Emerging opportunities for Pakistan in light of the US-China trade war, say Pakistani scholars
By Hussain Ali, Rameen Iftikhar
It would not be considered an exaggeration if one was to refer to the US-China trade war as one of the most consequential economic event, in recent world affairs. The reason why this event, or rather series of events, are so momentous is because this decoupling of the two most influential economies in the world will affect trade and economic prosperity globally. The effects will reach far beyond the two economies at play, changing the face of geo-political economics as we know it.
What started off as contention by the US President Donald Trump over the unfair trading practices, has now erupted into full blown imposition of tariffs on both ends. According to the US Census Bureau, by 2018, the US had imposed an estimated $250 billion tariff on Chinese products, while the threatened value by Trump was around $325 billion. President Trump took such drastic actions to force China to amend its intellectual property, industrial subsidies and market access policies, and the so-called force the transfer of technology to Chinese firms. However, China responded by implementing new tariffs on a wide range of US products. In 2018, out of a total of $120 billion worth of imports, China imposed $110 billion worth of tariffs. China (the world’s fastest growing LNG importer) has shifted from the US (the world’s fastest growing LNG exporter) to alternative sellers, to offset the high demand of LNG. Only 4 vessels of LNG were exported in 2019, compared to 32 vessels in 2018. This has adversely impacted the US economy greatly, who have no other alternative than to look for new potential markets. This trade war has slowed growth for both the economies and has placed the biggest drag on oil price. The two economic giants have tried and continue to try to negotiate to resolve and end the trade war. However, all negotiations have not been very fruitful.
This economic feud between the two countries has drastically affected and continues to affect both parties. For example, according to Katheryn Russ from the University of California, there could be an estimated increase of $800 to the average household's annual spending following the imposition of tariffs on Chinese products. This is also going to affect the Chinese economy, especially if it fails to find new markets or innovative ways to evade the US tariffs.
Consequences of this trade war do not end here. They extent beyond the geographical bounds of America and China to the rest of the world. Just like with all feuds, some economies will benefit from this trade war, while others get crushed underneath. However, escaping any possible backlash is impossible.
According to Nomura Securities strategists, Pakistan could potentially be the third most fortunate beneficiary in this feud. Abdul Razzak Dawood, adviser to the prime minister, has also reported to have given a similar statement, “The trade war between China and the United States is getting bigger and bigger by the day… and the demand for goods is not declining (in the US market). Pakistan needs to explore ways so that it can benefit from this war.” These controversial claims; however, have certain assumptions attached to them. There are three possible ways that Pakistan can turn one of the greatest economic feuds into its favor and establish itself in the international market as a key player in world economics.
First of all, the high tariffs on the Chinese products in the US makes Pakistani exports more competitive in the US market. It had always been very difficult to compete with Chinese products in any international market because of their low production costs due to cheap labor and economies of scale of Chinese firms. However, the high tariffs have made these “cheap” Chinese product more expensive for the US buyers. Higher prices have led to a decrease in their demand. This has left a gap that can be potentially filled by alternative sellers in the US market such as Pakistan. Ehsan Malik, Pakistan Business Council’s CEO, has also brought this to our attention by saying, “The China-US trade war has put Pakistan in an advantageous position and we have become more competitive than China in some areas like textiles. It offers an opportunity for Pakistan to boost its exports to the United States as well as revive the closed manufacturing capacity (mostly in Punjab).” Engineering, textile, surgical tools, sportswear, plastics, footwear, fishery, packaging, pharma, kitchenware, furniture and jewelry are some of the types of Chinese products that have been subjected to the high US tariffs. Out of these many Chinese products, Pakistan has the capacity to produce a substantial amount of these products as exports for the US market. Of course, the production of items from each of these categories will depend on the availability of resources to Pakistani industries. For example, Pakistan has a flourishing industry for sportswear products. In the year 2018, US imported sportswear worth an estimate of $ 1,468,202,000. Pakistan has the capacity to cover about 23.86% of the gap in the US sportswear market left by China. Similarly, the Pakistani textile industry can bridge 16.37% of a gap amounting $ 41,840,554,000 worth import in 2018. The surgical equipment industry, primarily situated in Sialkot, could also help boost the Pakistani economy by producing exports to the US that can cover 13.58% of a total gap of $ 2,791,677,000 left by the Chinese products.
Secondly, this tariff war between China and the US could lead to potential industrial growth and inflow of foreign investment into Pakistan. The Pakistan Business Council’s CEO, Ehsan Malik, is reported to have said that the Chinese manufacturers can ward off punitive tariffs on their exports to the United States by relocating their labor-intensive industries to Pakistan. The US has put tariffs on Chinese products, I.e. products produced in China. Moving industries to Pakistan will be a trend in this case because of the recent economic goodwill established by CPEC. Such inflow of foreign investment would boost the economic growth of Pakistan as the national income of the country will increase. These huge sums of foreign investment could lead to the establishment of Special Economic Zones in Pakistan. Establishment of these new industries will be closely linked to foreign investments in improving the infrastructure of the country to make long term production cost less. The inflow of Chinese investment will only be the start of a very fruitful ripple effect, as more foreign investors will be attracted to set up industries in Pakistan. With Pakistan’s geographical location, it could become a hot spot for future investments from all over the globe. This short-term and long-term increase in Pakistan’s national income could further improve infrastructure and educate the future labor force of Pakistan that could lead to an increase in productivity and efficiency, and decrease costs incurred. And let’s not forget the social advantages that this economic growth will bring to Pakistan such as the improved way of life for the general population.
However, before the Pakistani population starts to rejoice over this advantageous position that the trade war has blessed them with, they must first analyses the feasibility of such avenues for potential investments, developments and growth. In an ideal situation Pakistan could possibly bridge wide imports gaps in the US by supplying their exports. Unfortunately, we do not live in an ideal world. Keeping in mind the current situation of the manufacturing industries in Pakistan, they can only produce a small percentage of a minuscule variety of export products. Due to the devaluation of the Pakistani rupee, the production cost of many exports that use imported products has increased by a lot. This makes Pakistani exports less competitive in international markets. Furthermore, for Pakistan to be a hot spot for international investments, such as those from China, there needs to be political stability in the country. With the current struggle of the government with opposition parties, many investors would find it risky to invest large sums of money in an instable economy.
In conclusion, the US-China trade war has given Pakistan a golden opportunity that if used wisely could be an economic leap in Pakistan's history. Pakistan could potentially end up with an increased amount of exports to the US, become a hot spot for international investments (especially from Chinese investors). However, certain economic and political limitations might put a dent in how well this opportunity can be explored. Thus, what the Pakistani government should do is closely analyze all developments in the US-China trade war and make numerous alternative plans of action, keeping in mind the geographic, political and economic feasibility in mind. Then the best course of action can be taken. What Pakistan should not do is make rash decisions by overestimating their own potential and underestimating their limitations. Similarly, Pakistan should also not underestimate its potential and overestimate its limitations. It should tread carefully over one of the biggest economic feuds in history and try to benefit from it in the best possible way.