ISLAMABAD:
Trump’s tariffs remind me of the pencil example Milton Friedman used as a metaphor to illustrate the power of the free market and the spontaneous cooperation it enables. No single person knows how to make a pencil, yet it’s produced through the efforts of countless individuals across various countries.
Pakistan is at a pivotal moment in global trade. As the Trump administration’s new tariff policies take hold in 2025, the global economic landscape is shifting dramatically. While the United States has imposed a 29% tariff on Pakistani exports, consisting of a 10% baseline and a 19% retaliatory component, the challenges for Pakistan’s textile industry, which accounts for 60% of its $32 billion in exports, also bring unexpected opportunities.
China, long the dominant force in textile exports, now faces a crushing 104% US tariff. In response, China has announced an 84% levy on US goods starting Thursday. These tit-for-tat tariffs are effectively eliminating China’s presence in the American market.
Meanwhile, other competitors like Vietnam, Bangladesh, and India are burdened with tariffs of 46%, 37%, and 26% respectively. In contrast, Canada, Mexico, and Australia face relatively modest duties between 10% and 25%.
In this shifting environment, Pakistan has the potential to capture significant market share, but only if it adopts a smart, strategic approach: reduce energy tariff base, lower policy rates, and introduce a new term “Trade Finance” for subsidised rates on raw materials and semi-finished goods, replacing the current “Export Finance Scheme (EFS)” to lower overall costs.
This situation demands the application of game theory – the science of strategic interaction. By using principles like Nash equilibrium, tit-for-tat retaliation, and payoff maximisation, Pakistan can design a tariff policy that protects its industries while expanding its global footprint.
Understanding new trade landscape
The US tariffs effective from April 9, 2025 introduce a base 10% duty on all imports, with surcharges targeting countries deemed unfair in trade practices. China’s 104% tariff has shut it out of the American textiles market, while Pakistan’s 29% is lighter compared to Vietnam’s 46%, Cambodia’s 49%, and Sri Lanka’s 44%. India remains a formidable rival at 26%, but manageable with the right strategy.
Historically, Pakistan’s tariffs on US goods averaged 10-15%, although US negotiators cited higher rates. Despite these hurdles, Pakistan retains a cost advantage: labour at $0.50$0.70 per hour, energy at $0.08$0.10 per kWh, and access to both domestic and imported cotton. These fundamentals position Pakistan to outmanoeuvre competitors; if it plays its cards right.
Using game theory to structure strategy
Game theory emphasises anticipating competitors’ responses. The goal is to reach a Nash equilibrium, where no player benefits from changing their strategy unilaterally.
In the Prisoner’s Dilemma model, if all players raise tariffs, everyone loses. But a tit-for-tat strategy, where Pakistan mirrors others’ actions proportionally, can discourage aggression and foster cooperation. Rather than blanket retaliation, Pakistan should adopt a nuanced approach that balances firmness with flexibility.
Key players shaping Pakistan’s textile future are clear. The US imports $5.1 billion worth of Pakistani goods while exporting $2.1 billion, mainly commodities like cotton and soybean milk powder. China, though hobbled by US tariffs, remains vital for machinery and intermediate goods.
India, with higher labour costs and a 26% US tariff, is a direct competitor. Vietnam and Bangladesh are similarly positioned. The EU, facing a 20% US tariff but offering GSP+ benefits to Pakistan, remains a vital export destination. Canada, Mexico, Australia, and Singapore face lighter tariffs and offer partnership potential rather than rivalry.
Why a balanced approach is necessary
Pakistan faces two flawed extremes: full retaliation, which risks shrinking export markets, or open-door policies, which may flood the domestic market without reciprocal benefits. The optimal path is a calibrated middle ground – a differentiated tariff policy that responds proportionally while preserving critical supply chains and partnerships.
For the US, Pakistan should impose a 19% tariff, mirroring only the retaliatory portion. This signals fairness and restraint while maintaining access to essential cotton imports and room for negotiation.
With China, Pakistan should keep tariffs low at around 10%. As China’s access to the US shrinks, it becomes more critical to Pakistan’s supply chain. Lenient terms will ensure stability and strengthen trade ties.
India should face a 26% tariff, matching the US rate. This prevents India from diverting exports into alternative markets like Europe or the Middle East, where Pakistan seeks to grow. Vietnam and Bangladesh should face a 20% tariff, protecting Pakistan’s position without fully closing off beneficial imports like yarn and intermediate textiles.
The EU, under the GSP+ regime, should face only a 5% tariff. Encouraging trade while enjoying preferential access can help Pakistan double its European exports.
Canada and Mexico, with moderate US tariffs, are not major threats. A 10% tariff would preserve neutrality and good relations. Australia and Singapore, posing minimal threat, should face zero tariffs. This would attract foreign investment and position Pakistan as a competitive manufacturing base.
The roadmap for execution
Pakistan’s policymakers, especially the SIFC, must implement this methodically. First, US negotiations should link the 19% tariff to increased cotton imports for textile production. Second, financial support should be extended to small and medium exporters to offset the initial impact of the US tariff. Third, Pakistan must modernise its textile production through investments in spinning, weaving, dyeing, and robotics-based RMG manufacturing, powered by solar energy, under a national initiative like “Uraan Pakistan.”
Fourth, a global marketing campaign should rebrand Pakistan; not just as a textile hub but also as the home of halal cuisine, products, and services. Government support for exporters to gain FDA certification, especially in pharmaceuticals, is also crucial. Lastly, a real-time intelligence system should be developed to monitor global tariff changes and allow for adaptive policies.
If implemented effectively, this strategy could allow Pakistan to capture 10-12% of the US textiles market vacated by China, translating into an additional $4-5 billion in exports annually. Meanwhile, expanding GSP+ benefits with Europe could raise exports from $8 billion to $12-15 billion. Overall, this would yield $6-8 billion in new revenues and create one to two million new jobs in the textile and related sectors.
Retaliation by the US or India must be anticipated and neutralised through diplomacy and diversification into ASEAN and African markets. Domestic industries vulnerable to import surges should be protected with quotas or safeguards. Any unexpected global demand contraction should trigger a pivot to regional markets.
Conclusion: strategy wins the day
The 29% US tariff is not a defeat; it’s a call to strategy. With China sidelined, Pakistan can use smart, differentiated, game-theory-based policies to claim a larger share of global textiles. A balanced mix of retaliation and cooperation can secure Pakistan’s rise in global trade. The moment to act, with both courage and intelligence, is now.
THE WRITER IS A TRADE EXPERT WITH OVER 35 YEARS OF EXPERIENCE IN INTERNATIONAL TRADE, A COMMODITIES CONNOISSEUR & FORMER VICE PRESIDENT OF KCCI
#Dominating #textile #trade
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