Pakistan Looks East: Why Pakistan is Turning from Washington to Beijing for Defense Equipment By Shane Mason - Avascent
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Pakistan Looks East:
Why Pakistan is Turning from Washington
to Beijing for Defense Equipment
By Shane Mason
WHITE PAPER | JULY 2018
avascent.com
DC | LONDON | PARIS | OTTAWA | TOKYO
Since 9/11, the United States has provided over
$22.8 billion in overt security aid to Pakistan, and
another $10 billion in economic aid.1
Pakistani Defense Spending by Account
$12 The logic for military assistance to Pakistan has been
Source: Avascent
compelling. Pakistan permits the Pentagon to supply American
troops in Afghanistan through Karachi, allowing the US to
$10 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
$8
addition, Pakistan has used some of these funds to procure
US $ BILLIONS
US defense equipment, particularly aircraft. The Air Force, for
example, has spent at least $2.6 billion to field an inventory
$6
of 86 F-16 fighter aircraft from Lockheed Martin, 45 of which
received mid-life upgrades in 2012.
$4
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
$2
the years before he was killed by American special forces, while
Mullah Omar, the former head of the Taliban, is believed to
$0 have died in Karachi.4 Pakistan is both essential to US efforts
in Afghanistan and a reason why those efforts have been
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unsuccessful.5 Despite the contradictions in the relationship,
the Bush and Obama administrations decided that aid would
n Procurement n R&D n Personnel n O&M 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.
2
Impact of US Aid on Pakistani Defense Pakistani Procurement Before and After US Aid Freeze
Procurement $3.5
American military aid has been used by Pakistan to import
weapons from US firms. In addition to the Air Force’s $3.0
fleet of F-16s, the Army’s main attack helicopter remains the
AH-1 Cobra from Textron’s Bell Helicopters. Likewise, $2.5
US $ BILLIONS
Pakistan’s Navy flies seven Lockheed Martin P-3 Orion patrol
aircraft which it purchased in 2005 for an estimated $970 $2.0
million. American assistance accounted for 20 percent of
Pakistani defense spending since 2011, an annual average $1.5
of $1.2 billion.
$1.0
US assistance has also cleared budgetary space for Pakistan
to import weapons from other countries and fund military Source: Avascent
$0.5
operations. Over the past two decades, Islamabad expanded
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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 n Pakistan’s Procurement Budget n US Contribution
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 Future Pakistani Defense Procurement Based on Different Aid Levels
The future of US aid will have a significant impact on $4.0
Pakistan’s ability to invest in its military. The extent of the
impact on procurement hinges on the extent to which $3.5
President Trump is involved in Pakistan policy, the level of
US commitment to Afghanistan over time, and whether $3.0
US $ BILLIONS
Pakistan continues to view militants as assets rather than
liabilities. Whether the current suspension is permanent $2.5
remains to be seen. Given President Trump’s approach to
foreign aid and Washington’s frustration with Pakistan, $2.0
an enduring cut-off is a possibility. In terms of Pakistan’s
ability to import defense equipment, the impact will be most $1.5
painful in the short term. Without US aid, Islamabad’s
Source: Avascent
procurement budget will be ten percent lower in the next
$1.0
five years than originally forecast. Avascent estimates that
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under this “zero-option” that Pakistan will allocate $26.7
billion to procurement through 2028.
n Pakistan Changes Course n Glide Path n Zero Option
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
3
return to the strategy developed during
the Obama administration, in which
a “glide-path” approach to assistance
would slowly reduce our financial Pakistan’s Alternatives Amid
commitments to Pakistan. Aid could
be decreased gradually over time if the
Economic Uncertainty
US decides to scale back its role in The aid suspension comes at an
Afghanistan, conditioning a greater inopportune time for Pakistan, which
share of reimbursements to Pakistan faces its most precarious economic
on Islamabad’s approach to the outlook in years. Economic growth is
Haqqani Network. The House version expected to slow for the first time since
of the FY2019 National Defense 2015. Moreover, Pakistan’s current
Authorization Act (NDAA), for example, account deficit stands at $14 billion,
stipulates that half of the $700 million over 5 percent of GDP, while its foreign
allocated to Pakistan would be withheld exchange reserves have dwindled to
if it fails to deny safe-haven to $9.6 billion, enough to cover only two
the Haqqanis.9 months of imports.10 In a move seen
as paving the way for an IMF loan after
The most significant change could occur
national elections on July 25, the
in the unlikely event Pakistan were
country’s central bank has devalued
to completely reorient its foreign policy,
the rupee three times since December
abandon the practice of using terrorist
2017.11 A weaker currency makes
groups as instruments of foreign policy,
imports more expensive, further
and pursue the Haqqani Network and
constraining Islamabad’s ability to buy
Afghan Taliban operating from its soil.
defense equipment and spare parts in
Such a shift would likely trigger the
US dollars.
release of hundreds of millions of dollars
authorized to Pakistan by the US Congress Given negative trends in its relationship
each year. Avascent estimates that with the United States, a depreciating
Pakistan’s procurement spending under rupee, and its untenable foreign exchange
these conditions for the next ten years position, Pakistan has already begun
would increase 36 percent from the reaching out to other countries for
“zero-option,” and exceed $36.3 billion. support, particularly China. Pakistan has
While such a shift is unlikely, it received over $5 billion in bilateral and
Without US aid, highlights what Pakistan is willing to commercial loans from China this fiscal
surrender in exchange for its current year, including a $1 billion loan in early
Islamabad’s policy towards militant safe-havens. July.12 In addition to the China-Pakistan
procurement budget Economic Corridor (CPEC) – a package of
infrastructure projects in Pakistan funded
will be ten percent by Chinese loans worth an estimated
lower in the next $62 billion – Pakistan has also turned
to Beijing as a source of defense
five years than imports.13 Over the next decade, Beijing
originally forecast. will become the single most important
arms supplier for the Pakistani military.
4Given 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 may have difficultly financing some of its costly Rupee Depreciating to Record Lows (2017-2018)
defense imports from China. Along with JF-17 and J-10
105
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 110
USD / PKR
constraints, Islamabad will have few good options. If Pakistan
applies for an IMF loan to prevent a currency crisis, as 115
it is expected to do later this summer, it will be subject to
conditions on government spending and transparency, 120
including details on how the country funds CPEC. Greater Source: International Monetary Fund
transparency may jeopardize Chinese and Pakistani 125
interests in a $62 billion project with the full, public support
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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
Chinese Firms Dominate Pakistani Procurement Programs
China is not Pakistan’s only alternative to the United States.
$2.5
Turkey and Russia have also emerged as partners. Pakistan
has finalized contracts with various Turkish firms such as
$2.0
STM to upgrade the Navy’s three Khalid-class (Agosta 90B)
submarines and provide four MilGEM corvettes for over $1
US $ BILLIONS
$1.5
billion, and Turkish Aerospace Industries for 30 T129 ATAK
attack helicopters. Overcoming decades of distrust dating
$1.0
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, $0.5
Moscow will likely tread carefully before seeking to enter Source: Avascent
Pakistan’s defense market for fear of upsetting India, the most $0.0
important destination for Russian defense exports. 2018 2019 2020 2021 2022 2023
n All Other Procurement n J-10 Fighter Aircraft
n Type 054 Frigates n Type 41 Yuan-class Submarines
n JF-17 Fighter Aircraft n Opportunity Space
5Outlook for American Firms
Along with a devalued rupee which
will make imports more expensive, the
Trump administration’s decision to
freeze military aid will make US firms was awarded a $30 million contract to
less competitive in Pakistan’s defense upgrade the avionics on 11 C-130Es and
market. American defense platforms will five C-130Bs.18 This will likely be the last
become harder to purchase without the major platform upgrade by an American
billions of dollars in aid from Washington. firm for the foreseeable future. Pakistan’s
During the Obama administration, for fleet of almost 80 F-16s, along with
example, Congressional objections 85 JF-17s from China, represent the
prohibited Pakistan from using US funds mainstay of the country’s fighter
to purchase eight F-16 Block 52 aircraft aircraft fleet. The F-16s saw action
worth almost $700 million.16 Required during Operation Zarb-e-Azb, a military
to finance the procurement on its own, campaign against the Pakistani Taliban
Pakistan looked to buy cheaper F-16 credited with reducing terrorist attacks
Block 30s from Jordan, although that in Pakistan.19 While the country’s F-16s
transfer was reportedly blocked by the will remain operational until at least
United States.17 2030, the Air Force will add another 50
JF-17s during the same time period and
Absent security assistance, it will be will eventually overtake the F-16 as its
difficult for American firms to maintain premiere attack aircraft.
their predominant position in Pakistan’s
military aircraft market. Over two-thirds Unlike in Pakistan, prospects for US
of Pakistan’s mobility aircraft are firms in India’s defense market are
American. Last year, Rockwell Collins growing. The case for continuing to
withhold 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
Along with a devalued rupee which will to India in the last decade.20 The United
States now accounts for 12 percent of
make imports more expensive, the Trump India’s total defense investment, and
administration’s decision to freeze military American firms are active participants
in competitions worth an additional
aid will make US firms less competitive $24 billion.
in Pakistan’s defense market.
6What Pakistan May Foreshadow
American firms will be less competitive Pakistan’s increased dependence on
in Pakistan’s defense market due to the Chinese lending leave some worried
freeze in US aid, Pakistan’s precarious whether Pakistan will be able to service
foreign exchange position and reliance its debt obligations if CPEC investments
on Chinese capital, and Washington’s yield lower-than-expected returns.25 As
growing strategic and commercial ties Chinese influence increases in Islamabad,
with India. The suspension of security American companies are bound to lose
aid marks a new low in ties with Pakistan. out in the process.
Despite Islamabad’s support for the Afghan
Pakistan’s pivot from Washington may
insurgency, previous administrations
foreshadow developments elsewhere.
reasoned that engagement would better
Like Pakistan, the arsenals of Turkey,
protect US interests than estrangement.
Egypt, and Saudi Arabia have long been
Pakistan was too close to Afghanistan,
dominated by US defense platforms.
too big, and had too many terrorist
Amidst regional instability, an increasingly
groups and nuclear weapons to risk a
multipolar international system, and
public confrontation. The recent decision
growing Chinese influence, each of
on military aid was a clear signal that
these countries can now choose between
the current White House has reached a
Chinese, Russian, and Western alternatives.
different conclusion.21
US market share can no longer be taken
President Trump has gone further than for granted in these key countries, with
his predecessors in openly trying to implications for American strategic and
coerce Pakistan into acting against commercial interests.
militant groups based in its country. In
Despite current ties with the Trump
turn, Pakistan has accelerated its embrace
administration, it is up to Pakistan
of China, positioning itself as Beijing’s
whether security assistance will resume.
most loyal friend in Asia and the primary
Pakistan, however, is unlikely to change
market for Chinese defense firms.
course. The country has long considered
Pakistan’s embrace may come at the
maintaining influence in Afghanistan a
expense of its financial independence.22
vital interest and views the Taliban and
In the face of a currency crisis, Pakistan
Haqqani Network its primary conduits in
has accepted over $5 billion in loans
doing so. An about-face would, however,
US market share from Beijing during this fiscal year alone
satisfy the conditions Washington has
to shore up its foreign exchange position.23
can no longer be Pakistan’s dwindling currency reserves
placed on its military aid. This would
release billions of dollars in assistance
taken for granted in threatened economic stability and the
to Pakistan and boost its procurement
future of the $62 billion China-Pakistan
these key countries, Economic Corridor (CPEC), the
budget by an estimated 36 percent
through 2028. After the dramatic move
with implications for key project in China’s Belt and Road
by the Trump administration to freeze
Initiative.24
American strategic security assistance, it will take a dramatic
response from Pakistan to change
and commercial Washington’s approach.
interests.
7Key Takeaways
• 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 15 https://quwa.org/2018/04/10/pakistan-begins-
receiving-mi-35m-helicopters/
2 https://www.tandfonline.com/doi/
pdf/10.1080/00963402.2016.1241520?needAccess=true 16 https://www.reuters.com/article/us-usa-pakistan-planes/u-s-
tells-pakistan-it-will-have-to-fund-f-16s-itself-idUSKCN0XT1U6
3 https://www.defense.gov/Portals/1/Documents/
pubs/1225-Report-Dec-2017.pdf 17 https://www.youtube.com/watch?v=qyZ004QI6Iw&t=298s
4 https://www.bbc.com/news/world-asia-34105565 18 https://www.rockwellcollins.com/Data/News/2017-
Cal-Yr/GS/FY17GSNR33-Pakistan-C130.aspx
5 https://media.defense.gov/2017/Dec/15/2001856979/-1/-
1/1/1225-REPORT-DEC-2017-FINAL-UNCLASS-BASE.PDF 19 https://www.voanews.com/a/noticeable-decline-
in-pakistan-terror-fatalities/4125523.html
6 https://twitter.com/realdonaldtrump/
status/947802588174577664?lang=en 20 http://carnegieendowment.org/2018/01/10/removing-
barriers-to-u.s.-india-defense-trade-pub-75206
7 https://www.state.gov/r/pa/prs/ps/2018/01/276858.htm
21 https://www.voanews.com/a/voa-interview-national-security-
8 https://www.theguardian.com/world/2014/jun/15/pakistan-offensive-
adviser-hr-mcmaster-pakistan-iran/4191703.html
militants-north-waziristan; http://dunyanews.tv/en/Pakistan/390161-
Salaries-of-govt-employees-raised-by-10pc-in-Budge 22 https://www.scmp.com/week-asia/geopolitics/article/2153614/
pakistans-currency-crisis-china-problem-and-solution
9 https://www.congress.gov/115/bills/hr5515/BILLS-115hr5515pcs.pdf
23 https://www.ft.com/content/1256ceaa-802c-11e8-bc55-50daf11b720d
10 https://www.reuters.com/article/pakistan-rupee/
update-3-pakistans-new-rupee-devaluation-shows- 24 Ibid
economic-risk-before-election-idUSL4N1TD2O1
25 https://www.economist.com/asia/2018/06/14/
11 https://www.bloomberg.com/news/articles/2018-06-11/pakistan- pakistan-faces-a-currency-crisis.-who-will-help
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
8About the Author About Avascent
Shane Mason is a Senior Market Analyst with Avascent Analytics Avascent is the leading strategy and
in Washington, DC. Shane was previously a Research Associate at management consulting firm serving
the Stimson Center’s South Asia Program, and a Scoville Fellow clients operating in government-driven
at the Carnegie Endowment for International Peace. He graduated markets. Working with corporate leaders
with an MA from the Middlebury Institute of International Studies and financial investors, Avascent delivers
at Monterey, and received his BA from Pepperdine University. For sophisticated, fact-based solutions in the
more information, contact: smason@avascent.com. areas of strategic growth, value capture,
and mergers and acquisition support.
With deep sector expertise, analytically
rigorous consulting methodologies, and a
uniquely flexible service model, Avascent
provides clients with the insights and
advice they need to succeed in dynamic
customer environments.
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