The signing of the India-European Union Free Trade Agreement (FTA) in January 2026 is a huge development in the South Asian geoeconomic trajectory. For Pakistan, these developments naturally raise important questions. The EU is Pakistan's largest export market, absorbing more than 27% of its exports, or about $8.8 billion in fiscal year 2025. Pakistan currently enjoys duty-free access on over 85% of its exports under the GSP Plus scheme, which is secured until at least December 2027 and is now under consideration for renewal. The FTA shows 30 years of divergent economic trajectories and compels a reality check that the structural advantage of Pakistan in Western markets is getting eroded in a systematic way.
Deviant Trajectories: A Three-Fourths-of-a-Century Diagnosis
To understand the significance of the India-EU FTA, it is important to consider the statistics of 1990s, when both India and Pakistan were economically similar, with each having a GDP per capita of approximately $370. Pakistan, then, had a more open trade-oriented economy. The decoupling of the countries occurred radically during the next decades.
By 2025, the nominal GDP of India had surged to approximately 4.18 trillion dollars, which is more than 10 times the size of Pakistan's, which is 399 billion dollars. More importantly, the economic structure in both countries has also shifted. India increased its market penetration of high-value services, information technology and specialized manufacturing industries – its exports of services currently constitute more than 40 percent of its total trade. By contrast, Pakistan is still hooked on an export-based economy. In FY2025, textiles and apparel accounted for almost 60 percent of the total exports of Pakistan, making the economy vulnerable to shocks in this sector.
This difference is not just the result of the quantitative scale, but it is the expression of institutional capacity and trade diplomacy. Although India maintained two decades of negotiations with the EU to have a rules-based permanent FTA, Pakistan depended on the Generalized Scheme of Preferences Plus (GSP+) status of the EU. Despite the fact that GSP+ allows zero-duty access to 66 percent of tariff lines, it was still a unilateral, conditional preference to so-called vulnerable countries. The recent achievement of India to negotiate a zero-duty agreement to 100 percent of its textile lines has practically nullified the major competitive edge of Pakistan.
The Structural Shift
The India-EU FTA is not a one-time trade shock, but a realignment of the supply chains. Pakistan enjoyed a 10-12 percent tariff advantage over Indian textiles in the EU in the last 10 years. The tariff shield will now be practically gone.
The impacts on the Pakistani 8.8 billion-dollar portfolio of exports to the EU, which is about 27 percent of its total exports, are clear and far-reaching:
Neutralization of GSP+: India is now at par with Pakistan in terms of duty-free status of textile, and ahead of it in sectors like leather, footwear (Indian duties had earlier hit 17 percent) and chemicals.
Supply-Chain Lock-in: The FTA provides long-term assurance that motivates European companies to include Indian suppliers in their plans of “China Plus One” strategy. The fact that India is able to manufacture the whole value chain of raw fiber to high-fashion clothing now overshadows the price competitiveness of Pakistan, which is already hurt by the skyrocketing energy prices.
Compliance and Standards: The EU-India deal includes a chapter called “Trade and Sustainable Development”. With India harmonizing its regulatory and environmental guidelines with the EU, Pakistan is facing the threat of being left out of high-value, green supply chains, due to its slower pace in adopting ESG (Environmental, Social and Governance) frameworks.
Strategic Cost of Economic Fragility
The inherent strategic limitation is the economic weakness of Pakistan. The historical dependence on aid-based stabilization and frequent IMF bailouts has placed Pakistan in short-run liquidity at the expense of long-term industrial policy, which has inculcated a culture of crisis-management orientation towards trade. The depletion of forex reserves of a country will result in a loss of bargaining power for that country when the reserves run out – the reserves of Pakistan have often been at a level that would only sustain imports of a few weeks. The India-EU FTA is an indication of a world where international order is increasingly shifting towards the “minilateral trade blocs”. In this new paradigm, the strategic relevance is quantified through the utility of the market; India has a consumer base of 1.5 billion, which is becoming a manufacturing option compared to China, and hence it is deemed as an essential partner by the EU, but Pakistan has not diversified its economy; therefore, it is a fringe player.
Policy and Strategic Options The Road to 2030
Pakistan cannot counter the India-EU FTA by empty rhetoric or additional demands for favours. The answer has to be based on strict economic realism.
a. Moving Beyond the “GSP+ Crutch
Pakistan should start preparing for the post GSP+ era. The current one will be reviewed in 2027. Instead of spending diplomatic capital on renewals, the state must shift to an export emergency that is driven by productivity. This will require the rationalization of the industrial energy tariffs, which are among the highest in the region, to make Pakistani manufacturers compete on an even level with the Indian and Vietnamese companies.
b. Sectoral Diversification and Industrial Upgrading.
The low-value textile (yarn and grey cloth) concentration is a strategic dead end. Policy should be a motivation for a transition to:
Technical Textiles and MMF: The world has shifted to man-made fibre (MMF) but the industry in Pakistan is still dominated by cotton.
IT and Services: India has a good model of exports in IT (more than 190 billion USD) and to match this, Pakistan needs to break the regulatory barriers and the limitations of the internet connectivity, as these are hindering its growing freelance and software-export industry.
Strategic Trade Diplomacy
The trade diplomacy of Pakistan should not be restricted only to the EU and US. These partners are still important; however, it is essential to integrate more deeply with the GCC countries and approach the China-Pakistan Economic Corridor (CPEC) Phase 2 – that is more likely to focus on B2B industrial collaboration than on the infrastructure only. The country should pursue being part of the regional value chains where it can provide specialized components instead of trying to compete on the raw level.
Conclusion: The Mirror of Realism
The India-EU FTA is not something to fear, but something to observe. It represents the climax of 10 years in which India sought strategic integration, and Pakistan suffered because of structural inertia. The days when Pakistan could use its vulnerability to gain access to the market are long gone. The future of Pakistan as a competitive trading country is now dependent on its capacity to change its internal economic architecture. The country needs to move away from seeking concessions and move towards providing value; only then will it be able to negotiate a world where the neighbour not only is no longer a regional competitor but also is a global economic anchor.
The writer is the author of The Reforms. He can be reached at mianmajid582@gmail.com
Time to act is now!
Pakistan faces immediate strategic challenges due to the India-EU trade deal, which continues to require ratification. This period offers a critical opportunity for Pakistan to reassess its export policies, especially under the EU's GSP+ scheme, from which it has benefited significantly since 2014 by enjoying duty-free access to over 66% of textiles. The new deal grants Indian exporters similar access, threatening to erode Pakistan's competitive edge in textiles, a key sector for its economy.
The urgency is compounded by shifting global trade patterns and increased unpredictability, necessitating urgent analysis of how Indian textile exports may overlap with Pakistan's. Without proactive measures, such as targeted support for export sectors and better regulatory frameworks, Pakistan risks losing its market position slowly but irreversibly. The six-month window for policy action must not be underestimated; preparing now is essential to safeguarding the country's economic resilience.