To mitigate the impact of the tariff war sparked by US President Donald Trump, address uncertainty over tariffs on Pakistan’s exports to the US, and contain the trade deficit, the government must prioritise economic diplomacy and enhance the competitiveness of the export sector.

Donald Trump imposed a new 25 per cent tariff on imports from Mexico and Canada, along with a broad 10pc tariff on all Chinese imports. Last week, he announced a blanket 25pc tariff increase on all steel and aluminium imports, affecting the European Union (EU) as previous exemptions, duty-free quotas and product exclusions expired.

Canada swiftly imposed a 25pc retaliatory tariff on various US products and signalled further measures. Mexico’s response was more measured but included a warning of potential new tariffs on US goods. President Trump later paused tariffs on automobiles from Canada and Mexico.

Beijing retaliated with tariffs of up to 15pc on approximately $21 billion worth of US agricultural products and filed a World Trade Organisation (WTO) dispute against Washington. The EU also announced counter-tariffs on $28bn worth of US goods, set to take effect next month.

As the US tariff policy continues to unwind and reshape global trade, Pakistan must proactively find an opportunity to negotiate a fair deal for itself

Beyond the countries directly targeted by US tariffs, local and global experts criticised the tariff hikes as ‘disruptive’ to global trade. The WTO has neither assigned blame nor provided an independent assessment of the tariff war’s potential impact on global trading activity.

There is some uncertainty regarding the application of the 25pc tariff on other US trading partners with significant trade surpluses.

Businesses hope that Pakistan, with its negligible 0.15pc share in total US imports, will be spared from additional tariffs. However, if higher duties are clamped on Pakistani exports to the US, they fear it could erode competitiveness, suppress exports to the US, and widen the trade deficit by the end of the fiscal year.

According to official data from the first eight months (July-February) of FY25, Pakistan’s trade deficit reached $15.7bn. Exports grew by 18.1pc compared to the same period last fiscal year, totalling $22.2bn, while imports increased moderately by 7.4pc to $37.8bn. If this trend persists, the trade deficit is projected to remain under $25bn against $24bn in FY24.

Former federal secretary and ex-caretaker Sindh minister Muhammad Yunus Dagha states: “With the current trend in commodity prices, the chances of further widening in trade deficit don’t seem to be there. The settlement of the Russia-Ukraine conflict and resultant drop in the oil prices would further help keep our trade deficit in manageable limits. Trump’s tariff policy is aimed at countries making large trade surpluses in trade with the US, and Pakistan doesn’t fall in that category.”

Dr Manzoor Ahmed, Pakistan’s former ambassador to the WTO, downplayed concerns over Pakistan’s trade deficit, viewing it as a normal trend for developing economies, especially during growth phases. He noted that nearly two-thirds of Pakistan’s imports are industrial raw materials and capital goods, indicating a much-needed industrial recovery after a downturn.

“So far, Pakistan has largely escaped tariff shocks due to its negligible trade share, making it unlikely to attract attention. The real risk would be if Trump imposed tariffs across the board, but for now the situation remains uncertain,” he said.

He also saw a potential advantage, as President Trump’s focus is on China, Mexico, India and Vietnam, countries with major trade surpluses with the US, as well as steel, aluminium and related products, which Pakistan does not export.

Shahid Sattar, Secretary General, All Pakistan Textiles Mills Association, emphasised the critical role of textiles in Pakistan’s exports and urged the government to pursue a preferential trade agreement with the US.

In the first seven months of FY25, Pakistan’s exports to the US stood at $3.6bn (19pc of total exports), with textiles and apparel making up 79pc ($2.8bn). Of these, 94pc are value-added products like garments and home textiles, yet Pakistan faces tariffs of up to 17pc, while its cotton imports from the US remain duty-free.

If President Trump’s tariffs are imposed, Pakistan’s $6bn exports to the US will take a direct hit, weakening the rupee, increasing import costs, and widening the trade deficit, which is already growing 4pc monthly.

To safeguard exports, Pakistan must negotiate a deal similar to the Caribbean Basin Trade Partnership Act, allowing duty-free access for value-added textiles made from US cotton.

Ehsan Malik, CEO, Pakistan Business Council, also called to initiate trade talks with the US and prepare for potential policy shifts. “With monetary easing, rising demand, and limited local manufacturing, Pakistan’s import reliance grows, fuel being an example. In January, despite high remittances, the trade deficit led to the first current account deficit in six months.

“The US may push for lower tariffs on its exports, including cotton and soybeans. As the world’s largest importer of US cotton, Pakistan can leverage this to secure better market access. Ministries of commerce and foreign affairs must act proactively,” Mr Malik remarked.

Published in Dawn, The Business and Finance Weekly, March 17th, 2025