US-China trade war: Pakistan gets chance to boost exports of food products

This way country can reduce its massive trade deficit, says central bank

KARACHI: Pakistan, which is struggling to achieve a dramatic turnaround by reining in excessive imports and boosting sluggish exports to fix the faltering economy, is likely to partially achieve the goal in the wake of opportunities emerging due to the US-China trade war.

The two biggest economies of the world have made 62% ($360 billion) of bilateral trade expensive by slapping additional tariffs on thousands of each other’s goods since July 2018 and have caused a slowdown in the global economy, according to the State Bank of Pakistan (SBP).

“For Pakistan, the imposition of these cross-tariffs offers some interesting opportunities as well as challenges. On a positive note, key food items, such as rice, seafood and soybean (both seeds and oil), have come in the crosshairs, which offer an opportunity to Pakistan to reduce its trade deficit,” the SBP said in its first-quarter report on the state of economy for fiscal year 2018-19.

Among the thousands of goods on which additional tariffs have been imposed by the two countries, three product categories may provide benefit to Pakistan’s exports which are seafood, rice and cotton (raw cotton, fabric and yarn). “Specifically, American seafood exports to China are now much costlier as a result of the tariffs, as are Chinese exports of rice and cotton items to the US,” the central bank said.

Seafood

China is a major global importer of seafood products and imported 16.3% of its overall seafood imports from the US in 2017 (worth $1.3 billion).

“It mainly imports lobsters, oysters, flatfish and sardines, all of which are now attracting additional tariffs, and all of which are also exported by Pakistan,” it said.

Pakistan’s global exports of these products amounted to $338.9 million in FY18 and constituted 75.1% of the country’s overall seafood exports. “As the US seafood exports to China have now become much costlier, Pakistani exporters might increase their presence in the Chinese market,” the SBP said.

Soybean

China is the world’s largest importer of soybean and the US is the second largest producer and exporter of the commodity, after Brazil. Importantly, soybean is the largest export product from the US to China.

Soybean was among the first items targeted by China when the first round of retaliatory tariffs went into effect in July 2018. China then shifted its demand for soybean to Brazil and Argentina. As a result, soybean export prices of Brazil and Argentina have spiked whereas those of the US have plunged.

“This presents an opportunity for edible oil mills in Pakistan to reduce their imports of soybean oil and seed in value terms by diverting their purchases to the US, where the prices are falling,” the SBP pointed out.

Encouragingly, there are indications that this switch is already taking place. Brazil’s share in Pakistan’s overall soybean imports (both seeds and oil) fell to 49.5% in FY18 from 58.4% in FY17 whereas the share of the US rose to 45.4% from 32.1%.

“Further enhancing soybean imports from the US will yield more FX (foreign exchange) savings for Pakistan,” it said.

Iron and steel

On the other hand, the volatility in iron and steel prices in recent months after the imposition of tariffs by the US presents a challenge from Pakistan’s perspective.

In September 2018, with anti-trade measures in full swing, the US targeted the bulk (49.1%) of iron and steel products that it imported from China and imposed additional tariffs on them. Steel prices in China were falling during the first half of 2018 as uncertainty loomed about the extent of the protectionist measures that would be adopted by the US. Further downward pressure came from a cooling off in China’s economy this year, which has impacted its demand for steel.

However, Chinese steel prices have been rising since August 2018, partly as a result of an expected drop in steel production in winter months as the country tries to limit harmful emissions and control smog.

“All of this uncertainty has created challenges for Pakistan as the unit value of the country’s iron and steel imports (both scrap and finished products) has been rising, though with significant fluctuations. Even though Pakistan imports most of its steel from China, the unit value of its steel imports has not dipped.”

Nonetheless, a slowdown in broader economic activity, as Pakistan tries to stabilise its economy, has already stalled the demand for imported iron and steel products. “In Q1-FY19, quantum imports of these items have already dropped 10.1% on a year-on-year basis,” the SBP said. 

Published in The Express Tribune, February 3^rd, 2019.

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