Geopolitical Tensions and Trade Barriers: Navigating Investment Risks in Pakistan

The recent diplomatic engagement between U.S. Secretary of State Marco Rubio and Pakistan’s military leadership underscores the fragile balance between de-escalation and further conflict in South Asia. As India and Pakistan exchange military strikes and accusations, investors must weigh the risks and opportunities in Pakistan’s economy, now further strained by U.S. tariffs and regional instability.

The Geopolitical Crossroads

Rubio’s urgent calls to Pakistan’s Army Chief General Asim Munir in May 2025 came amid escalating hostilities triggered by India’s retaliation for the April 22 Pahalgam terror attack. India’s “Operation Sindoor” targeted Pakistani air bases and “terror launch pads,” while Pakistan denied involvement but retaliated with drone strikes and artillery fire. The U.S. and G7 nations have urged restraint, but military mobilizations continue, with Pakistan’s National Command Authority—overseeing its nuclear arsenal—now activated.

This standoff poses two critical risks for investors:
1. Direct Conflict Costs: A prolonged military escalation could divert resources from infrastructure projects, increase defense spending (already $11 billion in 2025), and deter foreign direct investment (FDI).
2. Secondary Economic Shocks: Trade disruptions, currency volatility, and supply chain delays could amplify inflation and weaken Pakistan’s already fragile economy.

Trade Barriers: The 29% Tariff Challenge

The U.S. “Liberation Day” tariffs, implemented in April 2025, have reshaped Pakistan’s export landscape. Textiles and apparel—accounting for 55–60% of Pakistan’s $6.6 billion in U.S. exports—now face a 29% tariff, up from 4–5% under the defunct GSP program. While this rate is lower than China’s 34% or Vietnam’s 46%, it still risks pricing Pakistani goods out of the U.S. market.

The trade deficit with the U.S. widened to $3 billion in 2024, and further imbalances could trigger higher tariffs. Pakistan’s strategy to reduce its deficit—such as lowering tariffs on U.S. imports—remains untested, but it could create opportunities for American companies in sectors like energy or technology.

Investment Climate: Fragility and Resilience

Pakistan’s FDI inflows have long lagged behind India’s, reaching just $1.5 billion in 2024 versus India’s $60 billion. The current tensions threaten to worsen this gap:
- Sectoral Risks: Textiles, tourism, and aviation face immediate headwinds due to trade barriers and travel disruptions.
- Currency Volatility: The Pakistani rupee (PKR) has depreciated sharply amid capital flight, raising import costs for raw materials and energy.
- Infrastructure Gaps: Defense spending crowds out investments in roads, power, and healthcare, deterring long-term FDI.

However, two opportunities emerge:
1. Competitive Tariff Position: Pakistan’s 29% rate versus rivals like Vietnam could attract manufacturers seeking to avoid steeper U.S. levies.
2. Strategic Sectors: Renewable energy (e.g., solar projects) and critical minerals (e.g., lithium exploration) may still draw investment if geopolitical risks stabilize.

The Path Forward

A de-escalation of India-Pakistan tensions is critical to unlocking Pakistan’s growth potential. Analysts estimate that peace could add $35 billion annually to regional GDP via revived trade and FDI. Conversely, sustained conflict risks shaving 2% off Pakistan’s GDP growth, per IMF projections.

Investors should monitor two key indicators:
1. Geopolitical De-escalation: Track diplomatic talks and military restraint signals.
2. Trade Policy Adjustments: Watch for U.S.-Pakistan tariff negotiations and Pakistan’s efforts to diversify exports.

Conclusion

Pakistan’s investment landscape in 2025 is a high-risk, high-reward proposition. While tariffs and regional instability create headwinds, the nation’s strategic position and comparative tariff advantages offer niches for resilient investors. The path to sustainable growth hinges on diplomatic solutions to the India-Pakistan conflict and structural reforms to improve trade competitiveness. Without peace, Pakistan’s economy—and its appeal to global capital—will remain hostage to the whims of war.

In this volatile environment, cautious investors may find value in sectors like renewable energy or critical minerals, while avoiding exposure to trade-dependent industries. The stakes are high: Pakistan’s future depends on turning geopolitical tension into diplomatic progress—and investors must be ready to act when the fog of conflict lifts.