Crisis-hit Pakistan gets a Trump tariff shock: Will China rescue its all-weather ally?

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US President Donald Trump’s sweeping “Liberation Day” tariffs seem to have hit Asian economies the hardest. While China and India have drawn the most attention, facing 54% (including 20% rate imposed last month) and 27% respectively, Pakistan has quietly found itself caught in the crossfire, slapped with a crippling 29% tariff on all exports to the United States.

The reciprocal tariff comes as a double-whammy for Pakistan’s fragile economy, especially at a time when it is battling a current account deficit, rising inflation, and low investor confidence.

Trump defended his tariff move saying it was needed in order to fix trade imbalances and provide equitable treatment for American products. He explained that Pakistan has been charging a 58% tariff on American goods, prompting the US to respond with its own 29% duty.

Pakistan ‘not to let crisis go waste’

Pakistan’s Finance Minister Muhammad Aurangzeb said Saturday that PM Shehbaz Sharif has set up two committees to tackle the economic implication of the new tariffs imposed by Trump.

The two bodies include a steering committee chaired by the finance minister and comprising ministers, prominent business leaders, secretaries, and academics, while the second was a working group led by the secretary of commerce.

“You should never let a good crisis go to waste,” Aurangzeb told a press conference in Islamabad and explained that while the situation created immediate challenges, it also would open doors for negotiation and long-term engagement.

He said that the government’s intention was to formulate and present a well-structured package to the US administration and the recommendations are expected to be finalised in the coming days and submitted to the prime minister for approval.

Why America imposed tariffs on Pakistan?

1.     The US has consistently maintained a trade deficit with Pakistan, where Pakistani exports to the US significantly outweigh American imports. The tariff is aimed at rebalancing the trade relationship.

2.     The US has accused Pakistan of imposing barriers on American exports while benefiting from duty-free access to American markets in various sectors.

How will it hit India?

1.     Pakistan’s textile sector is the backbone of its exports, with a significant share destined for the US market. The new tariff is expected to make Pakistani textiles less competitive. The additional cost burden may push US retailers to shift sourcing to Bangladesh, Vietnam, or India, which have lower tariffs.

2.     American companies that rely on Pakistani cotton and garments may seek alternative suppliers.

3.     Pakistan is the world’s fourth-largest rice exporter, with the U.S. as a key buyer. A 29% tariff could reduce the competitiveness of Pakistani rice, making Indian or Thai rice more attractive to American consumers.

Broader Economic Consequences

1.     Pakistan already struggles with a current account deficit, and a decline in US exports will further widen this gap.

2.     Decreased export earnings will apply stress on the Pakistani Rupee (PKR), which may result in its depreciation in comparison to the U.S. dollar. This will raise the price of imports, including crucial items such as fuel and machinery; escalating inflation, making products costlier for consumers in Pakistan.

3.     With major industries like textiles and agriculture affected, hundreds of thousands of jobs could be lost, increasing economic instability and social unrest.

Could this push Pakistan closer to China?

To avoid the impact of US tariffs, Pakistan may deepen its trade and strategic ties with China, which has already been a major economic lifeline for the country.

China has invested over $60 billion in CPEC, a flagship project of its Belt and Road Initiative (BRI). With US trade now under pressure, Pakistan could shift focus toward increasing exports to China. New industrial zones under CPEC could absorb job losses caused by US tariffs.

China is Pakistan’s largest trading partner, and Beijing could offer Pakistan tariff exemptions on certain products to offset US losses. In 2023, China granted duty-free access to 98% of Pakistani exports, significantly boosting bilateral trade. With the U.S. market becoming less accessible, Pakistan might rely more on China for economic survival.

The US tariffs could accelerate Pakistan’s shift away from American influence in defense and diplomacy. Pakistan may turn to China for military technology and strategic cooperation, strengthening Beijing’s foothold in South Asia.