War of Tariffs

Also, the high tariffs intended to artificially raise the price of imported goods are expected to boost US manufacturing, but US manufacturing mostly depends on imported parts. Take Tesla as an example; with almost 30% major components imported, if anything, prices will still go up. It is also generally believed that some companies, especially automakers, would prefer not to put up their plants in Mexico, etc., and have since put them on hold because exporting to the US would be too expensive due to the tariffs. It is thought that these manufacturers would prefer investing within the US and producing/manufacturing their products in the US itself. This would be another way to circumvent the tariffs imposed but enhance manufacturing in the US, creating jobs for Americans.

Nevertheless, imposing tariffs in the manner in which it has been done has created misgivings the world over.

But then, this would limit such companies to the US market while there are other markets worldwide, free of such tariff burdens. Besides, the greater overheads of production in the US would add to the cost of production, reducing profit margins. Trump also feels he can extend some comfort to the people through tax cuts, where he expects the government could make up the shortfall by higher revenues from tariffs and by reducing government spending. The former would depend on whether other countries would be willing to export to the US instead of looking at other markets, and if they did, that the people would be willing to buy a more expensive product; while the latter would create higher unemployment to deal with, as is the case of shutting down CARE. If countries stop doing business with the US, then the US will gradually move towards global isolation. Canada and other such countries have started to raise the slogan of nationalism. Politics in many countries may, sooner than later, be driven by an anti-US sentiment, exponentially contributing towards US isolation.

The current crisis is characterised by more of a political war than an economic war. Trump allowed domestic politics to influence his decisions by focusing on the ‘RED States’ where unemployment was highest, and as such, these policies would be seen favourably. Yet, in an attempt to improve the US economy by a more home-grown approach, Trump has, in fact, triggered a US-China conflict. The US and China control 40% of the world’s GDP and thus shape the financial initiatives undertaken by different regimes and regions. With China growing economically in volume, influence, and quality, the US may have to abdicate its global leadership in the financial domain to China. With such an abdication, will also come a loss in global influence, power potential, international status, and prestige, affecting multinational and bilateral relationships.

The US economy has an aging infrastructure, huge debt servicing, and has gradually come to rely more on providing financial services, whereas China has one of the largest economies based on the PPP factor. It has a growing production and manufacturing sector and continually increases its exports. China’s exports to the US amount to only 3% of GDP, and this conflict may affect the US much more than China. The dollar is weakening while the Yuan/RMB grows. BRICS is attacking the dollar reserve concept and replacing the US Banking system. The internationally recognised reserve currency, i.e., the Dollar, may lose ground to the Yuan/RMB and the ruble. Only recently, the Russian Ruble ranked as the best-performing currency in the world as it rallied by 37% against the US Dollar from the start of the year. China and Japan now own the US debt. China alone accounts for nearly $1 trillion, and if it dumps these bonds as part of its retaliation in this war, then the US is likely to see unmanageable inflation.

China is likely to expand its domestic market to absorb its manufacturing capacity, but more than that, it will search for alternative markets, while it reduces or bans US financial services, which will hit the US the most. The EU is already looking elsewhere, as are Canada and Mexico, for other markets; new regional trade agreements are likely to surface; different emerging markets are likely to become more visible. The US bid to attract greater investment from the Middle East by putting them in a lower tariff bracket has failed, with Saudi Arabia reluctant to invest in the US. Thus, we are seeing a gradual regression of the US leadership in the corporate spectrum, impacting other political issues as well. The collateral impact of the US’s economic fallout will impact NATO as the EU looks inwards for its own indigenous defence structure. This could snowball into a waning US influence over the Arab world vis-à-vis. Israel has a special impact on how the US views Iran in this environment. Thus, the world is likely to see a total reshuffle in a New World Order.

Such a phenomenon already has historical precedence when, in 1930, President Herbert Hoover approved the infamous Smoot-Hawley Bill into law. In this case, 1% of the US, i.e., the farmers, managed to lobby for protective tariffs to protect US agriculture, which resulted in ‘The Great Depression’ with 27% unemployment, unprecedented poverty, hunger, and misery, that plagued the US till 1939. Similarly, in 2025, 8% of the US, i.e., manufacturers, have enforced higher tariffs on all Americans to protect US industrial production. The current chaotic situation in the US has been further aggravated by Trump’s attempts to control the Federal Reserve and trying to force it to lower interest rates. The cumulative impact of these decisions is increasingly pointing towards a self-imposed injury to the US financial system, which is likely to create a far worse situation than was created by the Great Depression.

Pakistan will be affected by how the world does business in the new emerging environment, and it must construct institutionalised systems to manage the full spectrum of trade. The future now belongs to the age of AI, robotics, digitalization, and informatics. This spectrum is wholly dependent on rare-earth extraction and processing. Pakistan has such minerals that are very relevant to this new age of development. It must enter the market with strength and confidence, but will only succeed if it develops a structured, transparent policy. The present tariff conundrum can be a challenge and an opportunity for Pakistan.

Still, there is space for Pakistan to negotiate from a position of parity on account of its potential in its rare-earth minerals, in a trade-off deal. Nevertheless, for now, having been slapped with a 29% tariff on exports to the US, Pakistan still has an advantage over Vietnam and Bangladesh, which face a 47% and 39 % tariff, respectively. Thus, if Pakistan ups its game, it can capture bigger textile markets in the US. The trade deficit with the US, $2.9 billion, requires that Pakistan reduce the gap by importing more petroleum products, soya-beans, etc., from the US. Still, by reducing the trade deficit, Pakistan can negotiate lower tariffs as a reciprocal relief.

However, with US markets becoming unfeasible to other countries, Pakistan must avoid becoming a conduit through which goods can be exported to the US. This could lead to severe punitive steps, preventing Pakistan’s vulnerable financial system from surviving. Pakistan must be cautious about navigating these stormy waters in an uncertain world and a fluid environment. With the connectivity brought in by the CPEC and the opportunities provided by rare-earth minerals, Pakistan must generate economic activity and new trade deals in keeping with its people’s national interest and aspirations.