Trump’s tariffs have jolted the world. Their impact on global value chains could be similar to what COVID-19 had. As of now, the reciprocal duties (barring China) have been halted for 90 days. However, a baseline 10 percent tariff is applicable across the board, with 25 percent on certain products.
Most US trading partners have reached out (or are planning to reach out) to the US to negotiate, and many are ready to eliminate the duties on US products to reduce the reciprocal tariffs imposed on them. Pakistan is no exception. The question is what Pakistan can bring to the table, what the opportunities and challenges are, and what its strategy should be.
Pakistan’s government and exporters are excited and seeking opportunities in this global disruption. However, critics fear that Pakistan is at the bottom of the list in terms of trade with the US, and a balance-of-payment-constrained poor country does not have much to offer. The US may perhaps tell us about certain demands, and we need to comply — as it did after 9/11, when they said: either you are with us or against us.
Critics’ arguments may carry weight. However, sitting idly should not be an option. And the government is in the process of making a strategy. There are challenges and opportunities for Pakistan. The policy response should focus on the opportunities while being cognizant of the risk of doing nothing, which may increase our current account deficit, leading to another crisis.
The worst-case scenario for Pakistan is to face higher duties compared to US export competitors, including Bangladesh and India. The other option is to secure a better deal relative to them.
The US is demanding that countries reduce their trade deficits. Pakistan’s goods trade deficit with the US at $3.5 billion is much lower compared to our competitors’ — Bangladesh’s at $6.2 billion, while it is much higher for India’s ($45 billion) and Vietnam’s ($123 billion). Seeing the size of the deficit, on the face of it, despite being an external-account-vulnerable country, there is an opportunity for Pakistan as our relative deficit is much lower — both in absolute terms and as a share of GDP.
The other opportunity is to grab a small share of China’s textile exports (around $50 billion) to the US. The trade war is between two giants, and textile is a sunset industry in China — manufacturing is moving to other economies, and Pakistan can potentially grab a share of it.
Having said that, economies such as Pakistan can become collateral damage in the trade fight of the two giants. There are two main challenges for us. One is an increase in exports by others (mainly China and Vietnam) to non-US markets. They may flood the EU, and Pakistan may not be able to compete despite having GSP+ status. That could reduce our share in other markets.
The other challenge is the dumping of their products (both textile and non-textile) in Pakistan. China is already doing it in many economies, including Pakistan. Trump’s tariff threat has been looming large for months, and China is preparing for it. Already, they have dumped goods in many economies, and a few have imposed anti-dumping duties (such as Indonesia, India, Mexico, and Thailand).
Pakistan should be vigilant in countering it. In the past few months, imports in the textile value chain have jumped and led to the closure of many yarn and cloth manufacturers in Pakistan. Instead of imposing anti-dumping duties, Pakistan’s tax policy is giving an advantage to importers under the infamous EFS (Export Facilitation Scheme), where duty and taxes are not paid for imports meant for re-export.
However, taxes are applied to domestic procurement, where exporters must file refunds — which take a few months — forcing them to incur higher working capital costs. Many exporters are now avoiding imports from China.
Some of these textile players in China are likely to shut down in the next few years, and they are exporting (even at a loss) to manage cash flows. Pakistani authorities must end this undue advantage to Chinese exporters.
Going forward, other locally manufactured products are also challenged to sustain due to expected dumping (or flooding) of products from China and Vietnam. This is a big challenge for our struggling LSM. We need to have a counter-strategy by imposing anti-dumping duties.
Then the key strategy is to enhance imports from the US to lower the trade deficit through lowering duties and expanding the product portfolio. If we end duties on products Pakistan imports from the US, there would be some tax revenue loss. Plus, demand may also increase due to lower consumer prices. The government is apparently ready to do so.
Then, textile players think they can increase cotton imports from the US by not importing from other countries. Bangladesh is offering the same to the US.
The question is: what sweetener do we have to offer that others do not? The other agri-product import is soybeans, which can be pushed up. The government is also contemplating replacing a portion of oil and petroleum product imports from the Middle East with those from the US.
All this would increase costs (as either US products are not competitive or freight charges are higher) and result in potential revenue loss. Then the government may need IMF approval in certain cases, while most of our competitors are not in an IMF programme.
There are many ifs and buts in the strategy the government is crafting. There will be externalities that are not fully thought through. It’s not easy to deal with. The situation is tough, and challenges are paramount.
Currently, lower oil and other commodity prices are giving some breathing room to our import-dependent economy. It is unclear how things will pan out, as the situation is fluid and risks are significant.
Copyright Business Recorder, 2025
Ali Khizar is the Director of Research at Business Recorder. His Twitter handle is @AliKhizar
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