Zafar Iqbal

Pakistan’s stock market seems to have a far clearer understanding of the global economic shifts caused by US ‘reciprocal’ tariffs than our policymakers. This was evident on Monday when the Pakistan Stock Exchange (PSX) experienced a significant crash, dropping by 7.31% at one point. The severity of the sell-off prompted a pause in trading, triggered by the activation of circuit breakers to prevent further panic and instability in the market. This occurred after a steep decline in stock valuations during the morning session, signaling investor anxiety about the broader economic implications of President Donald Trump’s trade policies.

Despite the PSX managing to recover some of its losses later in the day, the market’s initial bearish response to the US tariffs highlights a stark contrast to the optimism expressed by Pakistan’s Finance Minister, Muhammad Aurangzeb. The minister tried to downplay the gravity of the situation, suggesting that the punitive tariffs could be turned into a “win-win” for both countries. In his remarks, Aurangzeb emphasized viewing the crisis as both a challenge and an opportunity, stating, “You should never let a good crisis go to waste.”

While optimism is important, it is crucial to distinguish between hopeful thinking and a clear-eyed assessment of the risks at hand. The Finance Minister’s upbeat tone seems to overlook the deeper concerns gripping the global markets, which were reflected in the sharp drop in the stock market. Investors, who tend to be far more in tune with global economic realities than politicians, are clearly more concerned about the potential for a global recession triggered by a trade war than the assurances of quick fixes offered by government officials.

Many policymakers and businesspeople in Pakistan seem to hold out hope that the country can negotiate its way into favorable trade terms with the US. The belief is that Pakistan can offer the White House reduced or zero taxes on imports from the US, and, in return, secure tariff concessions. There is also optimism that Pakistan’s exporters might gain an advantage, given that some of its regional competitors—like Vietnam, Bangladesh, and Cambodia—have been slapped with even higher import taxes by the US.

However, these assumptions raise several questions. Pakistan’s ability to gain market share in the US appears questionable, as the country does not produce the same high-quality textiles, garments, and other products that its competitors in Southeast Asia are able to offer. The global competitiveness of Pakistan’s exports, particularly in industries like textiles, seems limited in comparison to its regional rivals. Additionally, it is unclear how Pakistan intends to meet President Trump’s demand that all foreign countries reduce their trade surpluses with the US. This has been one of Trump’s core positions in his broader trade war strategy: unless other countries agree to shrink their trade surpluses with the US, he is unlikely to offer favorable trade terms.

There is little clarity in the way forward. Pakistan’s policymakers and business leaders seem optimistic about leveraging the situation to their advantage, but the broader picture remains uncertain. What seems more likely is that we are heading into a protracted trade war, as the era of multilateral, rules-based trade relations, governed by institutions like the World Trade Organization (WTO), is rapidly giving way to a more arbitrary and protectionist global trading system. Under such a framework, countries with weaker economies, like Pakistan, are likely to face significant risks.

The once stable and predictable international trade environment that existed under the WTO framework is now under threat. The rejection of this system by the world’s largest economy, the US, suggests that future trade negotiations may be dictated by the principle of “might makes right,” with less regard for established rules and regulations. This shift presents a particular challenge to Pakistan, whose economy and trade relations are vulnerable to such instability. Even if Pakistan manages to secure some tariff concessions from the US, this will not shield the country from the broader consequences of a trade war, which could lead to market volatility, reduced global trade, and economic stagnation.

In this new era of unpredictable and often arbitrary trade policies, Pakistan must be prepared to face the potential fallout. The optimism expressed by some policymakers, while well-intentioned, may be overly simplistic. The global economic landscape is shifting rapidly, and the risks are real. It is critical that Pakistan’s policymakers take a more cautious and well-informed approach to the situation, rather than relying on idealistic assumptions about turning a crisis into an opportunity.

For Pakistan’s stock market, the sharp drop in value is a reflection of the deep-seated anxiety about what lies ahead. Investors understand that the world economy is teetering on the edge of a major disruption. The global market turmoil, exacerbated by protectionist policies, poses a direct threat to economies like Pakistan’s that are already grappling with economic challenges, including inflation, fiscal deficits, and a growing debt burden. The risk of a global recession looms large, and Pakistan’s vulnerability to such shocks has never been clearer.

While Pakistan’s exporters may benefit from tariff reductions in the short term, the long-term prospects remain uncertain. The country’s manufacturing sector, especially in industries like textiles, faces intense competition from other low-cost producers in Asia. Moreover, if the US continues to press countries to reduce their trade surpluses, Pakistan’s ability to maintain a favorable trade relationship with the US will become increasingly difficult. The US’s protectionist stance also undermines the broader principles of free trade that have long underpinned global economic growth.

In conclusion, Pakistan’s stock market reaction to the US tariffs serves as a stark reminder of the growing uncertainties in global trade. Policymakers must temper their optimism with a realistic understanding of the risks posed by the shifting international trade environment. While efforts to negotiate tariff reductions and expand exports to the US are worth pursuing, Pakistan must also brace itself for the possibility of a prolonged trade war, where the stability of the global economy is at risk. In this new era of protectionism and economic nationalism, the road ahead will be fraught with challenges, and it is essential that Pakistan’s leaders adopt a more pragmatic and cautious approach to safeguard the country’s economic interests.