The world suddenly changed on April 2nd when President Donald Trump announced “liberation day” with unilateral imposition of import tariffs on 60 nations with whom the United States has huge trade deficits.
But the carnage across the world’s equity and debt markets due to his irrational action forced the most powerful president on the earth to blink and retreat. With that the notion of American exceptionalism has also been tarnished.
On April 7th, Donald Trump’s blunderbuss action shook all the pillars of the free market economy. There were downward spirals in currency, debt and equity markets. The rational world did not accept President Trump’s attempts to rewrite the rule of law with the notion of America first.
Hong Kong’s Hang Seng index plunged over 13 per cent in one day, marking its worst single day fall since 1997 when Asia had been hit by currency crisis. In Europe, the United Kingdom’s FTSE fell to a one-year low, and Germany’s Dax was down 10 per cent. The S&P 500 plunged 4 per cent, having already shed $5.4 trillion in market value since US President Donald Trump unveiled his disastrous package of tariffs on April 2.
After free fall in all markets, President Trump had to blink and put a temporary pause for 90 days on additional tariffs, except the base tariff of 10 per cent. But he further increased the tariffs on Chinese goods to a record 145 per cent, making it almost impossible to trade between the world’s two largest economies.
The measures of past two weeks have shattered the confidence in the US as a rational actor and champion of free market and free global trade. But it has also established that adverse reactions from equities or bond markets can constrain the most powerful president and reaffirm the belief that the trade interdependence can avoid serious conflicts.
One of the reasons that President Trump had to retreat was that the treasury markets, that used to be safe heavens even in crises times, also fell. The Financial Times, a prestigious global daily, reported that investors began to fret openly about the US having compromised its haven status, amid concerns that two of the most reliable buyers of US debt — Japan and China — might sell treasuries or tap the brakes on further purchases.
Investors withdrew from the riskier US debt. They pulled nearly $10 billion from US high-yield bond funds and about $7 billion from leveraged loan funds.
The commodities and crude oil markets also fell on concerns of global recession. The liberation day turned out to be self-destructive path for the US.
The international benchmark Brent crude has been trading around $64 a barrel. West Texas Intermediate settled at $61, a price that will threaten the country’s prolific shale gas sector. Asian markets have tumbled while gold has hit a record high.
In currency markets, an index of the dollar against a half-dozen trading partners’ currencies slid past a key threshold for the first time since July 2023 as the rush from US assets sent the yen, Euro and British Sterling surging. The yield on the US Treasury benchmark 10-year note hit 4.46 per cent on Friday.
China and European Union’s decision to retaliate, particularly Brussels warning that it could hit the services exports of the US with import duties may now compel the White House to rethink its strategy to bully the world.
European Commission president Ursula von der Leyen has said that the EU would seek a “completely balanced” agreement with Washington during Trump’s 90-day pause in applying additional tariffs.
The US might feel pressure to do quick deals to improve trading terms with the likes of Japan, and eventually Beijing, to show it can ease the pain, and that its policies can bring results.
If these irrational steps are not completely reversed, the pain will be across the globe, and it will hit all income groups. Countries like Pakistan, which were not expecting to be hit in the first wave of tariffs due to relatively smaller trade deficits, have also rushed to the drawing boards.
Pakistan has $3 billion trade surplus with the US, the 33rd ranking among the 60 nations that enjoy surpluses with the US. The amount is not large compared to the total size of $1.2 trillion of the US trade deficit.
In response to the crisis, Prime Minister Shehbaz Sharif had constituted two committees to prepare technical and policy options. On April 9th, Shehbaz Sharif endorsed a plan to start negotiations with the United States by offering it lower tariffs and increased market share.
The government plans to reduce tariffs on around 55 products by remaining within the World Trade Organisation framework, which would extend the similar benefits to other nations, according to the officials who are privy to these discussions.
These lowered tariffs would be largely in line with the tariffs availed by China under the bilateral Free Trade Agreement (FTA). The government has also prepared response to non-tariff concerns raised by the US related to ban on X, restrictions on repatriation of profits and other such barriers.
An announcement by the PM's Office said that the government has decided to send a high-level delegation to the US to promote trade relations and hold talks on US tariffs imposed by US President Donald Trump's administration.
The government's plan included seeking reversal of the additional tariffs in return of facilitating the increase of the market share of the US imports and lowering the tariffs. The options include offering benefits on cotton, soybean and petroleum products.
The tariffs on cotton import are already nil and the government plans to assure the US authorities for additional import of the commodity.
Although the government was quick to scramble, its decision to offer large concessions shows its weak position in negotiations. Pakistan trade weighted average tariffs on US goods are around 7.7 per cent compared to 9.3 per cent imposed by the US.
Due to multiple factors, it may not be economically viable for Pakistani businesses to import goods from the US, except for the government that can bear high cost of transportation. The country may need cotton and wheat, which can be imported from the US but still it will be an expensive venture.
Tabadlab, a policy think tank, has listed Pakistan’s challenges and opportunities in the ongoing trade war.
The report claims that Pakistan's export loss will amount to around $564 million in the next fiscal year under the new US tariffs, potentially increasing to $2.2 billion over time in the worst-case scenario. This would negatively impact the current account deficit, undermining recent progress and compounding the country's fragile economic growth outlook, it adds.
In the unlikely worst-case scenario, Pakistan may lose market share and domestic demand in the US is increasingly met by local producers, it added.
Tabadlab said that its initial discussions with exporters indicate that the sector's low profit margins make it difficult to absorb increased costs and US importers are likely to pass these costs onto US consumers. This could lead to a reduction in the volume of textile imports into the US.
Whether Pakistan will lose or gain market share in the US will largely depend on how the Pakistani government engages with the Trump administration and how other textile-producing countries respond.
Some significant sectors in which the US currently exports goods but faces significant tariff protection in Pakistan include vehicles having 76 per cent tariffs, furniture 27 per cent tariff, edible fruits and nuts 22 per cent tariff and Paper 19 per cent. But any change on this front would require Pakistan government to change its sector policy.
Unlike the government’s claim of taking advantage of “early mover”, Tabadlab thinks that it may not be possible.
The report says that countries with large home markets, strong trade fundamentals, and significant diplomatic capital may be able to take advantage of the opportunities that the Trump administration's tariff increases present.
Pakistan has historically struggled in such scenarios. Without urgent and strategically coherent policy actions, this moment could become more risk than opportunity for the Pakistani economy.
American concerns, as listed the Foreign Trade Barriers report by the US Trade Representative (USTR), are not just limited to tariffs.
The USTR has listed use of Statutory Regulatory Orders to manage specific import items and restrictions on US digital platforms like X as the areas of concerns.
When the giants are fighting, it’s better for minnows to pick up a shield. Pakistan does not have anything big on the trade front to offer to the US without disrupting its normal business. The country may try to allay some genuine US concerns like slow speed of internet that is disrupting trade in services, ban on social media platforms and using arbitrary tools to raise revenues on imports for trust building.
Pakistan’s embassy in Washington had a meeting with assistant secretary of USTR. Since the contacts have already been established, it is better to reassess position during the pause time instead of rushing and negotiating in haste.
As President Trump has already indicated that the negotiations would not limit to just tariffs, Pakistan should not commit anything on political and security fronts whose costs may be far higher than few hundreds of millions of dollars export benefits.
Since the global trade pillars are shaking, Pakistan also needs to review its future options. The nation cannot grow just based on exporting textiles, as the reliance on single sector multiplies vulnerabilities. After US, the EU might in future pull a trigger on Pakistani textile exports. It is better to broaden the base than protecting something that has now become a source of vulnerability.