Pakistan Looks East: Why Pakistan is Turning from Washington to Beijing for Defense Equipment

Since 2001, US aid to Pakistan has occurred in exchange for a supply route to American troops in Afghanistan, while benefitting from Pakistan using this assistance to procure US defense equipment.

However, President Trump recently ended this practice as recompense for Pakistan giving safe-haven to terrorist organizations like the Taliban and Haqqani Network.

As Pakistan looks to non-Western alternatives for procurement, this could foreshadow developments in Egypt, Saudi Arabia, and Turkey. However, opportunities still remain for American firms in India.

[1]

The logic for US aid to Pakistan has been compelling. Pakistan permits the Pentagon to supply American troops in Afghanistan through Karachi, allowing the US to conduct drone strikes in the western part of the country, and its Army remains the most stable institution in a country with over 120 nuclear weapons and countless terrorist groups. [2]

In addition, Pakistan has used some of these funds to procure US defense equipment, particularly aircraft. The Air Force, for example, has spent at least $2.6 billion to field an inventory of 86 F-16 fighter aircraft from Lockheed Martin, 45 of which received mid-life upgrades in 2012.

At the same time, Pakistan gives safe-haven to groups like the Taliban and Haqqani Network that have killed thousands in Afghanistan. [3] Osama bin Laden was hiding in Abbottabad in the years before he was killed by American special forces, while Mullah Omar, the former head of the Taliban, is believed to have died in Karachi. [4]

Pakistan is both essential to US efforts in Afghanistan and a reason why those efforts have been unsuccessful. [5] Despite the contradictions in the relationship, the Bush and Obama administrations decided that aid would continue.

Ultimately, access to the Pakistan Army was considered more important than its support for the Afghan insurgency.

With his first tweet of 2018, President Trump overturned two decades of US policy toward Pakistan. [6] The President announced, “The United States has foolishly given Pakistan more than 33 billion dollars in aid over the last 15 years, and they have given us nothing but lies & deceit, thinking of our leaders as fools. They give safe haven to the terrorists we hunt in Afghanistan, with little help. No more!”

Several days later, the State Department confirmed that the United States was suspending all security aid, totaling over $200 million, to Pakistan. [7] The move accelerated what was already a deteriorating relationship between Washington and Islamabad by the time President Trump took office.

Nevertheless, the aid freeze marks a new chapter in bilateral ties, with implications for US regional interests and the position of American firms in Pakistan’s defense market.

Impact of US Aid to Pakistan’s Defense Procurement

US aid to Pakistan has been used to import weapons from US firms. In addition to the Air Force’s fleet of F-16s, the Army’s main attack helicopter remains the AH-1 Cobra from Textron’s Bell Helicopters.

Likewise, Pakistan’s Navy flies seven Lockheed Martin P-3 Orion patrol aircraft which it purchased in 2005 for an estimated $970 million. American assistance accounted for 20 percent of Pakistani defense spending since 2011, an annual average of $1.2 billion.

US assistance has also cleared budgetary space for Pakistan to import weapons from other countries and fund military operations. Over the past two decades, Islamabad expanded its ballistic missile program, developed a nuclear-capable submarine-launched cruise missile, and procured a second tranche of JF-17 fighter aircraft from China.

It also launched a campaign against the Pakistani Taliban beginning in 2014 which significantly reduced terrorism, and last year raised military pay by ten percent.[8]

Future Scenarios for US Aid to Pakistan

The future of US aid to Pakistan will have a significant impact on their ability to invest in their military.

The extent of the impact on procurement hinges on the extent to which President Trump is involved in Pakistan policy, the level of US commitment to Afghanistan over time, and whether Pakistan continues to view militants as assets rather than liabilities.

Whether the current suspension is permanent remains to be seen. Given President Trump’s approach to foreign aid and Washington’s frustration with Pakistan, an enduring cut off is a possibility.

In terms of Pakistan’s ability to import defense equipment, the impact will be most painful in the short term.

Without US aid, Islamabad’s procurement budget will be ten percent lower in the next five years than originally forecast. Avascent estimates that under this “zero-option” that Pakistan will allocate $26.7 billion to procurement through 2028.

However, the logistical necessity of supplying US troops in Afghanistan may convince the administration to cut off some, but not all, security assistance.

This would be a return to the strategy developed during the Obama administration, in which a “glide-path” approach to assistance would slowly reduce our financial commitments to Pakistan.

US aid to Pakistan could be decreased gradually over time if the US decides to scale back its role in Afghanistan, conditioning a greater share of reimbursements to Pakistan on Islamabad’s approach to the Haqqani Network.

The House version of the FY2019 National Defense Authorization Act (NDAA), for example, stipulates that half of the $700 million allocated to Pakistan would be withheld if it fails to deny safe-haven to the Haqqanis.[9]

The most significant change could occur in the unlikely event Pakistan were to completely reorient its foreign policy, abandon the practice of using terrorist groups as instruments of foreign policy, and pursue the Haqqani Network and Afghan Taliban operating from its soil.

Such a shift would likely trigger the release of hundreds of millions of dollars authorized to Pakistan by the US Congress each year. Avascent estimates that Pakistan’s procurement spending under these conditions for the next ten years would increase 36% from the “zero-option,” and exceed $36.3 billion.

While such a shift is unlikely, it highlights what Pakistan is willing to surrender in exchange for its current policy towards militant safe-havens.

Pakistan’s Alternatives Amid Economic Uncertainty

The US aid to Pakistan suspension comes at an inopportune time for Pakistan, which faces its most precarious economic outlook in years.

Economic growth is expected to slow for the first time since 2015. Moreover, Pakistan’s current account deficit stands at $14 billion, over 5% of GDP, while its foreign exchange reserves have dwindled to $9.6 billion, enough to cover only two months of imports. [10]

In a move seen as paving the way for an IMF loan after national elections on July 25, the country’s central bank has devalued the rupee three times since December 2017. [11]

A weaker currency makes imports more expensive, further constraining Islamabad’s ability to buy defense equipment and spare parts in US dollars.

Given negative trends in its relationship with the United States, a depreciating rupee, and its untenable foreign exchange position, Pakistan has already begun reaching out to other countries for support, particularly China.

Pakistan has received over $5 billion in bilateral and commercial loans from China this fiscal year, including a $1 billion loan in early July. [12]

In addition to the China-Pakistan Economic Corridor (CPEC) – a package of infrastructure projects in Pakistan funded by Chinese loans worth an estimated $62 billion – Pakistan has also turned to Beijing as a source of defense imports. [13]

Over the next decade, Beijing will become the single most important arms supplier for the Pakistani military.

Pakistan may have difficultly financing some of its costly defense imports from China.

Along with JF-17 and J-10 fighter aircraft worth over $5.3 billion, Pakistan has also signed deals for eight Type 41 submarines for over $5 billion and four Type 054 frigates worth $1.4 billion.

Given fiscal constraints, Islamabad will have few good options. If Pakistan applies for an IMF loan to prevent a currency crisis, as it is expected to do later this summer, it will be subject to conditions on government spending and transparency, including details on how the country funds CPEC.

Greater transparency may jeopardize Chinese and Pakistani interests in a $62 billion project with the full, public support of President Xi Jinping. At the very least, Islamabad would be hard-pressed to justify its submarine modernization program, for example, when it is receiving loans from the international community.[14]

China is not Pakistan’s only alternative to the United States. Turkey and Russia have also emerged as partners. Pakistan has finalized contracts with various Turkish firms such as STM to upgrade the Navy’s three Khalid-class (Agosta 90B) submarines and provide four MilGEM corvettes for over $1 billion, and Turkish Aerospace Industries for 30 T129 ATAK attack helicopters.

Overcoming decades of distrust dating back to the Soviet invasion of Afghanistan in 1979, Pakistan purchased four Mi-35 helicopters from Russia in 2015 for $153 million. [15] Despite the symbolism of the helicopter sale, Moscow will likely tread carefully before seeking to enter Pakistan’s defense market for fear of upsetting India, the most important destination for Russian defense exports.

Outlook for American Firms Based on the Freeze of US Aid to Pakistan

Along with a devalued rupee which will make imports more expensive, the Trump administration’s decision to freeze US aid to Pakistan will make US firms less competitive in Pakistan’s defense market.

American defense platforms will become harder to purchase without the billions of dollars in aid from Washington. During the Obama administration, for example, Congressional objections prohibited Pakistan from using US funds to purchase eight F-16 Block 52 aircraft worth almost $700 million. [16]

Required to finance the procurement on its own, Pakistan looked to buy cheaper F-16 Block 30s from Jordan, although that transfer was reportedly blocked by the United States. [17]

Absent security assistance, it will be difficult for American firms to maintain their predominant position in Pakistan’s military aircraft market.

Over two-thirds of Pakistan’s mobility aircraft are American. Last year, Rockwell Collins was awarded a $30 million contract to upgrade the avionics on 11 C-130Es and five C-130Bs. [18]

This will likely be the last major platform upgrade by an American firm for the foreseeable future. Pakistan’s fleet of almost 80 F-16s, along with 85 JF-17s from China, represent the mainstay of the country’s fighteraircraft fleet.

The F-16s saw action during Operation Zarb-e-Azb, a military campaign against the Pakistani Taliban credited with reducing terrorist attacks in Pakistan. [19]

While the country’s F-16s will remain operational until at least 2030, the Air Force will add another 50 JF-17s during the same time period and will eventually overtake the F-16 as its premiere attack aircraft.

Unlike in Pakistan, prospects for US firms in India’s defense market are growing. The case for continuing to withhold  US aid to Pakistan is strengthened by Washington’s growing defense partnership with New Delhi, which historically has viewed arms sales to Pakistan as an affront.

India’s defense market is over five times that of Pakistan, and American firms have sold over $15 billion worth of defense equipment to India in the last decade. [20] The United States now accounts for 12% of India’s total defense investment, and American firms are active participants in competitions worth an additional $24 billion.

What Pakistan May Foreshadow

American firms will be less competitive in Pakistan’s defense market due to:

• The freeze in US aid to Pakistan,
• Pakistan’s precarious foreign exchange position and reliance on Chinese capital, and
• Washington’s growing strategic and commercial ties with India.

The suspension of security aid marks a new low in ties with Pakistan. Despite Islamabad’s support for the Afghan insurgency, previous administrations reasoned that engagement would better protect US interests than estrangement.

Pakistan was too close to Afghanistan, too big, and had too many terrorist groups and nuclear weapons to risk a public confrontation. The recent decision on US aid to Pakistan was a clear signal that the current White House has reached a different conclusion. [21]

President Trump has gone further than his predecessors in openly trying to coerce Pakistan into acting against militant groups based in its country. In turn, Pakistan has accelerated its embrace of China, positioning itself as Beijing’s most loyal friend in Asia and the primary market for Chinese defense firms.

Pakistan’s embrace may come at the expense of its financial independence. [22] In the face of a currency crisis, Pakistan has accepted over $5 billion in loans from Beijing during this fiscal year alone to shore up its foreign exchange position. [23]

Pakistan’s dwindling currency reserves threatened economic stability and the future of the $62 billion China-Pakistan Economic Corridor (CPEC), the key project in China’s Belt and Road Initiative. [24]

Pakistan’s increased dependence on Chinese lending leave some worried whether Pakistan will be able to service its debt obligations if CPEC investments yield lower-than-expected returns. [25] As Chinese influence increases in Islamabad, American companies are bound to lose out in the process.

Pakistan’s pivot from Washington may foreshadow developments elsewhere. Like Pakistan, the arsenals of Turkey, Egypt, and Saudi Arabia have long been dominated by US defense platforms.

Amidst regional instability, an increasingly multipolar international system, and growing Chinese influence, each of these countries can now choose between Chinese, Russian, and Western alternatives.

US market share can no longer be taken for granted in these key countries, with implications for American strategic and commercial interests.
Despite current ties with the Trump administration, it is up to Pakistan whether security assistance will resume.

Pakistan, however, is unlikely to change course. The country has long considered maintaining influence in Afghanistan a vital interest and views the Taliban and Haqqani Network its primary conduits in doing so.

An about-face would, however, satisfy the conditions Washington has placed on its military aid. This would release billions of dollars in assistance to Pakistan and boost its procurement budget by an estimated 36% through 2028. After the dramatic move by the Trump administration to freeze US aid to Pakistan, it will take a dramatic response from Pakistan to change Washington’s approach.

• American defense firms will continue to lose market share in Pakistan to Chinese, Turkish, and Russian counterparts amidst a suspension of US military aid, deteriorating ties with Washington, and declining rupee
• Pakistan’s ability to import defense equipment from Western firms will grow more difficult over the long-term, as the country relies more heavily on Chinese capital to shore up its precarious foreign exchange position and service debt on loans associated with the $62 billion China-Pakistan Economic Corridor
• At the same time, prospects in India – a democracy with a vibrant economy and a defense market that exceeds $53 billion – are growing, with American firms already active participants in competitions worth $24 billion
• Absent more focused corporate strategies, the declining fortunes of U.S. firms in Pakistan’s defense market could foreshadow developments in Egypt, Saudi Arabia, and Turkey – countries once dominated by American companies that can now realistically choose from non-Western alternatives

Endnotes:

[1] https://fas.org/sgp/crs/row/pakaid.pdf
[2] https://www.tandfonline.com/doi/pdf/10.1080/00963402.2016.1241520?needAccess=true
[3] https://www.defense.gov/Portals/1/Documents/pubs/1225-Report-Dec-2017.pdf
[4] https://www.bbc.com/news/world-asia-34105565
[5] https://media.defense.gov/2017/Dec/15/2001856979/-1/-1/1/1225-REPORT-DEC-2017-FINAL-UNCLASS-BASE.PDF
[6] https://twitter.com/realdonaldtrump/status/947802588174577664?lang=en
[7] https://www.state.gov/r/pa/prs/ps/2018/01/276858.htm
[8] https://www.theguardian.com/world/2014/jun/15/pakistan-offensive-militants-north-waziristan; https://dunyanews.tv/en/Pakistan/390161-Salaries-of-govt-employees-raised-by-10pc-in-Budge
[9] https://www.congress.gov/115/bills/hr5515/BILLS-115hr5515pcs.pdf
[10] https://www.reuters.com/article/pakistan-rupee/update-3-pakistans-new-rupee-devaluation-shows-economic-risk-before-election-idUSL4N1TD2O1
[11] https://www.bloomberg.com/news/articles/2018-06-11/pakistan-is-said-to-devalue-rupee-for-third-time-since-december
[12] https://www.reuters.com/article/us-pakistan-china-loans/china-lends-1-billion-to-pakistan-to-boost-plummeting-fx-reserves-sources-idUSKBN1JQ0TV
[13] https://www.wsj.com/articles/chinas-global-building-spree-runs-into-trouble-in-pakistan-1532280460
[14] https://www.bloomberg.com/news/articles/2018-03-08/pakistan-refutes-imf-report-as-its-eyes-bonds-china-funding
[15] https://quwa.org/2018/04/10/pakistan-begins-receiving-mi-35m-helicopters/
[16] https://www.reuters.com/article/us-usa-pakistan-planes/u-s-tells-pakistan-it-will-have-to-fund-f-16s-itself-idUSKCN0XT1U6
[17] https://www.youtube.com/watch?v=qyZ004QI6Iw&t=298s
[18] https://www.rockwellcollins.com/Data/News/2017-Cal-Yr/GS/FY17GSNR33-Pakistan-C130.aspx
[19] https://www.voanews.com/a/noticeable-decline-in-pakistan-terror-fatalities/4125523.html
[20] https://carnegieendowment.org/2018/01/10/removing-barriers-to-u.s.-india-defense-trade-pub-75206
[21] https://www.voanews.com/a/voa-interview-national-security-adviser-hr-mcmaster-pakistan-iran/4191703.html
[22] https://www.scmp.com/week-asia/geopolitics/article/2153614/pakistans-currency-crisis-china-problem-and-solution
[23] https://www.ft.com/content/1256ceaa-802c-11e8-bc55-50daf11b720d
[24] https://www.ft.com/content/1256ceaa-802c-11e8-bc55-50daf11b720d
[25] https://www.economist.com/asia/2018/06/14/pakistan-faces-a-currency-crisis.-who-will-help