KARACHI: The State Bank of Pakistan (SBP) in its report on Tuesday highlighted opportunities and challenges for Pakistan in ongoing tensions between the US and China, which have contributed to big swings in key commodity prices and has added uncertainty to the global trade dynamics.
The SBP in its first quarter report on State of Pakistan’s Economy, said that together, the US and China accounted for 21.8 percent of global exports and 23.5 percent of worldwide imports in 2017.
Bilateral trade between these two amounted to US$ 584.8 billion in 2017, accounting for 3.3 percent of global trade in the year.
Since July 2018, additional tariffs have been imposed on US$ 360.0 billion of goods traded between the US and China, which account for 61.6 percent of the bilateral trade between the two countries last year.
China has been hit harder as US$ 260.0 billion of its exports are now attracting higher tariffs in the US; against this, US$ 100.0 billion of American exports to China are affected by the retaliatory tariffs.
These tariffs are in addition to across-the-board tariffs on iron and steel products that the US had put in place in May 2018.
For Pakistan, the imposition of these cross-tariffs offers some interesting opportunities as well as challenges.
On a positive note, key food items, such as rice, seafood and soybean (both seeds and oil), have come in the crosshairs, which offer an opportunity for Pakistan to reduce its trade deficit.
On the other hand, the volatility in iron and steel prices in recent months after the imposition of tariffs by the US presents a challenge from Pakistan’s perspective.
Impact on Pakistan’s exports
Among the thousands of items on which additional tariffs have been imposed by the two countries, three product categories stand out from Pakistan’s exports standpoint: seafood, rice and cotton (raw cotton, fabric and yarn).
Specifically, American seafood exports to China are now much costlier as a result of the tariffs, as are Chinese exports of rice and cotton items to the US.
Seafood: China is a major global importer of seafood items, and imported 16.3 percent of its overall seafood imports from the US in 2017 (worth US$ 1.3 billion).
It mainly imports lobsters, oysters, flatfish and sardines, all of which are now attracting additional tariffs, and all of which are also exported by Pakistan.
Pakistan’s global exports of these specific products amounted to US$ 338.9 million in FY18 and constituted 75.1 percent of the country’s overall seafood exports in FY18.
As the US’ seafood exports to China have now become much costlier, Pakistani exporters might increase their presence in the Chinese market.
Impact on Pakistan’s Imports
Though Pakistan can benefit from the diverging trend in soybean prices, its iron and steel imports may come under strain from the trade tensions.
Soybean: China is the world’s largest importer of soybean, and the US is the second-largest producer and exporter of the commodity, after Brazil.
Importantly, soybean is the US’ single largest export item to China, and the country accounted for 56.9 percent of the US’ soybean exports in 2017 and 9.4 percent of the US’ total exports to China.
Given these dynamics, soybean was among the first items targeted by China when the first round of retaliatory tariffs went into effect in July 2018.
China then shifted its demand for soybeans to Brazil and Argentina.
As a result, soybean export prices of Brazil and Argentina have spiked, whereas those of the US have plunged since the tariffs went into effect.
This presents an opportunity for edible oil mills in Pakistan to reduce their imports of soybean oil and seed in value terms by diverting their purchases to the US, where the prices are falling.
Encouragingly, there are indications that this switch is already taking place. Brazil’s share in Pakistan’s overall soybean imports (both seeds and oil) fell to 49.5 percent in FY18 from 58.4 percent in FY17, whereas the US’ share rose to 45.4 percent from 32.1 percent.
Further enhancing soybean imports from the US will yield more FX savings for Pakistan, assuming that the US prices stay depressed in the wake of a record-high projected inventory level for 2018-19.
This dynamic also helped Pakistan’s soybean oil imports in Q1-FY19, when the unit value imports were 20.3 percent lower as compared to Q1-FY18.
Iron and steel: Iron and steel prices have been volatile ever since they came under the crosshairs of US tariffs. These tariffs were applied in two phases.
In the first phase in May 2018, the US imposed additional tariffs across the board on roughly 44.0 percent of the iron and steel products that it imported.
These tariffs particularly affected the US’ neighbors and allies (specifically Canada, Mexico, South Korea and Japan), instead of China.
However, some of these countries were later exempted from the tariffs after they agreed to export quotas.
While China is the largest exporter of overall iron and steel products to the US, its share in the specific products attracting the additional tariffs was minimal.
In September 2018, with anti-trade measures in full swing, the US targeted the bulk (49.1 percent) of the iron and steel products that it imported from China (and which were not part of the earlier across the board tariffs), and imposed additional tariffs on them.
For these specific products, China was the single largest exporter to the US, with a market share of 27.0 percent in Jan-Sep 2018.
Steel prices in China also present a complicated picture. Prices were falling during the first half of 2018, as uncertainty loomed about the extent of the protectionist measures that would be adopted by the US.
Further downward pressure came from a cooling off in China’s economy this year, which has impacted its demand for steel.
However, Chinese steel prices have been rising since August 2018, partly as a result of an expected drop in steel production in the winter months as the country tries to limit the harmful emissions and control smog.
All of this uncertainty has created challenges for Pakistan, as the unit value of the country’s iron and steel imports (both scrap and finished products) has been rising, though with significant fluctuations.
Even though Pakistan imports most of its steel from China, the unit value of its steel imports have not dipped.
Nonetheless, a slowdown in broader economic activity as the country tries to stabilize its economy, has already stalled the demand for imported iron and steel products. In Q1-FY19, quantum imports of these items have already dropped 10.1 percent on YoY basis.
