China’s entry into the World Trade Organization (WTO) in December, 2001, has indeed been an epoch-making event, insofar as it will contribute to the integration of the world’s fastest growing economy with the world trading system. China, with its newly-conferred most favoured nation (MEN) status, combined with low-cost labour, economics of scale and managed currency will pose a serious threat to the sustainability of exports of traditional labour-intensive products, specially textile and clothing, emanating from the developing countries.

Pakistan, being a big exporter of these products, must therefore, have an in-built mechanism in its Chinese “market-exploiting strategy to offset the impending “competition” effects in the third market by the “complementary” effects, through joint ventures/ collaboration, between the two friendly countries.

China, which presented a worst spectre of poverty, hunger and disease, and was bracketed with the world’s poorest countries about three decades back, with 80 per cent of its population, having income less than one US dollar per day, has set an unparalleled record in world economic history of doubling its per capita income after 10 years, faster than almost any country in the world. Chinese GDP is now $1.25 trillion with a per capita income of $ 900. Its open economic policy, devoid of ideological consideration, has done wonders. Hundreds of thousands of private foreign firms have been set up, employing over 150 million people.

Although the full and all-round impact of the growing prosperity is not yet discernible, in the wake of existing income disparities and of leading and lagging areas, yet the consumerism, luxurious and western style of living has started taking its route in the socio-economic set-up of the society. The tidal wave of direct foreign investment (DFI) worth more than $ 600 billion over the last two decades, has spurred the economic boom through a fast-emerging modernized and sophisticated industrial sector.

China is now the world’s 4th largest industrial producer after the USA, Japan and Germany. It has made spectacular progress in electronic industry and is exporting wide-ranging electronic goods to the USA. Its strength, however, still lies in low end products like textiles,etc. Even though textiles quotas won’t be fully phased out for another two years, foreign investors have already started flocking in ever greater number to set up their business in China.

Its agriculture sector will face problems due to unprecedented subsidies, which are being provided by the USA and Europe to its agricultural products. In high-tech, particularly in software, India leaves China far behind. India’s total sale of software was estimated at $8 billion ($ 6 billion export and $2 billion domestic sale). Last year, China’s export was merely $ 850 million. It is, however, on its way to make its name in I.T. industry also. As such, the hottest business in post-WTO China at least in short term will not be in high-tech goods, but in the labour-intensive products, including textile and clothing.

China is now engaged in re-designing its industry and re-structuring its economy, in order to bring them in conformity with the rules and regulations of the WTO and in the process, does face some problems. The quantum of protection that is available to the Chinese industry, is being eroded, following liberalization of trade and reduction or removal of tariffs. Industrial tariff will have to be brought down to 7 per cent and agricultural tariff will have to be 14.5 per cent by the end of 2003. A record foreign direct investment and technology worth around $60 billion is likely to flow during the current year, which would re-enforce the fierce competition in the Chinese market and render it more efficient.

At the same time, growing privatization and resultant rising competition will lead to the collapse of many state-owned enterprises. In fact, the closure of many factories has already given rise to the social unrest and labour problem. In the ultimate analysis, the private enterprise will become the foundation of the Chinese economy.

Meanwhile, China has to streamline its banking sector, wherein, along with the state-owned banks, foreign private banks would be allowed to operate. The process of political reforms have to be geared in line with the on-going economic reforms. Despite rapid industrialization and introduction of modern techniques and technologies, China still has the cheapest pool of manufacturing labour. Though Chinese population is now 1.3 billion, 700 million of them are living on farm earnings, on an average of just $285 per year, compared with an average US$ household income of nearly $40,000 a year.

China, unlike America, does not have a consumption economy and has an endless supply of low-priced labour, which allows companies not only to control cost, but often to cut it drastically. So, while textile and clothing industry in Japan, South Korea, Taiwan and even Thailand, have been subjected to the stifling-effect of the ever growing cost of production, China continues to hold on with low-cost industry, which mainly includes textiles, leather, sport goods and toys. A booming private sector adds to its export clout, absorbing access labour and keeping cost low. The Chinese currency, which is not floated, but managed, also serves as another weapon to stay its export competitiveness. In fact, China has been accused by Japan for transmitting deflationary genes to the large economies of the world, by supplying cheaper goods as a consequence of its currency, being persistently pegged with faltering dollar.

The disadvantage caused to its exports, following abnormal fall in the value of East Asian countries’ currencies in 1997, has almost been nullified because of economic revival in the affected countries. The newly-set up private enterprises have the advantage of conducting direct trade without involvement of state-designed middlemen and at the same time, they have import facility of raw-materials, equipments etc., at reduced prices as a sequel of compliance of WTO condition of making trade free through removal of all fiscal and physical barriers. It has been argued that the hourly-labour cost in Chinese manufacturing sector, especially in textile and clothing industry, is much lower than many other countries. A study, prepared by the UNCTAD on the basis of 1998 data, suggests that the hourly labour cost (inclusive wages, fringe benefits, etc.) in textile comes to $ 0.62 in China, whereas it is $ 0.97 in India, $ 20.92 in USA; $ 25.5 in Italy and around $ 1 in Pakistan.

Similarly, in clothing industry, the hourly-labour cost in China is $0.43; $0.91 in India, $0.70 in Bangladesh and around $1 in Pakistan; $23.10 in USA and $12.21 in Costa Rica. According to another estimate, at 43 cents an hour, China’s wages are less than one-third of Mexico’s. One of the reasons of higher cost in USA and Europe is that their textile industry is capital intensive.

It is perhaps due to these internal and external factors that one of the studies prepared by the UNCTAD to compare the industrial and technological capability of China, concludes as follows:

“China will be a major competitive threat to developing countries as liberalization proceeds and it gains access to world markets. The threat will be most immediate and intense in labour-intensive products and processes, but it is broader and is likely to quickly affect the entire technological spectrum.”

The developing countries, whose exports are likely to be affected, are: Malaysia is subjected to competition from China in furniture, non-textile clothing; Thailand in footwear;Indonesia in furniture; Vietnam in clothing and furniture; Bangladesh in outer-garments; Sri Lanka in toys and sport goods; South Korea in telecommunication equipments, electricity and machinery; India in textile and clothing, in addition to a number of countries of Africa and South America. Pakistan competes with China in outer-garments, cotton fabrics, leather goods, man-made fabrics, sport goods, textile goods, etc.,

Exports from these countries of Asia and other developing countries would, therefore, be vulnerable on account of the improvement in Chinese competitive position, as a result of its entry into the WTO. At the same time, the exporters from these countries to China, would have an easy access into its market, because of slowly dismantling the trade barriers and the removal of restrictions of quota and licensing, which could exercise a balancing effect. The quotas imposed by the United States and Europe are scheduled to be dismantled by December 2004. Now China after its joining the WTO, would emerge as the world’s leading garment producer as well as exporters. The World Bank estimates that China’s share of the world’s garment exports could increase from 20 per cent to 47 per cent by 2010. However, the agreement, Beijing had with the United States in 1999 offers some blunt instruments to slow the expected surge in Chinese apparel imports

The garment industry is experiencing a worldwide recession, and many countries are already feeling the chill wind from China. In Philippines, the Chinese apparel makers have already captured the market. The medium-wage countries like Mauritious are already struggling for survival. Meanwhile, the lowest wage countries, Bangladesh, Laos, Indonesia and Cambodia and others will now have to battle it out with each other at the bottom. In Pakistan, the textile and garment trade accounts for 60 percent of the country’s export earnings.

The Chinese competitive position, therefore, stands further improved; because i) its accession to WTO has conferred the status of MFN and its products will no longer be discriminated in foreign market, against the products of a country, already enjoying WTO’s membership. ii) It has comparative advantage in labour-intensive products, which has been further strengthened by relatively cheaper imports of raw-material, equipments; iii) it has a managed currency and iv) its products have the advantage of economics of scale. The over-riding emphasis is now, on export-led economic growth.

Although Pakistan and China have very close and cordial relations, but this closeness is not reflected in trade volume, which is far less than its potential. Pakistani export to China stood at $229.1 million in the year 2001-2002, whereas the imports from China accounted for $575.4 million, thus rendering the balance of trade against Pakistan. It is noteworthy that the USA is the largest importers both from Pakistan and China.

The share of Pakistan exports to the USA constitutes about 25 per cent of its total exports. The US imports of textile and textile-related-products, including garments, are as high as $80 billion, which are mainly supplied by Mexico, China, Pakistan, India, Bangladesh. Pakistan’s exports of textile to the USA is about $2 billion, out of its exports of textile and clothing of $6 billion. Its total exports during the period July-December, 2002, were in the order of $5.2 billion, mainly through cotton and cotton-based products. This upswing could be attributed to the greater market access to the European Union countries and the clearance of goods, stuck up at American ports last year.

Besides, the investment of about $1.5 billion made in the textile sector during the last few years, under BMR, for improving production, quality as well as for moving towards more value-addition had also been a contributory factor. Some milage could also be covered by entering into joint-ventures with China for boosting export both to China and USA, particularly in the field of textile and clothing. Such joint-ventures should not be located in Pakistan alone, but also in China to take advantage of cheap labour, technology and vast market

Despite some changes in the diversification of trade the textile sector remains the back-bone of the economy and still contributing 60 per cent to export earnings. In a world-wide perspective, however, while the competition in the export of textile and clothing is mounting day-by-day, its demand is rising at a sluggish pace, as compared to software and other engineering and electrical goods. Pakistan must, therefore, equally focus on bringing the highly value-added and hi-tech goods in its basket of export.

Meanwhile, our trade policy must be outward-looking, based on the realization of new developments abroad, which indeed warrants growth in exports in engineering, automobile and IT regimes. There should be close linkages between the market needs and the pattern of production in the country. We must remember that it is not through the export of potato-chips, but through the export of computer-chips that the foreign trade could serve as the engine of economic growth.

In conclusion, it may be emphasized that China’s WTO membership has added new dimension and direction to its economy and credibility which will elevate its status in the comity of nations. In the year 2003, the Chinese economy will witness second phase of phenomenal upturn in export-based economic growth.Its entry into the WTO is indeed a recognition by the international community of the pivotal and positive rate it is destined to play in the global trade.

In the short-term, particularly till the complete phasing out of quotas, its impact may not be abnormally significant, but thereafter, its exports, specially of traditional labour-intensive goods, would pose a formidable threat to the exports hailing from the developing countries.The developing countries, therefore, mast restructure and revamp their pattern of production and the composition of exports, to meet the unfolding challenges and to take advantage of the emerging opportunities.