19% US tariff on Pakistan: Higher cost of doing business main hurdle in harnessing USA market

ISLAMABAD: Pakistan has managed 19 percent US tariff on Pak products versus 20pc tariffs on Bangladesh, Sri Lanka and Vietnam and 25pc tariff on India, but the higher cost of doing business is feared to neutralize the tariff benefit Islamabad got over regional competing economies in maximizing exports to the USA market. However, Japan got 15pc US tariff, Turkey 10 percent, and Indonesia 19 percent.

In his response to the US tariffs on Pakistani products on Saturday, ex-Finance Minister Miftah Ismail wrote on X (formerly Twitter) that the US, which is our largest market, has imposed a 19pc tariff on our goods against a 20pc tariff on Bangladesh, Sri Lanka and Vietnam and 25pc tariff on India (plus an unspecified penalty). Thus, Pakistan has another opportunity. “Pakistan’s primary manufactured exports are textiles and largely compete with India, Bangladesh and Vietnam. But the cost of doing business in Pakistan is higher than the competing countries.”

Miftah said that electricity and gas tariffs in Pakistan are higher than almost all developing countries and the taxes are also higher than even most developed countries. Besides, there are serious infrastructure issues in some provinces (for instance, most factories have to buy water for millions of rupees a month in Karachi) and there are law and order issues across Pakistan. “This is the reason Pakistan has not received any FDI meant for exports’ manufacturing for more than two decades,” he reckoned. Even our great friend China, he said, wanting to set up export industries across Pakistan wasn’t able to do so and so much of their investment went to Vietnam and other countries. “Now it is likely that quite a bit of Chinese investment will go to Bangladesh, as just last week Handa Industries of China announced plans to invest $250 million in Bangladesh. It is also likely that Indian textile industry will also invest in Sri Lanka.”

“The real opportunity for Pakistan will come only when we create an enabling environment for exports and industry generally (lower energy tariffs, interest rates and taxes, and consistent energy and fiscal policies) so that both Pakistani, Chinese and other foreign exporters find it worthwhile to invest in Pakistan. Until that happens, we will have a slight edge over India (that Bangladesh and Vietnam also have) and we will still remain a more costly place to do business,” Miftah Ismail said. The former finance minister said, “Ever since we won the war against India, things have been looking up for Pakistan. It is a narrow, tricky situation and we need to work hard to improve the investment climate for locals and foreigners to feel comfortable using the environment.”

Chairman of All Pakistan Textile Mills Association (APTMA) Kamran Arshad while talking to The News said that the business community was expecting that tariffs from the US will stay at 15-17 percent, but the deal has been struck at 19 percent. However, he stressed the government’s top functionaries to continue to engage with the US trade representatives for further lowering tariff duties.

The chairman APTMA argued that whereas the US has imposed 20 percent on Bangladesh and Vietnam each, the one percent edge does not matter as the input cost — such as electricity, and gas rates both in Bangladesh and Vietnam are far cheaper than the energy tariff for Pakistan industries. More importantly, the interest rates are very low in both Bangladesh and Vietnam. So the one percent edge in tariff to Pakistan will have no impact on Pakistan exports. “The State Bank of Pakistan is now required to reduce the discount rate to 6 percent.”

He said the industrial sector is experiencing unreliable electrical supply due to frequent power interruptions and voltage fluctuations, resulting in non-continuous electricity delivery. Similarly the gas rates for captive power plants have increased to Rs3,500 per MMBtu in addition to Rs791 per MMBtu off the grid levy. This alone has curtailed the gas consumption in the exports sector to just 100 mmcfd from 350mmcfd.” “However, the opportunity to increase the exports to the US market have increased and a marginal increase in exports will be observed.”

As far as India is concerned, the APTMA chief said that the US has imposed the 25 percent tariff on Indian products and this will provide a space to Pakistani products and entrepreneurs in the US market. The Pakistanis will be in a position to get the advantage to grab a reasonable portion of Indian share in the US market. However, Pakistan will not be able to dent the market share of Bangladesh and Vietnam because of the high energy tariffs, huge taxation and high interest rates.

Kamran Arshad said that the negotiations between the US and India are still going on with pressure tactics by the US President. If sometime later the US tariff on the Indian products is reduced to a reasonable level from 25 percent, then the situation will be altogether different. Kamran Arshad said that in the US-Pakistan trade, the trade deficit of $3 billion is tilted towards the US. Pakistan, he said, has levied almost nominal tariffs on the US products, therefore, the Pakistan authorities should have tried to manage the US tariff by 15-17pc instead of 19 percent.