Trade war, SEZs and Pakistan

How can Pakistan optimally benefit from the ongoing tariff war between the US and China? This is a basic query requiring specialised focus and analysis of the export-led dynamics responsible for the virulent trade conflicts. The ‘reciprocity framework’ of the General Agreement on Tariffs and Trade (GATT/WTO), as explained under Articles XXVIII and XIX on ‘renegotiating concessions’, seems to provide legal justification for the turgid trade frictions worldwide. Moreover, tensions between major international trading partners are not a new phenomenon. Back in the 1980s, a similar trade tug-of-war was witnessed between the US and Japan. An exponentially high volume of the Chinese exports has been alarming the US pundits since 1990s. In a World Bank’s policy research working paper titled “US-Japan and US-China trade conflict: Export growth, reciprocity and trading system”, Chad Bown and Rachel McCulloch underline similarities and dissimilarities between the US trade friction with Japan and China. They argue that Japan, from 1950s through 1990s, and China, since 1970s, have posed vitiating challenges to the GATT/WTO trading system because of their unusually high shares of world exports and bilateral trade imbalances with the US. Such trade imbalances have been viewed, by the US policymakers, as a threat to the GATT/WTO principle stressing market-access concessions for quixotic players in the trading system.

Against this backdrop, the US continued to put pressure on the voluminous export of Chinese products. Taking offense at the US actions, according to media reports, many Chinese companies have started shifting their businesses to low-cost countries. Since Chinese companies are facing prosaic business challenges at the local level, such as rising wages, labour crunch, and the pressure of additional tariffs, Chinese companies are considering manufacturing their products in other countries in attempts to dodge the US in the ongoing tariff war. The querulous trend suggests that the trade tug-of-war between the US and China has created many business opportunities for low-cost countries such as Pakistan.

In the aftermath of the additional tariffs imposed by the US, Chinese exporters are facing a welter of business pressures to cope with the ongoing trade challenges. Prima facie, as per reports, they have three main options: increasing consumption of their products indigenously in China; diversifying their client base thus relying less on the US; and moving manufacturing of their products to other low-cost countries. If they focus on consuming their products indigenously, it may have vociferous consequences for their Open Door Policy in the long run. Given the US tariff vitriol that has followed China, Chinese exporters will also face the current trend of high wages and labour crunch locally. These factors will not allow Chinese exporters to focus on the local market for consumption of their products. The second option is to diversify the market for Chinese products internationally, thus bypassing the challenges posed by additional tariffs by President Trump. However, this is also not a plausible idea because the US is a major trading partner in the world and it is very hard for any country to bypass it. The third option of moving manufacturing to low-cost nations has several tangible merits. By doing so, Chinese exporters can easily manipulate their exports into the US by doing away with their ‘Made in China’ tag, as their products will be manufactured in other low-cost countries and labeled accordingly.

Meanwhile, reports suggest that the Chinese government has denied that companies have started moving their businesses outside China. However, it is argued that if Chinese exporters choose to manufacture their products outside China, their businesses may be at risk because the US and China may strike a deal through which China can contain the additional tariffs imposed by the US. In this scenario, the investments made by Chinese exporters in other countries may face huge losses. This creates a business conundrum for Chinese businessmen regarding whether they should shift their product production to other low-cost countries or not.

This is a time for Pakistan to keep a close eye on the ongoing international trade developments. The influx of the Chinese businessmen to other countries needs to be monitored systematically by collecting data regarding products that are high in demand in the US. Pakistan has the advantage of having geographical contiguity with China. The China-Pakistan Economic Corridor (CPEC) is another trade advantage. These comparative advantages should naturally mark Pakistan as the best option for the Chinese exporters where they can produce their products. In this regard, the location of proposed Special Economic Zones (SEZs) will have a crucial role to play as reflected in our article “Promoting SEZs: the location factor” that appeared in this newspaper on April 18, 2019.

This is the right time for Pakistan to come up with a policy plan, based on extensive research. It is not just trade, it is the entire international political landscape that will determine the future of trade between the US and China. Pakistan needs to prepare itself to accommodate the Chinese exporters willing to manufacture their products in other low-cost countries for onward export to the US. The spillover effect of the rising trade tensions between the US and China can indeed be a ‘quantum leap’ for Pakistan’s languishing economy. Responding with a pique to the US safeguards, if Chinese companies were to move to Pakistan, the products produced will be labeled as ‘Made in Pakistan’, creating a trend to promote a culture of business entrepreneurship and innovation in Pakistan.

Anticipating future trade variables, particularly the ripple effects of the additional tariffs imposed by President Trump on the $200 billion worth of Chinese goods, Pakistan must be prepared to welcome Chinese companies and exporters. It is a good time to attract Chinese investors, businessmen, industrialists and exporters directly affected by US tariffs. It may be noted that during the US-Japan trade tensions in the past, many low-cost nations benefitted. The US protection targeted at Japan, according to Bown and McCulloch, promoted the export growth in textiles, steel and semiconductors in several newly industrialised low-cost economies such as Taiwan, Hong Kong, Singapore and South Korea. India, Bangladesh and Vietnam have also been the beneficiaries of the US-China trade conflicts in the textiles and apparel sectors.

Currently the investors in China are closely watching the government policies and the depreciation of Yuan to counter the additional tariffs imposed by the US. Many of them may also be double-minded either to move their factories to other countries or not, because the two countries may enter into some kind of trade agreement that can offset the tariff pressures. In these circumstances, Pakistan could be an attractive destination for Chinese exporters aiming to bypass the tariffs imposed by the US. In the wake of ongoing trade frictions, Pakistan must devise a robust policy capable of accommodating the Chinese exporters, affected by the US tariffs, alongside establishing SEZs at locations of optimal advantage to both Pakistan and China.

Published in The Express Tribune, July 24^th, 2019.

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