Japan has previously challenged Pakistan’s auto policy at the WTO over export targets linked to tariff reductions and import licences

Pakistan’s new auto policy could reopen a trade dispute with Japan at the World Trade Organization (WTO) as Islamabad plans to link vehicle manufacturers’ benefits to export targets.

According to Nikkei Asia, Pakistan’s Automotive Industry Development Policy (AIDP) 2026-31 was approved by Prime Minister Shehbaz Sharif on September 9 and is expected to take effect after Cabinet approval. The policy seeks to increase exports, strengthen local manufacturing and encourage the production of new-energy vehicles. 

What does the new auto policy propose?

The policy reportedly requires automakers to increase exports from the current target of 10 per cent to 12 per cent of the value of vehicles manufactured in Pakistan by 2031. The target is expected to rise gradually. 

Companies that fail to meet the requirements could face customs penalties and, potentially, cancellation of their manufacturing licences. 

Pakistan also aims to generate around $4.6 billion in combined vehicle and auto-parts exports, while offering incentives for domestic assembly of new-energy vehicles.

The broader reform is part of Pakistan’s efforts to open up its automobile sector and make the industry more competitive. The International Monetary Fund (IMF) has also been pushing for tariff reductions and greater liberalisation of auto imports as part of Pakistan’s economic reform programme. 

Why is Japan concerned?

Japanese manufacturers including Suzuki, Toyota and Honda have a major presence in Pakistan’s passenger vehicle market, with the three companies accounting for about 75 per cent of annual passenger vehicle sales, according to Nikkei Asia. 

Japan has previously raised concerns at the World Trade Organization (WTO) over Pakistan’s auto policies. At a 2024 WTO meeting, Tokyo questioned requirements that link export targets to tariff reductions and import licences. Japan also called on Pakistan in April this year to ensure that its revised auto policy complies with WTO rules. 

Pakistan, meanwhile, has maintained that its export requirements are consistent with international trade rules. 

Chinese automakers may benefit

The policy is also reshaping competition between established Japanese manufacturers and newer Chinese entrants. 

Industry representatives told Nikkei Asia that the proposed framework could favour Chinese new-energy vehicle companies through incentives for electric and other low-emission vehicles, while established Japanese manufacturers face stricter export and compliance requirements. 

At the same time, Pakistani suppliers argue that Japanese automakers have contributed substantially to local manufacturing. Aamir Allahwala, CEO of Tecno Auto Glass, told Nikkei Asia that Japanese vehicles made in Pakistan use up to 65 per cent locally produced parts by value, while Japanese automakers purchase around $720 million worth of local components. 

The government says the policy does not discriminate against manufacturers based on nationality and is intended to push an industry whose exports have remained weak. 

Yet industry experts cited by Nikkei Asia argue that forcing exports may not resolve Pakistan’s competitiveness challenges. High manufacturing costs, expensive financing, and relatively small domestic volumes could make it difficult for manufacturers to expand overseas.