Free movement of goods and peoples benefits all countries as it allows scarcity of products and skills to be met at the cheapest possible price - a global mantra taken up by the rich countries (though all are now resisting influx of economic migrants), absorbed by the staff of multilaterals headed by G-7 nationals, while developing countries emphasized the relevance of fair movement of goods as a powerful anti-poverty tool.
That economic premise was upended by President Donald Trump even before he was inaugurated on 20 January 2025, as he proceeded to slap tariffs on friends and rivals alike with three distinct objectives: (i) to reduce its large trade deficits given that the US has trade imbalances with most countries of the world including allies such as the European Union, Canada, Mexico, and the UK.
The US is one of less than a handful of countries with which Pakistan has a trade surplus; (ii) encourage domestic output as tariffs would inspire local industry to meet the supply gap at a lower cost, hence a potential to increase GDP and employment; and (iii) as a foreign policy tool against rivals rather than relying on Biden era ineffective sanctions as those sanctioned are gravitating towards trading blocs like BRICS - Brazil, Russia, India, China, and South Africa - which has an evolving and ambitious objective to de-dollarize the global financial system.
Trump has warned aspirants of BRICS membership not to join and threatened members from replacing the US dollar as a reserve currency with a threat of 100 percent tariffs.
Less than a week after he announced punitive tariffs of 25 percent on imports from Canada and Mexico the US President, after telephone calls with the leadership of the two countries, announced a 30- day pause after (i) the Canadian Prime Minister pledged to list Mexican cartels as terrorist groups (though these cartels have an almost non-existent presence in Canada), launch a Canada-US Joint Strike Force to combat organized crime and name a fentanyl czar; and the (ii) Mexican President pledged to send 10,000 additional members of the National Guard to the border to prevent drug trafficking, particularly fentanyl.
Given that the borders were already patrolled by the two countries security forces, Trump’s audience is almost certainly domestic as snuffing out migrant inflow was his major campaign promise.
The US has begun deporting illegal economic migrants from South American countries (and India) though illegal migrants from other countries are expected to receive similar treatment.
This is in spite of economists arguing that this policy would have negative economic repercussions on the US economy while legal challenges have already begun.
Trump’s audience in this instance is domestic as this was a major pillar of his election manifesto.
In Pakistan there should be considerable understanding if not support for Trump’s anti-migrant policy as at one time the country provided sanctuary to three million Afghan refugees (whose numbers have dwindled to a still sizeable 1.5 million) and while the humanitarian element was paramount in Pakistan’s decision (as opposed to a largely economic one for migrants to the US) yet its negative socio-economic implications with a consequent rise in crime and terrorism across Pakistan are issues that we are still grappling with.
In the developing world, including nearly all countries within the South Asian region, migrants, sometimes with assistance from their governments (other times on their own with the disturbing element of becoming victims of human traffickers) seek to secure jobs in the Middle East and are a source of remittances which prop up the country’s foreign exchange reserves.
Pakistanis have and continue to seek foreign shores for purely economic reasons and the outflow has become an exodus as the country’s economy continues to be fragile.
Exhortations by the cabinet members not to engage with human traffickers, especially after fatal accidents en route, is unlikely to bear fruit until and unless the government is able to turn the economy around.
To date taxes are mostly indirect, up to 75 to 80 percent of all collections, whose incidence on the poor is greater than on the rich, while the recipients of the budget are largely the elite (institutions as well as those who serve in them) and this situation has exacerbated with the passage of time leading to rising fiscal deficit which is a highly inflationary policy as well as a rise in poverty levels to 41 percent as per World Bank estimates and 44 percent as per estimates by domestic economists.
In addition, the ultra-rich, including our political leadership as well as some institutional heads, bank abroad and have secured dual nationalities that not only absolve them from paying taxes locally but also provides them with a sanctuary as and when their political fortunes take a downturn.
Trump has also openly threatened European Union countries with tariffs, key allies, and these will, in all probability, as in the case of Canada and Mexico, be followed with talks with the EU extending concessions to the US to, at best, stay and, at worst, reduce the tariffs to manageable levels. Trump’s objective here would be to minimize the trade deficit.
US tariffs on China, a key rival, have not yet been deferred as talks remain pending between the two countries.
China has imposed retaliatory measures whose effects will be limited – 15 percent on coal and LNG and 10 percent on crude oil, farm equipment and a small number of electronic trucks, control on some metal sales including tungsten used for electronics, military equipment and solar panels.
In addition, China in its World Trade Organisation filing averred that US tariff measures are discriminatory and protectionist, thereby violating international trade rules. The outcome is not yet clear, though one would assume that China, regarded as an unmitigated rival by the US, will not receive the same treatment as allies.
Tariffs and their enhancement would enrich the treasury, as per economic theory cited by Trump. This is more relevant to Pakistan, which relies heavily on import tariffs as a major source of our tax revenue. Sadly, though, the government has pledged the following to the IMF under the ongoing programme: “We will continue to remove barriers to international trade.
Tariffs erode Pakistan’s competitiveness by increasing the cost of inputs and protecting inefficient producers, impose costs on consumers, and create an anti-export bias.
As the National Tariff Policy 2019–2024 draws to a close, with successful progress in rationalizing and simplifying the tariff structure, we will continue with trade liberalization reforms in its 2025-2029 iteration. We commit not to increase Pakistan’s trade-weighted average customs duties.
In addition, trade-weighted average tariffs (defined for these purposes as customs duties, additional customs duties and regulatory duties, taken together) will decrease every year during FY25-29.
We will also continue to improve Pakistan’s integration into world trade by reducing non-tariff barriers and refrain from implementing (or prolonging) preexisting trade-distortive measures such as export subsidies or local content requirements as defined under WTO agreements.“
In other words, reducing tariffs would imply reducing tax collections which, in turn, would further narrow fiscal space leaving the country hostage to donor support and their conditions that are openly opposed by the US.
The international world order is changing and, for the first time this was officially acknowledged by the US. Marco Rubio, US Secretary of State, said in an interview: “it’s not normal for the world to simply have a unipolar power. That was…an anomaly. It was a product of the end of the Cold War, but eventually you were going to reach back to a point where you had a multipolar world, multi-great powers in different parts of the planet.
We face that now with China and to some extent Russia, and then you have rogue states like Iran and North Korea you have to deal with.“
To conclude, one can only hope that the next step would be for multilaterals on which developing countries including Pakistan rely so heavily on, to adjust their conditions to this changing world order.
Copyright Business Recorder, 2025
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