US tariffs hit Pakistan’s exports, raising competitiveness concerns

KARACHI: The US has imposed a 29 per cent tariff on Pakistani imports, a move that could challenge the country’s export competitiveness, experts warn.

The tariffs are a jolt to globalisation and liberalisation, an agenda that has supported finan for decades, said former adviser to the Minister of Finance Dr Khaqan Najeeb in his comments to The News, adding that the reciprocal tariffs by the US have “certainly created uncertainty in the minds of governments, investors and businesses.”

Markets had braced for a 20 per cent baseline tariff, so the 10 per cent baseline is welcome. But the size of the impost on some of America’s biggest trading partners was more than anticipated, Najeeb explained.

Among the 100 countries with which the US maintains a trade deficit, Pakistan stands on the 33rd position with a $3 billion trade deficit.

The US is calculating reciprocal tariffs by looking at two key factors: the import duties that a country imposes on American goods and the overall trade balance, explained Mustafa Fahim, an investment banker working in the Middle East. If a country charges high tariffs on US products or runs a large trade surplus with the US, Washington is likely to impose equivalent tariffs in return. The goal is to make trade more “fair” by ensuring that both sides impose similar costs on each other’s goods, he added.

TARIFF MODEL

In a statement published on Wednesday night, the US Trade Representative explained the method for calculating tariffs. The calculations consider the following data: total exports to a country; total imports from the country; epsilon (elasticity of imports with respect to import prices); and Phi (pass-through from tariffs to import prices).

Epsilon measures how responsive the quantity of imports is to a change in import prices. The US Trade Representative keeps Epsilon at 4. A value of 4 means that for every 1.0 per cent increase in the price of imports, the quantity of imports decreases by 4.0 per cent. Similarly, if import prices fall by 1.0 per cent, the quantity of imports rises by 4.0 per cent.

Phi measures how much of the tariff is reflected in the final price of the imported goods. Per the statement, the value of Phi was set at 0.25. It means that only 25 per cent of the tariff increase is passed on to import prices, while the remaining 75 per cent is absorbed by exporters, intermediaries or supply chain adjustments.

In 2024, total US goods trade with Pakistan was $7.3 billion, according to the US Trade Representative. US exports to Pakistan reached $2.1 billion (up 4.4 per cent from 2023), while US imports from Pakistan were $5.1 billion

(up 4.9 per cent from 2023). The US had a $3 billion trade deficit with Pakistan, which increased by 5.2 per cent compared to 2023.

The US uses the following formula to calculate tariffs: the trade deficit (difference between imports and exports) is divided by the product of elasticity, pass-through and imports. In the case of Pakistan, the US uses the following figure: exports: $2.1 billion; imports: $5.1 billion; elasticity of imports: 4; and pass-through: 0.25.

Per the calculation, Pakistan’s tariffs stood at 59 per cent. Then this number was divided by two, producing the discounted rate of 29 per cent.

Key exports like textiles, leather goods and surgical instruments are major contributors to trade with the US. If costs rise, Fahim warned, Pakistani products may lose competitiveness, reducing exports and impacting industries that depend on the American market.

‘SHOCKING DEVELOPMENT’

Trump called imposition of tariffs ‘Liberation Day’ for America, explained Head of the Sustainable Development Policy Institute (SDPI) Dr Abid Qaiyum Suleri. “One can foresee a global retaliation day following it, where the major economies like the EU, China and Japan will subject American exports to retaliatory tariffs. There is no winner in this tariff war. It is a lose-lose situation where American consumers will suffer the most.”

Zubair Motiwala, former CEO of the Trade Development Authority of Pakistan (TDAP), called the tariff hike a “shocking development”, particularly for textiles. “A 29 per cent tariff on Pakistan, compared to India’s 26 per cent, places our exporters at a disadvantage,” he told The News. He added that Pakistan’s high manufacturing costs already make it difficult to compete internationally, and the increased tariffs could push exports into a risky zone.

Pakistan Textile Exporters Association (PTEA) Patron-in-Chief Khurram Mukhtar, however, said that Pakistan will maintain a competitive edge due to its integrated supply chain, quality standards and strong trade relationships. But, he noted that the global economic impact of these tariffs is yet to fully unfold, especially in relation to services provided by US companies worldwide.

Mukhtar also pointed out that Pakistan has been a major importer of US cotton for decades, benefiting American farmers and strengthening bilateral trade ties. “We urge the US administration to recognize this longstanding relationship and ensure fair trade policies that do not disproportionately impact Pakistan’s exports,” he said.

Moreover, he argued that US tariff models -- which assess import elasticity and price pass-through -- do not align with US-Pakistan trade dynamics. To counter the tariff challenges, he said Pakistan will engage with US trade officials to seek relief and explore preferential access while also diversifying markets, enhancing value addition and advocating for supportive government policies to safeguard its export sector.

WHAT’S NEXT

As long as we run a trade surplus with the US, “they will impose tariffs on our goods”, former finance minister Miftah Ismail told The News.

According to Suleri, the tariffs will hit the country’s export performance in the shorter run. However, he added, there is an opportunity in the medium term.

While Pakistan makes up only 0.16 per cent of total US imports, the American market is crucial for local industries. Textiles dominate exports to the US (75-80 per cent), followed by leather, surgical goods, rice, cement, steel products and salt.

Pakistan’s major competitors in the textile sector such as Bangladesh, Sri Lanka, Vietnam and Cambodia are subject to even higher tariffs. Suleri added that if Pakistan can compete with them on quality, “it has a chance to fill in the vacuum”.

Does Pakistan have a chance to negotiate? Ismail said, “we will see how it plays out,” adding that while Pakistan cannot negotiate, it can take certain steps that the US government wants us to take. Per Ismail, it is not just economic concessions that Pakistan might have to take. It may consider concessions like “sending [the US] some prisoners” to evade high tariffs.

Dr Khaqan thought that there is going to be “room for negotiation”. In Pakistan’s case, with nearly $7 billion in trade volume, authorities should be charting a negotiation strategy and also analysing if higher tariffs on China and Bangladesh give Pakistan an edge. In the end, it is about local businesses improving productivity, costs, finding new markets, and diversification of products, which all entail true hard work.

“I have always maintained that revamping the energy sector by Pakistani authorities is a must to bring down the cost of business, and now it has become even more important,” concluded Dr Khaqan.

When asked should Pakistan consider lowering the tariffs it imposes on US goods, Ismail said, “It would be good gesture but won’t be very useful and it may anger Europe and China.”