How to benefit from trade war?

The recent US tariff policies have created major problems for most export-led economies and have escalated the US-Sino trade war to new heights. In 2018, when the US imposed the first round of tariffs, it negotiated hard to balance its trade deficit with China by getting guarantees of increased soybean imports from Beijing. It worked for a while but afterwards the deficit has been widening over time.

Moreover, since 2018, Chinese investors started to relocate their manufacturing operations to Vietnam for rebranding Chinese-designed products as Vietnamese. Though these exports from Vietnam were generated by activities that used imports from China, it was not a simple case of trade rerouting or using Vietnam as a trade proxy.

The local industry added considerable value to the exports before shipping them to the West. Now, amid the current round of US tariff war, China and Vietnam have already signed over 40 fresh deals related to production, railway infrastructure and supply chains this month. These new deals, in retaliation to the US tariffs, come at a time when Vietnam is already China's fourth largest trading partner as well as the largest one from the Asean bloc – thanks to the free trade agreement (FTA) it enjoys through the Asean-China Free Trade Area (ACFTA) and the Regional Comprehensive Economic Partnership (RCEP).

This model has really worked for Vietnam, which in 2024 alone experienced a 14% increase in annual exports, surpassing the $400 billion mark for the first time. For perspective, China's exports to the US are valued at $480 billion, which shows how much Vietnam has benefited from Chinese investments and technology transfers over the years.

Vietnam received both capital and labour growth boosts due to rerouting from China with value addition. It retained the spillover benefits from tariffs on China while avoiding being targeted themselves till recently. Learning lessons from this model, it is high time for Islamabad to tear a page or two from Vietnam's playbook and take leverage of the escalating trade war between the two giants. Pakistan already has a free trade agreement with Beijing and has invested considerably in its duty-free Gwadar Port.

Gwadar's Special Economic Zone offers investor-friendly policies and as prices are inflated both in Chinese and US markets, it can attract parallel imports, especially in electronics, luxury goods and premium consumer products' categories. However, at present, Gwadar doesn't boast of state-of-the-art shipping operations and logistics – something that is required to carve out a new role in a high-tariff world.

If Pakistan doesn't capitalise on this opportunity, it is likely that Vietnam, Singapore or Hong Kong could become a parallel import powerhouse for mainland China. Hong Kong is in particular advantageous due to its tighter coupling with yuan, allowing China to bypass its own tariffs on American goods and to export goods destined for the US through Hong Kong. So, Pakistan needs a strong business case to convince Chinese investors to use Gwadar as a parallel import hub.

The most fruitful route is likely to be the policy of encouraging openness to foreign investment and technology transfer under systematic arrangements. Pakistan's government should design a framework for joint venture (JV) requirements, foreign investment modalities and administrative review and licensing processes for technology transfer from foreign companies.

JV mode should be made compulsory for FDI inflows in manufacturing where foreign companies agree to sign over their IP and technology to access Gwadar's Special Economic Zone. The products manufactured here may not be available to Pakistan's local market for the initial five years and should be made for export only. Regarding transfer of intellectual property (IP), Pakistan can take guidance from new EU rules regarding battery production for electric vehicles (EVs). As per the EU commission, the firms seeking grants and subsidies for battery production will be required to share IP with European firms and to establish manufacturing facilities within Europe.

Pakistan can opt for a similar policy by first launching a generous R&D grants scheme and then linking the award of such grants to those firms that share IP with Pakistani companies for local manufacturing.

At the same time, as China has barred rare earth exports to the US, Pakistan can set up rare earth mining operations in collaboration with foreign experts for export to the US. The problem with the production of rare earths is its huge environmental cost; otherwise rare earths aren't that rare.

Pakistan can even consider importing rare earth element-bearing rock or concentrate from China and set up processing plants in Gwadar. However, the contamination of water sources due to radioactive waste can result in net negative profits and the whole idea mayn't be feasible at all.

In a nutshell, Pakistan needs to act fast for negotiating with Washington by July 8, 2025 to avoid the re-imposition of tariffs after the 90-day pause. At the same time, it needs to seal a deal with China for the transfer of manufacturing technology and IP to the Gwadar economic zone so that products designed in China are "Made in Pakistan" for export to the US markets under licensing arrangements.

This could be a win-win situation for everyone, but by no means, it's an easy task, albeit not an impossible one.

The writer is a Cambridge graduate and is working as a strategy consultant