Implications of the US-China trade war

Six years after their imposition, the Section 301 tariffs under the US Trade Act of 1974 continue to significantly impact Chinese imports, especially in the textiles and apparel sectors. Initially implemented in 2018, these tariffs targeted 5,745 products, with rates increasing to 25 percent and an additional 10 percent tariff. The tariffs were aimed at addressing intellectual property theft and other unfair trade practices, as outlined by the US.

In addition to the strain on the Chinese textile and apparel industries through these tariffs, the world has witnessed a shift in global textile supply chains, with US GSP textile beneficiaries and alternative sourcing destinations stepping in to fill the void.

A 15 percent tariff was applied to imports of apparel, on top of the WTO’s Most Favored Nation (MFN) tariffs, which in 2018 averaged 14.4 percent for knitted apparel (HS Chapter 61) and 10.4 percent for woven apparel (HS Chapter 62). These tariffs were compounded by additional duties and anti-dumping measures aimed at specific Chinese companies and apparel products.

This evolving scenario prompted discussions on which countries were poised to benefit from China’s declining apparel exports to the US. While several contenders were expected, Pakistan emerged as one of the potential South Asian players that could benefit.

Trade war’s toll on China’s textile exports to the US

Later in 2019, the US enacted the Uyghur Forced Labor Prevention Act (UFLPA) to counter alleged forced labor practices in China. Combined with tariffs and legislative measures, Chinese exports to the US have suffered significant losses: USD 5.4 billion in knitted garments (Figure 1a), USD 5.6 billion in woven garments (Figure 1b), and USD 425 million in home textiles (Figure 1c).

Despite extremely high tariffs, China continued to export its low-cost articles, such as blankets, bed linen, toilet linen, kitchen linen, and other made-up articles under the home textiles category, with a noticeable shift towards tariff lines with comparatively lower duties.

‘China plus one’

Simultaneously, China’s manufacturing landscape underwent a significant transformation, driven by rising wages, stricter environmental regulations, and the adoption of digital technologies. Many Chinese companies began relocating operations to overseas destinations or shifting production to China’s western inland regions as part of the “China plus one” strategy, aimed at diversifying supply chains and reducing dependence on China.

This shift spurred discussions about alternative manufacturing hubs for labor-intensive Chinese textile businesses, with Pakistan emerging as a potential candidate. However, the relocation of Chinese manufacturing to Pakistan was impeded by security concerns, a challenge that still remains unresolved.

One country’s loss is another country’s gain

Trade wars inevitably create distortions for some players while offering opportunities to others. For countries in South Asia, the US-China trade war was a significant opportunity.

As the largest single buyer of textiles and apparel, the US remains a lucrative market for countries like Pakistan and Bangladesh, which rely heavily on textile and apparel exports.

However, much of the opportunity was seized by Vietnam, Cambodia, and Mexico. Between 2018 and 2023, China’s value-added textile exports to the US declined by USD 11.5 billion, but South Asia collectively exported only USD 3.6 billion to the US, missing an estimated USD 8 billion potential (Figure 2).

Southeast Asian countries, particularly Vietnam and Cambodia, increased exports to the US by USD 3.1 billion, while Mexico benefitted significantly from the shift, aided by zero tariffs under the United States-Mexico-Canada Agreement (USMCA) effective from 2020.

However, during this period, Pakistan achieved a notable Average Annual Growth Rate (AAGR) in US imports of value-added textiles. The country led in AAGR for woven garments, with Bangladesh closely competing in knitted garments and India in the market for made-up articles (Figure 3a).

A deeper analysis of South Asia’s potential to seize these opportunities lies in examining its share of the US import basket. While China’s share sharply declined, South Asian economies saw minimal or stagnant growth in their share of US imports of value-added textiles, highlighting a missed opportunity to capitalize on China’s diminishing export footprint (Figure 3b).

Although the USD 8 billion gap is substantial, reclaiming the lost share of China’s textile exports to the US demands a more strategic approach from countries like Pakistan.

The role of the US GSP in capturing China’s lost exports to the US

All these economies, including Pakistan, once benefited from the US GSP programme before losing their statuses: Pakistan’s expired in 2020, Bangladesh’s was terminated in 2013 following the Rana Plaza incident, and India’s was revoked in 2019 due to insufficient market access.

However, the benefits for Pakistan were minimal, with only 1.5% of its value-added textile exports to the US (USD 42 million out of USD 2.9 billion in 2020) qualifying for GSP preferences.

India and Bangladesh similarly experienced limited gains, with just 0.46% and 0.7% of their value-added textile exports benefiting under GSP before their statuses were revoked. In contrast, ASEAN countries effectively took advantage of US trade realignments. In 2023, ASEAN exports worth USD 11.7 billion benefited from GSP status, solidifying their position as key suppliers to the US market.

South Asia’s minimal reliance on the US GSP programme is one of the many reasons for not fully leveraging the US-China trade war. Facing tariffs of up to 16 percent, Pakistan’s value-added textile exports could have greatly benefited from improved access to the US market, potentially capturing a larger share of US imports.

Potential versus capacity

Two major developments have reshaped global trade in value-added textiles: China’s shift away from textiles to focus on other value chains and the relocation of its textile industries due to US tariffs.

Vietnam, with its competitive labor costs, extensive trade agreements, and growing manufacturing capabilities, has long attracted Chinese investments in sectors like furniture and textiles. However, it has yet to emerge as a global manufacturing hub capable of replacing China.

When it comes to Pakistan, in 2023, the US imported USD 144.4 million worth of knitted garments from Pakistan under China’s top tariff lines in the US import basket, compared to USD 3 billion from China for the same tariff lines.

Similarly, US imports of woven garments from Pakistan totaled USD 315.5 million, significantly lower than the USD 2.6 billion sourced from China. For made-up articles, Pakistan exported USD 473.5 million to the US, significantly less than the USD 6.3 billion supplied by China on the same tariff lines(see Figures 1a, 1b, and 1c).

Pakistan struggles to export textiles exceeding USD 100 million per tariff line in categories where China’s exports run into billions.

A major challenge is the inadequate pricing of inputs within Pakistan, which undermines the competitiveness of its exports, making them even less competitive in the face of high duties.

While these figures demonstrate Pakistan’s ability to export and compete in international markets to some extent, they also reveal the structural barriers hindering its full potential.With an estimated annual textile manufacturing capacity of USD 25 billion.

Pakistan’s textile exports peaked at USD 19 billion in 2022, the best year for Pakistan’s trade economy. The USD 6 billion gap from its capacity remains, which Pakistan can unlock by addressing structural inefficiencies and embracing market-driven pricing across the value chain.

A ‘Trump Card’ for Pakistan’s exports?

Structural inefficiencies and the absence of market-driven pricing present challenges, while a downturn in global demand could worsen the situation. With Donald Trump’s return to the US presidency, tariffs are set to become a key component of his economic agenda.

Trump argues these tariffs will not burden the US economy but shift costs to other countries, particularly China and those closely associated with it.

While China has endured much of the impact, such tariffs could severely affect economies like Pakistan, where exports are already under pressure. Meanwhile, Trump’s administration is considering a flat 20 percent tariff on all imports as part of its broader trade strategy.

The US remains Pakistan’s largest trading partner, contributing a significant trade surplus. In 2024, Pakistan’s exports to the US were of USD 5.4 billion, approximately 20 percent of its total exports, with textiles and apparel making up more than 70 percent of that figure.

A 20 percent tariff could disrupt Pakistan’s manufacturing sector, especially its textile and apparel industries, which are central to its export economy. The timing is particularly challenging as Pakistani businesses are also grappling with high taxes and an energy crisis.

However, there is a potential silver lining. Trump’s tariff policy primarily targets economies benefiting from China’s relocated production, so countries like Vietnam, Cambodia, Mexico, and Canada are at greater risk. Pakistan, which does not fall into this category, may avoid these tariffs.

Bangladesh’s new government, focused on strengthening trade ties with both China and the US, may face foreign policy dilemmas. Alternatively, Trump’s plans to renegotiate the USMCA could completely shift attention away from South Asia.

For Pakistan, effective economic diplomacy is essential to expanding its export footprint in the US market. The pressing question remains: how should Pakistan strategize its diplomacy to strengthen its trade position amid these global shifts?

Charting a way forward

To secure its position in the US market, Pakistan must actively pursue the revival of GSP status by negotiating its renewal and advocating for revised tariff lines to secure duty-free or reduced-duty access. Such access is essential in the ongoing tariff war.

Pakistan’s products in the US market primarily cater to low- to middle-income groups.

Additional tariffs would make Pakistani products less competitive, ultimately reducing demand for Pakistani apparel in the US With that, Pakistan is the second-largest destination for US long-staple raw cotton after China.

In 2023, Pakistan imported over USD 379 million worth of U.S. cotton, primarily for clothing and blanket manufacturing. Cotton imports were even higher in 2022, reaching USD 615 million.

As domestic cotton production fails to meet demand, the US remains a crucial supplier, with its raw cotton entering Pakistan duty-free. This contrasts sharply with the high tariffs, up to 16%imposed on Pakistan’s value-added textiles exported to the U.S.

With declining domestic crop production, Pakistan’s reliance on imported cotton is expected to grow. Under the Caribbean Basin Trade Partnership Act (CBTPA), apparel assembled in the Caribbean and Central America using US-origin fabrics, yarns, and threads enters the US duty-free.

However, raw cotton falls outside the CBTPA’s scope and is governed by general trade agreements.

The window of opportunity created by the US-China trade war may be shutting, and it is uncertain whether the US will continue favoring South Asian textile and apparel industries. However, Pakistan still has room to maneuver. Economic diplomacy will be critical in advocating for Pakistan’s interests in the US market. The real challenge lies in addressing internal structural issues that hinder export growth, which deserves immediate attention from the decision-makers.

To begin with, it is extremely urgent for Pakistani authorities to negotiate a trade agreement with the US to secure duty-free or reduced-duty access for value-added textiles assembled in Pakistan using US-origin cotton, before the opportunity slips through the cracks again.

Copyright Business Recorder, 2024