What impact could US elections have on Pakistan’s economy?
US presidential candidates Donald Trump and Kamala Harris have different visions for America but their economic strategies are similar, even if the modalities differ.
Both have promised to strengthen middle-income groups and support businesses, which is where Pakistan can be impacted the most.
Pakistan’s economic ties with the United States are multifaceted and deeply significant.
On one hand, the US is a crucial market for Pakistani exports, accounting for nearly a fifth of Pakistan’s total exports in 2023. For every $10 Pakistan exports abroad, $2 worth of goods head to the US.
Investment from the US, however, tells a different story.
According to State Bank of Pakistan data, foreign direct investment (FDI) from America is modest, contributing four per cent of total FDI in FY24.
Beyond direct investment, Pakistan’s reliance on multilateral institutions like the World Bank and the International Monetary Fund (IMF), where the US wields considerable influence, further cements the country’s economic dependence on American policies.
Trump’s tariffs
Trump’s ‘America First’ policies propose 60pc tariffs on Chinese imports and a possible 10p tariff on imports from other countries, which could include Pakistan.
Pakistan’s main exports are textiles and apparel, for which it does not get preferential access in any way, explains Ehsan Malik, CEO of the Pakistan Business Council.
However, the US-Dominican Republic-Central America Free Trade Agreement (CBTPA) covers textiles and is extended to Honduras, Nicaragua, El Salvador and Guatemala, Pakistan’s direct competitors.
Under the CBTPA, apparel assembled in Central America and DR made from American yarns and fabrics enters the US duty-free, encouraging those companies to form deep ties with American companies.
Exports from Pakistan mainly cater to the middle-income and lower-middle-income groups. A 10pc across-the-board tariff increase could eliminate the narrow price advantage Pakistan holds, already weakened by high electricity tariffs, interest rates, and inflated domestic costs.
Harris, on the other hand, has signalled a more tempered approach, opting for dialogue with China. It appears unlikely that a Democrat administration will impose new tariffs on Pakistan’s imports.
However, Mr Malik argues that even if the US administration proceeds with the plan to impose tariffs on other countries, it is more likely to be targeted towards coun tries where China has relocated production, such as Vietnam, Cambodia and Laos, that can be used as a conduit for exports to the US.
Paths to greater American purchasing power
Both candidates have proposed plans to boost Americans’ purchasing power, albeit with distinct approaches.
Harris focuses on middle-class tax relief, aiming to expand the child tax credit up to $6,000 for newborns — a continuation of Biden-era policies.
Trump, meanwhile, increasing the proposes current $2,000 child tax credit to $5,000 per year.
Harris has also promised to provide tax relief to 100 million Americans, particularly those in the middle class.
These measures could increase disposable income, indicating more demand for apparel purchases that could positively impact Pakistan.
The US imported at least $1.2 billion worth of baby apparel and accessories in 2023, according to Trade Map data.
Trump has said he would temporarily cap credit card interest rates at around 10pc, which is less than half the current rate.
According to the Federal Reserve, 82pc of American adults had a credit card in 2022. Slashing the interest rate drastically could help boost spending.
However, Dr Manzoor Ahmad, former ambassador to the World Trade Organisation, said this would, at most, have a marginal effect on Pakistan’s exports.
Both presidential candidates’ slew of measures aim at increasing the purchasing power of the mid-dle-income group, the target market of Pakistan’s exports.
Corporate tax tug-of-war
Going after big businesses, Harris backs increasing the corporate tax rate to 28pc from 21pc.
However, Trump’s approach is dif-ferent, benefitting big businesses that manufacture in the US. A higher tax rate could discourage the trickle of investment Pakistan receives from the US.
The 2017 Trump tax law lowered the top personal tax rate from 39.6pc to 37pc and the top corporate tax rate from 35pc to 21pc.
Trump has proposed slashing the corporate tax rate for companies that make their products inside the United States, bringing it down to 15pc.
A tax rate cut could draw even more investment into domestic production, which could diminish demand for imports, indirectly impacting Pakistan.
Missed opportunities and potential pathways
The US-China trade war started under Trump’s tenure in 2018. In the tit-for-tat moves, there was space for soybean exports before relations commodiy normalised.
While other countries jumped in to make some quick profits, Pakistan remained bogged down in bureaucracy and missed the opportunity.
Under Trump, Pakistan could have new opportunities if tariffs were imposed on China. For exam-ple, according to media reports, China invested $2.2bn in the first half of 2024 in Mexico’s auto sector to secure a ‘back door’ into the US market.
Pakistan can become an alternate destination for investment and exports. But the country has to fix its many domestic challenges before that could happen.
“Given the security conditions and lack of functional Special Economic Zones, it is unlikely that the Chinese will shift production to Pakistan,” said Mr Malik.