Pakistan and the trade war

It would be fair to say that US President Donald Trump’s second term’s main highlight so far, at least on the economic and business front, has been the tariffs issue.

His administration started off by imposing a range of tariffs on just about every country in the world. Initially, he had said that the new tariffs would reciprocate what the other country had imposed on US imports of goods and services.

However, when the tariffs were announced, the formula used by the US government seemed to take into account mostly the trade balance, or imbalance, that America had with a particular tariff, and the measure of the new tariff imposed was designed to offset that imbalance.

In the case of Pakistan, the Trump administration proposed a tariff of 29 per cent. This would be in addition to any existing tariff on imports from Pakistan – which currently on textiles is 8.6 per cent. The US is Pakistan’s largest trading partner and in FY2024, Pakistan’s exports to the US were $5.3 billion, most of which were textiles and related goods. Pakistan’s exports from the US are in the region of $2 billion which translates into a trade surplus for Pakistan of around $3 billion.

A closer look at Pakistan’s exports reveals that of the top ten exporters in the country, nine of them export textiles and related products, with big names like Interloop, Nishat, Artistic Milliners and Gul Ahmed leading from the front.

According to a study by the Pakistan Institute of Development Economics (PIDE), the tariffs imposed by the Trump administration could cause Pakistan's exports to the US to fall by between 20 and 25 per cent. This could translate into a reduction of total exports by between $1 billion and $1.5 billion.

The existing tariff on Pakistani textile exports to the US is 8.6 per cent and if the proposed 29 per cent is added then Pakistan's exports to the US will have a total tariff of 37.6 per cent. That would mean that regional competitors like India and Bangladesh would end up pricing Pakistan out of the US market.

Therefore, quite clearly, the government of Pakistan needs to act to avoid this from happening. It needs to engage with the Trump administration on ways to cut tariffs, which are then likely to be reciprocated by the US. If this does not happen, and exports decline as forecast, then the country's companies involved in exports, in particular those selling textiles and related goods, could take a big hit if the proposed tariffs come into effect then regional competitors like India and Bangladesh will have an advantage in exporting to the US market.

So what needs to be done by the government of Pakistan?

As far as the short-term is concerned, Pakistan could consider slashing tariffs on imports from the US to a point that the 29 per cent tariff imposed by the Trump administration is taken back. That would be one way for Pakistani exporters to the US to not suffer a decline in their exports and would prevent a decline in Pakistan’s overall exports.

This, however, is easier said than done and even if enacted won’t necessarily see the US reverse its proposed tariff. The reason for that is that its rationale for the tariff isn’t actually to reciprocate what other countries are doing to the US but to stem the trade deficits that the US has with many countries – including Pakistan.

So, as far as the short term goes, unless Trump has a change of heart and extends the current 90-day pause indefinitely, it is likely that Pakistani exports will take a hit – and also likely that it will be disproportionately felt by textile exporters. Pakistan has said that it is sending a high-level team to the US to try and resolve this matter but the truth is that they won’t have much leverage – unless they use the security and counterterrorism angle.

As for the long-term, that is where Pakistan and its export-oriented businesses can try and make a difference and change in direction. Much of what needs to be done on this count has already been suggested many times before. For example, explore new markets, innovate to make new products and services so that you gain a competitive edge compared to other countries, add value to your goods and services ready for export, develop the skills of your labour force, use technology and AI in the production cycle and so on.

Both the government and Pakistani industry and businesses will have to take on this challenge head-on if they want annual exports to rise to $50 billion and beyond.

The writer is a journalist based in Karachi. He tweets/posts @omar_quraishi and can be reached at: omarrquraishi@gmail.com