With the announcement of our FM that a high-level delegation will soon leave for Washington for talks on tariffs levied on Pakistan exports, the politicians and higher-ups in ministries along-with their families are already packing their bags for an opportunity to spend their summer in the US.
However, one needs to pre-plan what is likely to be on the table and how to approach the talks. A wiser approach would be not to rush to talks but first learn lessons from one or two developing countries in similar economic/geo-political environment. Critics may argue that we may miss the bus and it is better to strike the iron while it is hot.
The justification for the former approach is that lot is unknown and may start flowing in directly or indirectly in coming months? Given the formula for setting the tariff rates, however crude or imperfect it may be, the question is: Is it dynamic or static?
Once tariffs are negotiated at individual country level, say in 3 months’ time, thereafter will its value change in real time, monthly, bi-annually or yearly, or is it fixed till the next US elections?
Apparently, the tariffs are based on trade data for CY 2023. If tariffs are data-driven, once the trade data for year 2024 is public, what will be the lag before the updated tariffs are released in case it is dynamic? This introduces element of severe volatility in trade, financial flows and investment decisions across the globe.
Ideally, post-negotiations, tariff rate should be treated as fixed till the next US election for reducing volatility. However, from US perspective, it may be fixed for a year, as it leaves US the chance to monitor the commitments and adjust the rate accordingly while keeping the exporters on their toes.
An annual review is insufficient for investment decisions to materialize, if the purpose is to move manufacturing to the US. However, monitoring of imports into USA is possible on a yearly basis. There are two ways to incentivize negotiations.
As these negotiations will be mainly based on ex-ante commitments of increasing imports from US and/or increasing investments to US, a range of tariffs (lower and upper bound) should be set for the next 4 years. This will not only reduce import/export volatility, but encourage investment decisions in favor of US for trade creation and trade diversion. Another question to seek answer from the US government is?
In negotiations, is there any weight for geo-political ‘Trump’ cards held by the exporting country?Unfortunately, the geo-political ’Trump“ cards plus points will be revealed if tariffs are purely trade data driven (the assumption is that the trade data is 100 percent reliable).
Suppose the pre-negotiation base data (2023) tariff rate on country A is X but post-negotiation final tariff rate is X-10 percentage points. Thus, it is easy to guess that the country A has secured 10 percentage point geo-political/MAGA advantage over others. However, the risk is that global trade may even become more unfair than it is now with rule-based tariffs. Let’s assume that in this round of trade war negotiations, zero weight is given to geo-political ‘Trump Cards’.
How should Pakistan approach the negotiating table? Instead of luring US with geo-political ’Trump Cards“ and underhand security deals, it should try to rely on data-driven and evidence-based commitments to increase exports from US. For this to be possible it is necessary to go to the 6-digit if not the 8-digit level trends of imports from the US. A priori our imports from US are highly concentrated, cereals (incl. soyabean oil), cotton, machinery, electrical machinery and specialized chemicals. Exports of many items under these 3 latter categories are blocked by the US for security reasons and transfer of technology.
Even if Pakistan expresses its willingness to import these specific 8-digit items, but will the US remove export bans, probably not. At best their export may be allowed under strict monitoring. If not allowed by the US, how else to increase US exports to Pakistan? There is another item that Pakistan may be willing to import.
Military hardware. Until now, most of it is/was financed by loans from the US itself under non-transparent programmes. After the F-16 debacle, Pakistan is wary of buying military hardware from its own foreign exchange resources, and it is even more difficult now than 15 years ago.
Although distance is the same as US, soyabean oil and cotton can be imported from Argentina and Brazil at competitive prices than from the US. Should Pakistan reinstate import quota regime to force import of these items from the US? Or, arrange for targeted subsidies to importers so as not to raise domestic prices. What about specialized machinery/equipment for mining, Agriculture, Textiles and mitigating climate change?
The first item is in G2G domain and source of machinery imports are tied to investment deals. In the case of latter 4 items, sophisticated technologies will have to be subsidized to final consumer to lure them to imports plus leading to drainage of our precious foreign exchange. The only way for Pakistan is to have a win-win situation is to do away with geo-political assumption made in the beginning of the article.
From a macro policy perspective, the choice that Pakistan faces from this shock/uncertainty to global trade and transitioning to distorted trade rules is multi-dimensional. Ideally, in a data-driven trading world, it is essential to update trade elasticities for the US with regard to real depreciation/appreciation of USD and PKR and GDP’s of both countries (to incorporate recession fears in US and slower 4th quarter growth in Pakistan). Ex-ante in a forward-looking scenario it will show in a simplistic manner what pressure short-term our exchange rate can face.
Given our ‘casino economy’ the managed exchange rate market may face pressure from speculative imports and shift in asset portfolio by the speculators. In the interim period USD reserves are our insurance/shock absorber. In the next 3 months they should not be allowed to fall below USD 10 billion. In this case, open market SBP buying spree of USD needs to be minimized.
Luckily, the approaching Eid-ul-Azha inflow of remittances may also cushion the depreciation of the PKR. Moreover, if need arises import compression for durable/luxury goods be re-instated. Under the on-going IMF programme, the implications of additional (targeted) subsidies to (non-competitive) imports from the US, revenue loss from removal of selected import tariffs, introduction of import quotas and a more multi-layered interest rate policy (biased towards investment expenditure) will further distort the fiscal accounts and efficacy of the monetary policy.
Instead of succumbing to the textile lobby, it is better to rely on the single price, i.e., exchange rate and manage it through tight grip on foreign reserves for the next 3 months. The uncertainty factor has already pushed the PKR/USD above 280. Concentrate on reserves and let the exporters recoup some of the losses due to tariffs by letting the exchange rate stay between 285-290 range.
Another option is a serious and sincere attempt by Pakistan is through trade diversion and trade creation to stay afloat in this trade war on a sustainable manner. Unfortunately, we have failed miserably in the past. We cannot afford to fail again in the face of target of USD 60 billion for the next 5 years.
In fact, this trade war should be considered as blessing for us to put our act together instead of skirting around the much-needed structural reforms based on enabling environment in the export sector. The first step in this direction is real-time analyses and understanding of 4 to 8-digit level trade trends by countries.
Another option at the global level (including Pakistan, with a very small share in the world trade) is to sit back (and specifically delay investment decisions) and watch the impact of trade war on American economy. No doubt this has eco-politico ramifications for the individual countries.
At the end of 4 years and possibility of new government in the US declaring unilateral withdrawal from tariff territory, may at least save their misplaced long-term investments.
Copyright Business Recorder, 2025
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