Strategic Choices Of Pakistan Amid US And Chinese Investments – Analysis

Pakistan is walking a tightrope in its geopolitical and geo-economic orientations compounded by regional security issues and internal rifts hindering its capacity to respond decisively. Trump’s resurgence and enduring ascent of China is shaping a decisive global order to tip the balance towards either coexistence or strategic competition. Pakistan must safeguard its national interests through pragmatic balancing without extreme alignments in this shifting landscape. Given the substantial US and Chinese investments in Pakistan^___each advancing its regional interests^___Pakistan’s ability to hedge strategically will determine its success in leveraging opportunities and mitigating risks. 

Since independence, the Pakistan-US relationship has mainly been transactional, driven by Washington’s strategic interests, whether countering the Soviets in 1989, security concerns after 9/11, or stabilizing Afghanistan until 2021. When the interest was served, aid often declined. In contrast, Pakistan’s relations with China have remained steady since 1951. The Karakoram Highway marked the beginning of significant Chinese investment, leading to long-term partnerships in energy, mining, and strategic infrastructure like Gwadar Port. CPEC, being a $62 billion flagship project, puts Pakistan at a pivotal position in China’s BRI strategy. 

Keeping these relations as a pre-requisite, this insight analyzes the US and China’s comparative investment strategies in Pakistan, emphasizing the need for Pakistan to recalibrate its foreign policy to safeguard its national interests by balancing its relations with these global powers.

The US investment strategies, initially in the form of aid, follow a predictable script contingent upon its regional strategic interests. Over the years, the US has invested in areas like energy, defence, economy, health, education, etc. Graph I shows that being a Western ally in the Cold War gambit, Pakistan received nearly $2 billion of substantial military aid from 1953 to 1961. The aid was suspended during the Indo-Pakistan war of 1965 and 1971 and further deteriorated after Pakistan’s nuclear ambitions in 1979. The 1980s Afghan war reignited the Pakistan-US strategic alliance, which took another nosedive after the Soviet troops withdrew from Afghanistan. 

However, the alliance peaked after 9/11, with a surge in aid distinct from private investments, where Pakistan received approximately $7.89 billion in the “Coalition Support Fund”. The Kerry-Lugar-Berman Bill (2009) allocated $7.5 billion for development from 2010 to 2014.  In 2017, the U.S. government, through the Pakistan Private Investment Initiative (PPII), invested over 7.5 billion PKR in Pakistan’s small and medium-sized enterprises (SMEs). The initiative leverages local expertise via the Abraaj Pakistan Fund, the Pakistan Catalyst Fund, and the Baltoro Growth Fund, each receiving 2,496 million PKR from USAID, amounting to a total of 15.6 billion PKR, including their own investments. 

The US-China rivalry and the US withdrawal from Afghanistan in 2021 marked a shift in Pakistan-US relations, narrowing aid from $2 billion annually to eventually complete suspension. Private investment dropped to a mere $1.5 billion. Currently, US interests in Pakistan focus on counterterrorism, governance reforms, and conditional aid, shaped by the US-China impasse and concerns over regional radicalization threatening Pakistan’s internal security. 

Despite periodic sanctions, including the latest on ballistic missile technology in December 2024, Pakistan-US relations have persisted. However, the US-India partnership, marked by $20 million in defence deals, reflects Washington’s broader strategy to counterbalance China in Asia. Spanning over 7 decades, Pak-China relations, as described by President Xi as “Iron Brothers”, have stood the test of time. In Pakistan, significant Chinese investment started in 2015, and since then, it has emerged as the largest investor in Pakistan, accounting for 30% of total FDI. In FY2024, the investment stood at $ 224.81 million. China’s approach in Pakistan can be characterized by its pilot project, CPEC, which is a US$ 62 billion venture that builds infrastructure, energy projects, industrial units, and Special Economic Zones (SEZs). The purpose is to connect the deep-sea ports of Pakistan with the Chinese Xinjiang province and overland routes. 

Over the past decade, USD 44,370 million have been invested in 26 schemes, and 66 more projects worth USD 36.9 billion are in the pipeline. Thus far, CPEC has created 200,000 jobs in Pakistan, built 809 km of road, added over 10,000 MW of electricity to the national grid, and installed 886km of power transmission lines. The First Metro line in Lahore was a substantial project under CPEC. (see sector-wise investment graph in million dollars)

In September 2024, 25 Chinese companies pledged investments in Pakistan’s textile, technology, agriculture, pharmaceuticals, logistics, medical equipment, automobile, and education sectors. Several MoUs were signed for a $10 billion Chinese investment in four major export-oriented sectors: agriculture, food, textile, and car spare parts manufacturing. A protocol was signed with a Chinese investor to cultivate peanuts across 10,000 acres in Cholistan for export. Telecommunication companies like Zong, Huawei, and Changan Plant are prominent examples of Chinese investments. General Yang Yundong showed interest in investing $1 billion in establishing a medical city in Pakistan. 

China’s refusal to restructure Pakistan’s energy debt, totalling $16 billion, highlights the limits of this “Iron Brothers” partnership. Furthermore, recent tensions over Gwadar Port control and Pakistan’s request for sea-based nuclear capabilities indicate strains in the relationship, compounded by China’s obligations under the Nuclear Non-Proliferation Treaty.

The graph shows the comparative net FDI by China (red) and the US (blue) over the past decade, depicting a sharp decline in Chinese investments in 2018 due to government regulations and repayment concerns. Despite notable advances, Pakistan faces hindrances on nine priority SEZs, particularly the ML-1 railway line connecting Karachi to Peshawar, which inflated the cost to 45%. The US approach remained stagnant, depicting limited strategic investments. 

A comparative analysis of US and Chinese investment strategies in Pakistan reveals diverging strategic ambitions. The US focuses on conditional aid and private sector development in non-traditional areas. Meanwhile, China’s loan-driven investments in regional connectivity and energy routes may burden Pakistan despite promising expansion.

The future prognosis vindicates that Chinese and US investments will continue to shape Pakistan’s trajectory, necessitating a foreign policy revamp from hard-core alliances to issue-based multilateralism. The US is capable of swindling Pakistan’s politics through monetary institutions. For instance, the World Bank cancelled a $500 million loan under PACE-II because Pakistan could not renegotiate its terms with power plant agreements under CPEC. Similarly, Pakistan’s lapses in security assurances of Chinese nationals have slowed down CPEC investments.China refused to reopen big deals and restructure energy debt totalling around $16 billion.

The US is a key trade partner and influential in global economic institutions. At the same time, China provides Pakistan with crucial economic infrastructure, so hedging strategically is paramount for Pakistan without disengaging with either of them.  

Pakistan must strengthen indigenous capacity building by investing in domestic industries and leveraging its mineral and cold reserves to reduce reliance on external aid. (see Graph) Pakistan must also maintain diplomatic agility to navigate the US-China rivalry without compromising its sovereignty. Utilizing the global Pakistani diaspora to enhance soft power and attract foreign direct investment is crucial to escape the vicious cycle. Pakistan needs to demonstrate tangible progress on security and economic ends to ensure viability under CPEC and continued partnership with the US. Harness soft power, leverage its diaspora, and boost indigenous capacity building to improve income and attract FDI to escape the vicious debt cycle.  

About the authors:

• Shafaq Zernab is a Research Intern at India Study Centre, Institute of Strategic Studies Islamabad.
• Muhammad Ahmad Khan is a Research Associate at India Study Centre, Institute of Strategic Studies Islamabad.