Textile industry of Pakistan before and after the WTO

Industry before WTO:

In 1947 among 23 founder of GATT Pakistan was one of them. Pakistan participated in all the GATT negotiations actively. WTO was formed due to the presence of Pakistan in Uruguay round. Among founding members of WTO which was established in 1995 Pakistan was also one of them. WTO has greatest impact on all sectors of Pakistan’s economy, especially on its agriculture, textile and services. We can predict only few sectors because other sectors are difficult to predict.

If we talk about industrial sector Pakistan’s main export is textile and products related to it. Under the WTO regime Pakistan’s non textile products are negligible but have potential to grow. On the import side Pakistan is improving its tariff structure because of trade liberalization principle said by WTO. Average tax in Pakistan is 17 percent so it is ensure that there are no worse effects of trade liberalization on the domestic industry or products. There is a need for proper adjustment for domestic industry so that they may face the competition in global market. Under the free trade environment an agreement was held named as textile and clothing ( ATC ) in January 2005. According to this all textile and clothing products were integrated and this was the significant change for Pakistan. Economy of Pakistan heavily dependent on the textile and clothing because the textile industry is labor intensive and less capital intensive. Exports are globally competitive under free Quota trade.

Now we come to agricultural sector as we all know Pakistan is an agrarian economy but still it is net importer of food items. Agricultural agreement by WTO plays significant role in molding Pakistan’s agricultural policies. This agreement is called Agreement on Agriculture (AOA). This agreement tells us about export subsidies, access to the market and domestic support. Pakistan needs to utilizes its resources, it should produce and export such things like meat, dairy products, fruits, vegetables, horticulture etc. Pakistan and other developing countries want a world trading system or fair system of trade. Pakistan also has a comparative advantage in many other primary commodities. Although Pakistan has a comparative advantage but it should complete the domestic requirements. An Agreement was signed named as Trade Related Aspects of Intellectual Property Rights (TRIPS ). According to this it is ensured that effective protection of property rights on imported goods and same assurity for domestic industry of Pakistan.

Services are the main and largest component of developed and developing countries. Under inefficient and expensive services infrastructure, it is not possible for any state to grow. The contribution services sector is more than half of the GDP. Pakistan signed an agreement named as General Agreement on Trade in Services (GATS). Pakistan signed it to make commitment on trade in services such as economic services, wellbeing as

well as public services, commerce services, telecommunication services, tourism and travel related services, structure and manufacturing services.

Pakistan faces domestic problem of increased imports. WTO Agreements have an natural method providing for trade corrective measures to offset the effect of removal, subsidy and flow of imports. as a result Pakistan come up with antidumping law through general legislation, countervailing duty against subsidy, and safeguard action laws against flow of imports to protect domestic industry.

In a nutshell, Pakistan establishes liberal trade regimes where restrictions on quantity import was abolished or change in tariff. . It is important that the practical tariff in Pakistan are below the hurdle tariff in WTO, translate into market entrance. on the other hand, value control is necessary to competitiveness of Pakistan’s export. Low quality goods get low price in the international market. The obvious harms of quality for Pakistan are lack of scientific accuracy, lack of grade and lack of specialization. The WTO Agreement on Technical Barriers to Trade is relevant in this regard. correct support and sensible policies for the industry, beside quick balancing of import and export is major for the sustainability and development of Pakistan’s economy and this lead towards a intense prospect and trade development under the WTO system.

WTO AND TEXTILES:

A significant success of the Uruguay Round was the decision to phase out restrictions on imports of textiles and clothing. These restrictions were imposed by certain developed countries. The Agreement on Textiles and Clothing (ATC) of WTO which replaced the Multi Fiber Agreement (MFA), provided for the removal of these restrictions in four phases over a period of 10 years. The phasing out program ended on January 1, 2005. As a consequence the quotas have been completely abolished and the importing countries can no longer discriminate between exports of textiles and clothing. Moreover, the trade in textiles and clothing has now completely integrated into General Agreement on Tariffs and Trade (GATT) 1994 and will continue to be governed by its rules.Pakistan was the greatest sufferer of the quota regime as it had a high percentage of textiles and clothing exports which were restrained due to quotas by importing countries. Pakistan can, therefore, benefit greatly from the present non-quota regime of WTO in textiles and clothing sector.

However, there are a number of opportunities and challenges awaiting the textiles and clothing industry of Pakistan in the international market place. For instance, it is being expected that the importing countries would subsequently try to resort to other trade restrictions to take the place of quotas. These can be in form of non-tariff barriers such as importing countries’ requirements for the industry to comply with environmental, labor, sanitary, phytosanitary or technical regulations. The compliance to quality standards and regulations is a cost factor, which the industry will have to face and prepare for. Moreover, countries like China and India have already began giving a tough competition to Pakistan’s industry under the present quota free environment. A strategy needs to be made in this regard as well.

As the future global market is of clothing, Pakistan has been advised by certain analysts to concentrate more on value addition. Moreover, the success of Pakistan in the WTO regime lies not only in diversification of quality but also in the direction of trade. Majority of the exports are directed towards Europe and North America. It would be worthwhile for the industry to workout new markets in other parts of the world.

INTERNATIONAL TRADE ARRANGEMENTS IN TEXTILES AND CLOTHING:

MULTI FIBER ARRANGEMENT (MFA) 1974-94:

Under the Multi Fiber arrangement (MFA) developed countries controlled inputs of textiles and clothing into their countries through quotas on a country-by-country basis when increase in imports threatened their industries. Furthermore, it allowed bilateral or unilateral arrangement for not only quota imposition but also in the case of product categories, restrained levels and administrative arrangements.

Under this agreement the developed countries were required to enhance their quotas at the growth rate of 1% to 6%.. The MFA became effective since 1974 and lasted until the end of 1994 when Uruguay round negotiations was applied. It was a extended 5 times during the 21 year period and enlarged the product coverage for restrictions from cotton products to wool and man made fiber products and certain vegetable fiber products since 1986. MFA had 44 members, which were less than half of the GATT members but accounted for most members with an interest in textiles and clothing trade.

MFA was not successful because:

It did not protect jobs in developed countries

It led to loss of consumer surplus in importing countries.

The producers had to purchase quota rights (corruption).

The production decisions were based on quota restrictions and not on optimal

economic considerations

It led to oversupply and depressed world prices: loss to producers.

AGREEMENT ON TEXTILE AND CLOTHING (ATC) OF WTO:

Since 1995, the WTO contract on textile and clothes capture from the Multi fiber Arrangement. But from 1st January 2005, this Agreement has expired and the sector has been fully integrated into normal GATT rules. The quotas have thus come to an end, and importing countries are no longer clever to separate among exporters. Textiles and clothing products have returned to GATT rules more than 10-years period.

This happened gradually, in four steps, to allow time for both importers and exporters to adjust to the new situation. The respective durations and characteristics of the four phases for the elimination of quotas under the Agreement on Textiles and Clothing beginning from 1st January 1995 and ending on 31st December 2004 are as follows:

4 step period

% of goods to be brought in GATT

% of goods to be brought in GATT

Step 1: 1st January 1995 to 31st December 1997

16 % least amount, taking 1990 imports as base

6.96 % per year

Step 2: 1st January 1998 to 31st December 2001

17 %

8.7 % per year

Step 3: 1st January 2002 to 31st December 2004

18 %

11.05 %per year

Step 4: 1st January 2005

49 % highest

No quota

WTO REGIME RESULTS IN EMPLOYMENT LOSSES TO TEXTILE SECTOR:

The expert are claiming service losses in fabric zone follow the conclusion of Multi fiber agreement in stir of WTO rule, but, the policy makers are up to now focus on the labor problems in post quota system, official sources in department of Commerce established. Sources in Textile department of Ministry of Commerce told capital even with the fact the government had spent Rs 4 billion during last years to assemble the challenge of WTO execution, but unhappily, the government has yet to focus labor implication as Pakistan fabric started facing the impact of post quota system.

variety of dues with department and giant industrial energy tariff, which are disturbing cost of production, desires to be bring down to a significant level. These types of impediment not only are threading for being without a job but also dampening more job opening in the area. Policymakers, FPCCI and researchers should have paying attention the decline situation of workforce, especially females, of fiber making zone, ignoring them would eventually damage the fabric manufacturing of Pakistan in WTO system. The loss of job is a common problem and we should not see only wealth and financial side because service loss is a loss of generation and the quota regime were not blessing and disguise for Pakistan slightly a sentence, the expert believed.

Dr Karin Astrid Siegmann, examiner of Sustainable growth Policy institution (SDPI) while distributing her research study on “The Agreement on Textiles and Clothing: possible effects on sex parity in Pakistan”, told currency that enlarged competition would not only lead to decline situation of female employees in the area but would also raise the risks about their fitness and security. She said that the complete execution of the ATC from January 2005 shows a quantum rise in the global trade liberalization in textile and clothes. She said the reality of quota has condensed the supply of these commodities in the limited market up to now and had raised their prices.

Dr Karin suggested additional strain and execution of labor standards, improved training opportunity for female staff, better transport to job services after post quota period system. She said that female rather than male workers would accept the consequences of a prospective decline of operational conditions due to their attention in unit where quantity rates and other kinds of unstable contracts are general. Stressing on labor standards she said it was essential to protect worker from risky consequences of trade growth. This, she said, included the establishment of valuable enforcement mechanism to guarantee agreement with labor legislation, mainly in ensuring the female workers’ enrolment to a social security system for wellbeing, motherhood, disability, and departure benefits. Workers’, especially female workers’, right to manage should be emphasized. She suggested that constructive incentive, such as tariff cuts or subsidy for those companies that protect workers right were imaginable. she said that for the manufacturing, it strengthens the welcome side effects to help guarantee quality, and to counter expect NTBs related to poor labor standards.

Displaced female employees have more hurdels in finding job alternative than male due to their higher attention in little area in the labor market in Pakistan. Thus, to protect female employees from possible durable job losses, policy reactions should contain improved exercise opportunity for female staff. Information center linked to employment opportunity and commands may be reputable. Moreover, the industry’s class requirements that are possible to raise after the quota system has been abolish will call for better-educated workforce. Human resources development is therefore advocated by the sect oral strategy “Textile Vision 2005”, by the World Bank (2004), and others (e,g. Kazmi, 2002).

On the other hand, it is not reflected in company’s policies. What is desirable is a unique focus on female staff due to their better exposure on the labor market. 

The experts suggested for the improvement of transport to work, which is necessary to enhance female access to jobs. Given the voiced interest of manager in the fabric and clothes industry to have greater entrée to female labor supply, the manufacturing should take the guide here. This does not only hold true for service in the fabric and clothes manufacturing but for all other kinds of business service as well.

Vice President of federation of Pakistan Chamber & Commerce Industry (FPCCI) while expressing satisfaction that there would be no job losses in the textile sector but rather more definite employment opportunities generated after post quota era. Pakistan textile sector was prepared well to meet the challenges.

Criticizing some government policies the experts said that lack of management, consumption of time, repetition of efforts and inaccessible guidelines by different procession government departments are danger to face challenge after elimination of fabric quotas, needs to be addressed immediately.

CHAPTER 3: LITERATURE REVIEW

Trela and Whalley (1990) estimate that Pakistan would gain $0.008 billion with the removal of both tariffs and quotas. However, with the removal of only bilateral quota and not the tariffs, most of the developing countries including Pakistan would be worse off. Thus indicating the advantageous terms of trade for the developed country as a result of not eliminating the tariffs.

Akhtar Alam (1991) presents an overview of the textile industry of Pakistan. According to him, the textile industry witnessed remarkable growth during the 50’s and 60’s but it got severe set-back and a large number of spinning units became sick during the 70’s. However, things started improving gradually and phenomenal changes have taken place during the last few years.

According to Khan and Mahmood (1996) Pakistan will have an additional market access of about 62 percent and 67 percent for textile and clothing respectively with the eradication of MFA in 2005.

Rodrik and Rodriguez (2000) summarized the theoretical foundations and empirical evidence of a dynamic link from trade policy to economic growth. This literature is based on reduced-form cross-country regressions.

Hildegunn Kyvik Nordas (2004) starts his study with a discussion of the structure of the textile and clothing industries, focusing on technology and industrial organization, discusses the ATC and the progress so far in quota elimination. He analyses the ATC countries’ trade patterns in the sector since 1995, followed by an assessment of the likely changes in the sector post-ATC.

Afia Malik (2004) research has seen the trade prospects for Pakistan’s textile and clothing exports in the international market at the time when it has been decided in the WTO Agreement on Textiles and Clothing that the trade in this sector from the developing to developed countries should be completely free from quantitative restrictions and governed by the normal GATT rules by 2005. The paper has also reviewed the current status of Pakistan’s yard goods industry. Fabric and clothing is the main contributor to our total exports. But in the international market the share is marginal. The reason is the increasing world competition. The quality as well as the range of goods produced is the major weakness for our textile exports. Therefore, to survive in a more liberalized and more competitive world in which we are going to enter we need to go for modern technology and for the production of high value added goods.

Dr. Anwar Ali & Mohammad Munir (2008) analyzed Pakistan’s textile export in the global market. The analysis of data suggested that the shares of bed wear, towels and knitwear have increased over the last seven years. The share of other categories of textile exports either remained inactive or changed marginally. This study further suggested that there is a greater need to improve the quality of textile, because after quota free regime the competitiveness in the world market has been increased tremendously.

Dr. Lutuf Ali Phulpoto (2008) concludes that the development of textile industry depends upon the increasing output of cotton. The yield per hectare of cotton was 177 kg at the time of independence which was lower than other countries. In the beginning, Pakistan used to import cloth for meeting the requirements of the country. Therefore, need was felt to setup textile industry in the country. The yield per hectare of cotton increased from 197 kg to 760 kg during the period of 1947-48 to 2004-05, which developed textile industry in Pakistan.

Jodie Keane & Dirk Willem (2008) examines the job of fabric and clothing industry in enlargement and expansion strategies in developing countries. They propose that textile and clothing industry are significant in economic and social conditions, in the short-run by providing income, jobs, particularly for women, and foreign exchange receipts and in the long-run by providing countries the chance for continued economic growth. According to them, the potential of the fabric and clothing industry to contribute to long-run expansion and progress will depend not only on the characteristics of the investor, but also on the worth as well as efficiency of government policies and institutions in rising countries to put up on this deal.

Dr. Noor Ahmed Mammon (2010) analyzed the establishment and development of the denim sub sector. According to him, the weaving part in Pakistan generally is paying intense attention to the significant success of the denim sub sector. The clothing industry of Pakistan openly benefits from the latest developments in the denim adding up advanced price to the textile formed in Pakistan. The Denim area in Pakistan still much smaller in terms of scale is leading the system for the whole industry.

METHODOLOGY

SAMPLE SIZE

The sample of the study was 80 respondents and study was based on a survey which was conducted with different respondents.

RESEARCH TOOLS

Questionnaire

Websites

Articles

DATA COLLECTION

Data was collected through questionnaire and other sources i.e. websites, articles etc.

DATA ANALYSIS

Collected data was analyzed through computer. Table and graphs were prepared according to data received.

SURVEY RESULTS

1. What is your gender?

Male

50

Female

30

2. Do you think that textile industry of Pakistan is contributing significantly towards economic growth?

Yes

58

No

12

Don’t know

10

3. Is the development of the textile industry directly related to the development of the economy?

Yes

60

No

13

Don’t know

7

4. The textile sector of Pakistan acts as the backbone of the economy.

Agree

50

Strongly agree

20

Disagree

10

5. Enhancement of the textile industry will boost up economic growth in the country.

Agree

55

Strongly agree

20

Disagree

5

6. Do you think that textile industry was more successful before the establishment of WTO?

Yes

20

No

40

Don’t know

20

7. Are WTO policies favorable for Pakistan’s textile industry?

Yes

58

No

8

Don’t know

14

8. Did the textile industry of Pakistan grow after the establishment of WTO?

Yes

59

No

7

Don’t know

14

9. The textile sector is considered as the single largest determinant of growth in manufacturing sector.

Agree

30

Strongly agree

40

Disagree

10

10. Over governed and over monitored regime of the government of Pakistan has been a threat to the textile industry.

Agree

50

Strongly agree

20

Disagree

10

11. Pakistan’s bad image portrayed by the international media is affecting the performance of its textile industry or not?

Yes

66

No

8

Don’t know

6

12. Lack of infrastructure is a hindrance in the way of development of the textile industry.

Agree

50

Strongly agree

25

Disagree

5

13. Were WTO policies helpful for the growth of textile industry of Pakistan?

Yes

59

No

7

Don’t know

14

14. Do you believe that development of an economy depends largely on its textile sector?

Agree

35

Strongly agree

25

Disagree

20

15. There is a considerable impact of WTO on all sectors of Pakistan’s economy, particularly textile industry.

Agree

36

Strongly agree

24

Disagree

20

16. Pakistan was the greatest sufferer of the quota regime.

Agree

60

Strongly agree

13

Disagree

7

17. Is the present non-quota regime of WTO greatly in favor of Pakistan’s textile industry?

Yes

60

No

10

Don’t know

10

18. Pakistan needs to concentrate more on value addition.

Agree

60

Strongly agree

10

Disagree

10

19. An increase in the productivity of textiles and garments would increase the overall national welfare of Pakistan or not?

Yes

70

No

5

Don’t know

5

20. Public-private interaction can prove helpful in enhancing productivity of textile industry.

Agree

60

Strongly agree

12

Disagree

8

21. Can improvement of infrastructure enhance textile productivity, and hence increase economic growth in Pakistan?

Yes

68

No

5

Don’t know

8

22. The abolishment of textile and clothing export quotas is in favor of Pakistan’s textile sector.

Agree

55

Strongly agree

18

Disagree

7

23. Establishment of human resource development centers can help boost textile productivity.

Agree

50

Strongly agree

28

Disagree

2

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS:

The following portions have been adapted from the World Bank Report of 2004 titled “Textile and Clothing Policy Note: Implications for Pakistan of Abolishing Textile and Clothing Export Quotas”

Enhancing Productivity

Raising productivity is a key to reaping the benefits from the abolition of the trade quotas in the textiles and clothing sector. As the future global market is of clothing, Pakistan needs to concentrate more on value addition. The World Bank has worked out that an increase in productivity in textiles and garments would increase overall national welfare in Pakistan. However the mechanisms by means of which the above-mentioned targets can be achieved include:

Improving Process Efficiency

If large gains in process efficiency are to be achieved it is important that efficiency improvements be focused on the areas where cost is relatively large in Pakistan.

Product Quality Improvement

Augmenting the quality of the products is not only effective for enhancing the production but it is also a must to perform exceptionally well in the clothing sector. In the post ATC era of high competition among the developing countries in the market of USA and the EU, the issues of social compliance and other non-tariff barriers and the provision of various safe guard mechanisms quality will be the only driving factor.

Diversification of the Industry and Finding Niche Markets

The diversification of the textile and clothing industry within several of the goods where Pakistan specialize for example men’s knit shirts being much less significant to challenging countries and finding niche markets which are not very strict on social compliance issues for such products is recommended.

Investment Opportunities

Investment in both the forms foreign and domestic is the need of the time in T&C sector of Pakistan. Apart from the problems of electricity supply, administrative processes and low productivity of labor, the following two key areas need to be addressed:

Law and Order

No investment will take place if the investor feels that his investment will be at threat because of the security problem. So it needs to be improved in Pakistan.

Infrastructure

Improvement of the national infrastructure, especially communications, energy resources and human resource development is also required.

Promotion of Regional Trade Agreements (RTAs)

Regional trading is an effective tool to enhance the trade of the participant countries of any Agreement. Pakistan can look forward to become the member of potential trading blocks.

Encouraging Buyer Driven Commodity Chain

A product sequence refers to a complete variety of actions concerned in the design, manufacture and promotion of a manufactured goods. Contrary to the Producer-driven chains, which are usually found in capital and technological-intensive industries, the Buyer-driven chain is universal in manual, buyer goods industries such as clothes, footwear and toy. In such a sequence, great retailers and product manufacturer play the main character in creation decentralized making network in developing countries. As garments is a labor intensive activity Pakistan has a comparative advantage of cheap labor and can be encased by attracting the global brands.

Public-Private Interaction

A lot of input is being taken from the private sector while formulating national policies yet more initiatives can be taken in not only creating awareness among the stake holders but also providing technical education and R&D facilities with the collaboration of private sector.

Remedy through Foreign Direct Investment (FDI)

Foreign direct investment in fabric zone in the preceding four years has reached to US$4 billion which has lead to enhancement in output, both in conditions of value and number, in thread, fabric, home textiles and clothes, further generating above 300,000 new jobs. On the other hand, the investment amount is not acceptable as compared with the potential accessible in Pakistan’s Textile segment. There is moreover a critical need to set standard investment necessities for the formation of new capability and up-gradation of the presented production base.

Emphasis on Value Added Products

Pakistan is a leading exporting nation in raw yarn, cotton, and fabrics. If Pakistan emphasizes on the value added products like garments, hosiery, knitwear and other textile made-ups, it is believed that the export volume of textiles can be increased by manifolds. In this respect top priority should be given to stitching industry that leads to highest value addition and employment generation.

Center for Human Resource Development

There is a need to establish Human Resource Development Centers where training courses need to be conducted for the capacity building of labor. Furthermore there is critical need to enlarge the amount of such professional institutions where up to date technological learning is provided.

Establishment and Accreditation of Laboratories

The global trade regime requires standardization complied with WTO regulations. At present due to non-availability of testing laboratories, Pakistani exporters have to spend huge money to get certification from abroad. If WTO recommended labs are established in Pakistan a lot of valuable foreign exchange could be saved. So there is a need to set up such laboratories so that the exporters can get these standards at comparatively competitive prices.

Need to Reduce the Cost of Doing Business

At present cost of doing business in Pakistan is higher as compared to the regional countries, which has resulted in bitter competitiveness to Pakistani products in foreign markets. China and India are the bigger competitors of Pakistan. It is feared that if cost of doing business in Pakistan is not brought at par with other Asian countries, its products would find no place in market both in terms of quality and price. In the context of future trade, there is an urgent need to bring all the utility charges and levy of taxes down to the minimum level.

Focus on Man Made Fibers (MMF)

Realizing the importance of capital-intensive synthetic fibers (especially from the export point of view) the proportion of these fibers need to be increased gradually in Pakistan’s textile products.

In a nutshell, Textile industry of Pakistan is contributing significantly towards economic growth. Development of the textile industry directly related to the development of the economy. The textile sector of Pakistan acts as the backbone of the economy

Enhancement of the textile industry will boost up economic growth in the country. Lack of infrastructure is a hindrance in the way of development of the textile industry

Establishment of human resource development centers can help boost textile productivity.

An increase in the productivity of textiles and garments would increase the overall national welfare of Pakistan.