The global economy is poised for significant shifts as transactional diplomacy and tariff-driven strategies take center stage in international trade. The evolving landscape of global trade offers Pakistan potential opportunities to boost exports and strengthen its position in the international market, particularly in light of tariff-driven changes and shifting economic alliances.

Love him or dislike him, celebrate or critique him; President Donald Trump remains a figure that draws attention. After being voted out of the White House four years ago, he has returned to the political stage. His re-election to one of the world's most influential political offices has sparked discussions from East Asia to Latin America about what his second term might entail. Having already served four years as president, Trump is well-known for his policies and preferences. While his unconventional approach is a hallmark, it provides some basis for anticipating the direction of his second term. 
Transactional Diplomacy
For sure, the world will see the revival of transactional diplomacy, which was the defining feature of Trump’s first term. In a sense, all diplomacy is transactional, based as it’s on a quid pro quo (something for something). Negotiations are meaningful only when each side is willing to give some ground; otherwise, it’s either one dictating the terms to the other, or the parleys being not more than wit and gossip. The difference between transactional and conventional diplomacy is one of tone and visibility, not of substance. The country pursuing transactional diplomacy makes no pretentions about its intentions. Instead, it lays its cards on the table for all concerned to see and respond.
Thus, in his first term, Trump in his signature style made it clear to Washington’s North Atlantic Treaty Organization (NATO) allies that they’ll have to make their mandatory expenditure on defense (at least 2.0 percent of the national gross domestic product (GDP)). South Korea was told to put in its due contribution to maintaining the thousands of the U.S. troops on its soil, failing which it might be left to its own against its militarily much stronger and hawkish northern neighbor. Chinese imports were subjected to billions in higher tariffs with the message, clear as a whistle, that either it should buy more from the U.S. or see the taxes go up even higher. In the end, Beijing agreed to buy USD 200 billion worth additional goods from the U.S.-based enterprises every year. The oil rich Gulf states were also made to rack up their arm purchase in return for Washington continuing to underwrite their security. The U.S. walked out of the laboriously negotiated Joint Comprehensive Plan of Action—commonly known as Iran nuclear deal—over Tehran allegedly contravening American regional and global interests. 
More such instances of transactional diplomacy will be seen in the coming four years, especially in view of the current global scenario. Iran has been weakened by the dismantling of Hezbollah and the fall of the Assad regime in Syria. Europe is not only a house divided against itself but is also feeling more insecure from Moscow than on any other occasion since the end of the Cold War. China is facing increasing socioeconomic challenges in the face of its slowing economy, demographic shifts and a shrinking workforce.

In his first term, President Trump pulled down two of the pillars on which the edifice of Western capitalist democracies has rested in the Post World War-II World: free trade and free movement of people across national borders.

No Free Movement of Goods and People
In his first term, President Trump pulled down two of the pillars on which the edifice of Western capitalist democracies has rested in the Post World War-II World: free trade and free movement of people across national borders. Both these features made headline contributions to an era of unparalleled peace, prosperity, progress and stability in Europe. 
Come Donald Trump and from the word go he seemed to be a stranger in the house. His victory in the 2016 presidential race was arguably the greatest upset in American electoral history. Although, himself a mega success story in a capitalist democracy, he questioned both free trade and free movement of people. On his first day in the White House, he pulled his country out of the Trans-Pacific Partnership treaty, which envisaged the globe’s largest free trade area. 
Subsequently, he rendered the World Trade Organization (WTO)—the multilateral face of capitalism—virtually irrelevant, unleashed a trade war with other leading economies (including America’s long-standing European allies), sought to restrict immigration into the U.S., negotiated a new trade treaty with Canada and Mexico to replace the North American Free Trade Agreement (NAFTA), and began constructing a wall along the border with Mexico, thereby challenging the notion of open borders. He also urged other NATO members to share the economic burden of maintaining this Cold War-era alliance more equitably. Meanwhile, Wall Street, mainstream U.S. media, and major ICT-based organizations (commonly referred to as big tech) often expressed opposition to Trump.
The Power of Tariffs 
If transactional diplomacy formed the foundation of Trump’s foreign policy, import tariffs (or simply tariffs) served as its most significant tool. Typically, tariffs protect domestic industries, increase public revenue, reduce trade imbalances, and encourage consumers to buy costlier domestic products instead of cheaper imported ones. For a large economy like the U.S., higher tariffs have an additional impact: they depress global prices, reduce the output of exporting countries, and improve the importing country’s terms of trade (the difference between export and import prices) relative to its trading partners. To maintain their market share in the importing country, exporters are compelled to lower their prices, further worsening their terms of trade (ToT). Since ToT significantly affect an economy’s overall welfare, a large importing country like the U.S. stands to gain considerably from imposing higher tariffs.
Not only that, increase in tariffs, or a mere threat to do so, gives a big country like the U.S. leverage over its trading partners and makes them shift their policies—political, security, immigration related—in the “desirable” direction. Hence, the tariffs can serve as a potent instrument of serving several non-trade objectives as well.
As a policy instrument, tariffs are as old as international trade. However, in contemporary times, no other world leader has used, or threatened to use, them as thoroughly—for achieving both economic and political objectives—as Trump did in his first term, and as he for sure will do in his second. 
An analysis of U.S. trade with its top 10 partners reveals that, except for the United Kingdom (UK), the U.S. runs a trade deficit with all of them. For instance, in 2023, China was the U.S.’s largest trading partner, with bilateral trade amounting to USD 574.66 billion and a U.S. trade deficit of USD 279.11 billion. Similarly, the U.S. recorded trade deficits of USD 152.47 billion with Mexico, USD 82.57 billion with Germany, USD 71.55 billion with Japan, USD 64.26 billion with Canada, USD 51.10 billion with South Korea, and USD 43.31 billion with India. Together, these nine countries accounted for a cumulative U.S. trade deficit of USD 796 billion in 2023. This trend is not an anomaly; rather, the U.S.’s substantial trade deficits with these countries have been a consistent feature over the years.
As the world’s largest economy, consumer market, and importing nation, the U.S. presents a lucrative opportunity for other major economies, which are eager to continue benefiting from their favorable trade imbalances—and, in some cases, to expand them further. While such a situation should naturally concern policymakers in Washington, for a shrewd businessperson like Trump, it also presents a window of opportunity. What if these countries were compelled to negotiate favorable terms with Washington on various policy issues, under the implicit threat of facing increased barriers to their access to the U.S. market?

increase in tariffs, or a mere threat to do so, gives a big country like the U.S. leverage over its trading partners and makes them shift their policies—political, security, immigration related—in the “desirable” direction.

Yes, these countries can retaliate by implementing similar barriers for U.S.-based businesses, potentially ushering in a zero-sum game. Yet, in this strategic game, Washington holds more cards than any other player for at least three reasons: First, the other players benefit more from bilateral trade; thus, in this potentially zero-sum game, they stand to lose more, making their stakes in avoiding such an outcome higher. Second, as a larger economy and a bigger importing nation than any other player, any tariff action taken by the U.S. will have a greater impact. Third, Washington underwrites the security of many of its principal trading partners, such as Germany, Japan, South Korea, and France. This fact alone limits the policy options available to them. Furthermore, as the world’s top military power by a significant margin, the U.S. possesses unmatched leverage to enforce its decisions.
That’s why Trump often remarks, “I love tariffs. They’re a great thing.” He has already announced plans to raise tariffs by about 60 percent on all Chinese goods entering the U.S. During a recent meeting with Canada’s Prime Minister, he warned of a potential 25 percent increase in tariffs on all Canadian imports if Ottawa fails to secure its borders with the U.S., specifically by controlling the movement of people seeking asylum into the U.S. A similar stance has been outlined for Mexico should it decline to cooperate with the Trump administration in preventing immigrants from entering the U.S.

As the world’s largest economy, consumer market, and importing nation, the U.S. presents a lucrative opportunity for other major economies, which are eager to continue benefiting from their favorable trade imbalances—and, in some cases, to expand them further.

Many, including most economists, argue that another round of tariff wars would likely hurt the U.S. economy as much as those of its trading partners. Such critics, however, overlook the fact that the tariff war Trump envisions isn’t merely a conventional trade policy tool. Instead, it’s part of a strategic game, where concerns extend beyond economics. Chief among these is the challenge posed by the rise of China.
The China Challenge
The U.S. has long viewed China’s rise to superpower status with apprehension. However, before 2016, American administrations hesitated to take decisive action against Beijing, primarily due to fears that such measures might backfire. It was Trump who, in 2018, imposed punitive tariffs on most Chinese goods entering the U.S., prompting retaliatory tariffs from Beijing. The strategic significance of these tariffs was such that the Biden administration chose to keep them in place.

The U.S. is Pakistan’s largest export market, with exports valued at USD 5.18 billion in 2023. The bilateral trade stands at USD 7.25 billion, with Pakistan enjoying a trade surplus of USD 3.11 billion. 

The issues between the U.S. and China are not limited to trade. However, trade takes center stage because the economy is the cornerstone of China’s strength. The country’s global ambitions, including the Belt and Road Initiative (BRI), are supported by its vast accumulation of foreign exchange reserves, built on its impressive export performance. From Washington’s perspective, engaging Beijing in an ostensibly zero-sum game could hinder its strategic aspirations. Already, China is grappling with an economic slowdown, along with a declining and rapidly aging population.
Implications for Pakistan
On balance, Pakistan has generally had better relations with Republican administrations than with Democratic ones. This is primarily due to the Republicans' no-nonsense approach, in contrast to the Democrats, who, over the decades, have often been bogged down by irrelevant issues in their dealings with Pakistan, as well as supporting New Delhi at Islamabad’s expense. Therefore, looking to the near future, one can expect an improvement in Pak-U.S. relations. 
Pakistan and the U.S. enjoy deep-rooted economic and security relations. During the 1950s and 1960s, Pakistan remained a member of the Washington-sponsored security alliances, namely the South-East Asian Treaty Organization (SEATO) and the Central Treaty Organization (CENTO). In 2004, Pakistan was designated a Major Non-NATO Ally (MNNA) by President George Bush (a Republican) administration in recognition of Islamabad’s counterterrorism efforts. The MNNA, according to the U.S. Department of State, “provides foreign partners with certain benefits in the areas of defense trade and security cooperation,” and is a “powerful symbol of the close relationship the United States shares with those countries.” 
While this figure is not large enough to raise major concerns in Washington, there is potential for growth. If the Trump administration were to impose tariffs on major trading partners, exports from Pakistan—such as textiles, leather, sports goods, and surgical instruments—could become more competitive in the U.S. market. Additionally, foreign enterprises might find it beneficial to set up manufacturing operations in Pakistan to export to the U.S., bypassing higher tariffs.
A similar opportunity arose in 2018, but it was not fully leveraged due to a lack of preparation by relevant departments and export houses. To take advantage of a potential opportunity this time, it’s important to begin preparations now. The government could consider forming a task force with representatives from both the public and private sectors to develop a strategy.

The author contributes to national and international issues, with a special interest in the Chinese economy, governance, and development model. 
E-mail: [email protected]

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the official policy or position of the publication.