Pakistan appears to be the latest battleground between the US and China as the trade war between the two superpowers escalates. The US has curtailed Pakistan’s security-related aid to $150 million from more than $1 billion per year after opposing an idea of an International Monetary Fund (IMF) bailout for it. It indicates the US’s frustration after Pakistan came out of its influence and entered into a strategic partnership with China.

In an interview, US Secretary of State Mike Pompeo issued some warning words over Chinese involvement in Pakistan, shedding light on what could be another growing point of contention between the world’s two largest economies. He criticized the idea of an International Monetary Fund (IMF) bailout for Pakistan. The remarks were specifically pointing to China and how it would benefit from such a deal. “Make no mistake, we will be watching what the IMF does,” he warned, in response to reports that Pakistan is planning to request a bailout package of up to $12 billion to shore up its depleted currency reserves and indebted economy. “There’s no rationale for IMF tax dollars — and associated with that, American dollars that are part of the IMF funding — for those to go to bail out Chinese bondholders or China itself.” According to US experts, Washington has voiced its disapproval of growing Chinese involvement in Pakistan and other developing countries, accusing the world’s second-largest economy of overwhelming smaller countries with loans and being part of the problem rather than the solution.

Against its earlier stance that the US wanted similar cooperation with Pakistan, it appears to be annoyed at both Pakistan and China after the launch of the China Pakistan Economic Corridor (CPEC). The US is worried about Beijing’s increased engagement with Islamabad. Pakistan’s significant increase in foreign direct investment (FDI) in the last year is largely thanks to the $62 billion CPEC, a series of joint projects in energy production and infrastructure including railroads, roads, ports and power plants. The CPEC is part of China’s broader One Belt One Road (OBOR) infrastructure push across much of Asia, the Middle East and Africa. “The US is stepping up the ante against China and its One Belt One Road project,” CNBC quoted Timothy Ash, senior emerging markets strategist at Bluebay Asset Management, arguing that the US point “is a fair one.” This, he said, is because China extends loans to emerging market countries around the world for difficult-to-finance projects in areas like infrastructure and energy. While this offers a crucial leg-up in terms of development, the costs are often high, “including unfettered market access which can destroy local industries and perversely the ability to pay back.” It also creates immediate-term economic imbalances like wider current account deficits, higher debt, weaker currencies and foreign currency reserve depletion, which is exactly what Pakistan is seeing today. “The Pakistan bailout now in sharp focus, and with the US looking to counter rising Chinese influence globally, this story will run, and run.”

Faced with an impending crisis, Pakistan’s newly-elected government is likely to request an IMF bailout, although the IMF says it has not yet received any requests. Experts say Pakistan needs a sizable injection of capital. Foreign exchange reserves are simply too low. And that means the IMF. Some investors are worried that the US stance could prevent a potential bailout from being approved. It is also due to the deterioration of US-Pakistani relations amid criticism and funding cuts from Washington over Islamabad’s “inadequate” efforts against extremist groups in and around the country. However, in response to a vocal rebuke from Trump on the issue in January, China quickly came to Pakistan’s rescue and its Foreign Minister Wang Yi praised Pakistan’s outstanding contribution to the global cause of counter terrorism.

After the threat to the IMF, the US Congress passed a $716.3 billion defence spending bill, capping its security-related aid to Pakistan at $150 million, which is significantly below the historic level of more than $1 billion per year. “The legislation reduces the total amount of funds provided for reimbursement to Pakistan to $150 million. This is a significant reduction from the $700 million that was authorised through Coalition Support Fund last year,” said Anish Goel, who was part of Barack Obama’s White House National Security Council. The National Defense Authorisation Act-2019 (NDAA-19), however, removed certain conditions—like action against Haqqani Network or the Lashkar-e-Taiba (LeT). Pakistan, during the Obama administration, used to get nearly 1.2 billion dollars in aid from the US under the Enhanced Partnership with Pakistan Act of 2009, also known as the Kerry-Lugar-Berman Act. In August last year, US President Donald Trump unveiled his new South Asia policy and asked Pakistan to do more against terror groups.

The situation points out serious problems for the new government in Pakistan. It will not only have to deal with an acute economic crisis but also face hostile global politics. The US warning and aid cut mean the government will have to act quickly to adjust to ground realities at national and international levels. Some say the US behaviour has become more hostile after Pakistan rejected its plan to re-impose ousted Prime Minister Nawaz Sharif and his party on the country. The US media openly backed Nawaz Sharif in corruption cases against him and his subsequent disqualification by the Supreme Court of Pakistan. It desperately wanted his party to win elections against the Pakistan Tehreek-i-Insaf (PTI) of Imran Khan. The US warning to the IMF also explains how it influences international monetary institutions to advance its agenda in the world. However, Pakistan cannot be browbeaten by it in the current situation as China will not leave it alone and would fulfill its financial requirements to realize its own economic dreams.