Echoes of the Past: Trade Wars and a Fragmenting Economic Order

Winston Churchill wisely stated that understanding the past is key to predicting the future. The current rise in trade tensions amid a crumbling global economic structure strikingly mirrors the period before World War I. The late 19th century saw a similar breakdown in the global economy.

The liberal trade agreements of the 1800s were undermined by a succession of retaliatory tariffs imposed by nations such as Germany, France, Italy, and the United States. Economic isolation led to crises like the Panic of 1873, dividing the West into economic zones, ultimately contributing to World War I. Now, a century later, we are seeing the potential start of a new economic framework with competing blocs as the world’s major economies clash. It seems history may be repeating itself.

The Impact of US Tariffs

US President Donald Trump’s tariffs have weakened the multilateral trade system that his predecessors worked to maintain. A broad 10 percent tariff was met with a 145 percent retaliatory tariff on Chinese goods. China responded with tariffs of 125 percent and devalued its currency. Amid the disruption of global supply chains, Trump, facing pressure from the US technology industry, granted tariff exemptions to certain important industries, including smartphones, laptops, and semiconductors.

Pakistan, meanwhile, faces a 90-day period before its 10% tariff increases to 29%. The World Trade Organization predicts a 0.2 percent decline in global trade this year, potentially reaching 1.5 percent if tariff uncertainty spreads beyond the US. Such declines have historically only occurred during severe crises like 2020 and 2009. The WTO’s mechanisms are ineffective, and global trade is shifting away from rules-based system and towards a bloc-based one.

Emerging Economic Ideologies

In an increasingly economically divided world, three key ideologies are taking shape. The United States champions national capitalism, focusing on industrial onshoring, bilateral pressure, and tariff protection. Europe is focusing on technocratic capitalism, which includes subsidy programs based on regulations related to carbon neutrality, AI, and digital services. China, on the other hand, has embraced command capitalism, which includes government bailouts, equity stabilization via its “national team,” and subsidized oversupply as a buffer against shocks.

Asia is pursuing a balanced strategy of pragmatic pluralism, combining diplomacy with realignment. Countries are participating in numerous blocs in this strategic environment. Nations such as India, Singapore, and South Korea are reducing rates and employing targeted diplomacy, reforms, and industrial subsidies to withstand economic volatility. They are engaging with all major global powers, testing bilateral agreements, and integrating supply chains without ideological constraints. Pakistan, however, has entered this arena late and must accelerate its efforts.

Pakistan’s Strategic Imperative

US tariffs on Pakistan increased to 29 percent on April 9 due to a $2.99 billion trade surplus. This has now returned to a baseline of 10% under a 90-day executive pause. This reprieve is temporary, and Pakistan must act strategically. Tariffs could be reinstated once the pause expires unless Pakistan can present a strong case for an exemption.

The stakes are considerable. According to a policy paper by the Pakistan Institute of Development Economics (PIDE), the tariffs could result in annual losses of up to $1.4 billion and over 500,000 jobs, primarily in the textile industry, which accounts for 76 percent of Pakistan’s exports to the United States. This could have a knock-on effect, impacting sectors such as surgical instruments, leather, rice, and sporting goods. PIDE’s research emphasizes that the tariffs present not only a challenge but also a crucial need for extensive export diversification.

The Cotton Paradox

Pakistan was the world’s top importer of US cotton in 2024. It imports raw cotton, processes it, and then exports finished clothing, much of which goes back to the United States. This creates a unique bilateral value chain. The Export Facilitation Scheme (EFS), which imposes an 18 percent tax on local raw materials, has significantly contributed to the rise in imports, as exporters favor US cotton over domestic cotton, which is subject to sales tax.

This situation aligns with Trump’s tariff rationale: the higher the surplus, the higher the tariff. The Prime Minister, recognizing the risk, recently blocked the EFS exemption. This action aims to prevent undermining Pakistan’s argument that its textile exports support American agriculture but comes at a cost. Over 120 spinning mills have closed, local ginners are in crisis, and the Pakistan Cotton Ginners Association (PCGA) has warned of record-low production. Without a reliable tax system or support price, Pakistan’s cotton sector is collapsing.

A Strategy for the Future

There are no quick fixes, but a viable strategy exists.

Pakistan must position itself as an integrated, value-adding partner rather than a surplus threat. Recent tariff exemptions for smartphones and laptops serve as evidence that targeted diplomacy can be effective. Unlike smartphones, cotton supports employment on both sides. This argument must be prioritized in discussions in Washington.

The textile sector should not be abandoned despite these challenges. Relief can be offered through energy cost subsidies, faster GST refunds, digitized customs, and textile diversification, along with special interest rate zones for export-based industries. The Karachi Textile Expo 2025 saw strong participation despite potential tariffs, indicating that demand remains if Pakistan stays competitive. Additional sectors such as workwear, technical textiles, smart fabrics, and green apparel also present investment opportunities.

Pakistan’s textile and apparel exports showed a promising 9.38 percent year-over-year increase during the first nine months of FY25, from $12.44 billion to $13.62 billion. Ready-made garments and knitwear led this increase, with values up by 19.05 percent and 16.82 percent, respectively. Exports of bed linen, towels, and canvas products also experienced steady growth. However, the larger situation remains precarious.

Yarn exports fell by 32 percent, raw cotton exports plummeted by 98.45 percent, and cotton cloth volumes decreased. Despite having a $25 billion installed capacity, textile exports have remained largely unchanged over the past two years due to structural problems, including high input costs and delayed refunds. Exporters continue to push the government to expedite GST refunds and rebate clearances, as failure to do so could halt this progress, especially if tariffs are reinstated.

Diplomacy and Reform

Pakistan is now involved in critical negotiations. A delegation from the Ministry of Commerce is scheduled to meet with US trade officials. These discussions must extend beyond cotton. Mineral diplomacy is gaining prominence, with the US State Department recently recognizing Pakistan’s critical mineral reserves as “strategically important” for supply chain security. By combining textile diplomacy with discussions on minerals and digital services, the relationship can be framed more broadly. Pakistan earned $3.2 billion in IT exports last year.

Reforms must also be expedited. Pakistan’s customs infrastructure is outdated, with reliance on physical invoices and discretionary penalties. Rules 389 and 391, recently highlighted by US exporters, have caused delays and valuation disagreements.

Pakistan’s Senate has also raised concerns on two occasions. The Senate Standing Committee on Commerce recently criticized Pakistan Customs for mishandling consignments from Iran, citing delays and arbitrary assessments. These issues, intensified by US complaints, undermine exporter confidence and slow trade flows. Reforming customs is now vital for strategic survival. India, in contrast, has introduced “Faceless Assessment” and reduced customs processing time to 1–2 days at key ports.

Pakistan’s high electricity prices also require attention. High energy costs could eliminate any competitive advantage. Industrial electricity rates in Pakistan range from Rs 31.85 to Rs 44.46 per kilowatt-hour, nearly double those in China and more than triple the Rs 8 to Rs 12 range in India and Bangladesh. Without energy reform, Pakistan’s manufacturing sector risks further decline. If US tariffs are reinstated and input costs remain unchecked, Pakistani exports will become prohibitively uncompetitive, losing ground to other textile-exporting countries like Vietnam and Bangladesh.

Strategic Imperatives

This situation presents a classic example of sequential game theory. Pakistan must anticipate the US reaction to its actions and to changes in its trade surplus and input mix. If it reduces its reliance on US cotton due to domestic pressure, the surplus will increase. If its exports become less competitive because of high electricity costs and outdated customs procedures, US buyers will seek alternatives, making tariffs more politically appealing in Washington. The best strategy is to proactively maintain the value-added bilateral loop through cotton imports, alleviate surplus pressure, and offer reciprocal tariff relief where possible, such as on US machinery or petroleum.

Despite the uncertainty, there is reason for optimism. Fitch Ratings upgraded Pakistan to B- this month, citing a stable macro outlook and sustained compliance with IMF requirements. While challenges remain, the upgrade signals a tentative return of creditworthiness. It also opens doors to market-based instruments like Panda Bonds and Green Sukuk. These reduce reliance on dollar-denominated loans and enable access to yuan-backed repayment ecosystems, particularly if tied to infrastructure linked to Chinese supply chains.

Islamabad is also exploring its options. According to reports, Pakistan is considering increasing imports of US cotton and soybeans to reduce its $2.99 billion trade surplus, aiming to counter potential tariffs. Discussions have included purchases of Texas crude oil, although concerns about high freight costs and internal consensus have delayed a final decision. Still, the strategic intent is evident: to shift the balance sheet through high-volume imports to demonstrate reciprocity and prevent punitive measures.

Pakistan recently reported a current account surplus of $619 million in March 2025, a 229 percent increase from March of the previous year, driven by record remittances of $4.1 billion. For July–March FY25, the cumulative surplus stands at $1.85 billion, a sharp turnaround from the $1.65 billion deficit during the same period in FY24. While this strengthens the rupee and reduces short-term external pressures, it complicates Pakistan’s tariff case.

Since remittances, not exports, drive Pakistan’s current account surplus, it must be emphasized that this surplus is not trade-related. Otherwise, it could be misinterpreted in Washington as evidence of an unfair trade imbalance, supporting arguments for higher tariffs. To counteract this, Pakistan should explicitly highlight its large-scale imports of US cotton and energy, which create jobs in the US and reflect balanced bilateral trade.

Therefore, Pakistan must secure US-linked supply chains, reduce bilateral asymmetries, and highlight its integration into American agricultural and energy ecosystems. Otherwise, the surplus will appear as a one-sided benefit, a costly misinterpretation in a world where tariff policy is often dictated more by optics than economics.

Regional Opportunities

The regional opportunity is clear. Vietnam, a cotton exporter and major textile competitor, will face US tariffs as high as 46 percent after the 90-day pause ends. Pakistan can capture the spillover demand if it improves logistics, lowers energy tariffs, and accelerates reforms. India has already taken steps, with Apple routing up to 50% of iPhones from Tamil Nadu. Pakistan must seize this opportunity before the global trade chessboard is reset.

Today’s world is divided by tariffs and trust, not ideology. In this realignment, Pakistan can demonstrate pragmatic pluralism by trading with China, negotiating with the US, and intensifying domestic reform.

Multilateralism may return in the future. Until then, Pakistan must act strategically, anticipate changes, and proactively adapt to evolving conditions.