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Last Updated on: 8th January 2018, 05:14 pm
This past week an important but almost overlooked event took place in the tense and frustrated exchanges between the United States and Pakistan. U.S. President Donald Trump threatened Pakistan for sheltering terrorists and pledged to cut off military assistance and other forms of aid to the country.
What many downplayed or overlooked entirely centered on the significant Pakistani response. Their central bank declared that it will stop using the dollar in favor of the Chinese yuan for all bilateral investments and trade with China. The sobering part of the story is that in only a week, Pakistan has rapidly moved to realign away from the United States and closer towards China's camp.
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China Moves Closer to Pakistan
The most significant part of the Pakistani response to America's new policies against it came from their central bank statement. This declared that it:
“Foresees that CNY denominated trade with China will increase significantly going forward; and will yield long term benefits for both countries.”
This is not to say that Pakistan and China have not been close before this incident. In the past, they enjoyed warm relations because Pakistan decided to recognize diplomatically the People's Republic of China in under two years from its foundation. In fact the prime minister of Pakistan has labeled Beijing his nation's “best and most trusted friend.” They have traded closely together for decades.
Yet things changed significantly in the past week. China had been carefully observing the deterioration of Pakistani and U.S. ties. This happened naturally as President Trump shifted the focus more to India, the great rival of Pakistan. All the while he was insisting that Islamabad fight terrorism more aggressively. The Economist Intelligence Unit's Asia Director Simon Baptist explained that:
“Pakistan and the U.S. have had a fraught relationship for years, but the big change recently has been China. China has really gone hard in cementing its existing relationship with Pakistan, it's the only place that's seen significant investment under the Belt and Road initiative and China has been pushing for geopolitical advantage there.”
Pakistan was already the recipient of one of the chief infrastructure programs China has pursued called the China-Pakistan Economic Corridor. This package of over land and sea infrastructure projects amounts to almost $60 billion. It is a central part of the inter-continental Chinese One Belt One Road initiative.
The Chinese ambassador to the country was there in Pakistan last Wednesday. He pledged that Beijing will fast track the bundle of infrastructure projects in light of straining relations with the U.S. This graphic shows the corridor route between the two nations:
At the same time, the Chinese were quick to come to Pakistan's defense after the U.S. criticisms. Geng Shuang the spokesman for the Chinese Foreign Ministry said in no uncertain terms that China feels:
“Pakistan has made enormous efforts and sacrifice for the fight against terrorism and has made very outstanding contribution to the global cause of counter terrorism.”
The Chinese commitment to Pakistan was further spelled out in the Global Times official state run Chinese news outlet. They ran an editorial that declared:
“China and Pakistan enjoy an all weather strategic partnership of cooperation, Beijing will without doubt not give up on Islamabad.”
China is not making these decisions out of all around goodness though. They see great economic and political strategy in their stance on Pakistan.
U.S. Cuts Aid to Pakistan
The rising tensions between the United States and Pakistan only escalated as last week progressed. The U.S. administration later announced that it would suspend Pakistan security aid which goes to help their military.
This will be done until such a time as they move decisively to stop the Taliban and Haqqani groups which attack American troops based in neighboring Afghanistan. The security aid being frozen amounts to a substantial $255 million. Pakistan relies on this money in order to purchase American military hardware.
Heather Nauert the spokeswoman for the State Department would not disclose how much other aid would be suspended as they are still fleshing out the arrangements, but it will also include other forms of financial aid. Ultimately the Defense Department will have a significant say in this as they run the program.
Along with other security help to the country which the U.S. will cut this adds up to a significant chunk of money. This has provided the Chinese with a major opportunity to increase their relationship with Pakistan as the U.S. punishes the country.
Pakistan Less Dependent on US for Aid Now
Pakistan has the advantage that it is not so dependent on American aid these days thanks to the upcoming Chinese infrastructure projects and investments. This will lessen the ability of the U.S. to leverage its threats and dictate counter terrorism policies to Pakistan. Brookings Institute Fellow Madiha Afzal explained the declining American influence over Pakistan as:
“Pakistan balks far less at reductions in American aid, which…has dwindled in recent years anyway. China, on the other hand, has promised Pakistan $57 billion in investments on infrastructure and energy under its Belt and Road Initiative. All this means that America has far less leverage over Pakistan. The history of Pakistan's relationships with China and the United States also shows that Pakistan's policy does not respond to strong handedness, but to loyalty, and to being treated with dignity.”
Will Pakistan Continue Cooperating with U.S. Going Forward?
It remains to be seen how much the relationship between the United States and Pakistan will suffer over the latest events. Pakistani Foreign Minister Khawaja Asif claimed that the criticism of the country by President Trump comes down to politics. For now it appears that both countries will extend their military cooperation through 2018.
There is a lot at stake regionally. Pakistan and its continued help is essential for American objectives and aims in both Iran and Afghanistan according to analysts. Limiting the spread of Chinese power and economic influence throughout South Asia will be another area of concern.
Pakistan Only the Latest Country to Abandon the Dollar in Trade With China
There are a lot of different geopolitical concerns in this story on the triangle of Pakistan, the United States, and China. Ultimately one of the more potentially significant points that continues to be lost in the details is the fact that Pakistan's central bank is now settling its cross border trade with China in yuan going forward.
This is only the latest country to sign on to moving away from the U.S. dollar in trade settlement. Others that have already done so include Russia, Iran, Venezuela, and Brazil. Ultimately this matters enormously for your retirement portfolio.
Not only is geopolitical stability important for economic stability, but continued international demand for American dollars is crucial for the U.S. economy and financial markets. Gold can be denominated at any time and in any currency that you desire. This is why you need to add gold to your IRA. You can now actually buy gold in monthly installments thanks to changes in Gold IRA rules and regulations.