Economic Implications of BREXIT for Pakistan

Pakistan’s trading relationship with the United Kingdom (UK) is governed through the European Union’s (EU) Single Market regulations & tariffs. Pakistan has granted a Generalized Scheme of Preferences (GSP) plus status by the EU, which allows Pakistan commodities duty-free access to the European market. Britain’s decision to leave the EU popularly quoted as “Brexit” can have implications for Pakistan. Pakistan will no more enjoy duty-free access to the UK market. With this backdrop, this research used a new global economic trade model calibrated using the latest GTAP Database and latest Social Accounting Matrix (SAM) 2013 of Pakistan to quantify the impact of Brexit on Pakistan's Economy. Results show that with Brexit, Pakistan's Exports to the UK will decrease by 48 percent. This research recommends the Pakistani government to revisit its trade relations with the UK and should launch negotiations with the UK for attaining unilateral preferential access like EU GSP Plus.


Introduction
Trade liberalization widens trade and, on average, have direct and substantial positive impacts on economic growth (Busse and Koniger, 2012). These effects usually come from an increase in productivity growth while some effects coming through the investment channel. However, bene ts from trade depend upon the level of development, trade specialization, and time (Golley, 2004). Pakistan is a developing country and currently facing huge current account de cits. Its exports are stagnant over a couple of years while imports showing a continuous upward trend (Khan et. al 2018). The policy focus has been shifted towards the increase in export to overcome the burgeoning export-import gap. Pakistan like many developing economies, has, therefore, joined various regional and bilateral trade agreements in the hope of raising their trade performance to achieve economic growth.
Pakistan and the United Kingdom have shared traditional strong economic cooperation since the creation of Pakistan (Samir, 2017). The UK accounted for 22% of the total EU exports from Pakistan in 2017 ( Figure 1). Pakistan's current trade with the UK is governed by EU GSP plus status which allows Pakistan to export its commodities at preferential rates. United Kingdom is the largest export market for Pakistan in the EU and Brexit could make Pakistan lose its GSP plus rates for exports reaching the United Kingdom  Roy and Mathur (2016) for India and Kawasaki (2018) for Japan. It is pertinent to mention that Brexit will have a more negative impact on the trade relation of the UK with countries with which the EU has preferential trade arrangements like Pakistan.
There are 3 major types of Preferential arrangements as awarded by the EU; Everything but Arm 3 , Generalized Scheme of Preferences (GSP) plus 4 and Standard GSP 5 . Pakistan was granted a Generalized Scheme of Preferences (GSP) plus status by the EU in December 2013 (Iqbal et.al 2016). Brexit has economic implications for export-driven economies like Pakistan.  (Table 1). These items included products from the textile industry such as made-up textile articles, articles of clothing, accessories, and articles of not knitted clothing. Without GSP + scheme, the MFN tariffs, if applied, would be considerably higher. It will be tough for Pakistan to compete with competitors like China, Bangladesh, Vietnam, and India with this much high tariff on Textile products. for all products except arms and ammunition (https://ec.europa.eu). 4 It slashes these same tariffs to 0% for vulnerable low and lower-middle income countries that implement 27 international conventions related to human rights, labour rights, protection of the environment and good governance (https://ec.europa.eu). 5 This is for low and lower-middle income countries. This means a partial or full removal of customs duties on two third of tariff lines.

Data & Methodology
Economists used models based on real data sets to compute the impact of various economic policies and implications. There are 3 major model types researchers used widely for data analysis. These include Computable General Equilibrium, Input-Output (IO), and econometric models (Shoven and Whalley (1984). All these have the same purpose which is to compute the impacts of various policies. Keeping in view how econometric models are different from CGE or I-O models; econometric models do not rely on neoclassical microeconomic theories. They are tailored to observe the impact on a speci c sector or industry. These models are stochastic by nature and longer time series reduces the capacity to identify inter-sectoral linkages. Thus, to study the economic implications of BREXIT for Pakistan, general equilibrium is a tailor-made tool for analysis. Each country in the GTAP model has a regional household that collects all income (from factors of production and taxes). This research removes the regional household and incorporates multiple Households from Pakistan SAM. The relevant shares from the Pakistani SAM are then used to disaggregate factor use, and the income and consumption of each household using the facility developed by (Minor and Walmsley, 2013). These modi cations are made in such a way that the total returns to factors and consumption are consistent with the original GTAP Database. The process is undertaken in many steps (depicted in Figure   2). First, remittances and the incomes earned by the 12 factors of production provide the sources of income to the 16 households, based on each household's ownership of those factors. Secondly, the government, which is separated in the MyGTAP model, collects income from taxes and foreign aid which it uses to consume (with the difference being the government surplus/de cit). Thirdly, transfers between the government and the 16 households, as well as between the 16 households can be incorporated; and nally the private consumption and savings by each of the 16 households are included.

Research Simulation / Experiment
This research investigates the economic implications of Brexit for Pakistan. Two realistic simulations are designed as illustrated in Table 2.  implies optimal domestic production. In other words, when the marginal costs of production are equal to the marginal utility of that output, this is called allocative e ciency. Improvements in the terms of trade (TOT) also leads to an increase in overall welfare as it leads to avail higher prices of exports as compared to what is paid for imports. The increase in tariffs further effects many factors at the domestic level which lead to a change in GDP e.g. increase (decrease) in prices, changes in factor wages, labor market changes, and supply & demand patterns, terms of trade, the scale of production, economies of scale. The provision of zero tariffs increases the production of export commodities in Pakistan as producers gain a cost advantage in the form of zero tariffs.
Results of Potential Pakistan-UK Free Trade Agreement show that FTA creates a positive impact on the GDP of Pakistan and compensates for some of the losses created due to Brexit. The net effect created by FTA on the GDP of Pakistan is US$ 30 million. It is to be noted that FTA creates no signi cant impact on the UK as Pakistan is not a major exporting partner to the UK. UK export portfolio to Pakistan is composed of manufactured goods of which Pakistan is a big importer from China and Japan. Pakistan has signed FTA with China which allows Pakistan to ful ll its demand from Chinese imports which face minimum tariffs and must bear the least transportation costs as compared to the UK.

Impact on Sectoral Exports
The GSP Plus status allows Pakistan commodities duty-free access to the European market with more than 500 million consumers. UK is the top export destination for Pakistan in the EU and the secondlargest import source for Pakistan in the EU after Germany. The increase in tariffs for exports of Pakistan eliminates the cost advantage that Pakistani producers gain due to GSP plus status. Though due to BREXIT, Pakistan will lose worth 890 Million US dollars exports in the UK market, this will allow Pakistan exporters to look for other markets for their export. For instance, Pakistan exports to the European Union7 will increase by 167, United States of America (USA) by 127, and China by 80 Million US Dollars.

Conclusion
Pakistan has bene tted from EU GSP Plus status as it has allowed Pakistan to increase its volume of exports to the European Union. Britain's decision to leave EU popularly quoted as "Brexit" has implications for trade between the two countries as Pakistan's trade with the UK will no longer be governed by EU Single Market regulations & tariffs and unilateral preferential access under GSP Plus status will no longer apply to exports of Pakistan entering UK. MFN or Preferential tariffs will impact Pakistan's exports to the UK. We nd that with Brexit, Pakistani commodities face higher tariffs that result in deterioration in the volume of exports, overall welfare and Real GDP of Pakistan. The main sectors that will be affected are Textile, wearing apparels, agricultural commodities and light manufacturing. The study also proposed FTA between Pakistan & UK and the result show an improvement for various factors of the economy of Pakistan but lost potential due to UK exit from the EU is not fully restored. UK was the biggest supporter of granting GSP Plus status to Pakistan. Now, it is of great need that Pakistan should nd a supporter like UK in EU to maintain GSP plus status. It affects Pakistan's economy through several pathways, like foreign direct investment, remittances, trade etc. The macroeconomic variables and sectorial exports of Pakistan faces decline which will lead to a fall in economic growth.
This research recommends Pakistan to revisit its trade relations with UK. Pakistan should launch negotiations with UK for attaining unilateral preferential access like EU GSP Plus after Brexit as unilateral tariff reduction would be more bene cial to Pakistan. If not granted unilateral access by UK, then Pakistan should negotiate for bilateral tariff reduction with UK in the form of either FTA or Preferential Tarde Agreement PTA to maintain its exports to UK.

Declarations Authors' contributions
All authors have equally contributed to designing of the research, the process of data collection and calculation as well as drafting and revision of the manuscript. All authors read and approved the nal manuscript.