Elimination
of the ATC (Agreement on Textiles and Clothing):
How should Pakistan respond?
By
Sobia Qasim
BSc Candidate,
Lahore University of Management Science (LUMS)
Posted April 19, 2005 |
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Even though recent economic research provides convincing evidence that trade liberalization is associated with increased growth and economic development, it has been observed that gains from free trade have not been equally distributed between developed and third world countries. Pakistan, being a developing country, is no exception. |
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Despite having a comparative advantage in the production of textiles, various macro-economic constraints have prevented the economic advancement of Pakistan in this era of trade liberalization.
Hence, the country has encountered many obstacles in the way of economic development since the elimination of the Agreement on Textiles and Clothing (ATC). On 1st January 2005, the ATC ended and with it, the quota system for international trade in textiles and clothing. Even though the removal of quotas in the sector was purported to lead to enormous welfare gains for the country, the economy of Pakistan has been unable to realize the professed benefits in the form of greater market access.
Obstacles
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here are a range of obstacles hindering Pakistan's economic advancement in the post-ATC scenario and thus, a greater role of the government is required in the form of concrete steps to help achieve the economic progress that was originally visualized as an automatic accompaniment to trade liberalization. |
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China accounted for approximately 21% of the total global exports of textiles in 2004 and many analysts feel that its share will go as high as 50 % in the post-quota era. |
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Firstly, even though there is a wider range of buyers in the form of greater market access, competition between exporters of textile and clothing is increasing as the low-cost producers' share of the market is no longer limited by quotas. The U.S. Dept. of Commerce has estimated that major buyers of textiles will reduce the number of countries they source from by half in 2005-06 and by another third in 2010. Elimination of quotas will enable large developing countries like China to make their production more efficient and build stronger clusters of textile expertise due to economies of scale.
China accounted for approximately 21% of the total global exports of textiles in 2004 and many analysts feel that its share will go as high as 50 % in the post-quota era. Pakistan, too, should be able to take advantage of greater efficiency in production but this effect will be offset by the decrease in unit value prices as competition heats up. Hence, in order for Pakistan to survive in this highly competitive setting, the industry will need help from the government to reduce costs.
Secondly, there are loop-holes in the WTO agreement that allow the developed world to continue practicing discriminatory policies and thus, enable them to restrict market access for developing countries. Even though the ATC rules out import quotas, policies like import tariffs, anti-dumping charges and regional trade agreements are allowed by the WTO. These biased policies allow the developed countries to continue the protection of their domestic industries and thus, continue to act as hindrances in the way of free trade. Pakistani government needs to wake up to its role immediately in order to combat these WTO issues and thus fight for trade that is free and fair.
Government's Role:
Technical Expertise training
There are various ways through which the government can play a pivotal role in overcoming these problems and thus facilitate the industry's progress in the post-quota regime.
Firstly, technical expertise is mandatory to enable Pakistani producers to match the competitiveness of global exporters. The government can play a very important role to achieve this end. It can induce transfer of knowledge by facilitating imports of advanced-technology machinery (by relaxing import duties etc.) to assist workers and enable Pakistani industry to progress by the concept of 'learning by doing'. However, the industry needs to be wary of excessive reliance on imports and thus, it is imperative that backward linkages be developed simultaneously.
Government's Role:
Infrastructure investments
In order to give a positive impetus to the industry, the government also needs to spur investment in key infrastructural concerns including easy transportation access, reliable communication, availability of natural gas for self-generation of power, structure of power costs etc. The state also needs to stimulate Foreign Direct Investment, as its level has been very low in the agricultural sector. This is primarily due to weak property rights and the lack of credibility of the government when it comes to honoring international agreements. The Federal Minister of the Textile Industry portrays a very encouraging picture of the investment climate, in claiming that record investments have been made in this sector over the past few months.
Government's Role:
Professional/ Quality standards support
Since buyers have a far greater choice of who to buy from, they are able to demand stricter adherence to a range of quality standards. The implementation of standards such as SA 8000 (for labor), ISO 9000 (quality) and ISO 14000 (environment) shall help add value to the Pakistani products and thus, enable them to sell for a premium above the cellar-level that prices are driven to by today's cut-throat competition.
Government's Role:
Career training
As Pakistan updates its production technology by switching to labor-saving machinery upgrades, there will be tremendous job losses all over the country, especially amongst women workers. In order to offset the social cost accompanying more efficient production, the government needs to compensate the unemployed masses by creating more jobs, and by increasing the attractiveness of these unemployed. Training of workers should be encouraged by providing tax incentives and subsidies, and comprehensive assistance programs should be set underway to enable the unemployed to seek jobs in other sectors.
Government's Role:
Build industry clusters
Secondly, as Pakistan expands production, the government should initiate, and guarantee the completion of, more projects like Garment City, Value Addition City and Faisalabad Industrial City in order to generate employment. The government should also step in to promote and develop small cottage industries and Small and Medium Enterprises (SMEs) to boost employment. The SME sector, despite the utter lack of attention, has a share of $2.5 billion in Pakistan's total exports and absorbs approximately 57% percent of the country's labor force. Therefore, by solving SMEs' problems of infrastructure and finance, the government will not only generate more employment but also increase the share of value-added items in total exports.
Government's Role:
Forge preferential trade agreements
Following the example of western countries, Pakistan also needs to secure greater access to preferential trade agreements since they play a pivotal role in determining export market share. A significant achievement in this regard is the signing of a Preferential Trade Agreement (PTA) with China on 3rd Nov. 2003. Dialogue has also been initiated between trade bodies on a possible FTA with China. Being a member of SAARC, the South Asia Free Trade Agreement (SAFTA) will be effective from the 1st of Jan. 2006 and will greatly enhance trade between member countries by totally eliminating tariffs by 2015.
Pakistan should make a concerted effort to help eliminate historical political differences between neighbors and attempt to reach an agreement that is beneficial to all. This is true especially in the case of India, and Pakistan needs to overcome its differences with the country in order to devise a joint strategy to face the possible challenges of the WTO era.
The All Pakistan Textile Mills Association and the Northern India Textile Mills Association should work more closely in order to allow the strengthening of a mutually benefiting relationship. The government can be commended for its successful efforts to sign FTAs and Memorandums of Understandings (MoUs) with various countries including Sri Lanka and Iran, and such efforts should continue in order to secure more market access for Pakistan.
Government's Role:
Extract value from support of 'War on Terror'
Another way in which the government can aid industry is to help offset the disadvantageous conditions that have prevailed for Pakistani goods in the light of Pakistan being a frontline country in the 'War on Terror'. In order to capitalize on this hazardous role, the Ministry of Commerce recently proposed that President Pervez Musharraf, Commerce Minister Humayun Akhtar, and Secretary Commerce Ministry Tasneem Noorani visit various European countries to convince their leaders that Pakistan deserves special treatment for its fight against terrorism. The government has decided to start extensive lobbying to seek zero-rated duty for the country's goods in the European countries after Feb 2005. Such efforts deserve to be commended and should be continued with increased vigor to guarantee Pakistan the market share it deserves.
Government's Role:
Work the WTO
One of the primary reasons for the EU imposing anti-dumping charges against Pakistan was that our exporters were unaware of the rules of the game under WTO agreement on anti-dumping. Creating awareness of WTO-related pitfalls is therefore the foremost requirement and the government needs to promote further research and impart the results to business enterprises.
The WTO is not just an agent for globalization, it is also meant to be the primary body for mediation on all international trade-related disputes. The Pakistani government needs to realize the potential of the WTO as an arbiter, and use this to the fullest to promote domestic exports. The developed country model could also be followed whereby the advanced countries resort to retaliatory tariffs if some of their products are being unfairly targeted abroad. Therefore, it is imperative to realize the potential of the WTO as an arbiter to fight discriminatory charges and hence, enable the industry to attain global competitiveness.
It is evident that the government has a very important role to play in changed post-ATC scenario of world trade. It is imperative for it to wake up to this role and act immediately so that Pakistani industry can realize the advantages of free trade.
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Sobia Qasim is currently pursuing her studies at the Lahore University of Management Sciences. Her academic major is Economics and she aspires to graduate with a BSc honours degree in 2006.
