US vs Iran War: The Economic Fallout And Pakistan’s Next Move
⏱️ 2.5 Mins Read
The collapse of the recent ceasefire has triggered the direct resumption of the US vs Iran war, transforming a regional geopolitical threat into an unabated global economic crisis
With the diplomatic window officially shattered and regional tensions escalating rapidly, the focus for global supply chains and Washington’s trade planners has shifted from deterrence to damage control.
For Pakistan, the brief window to capitalize as a ‘peace mediator’ has abruptly closed, forcing Islamabad to urgently pivot its strategy to protect its $10.1 billion US trade relationship and monetize its strategic geography amidst the renewed conflict.
The New Trade Equation: Shielding What Is Left
Pakistan’s economic stakes in this renewed conflict are enormous. The United States remains Pakistan’s single largest export destination, with bilateral trade volume hovering around $10.1 billion. But with the peace deal null and void, Trump’s protectionist trade policy is once again a sword hanging over that relationship.
The diplomatic dividend Pakistan secured in July 2025, a reduction of the punishing 29% tariff to 19%, is now in sheer jeopardy. In a conflict scenario, Washington’s trade team will likely re-evaluate every bilateral concession. Pakistan’s immediate demand should not be for new wealth creation, but for aggressively ring-fencing this existing tariff relief to protect the textile sector’s export value.
But a tariff reduction is not sovereign wealth creation; it is the management of dependency at a slightly lower cost, which is precisely how the middle power trap sustains itself across political cycles.
What Pakistan Must Demand in a Conflict Scenario
1. IMF Program Insulation from the Oil Shock: The collapse of the US-Iran talks guarantees an immediate spike in global oil prices. For Pakistan, currently under a $7 billion Extended Fund Facility (EFF), this oil shock threatens to detonate the current account deficit. Islamabad must demand that Washington, in exchange for any regional neutrality or logistical cooperation, back preemptive IMF waivers. Pakistan cannot absorb the macroeconomic fallout of America’s Middle East conflict without explicit financial insulation.
2. FDI Redirection to Secure Supply Chains: With FDI currently standing at a dismal $943.8 million, regional instability usually scares away capital. However, the Hormuz closure threat makes Pakistan’s geography vital. Islamabad must leverage this crisis to redirect American private equity into Pakistan’s Special Economic Zones, pitching Karachi and Gwadar not as standard investment hubs, but as emergency supply chain alternatives for the US and the Gulf.
3. The Iran-Pakistan Pipeline Reality Check: The dream of securing Western waivers to operationalize the Iran-Pakistan gas pipeline is officially dead. With Iran returning to active conflict status, Pakistan must permanently shelve this liability. Instead, Islamabad must use its current geopolitical leverage to demand accelerated US and Gulf support for alternative energy corridors, completely decoupling its energy security from Iranian infrastructure.
The Catch: None of this damage control is guaranteed. Pakistan’s business environment carries real structural risks, policy inconsistency, energy costs, and legal uncertainty that foreign investors cannot overlook, even in a crisis. Furthermore, Pakistan’s trade surplus with the US remains an indigestible statistic for Trump’s trade team.
“Islamabad has to play smart. The focus must shift from playing the peace mediator to surviving as a neutral economic corridor,” notes former VP FPCCI Arshad Jamal. Furthermore, any strategic alignment with Washington in this conflict will be watched closely in Beijing, where China’s FDI in Pakistan surged 90% in FY2025.
The Bottom Line: The peace deal may have evaporated, but the global recognition of Pakistan’s geopolitical weight has not. With a concluded 2025 trade deal, Saudi deposit support, and a highly volatile region, Pakistan still holds immense leverage. The government must treat this crisis as a perishable asset, securing durable economic shields before the conflict permanently damages regional trade.
Read more analysis in our Middle Power Trap section.
