Below is a detailed report on US-Pakistan Trade Relations: Navigating New Tariffs and Opportunities. This report synthesizes current trade dynamics, the impact of recent US tariffs, potential opportunities for Pakistan, and strategic recommendations for navigating this evolving landscape.
Overview of US-Pakistan Trade Relations
The United States is one of Pakistan’s largest trading partners, with bilateral goods trade reaching approximately $7.3 billion in 2024. Pakistan exports $5.1 billion worth of goods to the US, primarily textiles and apparel (e.g., bed linens, towels, knitwear, and woven garments), while importing $2.1 billion in goods, including machinery, energy products, and agricultural commodities. This results in a consistent trade surplus for Pakistan, which stood at $3 billion in 2024, up 5.2% from the previous year. However, the introduction of new US tariffs in April 2025 has introduced significant challenges and opportunities to this relationship.
Historically, the US has maintained relatively low tariffs under the World Trade Organization’s Most Favored Nation (MFN) framework, while Pakistan applies higher tariffs to protect its domestic industries. This asymmetry has long been a point of contention, culminating in the Trump administration’s reciprocal tariff policy announced on April 2, 2025, which imposes a 29% tariff on Pakistani goods—reflecting Pakistan’s 58% tariff on US goods.
The New US Tariff Policy
On April 2, 2025, President Donald Trump unveiled a sweeping reciprocal tariff plan targeting over 60 countries, including Pakistan, as part of the “America First Trade Policy.” Key details include:
- Baseline Tariff: A 10% tariff applies to all countries starting April 5, 2025.
- Reciprocal Tariffs: Countries imposing higher tariffs or non-tariff barriers on US goods face additional duties. Pakistan’s 29% tariff reflects its trade practices, which the US claims disadvantage American businesses.
- Additional Measures: A 25% tariff on foreign-made automobiles was introduced, though this has limited direct impact on Pakistan due to its negligible auto exports to the US.
- Exemptions: Canada and Mexico are exempt under existing trade frameworks (e.g., USMCA), while Russia faces no new tariffs due to existing sanctions limiting trade.
The policy aims to address the US’s $1.1 trillion trade deficit (2023 data) by reducing imports and boosting domestic manufacturing. For Pakistan, this translates to higher costs for its exports, threatening its $5.1 billion export market in the US.
Impact on Pakistan
Economic Consequences
- Export Decline: The 29% tariff increases the landed cost of Pakistani goods in the US, making them less competitive compared to alternatives from countries with lower tariffs (e.g., Bangladesh, India) or domestic US producers. Textiles, which account for over 60% of Pakistan’s exports to the US, are particularly vulnerable.
- Short-Term Effect: American importers may reduce orders, leading to a potential decline in export volumes in 2025–2026.
- Long-Term Risk: Sustained tariffs could erode Pakistan’s market share if competitors capitalize on trade diversion.
- Macroeconomic Ripple Effects:
- GDP Growth: Exports contribute to industrial production and GDP. A drop in US exports could shave off growth, though experts estimate the impact at less than 1.5% of GDP even in a worst-case scenario.
- Employment: The textile sector employs 40% of Pakistan’s industrial workforce. Reduced orders could lead to layoffs or stalled hiring, disproportionately affecting women.
- Trade Balance: A shrinking surplus with the US could widen Pakistan’s overall trade deficit, pressuring foreign reserves and the Pakistani Rupee (PKR).
- Inflation: A weaker PKR due to lower export earnings would raise import costs, fueling domestic inflation.
- Government Finances: Lower corporate profits in export sectors could reduce tax revenues, while potential subsidies to support exporters might strain Pakistan’s IMF-constrained budget.
Global Trade Context
The US tariffs coincide with higher duties on competitors like China (34%), Vietnam (46%), and the European Union (20%). This creates a mixed landscape:
- Competition: Pakistan faces stiffer competition from India, Egypt, and Turkey, which may also seek to fill gaps left by tariff-hit nations.
- Opportunities: Higher tariffs on China and Vietnam could divert US demand to Pakistan, particularly in textiles, if it can maintain cost competitiveness.
Opportunities for Pakistan
Despite the challenges, the shifting trade dynamics offer Pakistan several opportunities:
- Trade Diversion:
- The US-China trade war during Trump’s first term saw India and Bangladesh increase exports to the US by 39% and 50%, respectively, while Pakistan’s exports fell by 3%. Learning from this, Pakistan could target niche textile segments (e.g., high-value or specialized products) to capture redirected demand.
- Lower Commodity Prices:
- Global trade disruptions and a stronger US dollar may reduce commodity prices (e.g., oil, cotton), lowering Pakistan’s import bill and input costs for export industries.
- Relocation of Chinese Firms:
- As Chinese businesses face 34% tariffs, some may relocate to Pakistan to avoid US duties, boosting local manufacturing and exports.
- Market Diversification:
- The tariffs underscore Pakistan’s overreliance on the US (19% of exports in 1HFY25). Expanding trade with the EU, Russia, Central Asia, Africa, and East Asia could mitigate risks.
- Critical Minerals and Investment:
- Discussions between US Secretary of State Marco Rubio and Pakistani Foreign Minister Ishaq Dar on April 7, 2025, highlighted potential collaboration on critical minerals. This could attract US investment and diversify Pakistan’s export base beyond textiles.
Strategic Recommendations
To navigate the new tariffs and seize opportunities, Pakistan should adopt a multi-pronged approach:
- Diplomatic Engagement:
- Leverage ongoing talks with US officials (e.g., the planned delegation to Washington) to negotiate tariff concessions, emphasizing Pakistan’s strategic alliance and modest trade surplus relative to other nations.
- Propose reducing Pakistan’s 58% tariff on US goods to secure reciprocal relief, as suggested by Finance Minister Muhammad Aurangzeb.
- Export Diversification:
- Invest in non-textile sectors like IT services, pharmaceuticals, and high-tech manufacturing to reduce reliance on a single market and product.
- Launch a “Global Trade Branding Initiative” to promote Pakistani goods through trade expos, digital marketing, and diplomatic outreach.
- Competitiveness Enhancements:
- Subsidize exporters to absorb tariff costs temporarily while improving productivity and quality to compete with India and Bangladesh.
- Lower trade-weighted average tariffs (currently 7.3% on US goods) to attract US upstream textile inputs, potentially qualifying for tariff concessions.
- Regional Trade Agreements:
- Accelerate trade deals with the EU, ASEAN, and African nations to offset US market losses.
- Strengthen ties with China under the China-Pakistan Economic Corridor (CPEC) to attract relocating firms.
- Economic Resilience:
- Bolster foreign reserves (projected to grow with $36 billion in remittances in FY25) to cushion currency depreciation.
- Use lower commodity prices to reduce inflation and support export competitiveness.
Conclusion
The 29% US tariff on Pakistani goods poses immediate challenges, particularly for the textile sector, with potential declines in export volumes, employment, and economic growth. However, it also presents opportunities to diversify markets, attract investment, and capitalize on trade diversion. Pakistan’s response—combining diplomatic negotiation, strategic diversification, and competitiveness reforms—will determine whether it can turn this adversity into a catalyst for long-term growth. As global trade dynamics shift, proactive and adaptive policies will be key to navigating this new era of US-Pakistan trade relations.
