Pakistan and the transforming international trade order

A number of actions taken by President Donald Trump and his administration in the area of international trade will not directly affect Pakistan. But they will significantly change the environment in which Islamabad is operating and managing world trade. This is occurring at a time when Pakistan’s policymakers have begun to recognise that they need to focus on increasing the quantum and quality of exports in order to increase foreign earnings. Pakistan now has a large trade imbalance which is being financed either by running down the depleted foreign reserves or by new borrowings from foreign sources. If the latter, the result is building foreign debt.

Pakistan will also have to rethink the direction in which exports should be sent. Mostly because of inertia, Pakistan has not significantly altered the content of the export basket or the countries to which most exports are sent. Cotton, cotton products and rice have remained the most important exports while the markets to which they are being sent remain in the United States and Western Europe. Even before President Trump shook the established international trade order, Pakistan needed to develop a more dynamic trade policy. With Trump’s approach, this task has acquired greater urgency.

Trump’s actions on international trade have already affected the global market as well as the financial markets. China is the target of much of what he is doing and is likely to do in the future. This has brought the world close to a world trade war. In one of his many pronouncements on international trade, he said that a trade war is a good thing and America will always win in such an encounter. Both assertions of course are incorrect. International trade is a difficult subject even for economists to master. Trump understands little of it. The launch of a trade war with China has sent the financial markets into wild spins in most developed parts of the world, especially in the United States. The sharp increase in values that came to be called the ‘Trump bump’ has been rechristened as the ‘Trump dump’. But my subject today is the consequence for Pakistan of what Trump is doing to international trade.

As I said, Islamabad needed to rethink how it manages international trade. Up until now, little effort was made to focus on exports as an engine of economic growth. Exports were a by-product of normal economic activity. Most of those who were involved in it used it to take care of the surpluses that became available once domestic demand was satisfied. Much of what the Pakistani economy produced was low value added since that was what was demanded by local consumers. Take the well-endowed agriculture sector as an example. Pakistan could have used it to produce high value-added products such as fruits, vegetables and flowers. Instead, it focused on the production of grains for local consumption. The government used its procurement policy to encourage this to happen. Pakistan’s geographic location is such that it could have become a large supplier of these high value-added crops to the Middle East with a large population of wealthy consumers.

Trump by focusing on bilateralism rather than multilateralism as the way to manage his country’s trade relations, has put countries such as Pakistan in an awkward place. In the past, Pakistan spent a great deal of diplomatic effort on gaining access for its textile products in the US market. This in itself was the wrong approach. Even in this area, Pakistan produced low-value products such as towels and bed sheets. Producing garments would have been more profitable but that did not happen as our trade diplomats did not work on creating a US market for these manufactured items. Now, with Pakistan-United States relations having reached the lowest point ever, focusing on market access to that country would not work. It would only work if Islamabad was prepared to slavishly follow the United States in its losing struggle in Afghanistan. This Pakistan is not likely to do.

The rapidly developing Pakistan-China relations offer a good opportunity for Islamabad to fundamentally alter its international trade stance. The still-not-fully-developed CPEC programme needs to have a large export-building content. The Chinese would welcome that. As the proportion of the Chinese population living in the country’s extreme west increases sharply, its demand for the products of Pakistan’s agriculture will greatly increase. Personal incomes are rising rapidly in China and this is increasing the demand for such high-value products as fruits, vegetables, nuts, meat and milk. By focusing on increasing the supply of these items, Pakistan could transform its agriculture sector that has long remained committed to producing food grains and cotton.

This transformation could be particularly significant in the country’s northern areas that border China. The intended CPEC investment in improving road and rail connectivity between northern Pakistan and western China should help to transport these products to the neighbouring country. By developing the sector of livestock to meet the Chinese demand for meat and milk products, Pakistan could help the poorer populations in these parts of the country. Women who are actively involved in the rearing of animals would benefit in particular. Since it would be cheaper to transport processed meat and milk products over this difficult terrain, these areas could also build an agro-industrial base.

Adding China in a significant way as a destination for Pakistan’s exports would be helpful in meeting Islamabad’s needs for external finance to promote economic and social development. While the CPEC programme would provide the framework for bringing about this important change, it will require a significant change in the direction and scope of public policy. I would suggest that the Planning Commission establishes a specific wing to guide this change. Such a wing should work closely with the Chinese authorities and some of the international development agencies that have included CPEC in their work programme.

Published in The Express Tribune, April 9^th, 2018.

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