Flash Point

Tariff Trouble: Will Pakistan survive the new U.S. tariff regime?

Date: April 9, 2025

The United States’ imposition of steep reciprocal tariffs under President Trump has triggered concern about a breakdown in the global trade order. With major exporters like China retaliating and smaller economies like Pakistan facing collateral damage, Jinnah Institute asked experts to weigh in on the implications of this protectionist turn for Pakistan’s economy, trade diplomacy, and strategic choices.

Sherry Rehman
President, Jinnah Institute

In 1930, at the height of American economic anxiety, the U.S. Congress passed the Smoot-Hawley Tariff Act- raising duties on more than 20,000 imports. The move was made to protect domestic farmers and manufacturers. Instead, it triggered a global economic recession called the Great Depression. ​​Nearly a century later, we are witnessing echoes of that era, as the U.S. again turns inward, this time imposing a baseline 10% tariff across the globe.

Today, it is clear that much more is at stake as America abandons its role as the global leader of a system based on multilateralism. Already, we are seeing volatility in commodity prices, fluctuations in the dollar, and uncertainty in stock markets that ripple far beyond bilateral corridors.  J.P. Morgan has expressed concerns that escalating trade tensions pose a 60% risk of pushing the U.S. and global economy into recession. Stock Exchanges worldwide experienced major losses after Trump’s tariff announcement wiping over $5 trillion off Wall Street between April 2-4, 2025, while $9.6 has been wiped out since Inauguration Day in the U.S. stock market.

For Pakistan, there has been a 29% tariff hit on exports. Where 90% of Pakistan’s exports to the U.S. are textiles valued at $5 billion, these numbers highlight the scale of exposure. There are several ways Pakistan could choose to respond, but a reactionary approach is neither feasible nor strategic. What is required is an assessment of long-term imperatives–diversifying both our export basket and markets, moving up the value chain, and building policy resilience to weather shocks.

To begin with, we must recognise that our overreliance on a few sectors: textiles, leather, and natural fiber-based goods-has become a handicap. Unlike diversified East Asian economies, Pakistan has not broadened its industrial base or export destinations. While our trade surplus with the U.S. is modest at $3.3 million, the sheer concentration of our export volume leaves us exposed to every external policy jolt. Key policy reforms such as increased technological innovation, improved labour productivity and diversified product lines are required to circumvent such shocks. However, Pakistan’s textile and leather industries are not without leverage. We offer natural fibre products at a time when synthetic textiles face greater scrutiny. Our towel exports to niche U.S. markets face limited competition. And yet, inefficiencies at home–from energy costs to logistics–hold back our full potential.

Diversification is the second step. Pakistan must expand market access beyond the U.S., to untapped markets in South America, Russia, Central Asia, and Africa. The EU’s GSP+ framework remains a vital channel for value added exports, despite recession concerns. Regional trade must be depoliticized where possible, even with India. Lowering input costs through Indian yarn imports, for instance, could offer immediate relief. Opportunities should not be ignored. If foreign investors like Starlink or Tesla are looking to diversify manufacturing, Pakistan should offer them fertile ground.

Mr. Haroon Sharif
Chairman, Pakistan Regional Economic Forum

President Trump has managed to disrupt the global markets by altering the terms of trade by using the card of reciprocity while trading with the world’s largest consumer market. In total disrespect to the rules governed by the World Trade Organization (WTO) and internal congressional processes, this Executive Order is based on a so-called “economic emergency” in the Unites States. It has not only signalled an uncertain future of economic engagement but has clearly indicated the beginning of an era of populist protectionism. At the end of the day, it seems all about curtailing China, opening spaces for the U.S. companies in the global marketplace and balancing the U.S. trade deficit. The evidence suggests that protection through tariffs does not lead to achieving medium term goals of investment, competitiveness and job creation.

Obviously, various economies are left with no choice but to come up with a short-term response to adjust to the new ways of engagement with the U.S. Administration. The top five suppliers of U.S. imports in 2022 were: China ($536.3 billion), Mexico ($454.8 billion), Canada ($436.6 billion), Japan ($148.1 billion), and Germany ($146.6 billion). While Vietnam, India, Bangladesh and Pakistan exported $120, 90, 8.3 and 5.2 billion respectively, there could be a massive downward impact on the GDP of economies dependant on their exports to the U.S. From the other side, the top five purchasers of U.S. goods in 2022 included Canada ($356.5 billion), Mexico ($324.3 billion), China ($150.4 billion), Japan ($80.2 billion), and the United Kingdom ($76.2 billion).

The China factor remains one of the key driving forces behind this U.S. Presidential Order. China, the country the U.S. has its largest trade deficit, was hit with a steep 34% tariff, prompting Beijing to respond with similar countermeasures. The escalation has marked the beginning of a new global trade war between the world’s two largest economies. Total U.S.-China bilateral trade in goods was $582 billion in 2024, down from $661.5 billion in 2018 – the U.S. share of Chinese exports dropped from 19.2 percent to 14.7 percent. The general perception is that China will come out as a winner in the medium term due to its dominance on technology and market diversification done under the Belt and Road initiative.

For the past three decades, Pakistan has failed to bring a change in the structure of its economy which remains largely dependent on non-exportable services. Under the emerging scenario of the U.S. Pakistan’s trade, our exports are expected to take a hit due to a potential dip in consumer demand in the U.S. The opportunity arising out from the pressures on our competitors is unlikely to materialise in the short term as the investment climate remains unfavourable for expansion of export led industry, knowledge products or re-location of industry from China and East Asia. The best Pakistan can do in the short term is to control the potential damage through trade and strategic diplomacy with the U.S. Pakistan’s trade deficit with China is huge and the U.S. may ask for shifting of some imports towards the U.S. under their argument of reciprocity. This will lead to making some difficult choices. It is yet to be seen if China would consider giving more market access to Pakistan for making up for the potential trade losses with the U.S.

For Pakistan, it is inevitable to make a transition from using geo-politics and diplomacy as a tool for economic gains in the shape of aid, market access or investment. There needs to be an economic value proposition based on competitiveness and diversification of the economy. This can only be done if institutional changes are made to delegate economic transactions to the private sector. The current uncertainties might open up space for increasing trade with India and other regional countries. Pakistan’s failure to leverage connectivity infrastructure needs to be re-visited under the tariff war. There are a number of markets in East Asia, Southeast Asia and the Middle East that will be looking for diversification from the U.S. and China. Can Pakistan offer an attractive economic value proposition to partner with these countries?

Mr. Ehsan Malik
CEO, The Pakistan Business Council

On April 2^nd, billed as the Liberation Day, President Trump announced reciprocal tariffs on 60 countries, threatening the world trade order based on comparative advantage to produce goods where they can be more efficient to serve consumers elsewhere with affordable, quality products. As a result, China and other Asian countries became manufacturing hubs, whilst the U.S. dominated in technology and the services sectors. While tariffs are a tool, the aim of reciprocal tariffs is to balance trade. In Pakistan’s case, the trade deficit that the U.S. seeks to rebalance is $3.3 billion and the proposed reciprocal tariff is 29%, on top of the 10% baseline tariff imposed on all countries.

At $ 5.5 billion, the United States of America is Pakistan’s largest export destination and one from which derives the largest trade surplus. The U.S. exported $2.13 billion of goods to Pakistan in calendar 2024. Cotton composed 36% of US’s exports, followed by scrap iron 19%, machines and aircraft parts 11%. Soya Bean exports which in 2022 amounted to $240 million were virtually absent in 2024 due to issues related to GM food, which have now been resolved.

Unlike China, retaliating with higher tariffs on imports from the U.S. is not an option for Pakistan. Neither is geopolitical leverage, though the U.S. will be reminded of cooperation on security. A reduction in demand for textile goods in the U.S. is inevitable due to higher consumer prices. Though the tariff imposed on Pakistan is lower than China, Vietnam, Bangladesh and Indonesia, in the short term, it is not possible to change Pakistan’s export mix to avail of the favourable tariff differential. At parity duty rates, these countries were exporting substantially more quantity, often at a higher unit price, implying a qualitative product advantage. This would take Pakistan time to address. Some positive impact may however come from the switch by American consumers to cheaper textiles that mostly compose Pakistan’s exports. The risk to Pakistan’s exports is estimated at $1 billion. The objective of tariffs by the U.S. is to balance trade, meaning that Pakistan would need to displace imports from other countries with US goods and services worth about $2 billion. In the absence of a trade agreement, Pakistan cannot under WTO rules reduce duty rates for the U.S. without doing the same for other countries. Potential reductions can be considered for Soya Beans, Meat, Corn, Almonds, Fuel and Scrap Iron.

Together with importing more cotton, the U.S. is also expected to seek parity tariffs with what apply to China under our FTA. This would be difficult without a trade agreement, which the U.S. is unlikely to entertain at this time. Diverting fuel imports from the middle east could offend our benefactors. The U.S. has also sought removal of non-tariff barriers, such as inspection and valuation processes and to create a level playing field with domestic industry for U.S. businesses. Most of these are regarded as beneficial for Pakistan.

A serious consequence of denying access to the U.S. market to China, in particular, would be dumping of goods in other countries. Pakistan’s anti-dumping regime is weak. China could also move aggressively to displace South Asian exports of textiles to the EU and UK. Hence, what is presently regarded as an isolationist move by the U.S., could height competition between its suppliers in other markets. With 17% of its exports to the U.S., Pakistan can’t adopt a “do-nothing” approach. Neither should it over-react by offering to increase imports from the U.S. at any cost as that would impact the external account negatively. It should instead engage the U.S. administration on bridging the trade balance on a win-win, commercially sustainable basis.

Ms. Nazish Afraz
Economist

The Trump tariffs, broad and imprecise, appear less a product of coherent trade policy and more a negotiating tactic—a dramatic opening move to reset the terms of engagement and strengthen the U.S. position in trade talks. As Kevin Hassett of the White House National Economic Council noted, over 50 countries have already contacted the White House to initiate negotiations.

The primary targets are major economies like the EU and China, which have large trade imbalances with the U.S. While the U.S. is likely to take a harder line with them, the tariff formula—based on the bilateral trade imbalance as a share of the imports from the partner country —has produced some oddly punitive outcomes. Several small economies with negligible contributions to the U.S. trade deficit have been hit with steepest tariffs. For instance, Lesotho and Laos each account for just 0.02% of the total U.S. trade deficit, yet both now face tariffs exceeding 40%. This highlights the bluntness of the approach and how smaller countries have been swept up in a strategy not intended for them.

Ironically, this may also create an opening. Because such countries are not central to the U.S. trade grievances, Washington may be more amenable to negotiated adjustments—if presented with credible, mutually beneficial alternatives. Pakistan is similarly positioned: its bilateral trade deficit accounts for less than 0.3% of the total U.S. trade deficit, compared to China at 26%, Mexico at 13.6%, and Vietnam at 9.5%. There is, therefore, space to engage. The focus for Pakistan should be on identifying U.S. imports that not only help reduce the trade imbalance but also strengthen Pakistan’s own productivity and competitiveness—such as advanced ICT, agricultural technologies, or energy transition tools. By using imports as a strategic tool for both economic upgrading and trade rebalancing, Pakistan can address U.S. concerns while pursuing its own development agenda.

But strategy requires capability. Pakistan’s past performance—exemplified in previous FTA negotiations—demonstrates the cost of entering trade talks without adequate analysis or technical preparation. In a rapidly evolving trade environment, Pakistan will have to significantly sharpen its tools. China’s response to U.S. tariffs, for example, has included curbing exports of critical minerals. In doing so, it is not only retaliating—it is exposing the U.S. vulnerabilities and forcing a diversification of supply chains. Reactions such as these, while disruptive and destabilising, also create opportunities for countries like Pakistan to expand exports and strengthen participation in global value chains. These opportunities, however, can only be leveraged if Pakistan is agile in identifying shifts and responding quickly. Pakistan must also realign itself strategically in a changing world order. The more unpredictable and transactional U.S. trade policy becomes, the more other countries diversify away from it economically. Pakistan must recognise these shifts and respond accordingly: by broadening trade relationships, reducing dependence on any single partner, and investing in trade policy capacity.

Mr. Khurram Husain
Business and Economy Journalist

The tariffs themselves will have a smaller impact for countries like Pakistan. We are not the target here. What is more important is what this signifies for the changes afoot in the global order that the U.S. built and is now busy dismantling. Pakistan has lived off this global order, availing itself of the multilateral bailout mechanisms embedded within this order multiple times in the last quarter century. This sun is setting on this option and the imperative to learn to stand on our own feet.

Oil prices are falling in anticipation of a sharp slowdown in global growth as a result of these tariffs and their fallout, so that is one positive for Pakistan’s energy sector. Manufacturing will see a mixed impact, where some textile exporters will have to face higher tariffs while their competitors in countries like Bangladesh, Sri Lanka and Vietnam will face even higher tariffs. Overall, the direct impact of the tariffs is not likely to be as large and disruptive for Pakistan as it is for other countries in the EU and China, or export powerhouses of Southeast Asia.

This will certainly catalyse a global pivot to China, but it is worth remembering that China is in the crosshairs of this entire policy. Countries around the world will increasingly be told they have to choose between the United States and China, and policies designed to penalise China’s economic relationships around the world are likely to ramp up significantly. So, the pivot will be accompanied by countervailing pressures too.

Pakistan now needs a new economic strategy altogether. The import substitution strategy that we have been trying to implement since the 1960s ran its course many decades ago, but we never quite grew out of it. Today even the liberalisation strategy of the 1990s that was presented as the alternative, is outmoded. In the words of Turkish economist Dani Rodrik, “more than ever, the fate of developing countries now rests largely in their own hands.” This means we cannot and should not count on or even look for external bailouts, and now even external policy advice may no longer suffice for our purposes. We are truly in a new and uncharted world.