Budget 2026-27 and Pakistan's China Trade Deficit -

By Fizza Qaisar
Pakistan’s trade relationship with China has a problem that years of friendly diplomacy have not managed to fix. The country buys far more from China than it sells, and that gap keeps growing even as political ties between the two countries deepen. Budget 2026-27 is the government’s first real attempt to address this imbalance through tariff reform and export incentives, and the numbers suggest there is a long way still to go.
The scale of the problem is hard to miss. Pakistan’s overall trade deficit reached close to 34.8 billion dollars during July 2025 to May 2026, with exports standing at 27.9 billion dollars against imports of 62.7 billion dollars. This widening gap shaped how the FY27 budget was built, pushing policymakers toward an export focused strategy rather than broad based stimulus spending. Within this larger picture, China stands out clearly. Imports from China rose nearly 20 percent to 15.8 billion dollars in the July to April period of FY26, while Pakistan’s exports to China over the same months stood at just 2.22 billion dollars. The trade gap with nine neighboring countries combined widened more than 30 percent year on year to reach 12.7 billion dollars, and China was the single biggest driver of that increase. In March alone, China exported 1.79 billion dollars’ worth of goods to Pakistan while importing only 361 million dollars, leaving a trade balance of 1.43 billion dollars in China’s favor for that month.
There is one genuinely encouraging number buried inside this otherwise difficult picture. Pakistan’s exports to China grew by 48.7% year on year in the first five months of 2026, reaching 1.55 billion dollars. It is a small base, but the growth rate itself shows that Pakistani goods can gain ground in the Chinese market when conditions line up, even while the overall imbalance remains large in absolute terms.
To understand why this gap exists in the first place, it helps to look past tariff schedules and budget documents. A State Bank of Pakistan staff analysis found that Pakistan’s potential export areas remain limited largely because China outpaces Pakistan in almost all of its own major producing sectors. Textiles make the point clearly. It is Pakistan’s leading export industry, yet China itself is one of the world’s largest textile manufacturers, which caps how much volume Pakistan can realistically capture even in a sector where it has genuine strength. The China Pakistan Free Trade Agreement was meant to help close this gap, but its tariff concessions told a different story than intended. Pakistani products with the strongest export potential often kept facing steep tariffs, dried fruits at around 25 percent, semi milled rice at 65 percent, and certain footwear at 24 percent, while goods where Pakistan holds little competitive advantage, such as telephone sets, digital cameras, and electrical machinery, were the ones placed on China’s tariff elimination list. The pattern shows up clearly in what actually moves between the two countries today. Refined copper, cotton yarn, and raw copper dominate Pakistan’s exports to China, while semiconductor devices, telephones, and cars dominate the goods flowing in the other direction, a fairly textbook arrangement in which the less industrialized partner exports raw materials and imports finished, higher-value products.
Budget 2026-27 takes aim at this imbalance through several specific measures rather than one sweeping policy. Under the National Tariff Policy 2025-30, the government has reduced duties on thousands of industrial input lines specifically to lower manufacturing costs and improve export competitiveness, the idea being that cheaper imported raw materials, including from China itself, could help local manufacturers produce finished export goods more competitively. The budget also locks in the IT and telecom sector’s 0.25 percent final tax rate on export earnings through June 2029, giving exporters multi year certainty at a moment when the sector is already performing well, with exports reaching roughly 4.2 billion dollars in FY26 and growth of around 20 percent over the previous year. Officials have been explicit that this budget avoids broad based economic stimulus in favour of supporting industries capable of earning foreign exchange, a deliberate trade off, since general stimulus tends to pull in more imports and would likely widen the very deficit the government is trying to close.
Even so, a fair reading of the budget has to acknowledge what it does not fix. Pakistan’s core difficulty with China is less about tariff rates than about what Pakistani industry is actually capable of producing, and the same State Bank research pointed to an inadequate, non innovative export approach among local businesses, including limited effort to diversify the export base or pursue new opportunities inside the Chinese market. No tariff adjustment can substitute for the research, certification, and product development that exporters need to move into higher value categories. Rising electricity tariffs add another layer of disadvantage, since a manufacturer paying significantly more for power than competitors in Bangladesh or Vietnam starts every export deal behind, no matter how favorable the tariff treatment looks on paper. There is also the much discussed idea that China’s own economic restructuring could push low value added Chinese industries to relocate into countries like Pakistan, an opportunity Prime Minister Shehbaz Sharif has actively promoted to Chinese businesses, resulting in billions of dollars in memorandums of understanding so far. Memorandums of understanding are not factories, however, and most independent analysis agrees that continuity and consistency in investment policy will ultimately decide whether this relocation happens at a scale large enough to meaningfully shift the trade balance.
Taken together, the numbers do not point toward a shrinking deficit with China anytime soon. Imports from China grew nearly 20 percent in the most recent reporting period, and even though exports to China grew faster in percentage terms, they remain a small fraction of that import volume in absolute dollars. For businesses and finance professionals tracking this relationship, the two areas most likely to show real movement over the next year are IT and telecom exports, supported by the multi year tax certainty written into this budget, and copper related exports, which already form the backbone of what Pakistan successfully sells into the Chinese market. The single most important thing to watch, though, has little to do with any line item in the budget itself. It is whether the billions of dollars in Chinese manufacturing relocation deals signed throughout 2026 actually turn into operating factories on Pakistani soil. If that shift happens at real scale, Pakistan’s exports to China could eventually move away from raw copper and cotton yarn toward higher value manufactured goods, a change that would matter far more to the trade balance than anything currently written into this year’s budget.