US tariffs put growth at risk

ISLAMABAD: Pakistan could see a worsening of external position on account of new US tariffs that will potentially weigh further on the outlook for economic growth, says Moody’s Investors Services (Moody’s).

The rating agency in its report, “Tariffs – Asia-Pacific” stated that new tariffs on APAC economies are more draconian than market expectations and will be credit negative for the region, but with some differentiation.

It stated, “Frontier markets such as Sri Lanka, Pakistan (Caa2 positive) and Bangladesh, which do not have the capacity to import as much from the US and whose current account balances are relatively fragile, could see a worsening of their broader external positions that will potentially weigh further on the outlook for economic growth”.

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The APAC will be exposed to the higher US tariffs both directly and indirectly. Across the region, direct export exposure to the US is the highest for Vietnam, followed by Cambodia, Thailand and Taiwan, China.

While Pakistan and Bangladesh have lower overall exposure, their exposure to the US is heavily concentrated in the food, textiles and wood products sectors. Exports in these sectors tend to have higher price elasticities and will therefore be more vulnerable to shortfalls in US demand.

The new tariffs will hurt the “China+1” strategy, and an acceleration in supply chain diversification away from China is more uncertain at this stage.

However, APAC economies may still be incentivized to deepen trade and investment ties intra-regionally.

India also has a relatively low overall exposure but more diversified exports to the US.

Across the region as a whole, electronics, machinery and equipment as well as food and textiles are among the most exposed sectors to US demand.

The rating agency stated that lower-tariff countries such as Malaysia, India, and the Philippines might gain market share through trade triangulation to serve the US market.

Countries with large domestic markets, such as India, may benefit from production shifts in the long term.

Higher tariffs will affect global trade; reduce regional export demand, and lower business confidence, leading to decreased investment in APAC.

The APAC economies face both direct and indirect exposure to higher US tariffs. Vietnam, Cambodia, Thailand, and Taiwan have high direct exposure, while Pakistan and Bangladesh’s exposure is concentrated in specific sectors.

Countries will also be indirectly impacted through value-added contributions to other nations’ exports, with significant links to connector economies such as Vietnam, Singapore, and Malaysia, it added.

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