projected to see growth ease slightly to 4.2 percent in 2026 from 4.3 percent in 2025, reflecting a more volatile external environment. Major economies are also losing momentum. The United States is expected to grow at 1.5 percent in 2026 compared to 1.8 percent in 2025, while China’s growth is projected to slow to 4.6 percent from 5 percent.
Europe may see limited support from fiscal stimulus, yet overall demand will remain modest. This reinforces a global environment marked by weaker export demand, tighter financing conditions, and heightened exposure to external disruptions.
Global trade in 2026 is increasingly shaped by geopolitical tensions, economic headwinds, technological transformation, and sustainability imperatives. Governments are using tariffs and other trade instruments for strategic and domestic policy objectives, raising average global tariffs and increasing uncertainty for exporters and investors.
Global value chains continue to reconfigure as firms diversify suppliers, localize production, and integrate more deeply to reduce geopolitical and supply risks. Services trade is expanding faster than goods and now accounts for 27 percent of global trade, with digitally deliverable services emerging as a central pillar of competitiveness.
South-to-South trade has become a major engine of global commerce, rising from US$0.5 trillion in 1995 to US$6.8 trillion in 2025. Notably, 57 percent of developing-country exports are now directed toward other developing markets.
Sustainability has also become integral to global trade governance as environmental agreements move from negotiation to implementation. The European Union’s Carbon Border Adjustment Mechanism is set to become fully operational in 2026, introducing carbon pricing on selected imports and reshaping market access conditions. The clean energy technology market could reach US$640 billion annually by 2030, positioning green industries as a new driver of global trade.
At the same time, critical mineral markets have experienced sharp price adjustments, with key minerals now trading 18 to 39 percent below peak levels. Despite this correction, supply risks persist due to export controls and geopolitical competition. Agricultural trade remains central to food security, accounting for roughly one-third of global commodity exports, while fertilizer prices remain elevated.
Governments worldwide have tightened trade regulations, introducing nearly 18,000 new discriminatory measures since 2020. These measures have significantly raised compliance costs, particularly for smaller and developing economies.
Against this global backdrop, Pakistan’s latest external trade data released by the State Bank of Pakistan (SBP) reveals a deepening structural imbalance. This recurring condition cannot be explained by cyclical fluctuations or seasonal adjustments. Instead, it reflects entrenched structural weaknesses.
The preceding financial year witnessed a shift in the current account from deficit to a US$1.9 billion surplus, marking a notable turnaround after more than a decade. However, the underlying vulnerabilities remain largely unaddressed. The improvement appears to have been achieved primarily through administrative controls. Imports were curtailed through high tariffs and exchange restrictions, but once these measures were relaxed, the imbalance resurfaced. During July–December 2025, the current account recorded a deficit of US$1.17 billion, compared to a surplus of US$957 million in the same period of 2024.
The widening trade deficit has driven this reversal. Export receipts declined by about 5 percent during July–December 2025, falling from US$16.3 billion to US$15.5 billion. Meanwhile, import payments rose by over 12 percent, increasing from US$27.9 billion to US$31.3 billion. As a result, the trade deficit expanded from US$11.6 billion to US$15.8 billion—an increase of nearly 37 percent within six months. This divergence points to a structural gap rather than a temporary fluctuation.
Export performance presents a mixed picture. Textile exports, long regarded as the backbone of Pakistan’s export economy, grew by 5 percent to reach US$9.1 billion. Knitwear, readymade garments, and bed-wear segments posted reasonable gains.
Textiles now account for nearly 59 percent of total exports, up from 53 percent a year earlier. While this growth is notable, the increased concentration signals weak diversification and growing dependence on a single sector vulnerable to global demand cycles, domestic energy costs, and escalating tariff conflicts.
In contrast, food group exports contracted sharply by 36 percent, declining from US$3.6 billion to US$2.3 billion. Rice exports alone fell by over 43 percent, resulting in a loss of around US$690 million. Sugar exports declined by US$343 million. This collapse in agricultural exports has significantly widened the external gap at a time when global food trade remains both critical and volatile.
The import surge has not been driven by energy, as is often assumed. Petroleum group imports declined slightly due to lower LNG-related payments. Instead, the transport group emerged as the largest contributor, with imports rising by more than 109 percent year-on-year. Motor vehicle imports, including completely knocked down (CBU) and completely built up (CKD) units, added US$757 million to the import bill in just six months. The composition of imports therefore reflects a tilt toward consumption rather than productive capacity.
The International Monetary Fund (IMF) expects Pakistan’s current account to slip back into a modest deficit in FY 2026, though it is projected to remain manageable. This deterioration is largely linked to a rebound in imports driven by two factors. First, the economy continues to absorb the adverse effects of recent floods, which weakened agricultural output and increased reliance on imports. Second, tariff reductions under the National Tariff Policy are likely to further expand the import bill.
Evidence suggests that once import compression eased, the economy reverted to its traditional pattern of import-led growth. Domestic industry has failed to develop as an effective import-substitution base and has also struggled to expand export capacity. Persistent trade deficits increase reliance on external borrowing and place pressure on the exchange rate. Recent gains in foreign reserves and currency stability could erode rapidly if these structural weaknesses remain unaddressed.
The composition of the deficit raises deeper concerns about long-term growth. Heavy imports of machinery and capital goods could signal future productivity gains, yet Pakistan continues to import predominantly consumption-based goods. July–December 2025 data underscores that imports are expanding far faster than exports. Without structural reform, the country risks recurring cycles of crisis-driven adjustment and renewed external dependence.
Remittance inflows are expected to provide some cushion, as they have in the past. Overseas Pakistanis continue to send funds that offset a portion of the trade deficit. However, remittances cannot substitute for a coherent export strategy. Export growth and diversification must move beyond rhetoric and be embedded in clear industrial policy, regulatory support, access to finance, and regionally competitive energy pricing.
Pakistan must transition from import dependence to a growth-oriented trade strategy aligned with global trends. Industrial diversification should be treated as a national priority through incentives for high-value manufacturing, technology-driven industries, and agro-processing. The export base must expand beyond textiles to include pharmaceuticals, engineering goods, and digital services.
Tariff policy should discourage consumption imports while facilitating inputs for export industries. Logistics, infrastructure, and regulatory certainty must improve to enable deeper integration into global value chains. Special economic zones must operate under transparent governance with reliable energy supply.
Digital trade requires stronger broadband, skills development, and supportive regulation. Agriculture needs better inputs, climate-resilient practices, and modern storage facilities. Energy pricing must remain stable and regionally competitive, while trade regulations should align with international standards to lower compliance barriers.
Pakistan stands at a pivotal stage where comprehensive reforms can significantly strengthen its external trade position. Without such reforms, however, the country will remain vulnerable to external shocks and recurring balance-of-payments stress.
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Dr. Ikramul Haq, an advocate of the Supreme Court and writer is an adjunct faculty at Lahore University of Management Sciences (LUMS). Abdul Rauf Shakoori is a corporate lawyer based in the USA.