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Implications of US-China trade war for Pakistan

It is said that whether elephants love or hate, the grass underneath their feet gets crushed. Same is the case with Pakistan. The US and China are on the verge of sparking a trade war after both slapped tariffs on each other on key imports. This is serious not just for the US and China, but for the entire global economy in particular and Pakistan, in general. The debate between protectionism and liberalization has ensued once again.  But amid the gloom surrounding the globe with respect to protectionism there is a force in the works that could deliver a strong impetus to trade liberalization through creation of new mega trade blocks like BRICS, BEAMS, RCEP etc.

The basic premise behind the recent US-China spat is abolition of “unfair and inequitable practices”. While each country is free to safeguard its own interests, China seems to be leading the way as most US companies have moved their production to China. In this way, US-China trade relationship is very complex. By 2016, China has become US top trading partner with a total trade volume of USD 528 billion (USD 105 billion exports, USD 423 billion imports). The US industries most at risk in a trade war with China are transportation equipment, computers and electronics, agriculture products, chemicals and machinery.

While the ramifications of US-China ‘trade war’ will take at least a year’s time to take effect, the immediate impact would be a severe risk of disruption of component supply lines with knock-on effects on manufacturing, output, costs and employment. Manufacturers in producing countries lose output, profits and jobs. Ancillary traders and services like shippers, financiers, insurers and importers lose turnover. Consumers in importing countries face reduced availability of goods, and higher prices. Governments suffer loss of revenue because of reduced trade volumes.

In the short to medium term, the US is determined to persist in the rebalancing of international trade in its favor to please its electorate. On the other hand, China is using BRICS plus grouping as a reserve option to pursue a more diversified global approach.

 

Implications for Pakistan

The prices of steel and aluminum are likely to be increased which will subsequently raise the cost of construction. In Pakistan, construction, infrastructure projects and the housing sector are the key drivers for consumption of steel. Any adverse developments on the CPEC front, delay in infrastructure projects (particularly hydropower projects) and significant increase in input prices may pose risk to future profitability growth of the sector. This does not bid well for the present government which plans to provide 5 million housing units for the poor in the next five years. The prices of solar panels, washing machines and other appliances are also likely to go up.

What Pakistan needs now is to come up with slogans like ‘America First’ or ‘Make in India’. For example, Pakistan boasts of 150 million plus smartphones users out of a total population of 208 million. Considering the potential, companies like Vodafone or Nokia could be invited for investment in Pakistan but for that to happen, business environment needs to be made conducive. Recent cancellation of Edotco-Jazz deal amounting USD 940 million is a major setback in this regard. The need of the hour is to identify various avenues of investment and market them through roadshows to international investors in the form of ‘packaged deals’.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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