The textile and clothing (T&C) sector is the main pillar of Pakistan's economic edifice, the share of which in the total export earnings is 64 per cent. The sector employs 250 million people and accounts for 9 per cent of the GDP.
The global T&C trade is regulated by the Agreement on Textile and Clothing (ATC) of the WTO. The agreement provides for the complete phasing out of the quantitative restrictions on the export of T&C products by December 31, 2004. Currently these quantitative restrictions or quotas are applied by the European Union USA, Canada and Turkey on T&C exports from many developing countries thus restricting market access.
However, from January 1, 2005, when quota restrictions are completely lifted, market access to the economies of the EU and North America will increase.
However, the developing countries like Bangladesh which are not subject to quota restrictions may lose their market share. Moreover, the lifting of quotas will transform the T&C market from a seller to a buyer market and increase price competition. As price competition intensifies, profits will be squeezed and marginal exporters may be forced to quit the fray. Exporters enjoying the economies of scale are likely to be the major beneficiaries.
The opening of markets for T&C poses numerous challenges for developing economies including that of Pakistan. As increase in market access will not be evenly distributed, some countries will increase their market share, while others may even find it difficult to maintain their market share.
In order to understand the likely position of Pakistan in the post-ATC regime, it is imperative to look at the country's export pattern in the context of global T&C trade.
Globally trade in T&C is $353 billion (the source of this and most other data presented in this article is WTO, while the source of Pakistan-specific data is mostly EPB), which accounts for nearly 6 per cent of the total merchandise trade.
Of this, the share of textile is $152 billion, while that of clothing is $201 billion. The largest T&C exporter is the EU whose export receipts exceed $102 billion-nearly 29 per cent of the global exports. The EU is also the largest T&C importer, which constitutes 40 per cent of the world imports.
The second major player is China. At $96 billion, China (including Hong Kong) accounts for 27 per cent of the world's T&C exports. The other major exporters are the USA, South Korea, Turkey, Taiwan, India and Mexico. Pakistan at $7 billion accounts for nearly 2 per cent of global T&C exports. Of this, the share of textile is 69 per cent, while that of clothing is 31 per cent. This is in contrast with global T&C trade, where the share of textile and clothing is 43 and 57 per cent respectively.
The EU and the USA are Pakistan's largest buyers whose share in the exports is 21 per cent and 20 per cent respectively. The percentage share of Canada and Turkey, the two other quota countries, in Pakistan's global T&C exports is 1.5 and 0.91 per cent respectively.
The total value of exports to quota countries is to the tune of $5 billion, which is 70 per cent of total exports. Of the non-quota export markets, the largest share is held by the Middle East, which at $913 million is 8.3 per cent.
This is followed by the Chinese (including Hong Kong) market, which at $587 million constitutes 5.3 per cent. The share of other markets value wise is: South Korea $147 million, Saarc region $124 million, Asean region $108 million, Australia $90 million, South Africa $76 million, and Japan $70 million.
Category-wise, the largest share is held by made-ups which constitutes 28.7 per cent of total T&C exports. This is followed by fabrics, which account for 18.7 per cent of the exports. The percentage share of other categories is: knit-wear 15.9; ready-made garments 15.2; yarn 12.9; synthetics 8 and raw cotton 0.68
As the two largest markets for T&C exports are the quota countries, the EU and the USA, the removal of quantitative restrictions will give greater market access to Pakistani products.
However, there are a few factors which must be taken into account before drawing any conclusions about a likely increase in Pakistan's market share. One, Pakistan has never realized its full quota in these two markets.
In fact quota realization by Pakistan has been around 70 per cent only. And it is being widely predicted that countries failing to realize their full quota may find it difficult to secure a substantial increase in their market share.
Two, market access for exports of other developing countries to the USA and EU will also increase. This means our exports will face greater competition. China is the largest supplier of US textile imports accounting for nearly 16 per cent of US imports.
The second and third largest, suppliers to US textile market among developing countries are Mexico and India respectively. The Mexican share is 10 per cent while Indian share is 8 per cent. Pakistan, whose share in US textile imports is about 7 per cent, is the fourth.
The next largest supplier is South Korea whose exports constitute 6.2 per cent of US textile imports. Clothing exports to the USA are in excess of $1 billion. However, these exports constitute less than 2 per cent of total US clothing imports. Again, China is the largest supplier of US clothing purchases.
The value of Chinese clothing exports to the US market is more than $10 billion, which constitutes over 15 per cent of the US, clothing imports. If we add Hong Kong's clothing exports to the USA, which are well over $4 billion, Chinese share in US market becomes even larger.
The next major supplier of clothing to the USA is Mexico whose market share is nearly 12 per cent. Mexico being a member of the North Atlantic Free Trade Area (NAFTA) enjoys very low, and in many case zero, tariffs on its exports to the American market.
The other major suppliers to the US market among developing countries are South Korea, Indonesia, Thailand and India. Even the share of Bangladesh to the US market is 3 per cent almost double than that of Pakistan.
China is also the largest supplier of EU textile imports among developing nations followed by Turkey, India and Pakistan. Intra-EU trade, of course, contributes to about 63 per cent of EU imports. The share of China is slightly less than 5 per cent. The share of Pakistan and India is 3.5 and 2.4 per cent respectively.
As for EU clothing imports, China again has the largest share, outside the EU itself, which is 11.5 per cent. The other major suppliers include Turkey, India and Bangladesh. Both India and Bangladesh export in excess of $2.5 billion each to the EU. However, Pakistan's clothing exports to the EU are only to the tune of $1 billion.
Definitely with the removal of quota restrictions, the share of developing countries in EU imports will rise. But which country will grab the larger share of the cake? Courtesy the economies of scale and a highly subsidized economy, which make Chinese products more price competitive, China stands higher chances than any other country.
Besides, since international economic relations are based on a quid pro quo, the EU attracted by the world's largest market, may give China special treatment. However, unlike other developing countries, China will face quantitative restrictions till the end of 2007. This will give some, breathing space to other developing economies like India and Pakistan.
Three, tariff and non-tariff barriers will remain intact In fact non-tariff barriers like environment, technical and labour standards and anti-dumping duties will assume greater significance. Pakistan may find it a lot difficult to comply with these non-tariff barriers.
China is among the fastest growing textile buyers in the world. In 1980, China accounted for 1.9 per cent of global imports. In 1990, the share increased to 4.9 per cent and presently it is well in excess of 8 per cent.
Moreover, Pakistan and China have a preferential trade agreement (PTA) under which exports to China will be given preferential tariff treatment. However, at present Pakistan's share in Chinese textile imports is less than 4 per cent. For the Chinese textile market, Pakistan will face tough competition from Taiwan, Japan and Korea.
Arguable the greatest weakness of Pakistan in the post-MFA regime is that it is not a member of any vibrant regional organisation. This is an era of regional trade alliances (RTAs). The members of an RTA give tariff concessions to each other over and above their commitments under the WTO.
Though Pakistan is a member of two RTAs -- Saarc and ECO-- their trade performance has so far been disappointing. For example, intra-Saarc trade accounts for less than 5 per cent of the total trade of the seven member countries. Recently agreement on SAFTA has been concluded, which seeks to promote intra-SAARC trade. However, its success depends upon Pak-India relations.
Another weakness is the low labour productivity. Cheap labour is an advantage. However, this advantage is lost if labour is not productive. Labour in Pakistan is of low productivity because human resource development (HRD) has been a low priority area in Pakistan in both public and private sectors.
High cost of utilities and high interest rate in Pakistan increase the cost of doing business and make our exports less price competitive than many developing countries. Finally, there is the problem of cotton contamination. Contamination of cotton starts at picking stage and continues till pressing of cotton into bales. This badly affects the quality of the final product.
