Strategic trade shift

AS the world’s attention remains squarely focused on geopolitical conflicts, a silent revolution is reshaping global trade by linking trade, innovation and national security. Given such momentous changes, Pakistan appears behind the curve by still hoping for free trade agreements with neighbouring countries such as India. As such, Pakistan’s policymakers will need to develop strategic clarity before opening the country’s borders to free trade.
The Washington Consensus, centred on free markets and deregulation, dominated post-Cold War economic thinking. However, China’s rapid economic rise and the resulting loss of millions of US manufacturing jobs forced a rethink of free trade policies.
Bringing China into the free trade regime was supposed to turn that country into a Western-style liberal democracy. Instead, China’s massive economic capabilities sucked millions of jobs out of industrial American cities like Detroit. According to an estimate by Janet Yellen, US treasury secretary, two million manufacturing jobs have disappeared since China joined the WTO in 2001.
At the same time, China’s economic muscle has enabled hefty increases in military spending. This increased spending and millions of locally available engineers have enabled China to develop state-of-the-art armament, such as the Y-20 transporter plane that can carry several tanks over 7,800 kilome­tres, signalling expeditionary warfare capabilities.
To be sure, China’s ‘hard power’ is moving in tandem with China’s burgeoning ‘soft power’, increasingly on display through the Belt and Roadway Initiative as well as through development institutions like the Asian Infrastructure Investment Bank. Such exponential increases in China’s power have led analysts to predict China creating a new economic and political order.
Facing an existential challenge from China, the US finally turned away from the Washington Consensus in 2017. Robert Lighthizer, US trade representative under Donald Trump, was instrumental in developing a set of ‘America First’ economic policies that brought down the curtain on free trade.
In No Trade is Free, Lighthizer highlighted the US trade deficit, which had reached $921 billion in 2022, as a key statistic and argued that free trade had led to the loss of US manufacturing, stagnation of American wages, as well as the deterioration of America’s strategic position against China.
In order to regain strategic dominance, Lighthi­zer proposed a new Washington Consensus for the US. Lighthizer convinced Trump to slap a 25 per cent tariff on steel and aluminum imports, as well as impose similar tariffs on 75pc of Chinese exports to the US, while forcing Canada and Mexico to renegotiate the North American Free Trade Agreement.
The new Washington Consensus has gained wide currency in the US, as even after his election in 2020, President Joe Biden largely continued Trump’s policy by keeping these tariffs in place. Actually, Biden took this new thinking even further by implementing a comprehensive industrial policy, using state power and public resources to build and maintain the capacity to produce specific manufactures, including electric vehicles and semiconductors.
If Trump wins the election in 2024, the ‘Maganomics’ economic agenda will entail a radical extension of policies introduced during his first term. For instance, in the case of Chinese imports, Trump has talked about increasing tariffs to 60pc. By doubling down on his earlier attempts to wean the US off free trade, Trump hopes to restore manufacturing jobs despite concerns that his tariffs will disproportionately impact low-income households to the tune of an extra $2,600 per year.
Even Vice President Kamala Harris’ economic vision is not much different. It is expected that once in the White House, she will largely continue in the same direction set by Biden, who, after accusing China of “overcapacity”, increased tariffs on a whole slew of Chinese imports. In other words, the US will keep moving away from free trade regardless of whoever is in the White House.
European policymakers have also taken a leaf out of the American playbook on the economy. In a recent report, Mario Draghi proposes a paradigm shift for economic policy in Europe as Europeans seem to have been caught flat-footed by relying just on free trade. One of the report’s main recommendations calls on European countries to channel savings towards investment, R&D spending and academic excellence or, in essence, an expansive industrial policy that will assist Europe regain its trade competitiveness.
Against the backdrop of such a fundamental shift in economic thinking, any proposal for free trade between Pakistan and India needs to be carefully scrutinised lest it creates a strategic disadvantage for Pakistan.
First, Pakistan and India should certainly pursue peaceful relations, but the idea that trade will boost peace between the two neighbours is not entirely convincing. Despite vast bilateral trade, the rivalry between the US and China is only becoming more intense.
Second, even though untapped trade potential between Pakistan and India is often touted, trade with India will be no boon for Pakistan as it would lead to a hefty trade surplus favouring India. For 2018, a year that can be considered the last year of ‘normalised’ trade between the two countries, Pakistan’s exports to India covered only 23pc of imports.
Last, given the technological gap between the two countries, where Pakistan comes at 91 and India at 39 in the 2024 rankings of the Global Innovation Index, our quantum of low-value added exports would need to continuously increase every year to pay for high-value added imports from India. In a sense, given the technological gap, Pakistan would suffer from deteriorating terms of trade.
Global economic thinking has shifted from free trade to strategic trade, where state power now shapes competitive advantage. In order to play this new game, Pakistan must prioritise strengthening its industrial base and innovation capacity. To that end, Pakistan’s policymakers would do well to focus on increasing Pakistan’s exports competitiveness by means of a comprehensive industrial and innovation policy rather than falling headfirst into free trade with India.
The writer completed his doctorate in economics on a Fulbright scholarship.
[email protected]
X: @AqdasAfzal
Published in Dawn, October 16th, 2024