America’s aggressive designs have economic implications

However, designation as a state sponsor of terrorism would create a break

in relations between the two countries that may not be easily repaired.

Through the ebbs and flows of that history,

Pakistan was either a darling or a foe,

but the relation had survived.

Even before the ink was dry on President Trump’s speech, alternative explanations were being put forward to taper-off its rough edges (Rex Tillerson, John Nicholson, and Ambassador Hale). Yet, wise counsel to Pakistan recommends adoption of a minimax strategy in facing the threat: All possible adverse actions should be considered and corresponding responses mapped.

How dependent is Pakistan’s economy on America and what would be the consequences our relations were severed?

During 2016-17, Pakistan exported $3.6 billion worth of goods (or 17 percent of total exports) and imported goods less than a $1 billion (less than 2 percent of total imports). So, the trade account with the US is in Pakistan’s favour. On the services side, Pakistan received 12 percent of total remittances (of $19 billion) from America. There was only a $500 million in reimbursement out of now more than $3 billion approved and due for payment under the Coalition Support Fund (CSF). CSF is not aid. It represents reimbursement for expenses already incurred, compensation for facilities made available all at America’s request. The US is in default on these agreed reimbursements. As for aid, last year about $57 million were received from USAID, all for projects that lay outside government budget. Although the US has been one of the most significant investors in Pakistan, over the years the level has declined sharply and last year it was less than $50 million or 3 percent of total foreign direct investment. However, investors based in the US invested nearly 60 percent in a $1 billion Pakistan Sukuk issued last October.

Clearly, barring significant exports, the direct economic relations compared to the size of Pakistan economy are modest and their disruption would not cause an upheaval. Even so, since most trade and investment activities are private sector driven, there is no reason that this engagement with the US would be disrupted unless of course very specific adverse actions are adopted to do so.

The US does, however, exercise considerable influence in the global financial system. First, it holds significant shareholding in the international financial institutions (IFIs) like IMF, World Bank and ADB. Pakistan would be vulnerable to this influence if it seeks balance of payments support (unlike project financing) from IFIs. It is generally believed that with rising fiscal deficit and falling foreign exchange reserves, soon a need for IMF support would be felt. Second, in recent years, the Financial Action Task Force (FTAF) has also become an important forum to regulate international monetary flows and US is a very active player. Pakistan could reduce its vulnerability by strengthening its Anti-Money Laundering (AML) and Countering Financing for Terrorism (CFT) regimes. Third, America remains the hub of global capital and could limit Pakistan’s access to its jurisdictions. In the last Sukuk issue, private US investors had contributed the largest amount (more than 60 percent).

To assess their impact, we need to anticipate what kind of sanctions could be imposed. The menu of sanctions that the President or the Congress can impose is fairly large. During the period 1979-2001, Pakistan had been subjected to a variety of sanctions under various statutes including Export Control, Foreign Assistance and the infamous Symington and Pressler Amendments. Presidential Orders can also be used to impose sanctions. The common thread running through the past sanctions was mostly Pakistan’s nuclear program. Undoubtedly, those sanctions had caused economic disruptions but none was such that it proved unravelling. If anything, the US lost considerable influence in the region. The situation that developed in Afghanistan in the aftermath of the US withdrawal in 1990s, owes largely to this disengagement.

If one looks at the list of countries subjected to sanctions by the US, we find Iran, North Korea, Syria, Sudan, Burma, Russia, Libya, Iraq, Somalia, Serbia and Ivory Coast, among the most prominent. The reasons cited have varied from terrorism to human rights violation and in some cases war crimes. The most sanctioned and materially the most oppressive sanctions are imposed on Iran even though the nuclear related sanctions were terminated after an agreement reached between Iran and P+1 countries. Would Pakistan fit into any of those countries? The plain answer is in the negative.

Some have surmised that Pakistan could be declared a state sponsor of terrorism. The authority for such a declaration vests in the Secretary of State who determines if a State has repeatedly provided support for acts of international terrorism. Sanctions are then imposed pursuant to three laws: section 6(j) of the Export Administration Act, section 40 of the Arms Export Control Act, and section 620A of the Foreign Assistance Act. Taken together, the four main categories of consequent sanctions include restrictions on U.S. foreign assistance; a ban on defence exports and sales; certain controls over exports of dual use items; and miscellaneous financial and other restrictions. Designation under the above-referenced authorities also attracts other sanctions laws that penalise persons and countries engaging in certain trade with state sponsors.

This designation, undoubtedly, carries a significant potential of economic disruption. The most daunting aspect would be financial, as the country’s largely dollar denominated commerce and banking would be at risk. The central bank only deals in US dollars and, therefore, to hedge against possible disruptions, a move toward multi-currency reserve management is long overdue.

At present, Iran, Syria and Sudan are designated as state sponsors of terrorism. Pakistan doesn’t compare with any of these countries. Iran is subject to multiple layers of sanctions and bears a long history of hostilities with the US. Syria has been in the Soviet camp and a very close ally of Iran and Hezbollah. Sudan is also not comparable to Pakistan.

However, designation as a state sponsor of terrorism would create a break in relations between the two countries that may not be easily repaired. The historical ties between the US and the presently designated countries bear no resemblance to the history of relations between Pakistan and the US. Through the ebbs and flows of that history, Pakistan was either a darling or a foe, but the relation had survived. The most responsible elements of Pakistan Government have unequivocally asserted that there are no sanctuaries for Taliban in Pakistan. In dozens of sweeping operations, the Army has indiscriminately cleared militants from the most sensitive and treacherous territories. The designation, therefore, would not be based on facts on the ground. Pakistanis would, therefore, be justified in raising suspicions regarding the true motives behind the designation. Nuclear India and China are the areas on which the two countries have divergent views that cannot be settled easily. But the designation would not enable the US to reach an understanding on these matters. If anything, it would very likely lead to a serious escalation of distrust.

It may also be noted that the US presence in Afghanistan requires considerable logistic support from Pakistan both in the uninterrupted passage of supplies as well as in providing a great deal of border patrol and security cover for which the Al-Meezan (CSF) was developed. The US would expose its presence in Afghanistan by denying a safe supply route and a security-cover, besides alienating a real stakeholder in Afghanistan that has been playing the lead role in bringing peace in the region.

This development would also draw the curtains on the seven-decades-old history of cooperation. Imagine the fall out: there is a very large Pakistani diaspora in the US and they would be torn apart in figuring out how to deal with the consequences of such separation. A large number of American corporations are working in Pakistan and their future operations and current investments would be at risk. Education and medical tourism would be seriously affected. The list goes on.

We hope that rational thinking would prevail in Washington. Pakistan should not hesitate to offer any number of guarantees, diplomatically and at the military level, to allay the UA apprehensions. But it should also be unequivocal in specifying its red lines for cooperation.