A comprehensive study released by the World Trade Organization (WTO) on how the textile market will shape up once the quota regime is dismantled on January 1, 2005 offers Pakistan nothing to cheer up.
A key conclusion of the study is that China is poised to capture more than 50 per cent share of the world market and that another country to largely benefit from the expiry of the Agreement on Textile and Clothing (ATC) is India.
Pakistan does not figure in among the top ten countries to have a major share in the vast markets of the EU, the United States and Canada, nor has it been among them before.
Ironically, Bangladesh, which does not produce much cotton but produces quality garments and entered the fray only a decade ago, will retain its share to some extent although it is deeply worried about its possible decline.
As it appears, Pakistan may take some time to enable itself to clinch a sizable share of the market because its textile industry and policy-making state agencies, as they stand today, lack the preparedness, discipline and the competitive edge that the post-ATC free trade environment would require.
Even a separate ministry for textiles has yet to become functional when only a few weeks are left for the trade to become quota-free. The decision to set up the ministry was taken long time back.
And the most ironic aspect of the prevailing situation is that the commerce ministry finds it difficult to reconcile with going away of this lucrative industry away from its fold.
This is despite the fact that the private sector is preparing itself in its humble way to meet the new situation and has already invested a huge sum of money to modernize the factories.
A major impact of the phasing out of the ATC, according to the WTO report, will be that China and India will come to dominate the world trade in textiles and clothing, with China's share alone touching 50 per cent or more.
The two countries will gain market access in the European Union, the United States and Canada to a significant extent, "but the expected surge in market share may be less than anticipated, as proximity to major markets assumes increasing economic significance," says the study.
There is, however, some room for other developing countries to catch up with China because it has yet to show competitive strength in the design and fashion segments of the markets.
Following are the market shares before and after the quota eliminations in respect of the top ten countries in the textile market of the European Union (first figure shows pre-2005 share and the second one post-2005 share): China (10%, 12%), Turkey (13%, 12%), India (9%, 11%), US, Canada (8%, 7%) Central, Eastern Europe (6%, 6%), Indonesia (4%, 5%), South Korea (5%, 4%), Taiwan (3%, 3%), Other North Africa (3%, 3%), Bangladesh (0%, 3%), Africa (3%, 0%) and Rest of the world (36%, 34%).
Following are market shares (before and after) in the EU clothing market: China (18%, 29%), India (6%, 9%), Turkey (9%, 6%), Central, Eastern Europe (9%, 6%), Hong Kong (6%, 6%), Other North Africa (6%, 5%), Morocco (5%, 4%), Poland (5%, 4%), Bangladesh (3%, 4%), Indonesia (3%, 3%) and Rest of the world (30%, 24%).
In respect of the US textile market, following are the market shares before and after the quota elimination: China (11%, 18%), European Union (16%, 14%), Mexico (13%, 11%), Rest of Americas (10%, 8%), South Korea (6%, 6%), Taiwan (7%, 6%), India (5%, 5%), Hong Kong (6%, 5%), Japan (3%, 3%), Indonesia (3%, 3%), Rest of the world (20%,21%).
And in respect of the US clothing market: China (16%, 50%), India (4%, 15%), Mexico (10%, 3%), Hong Kong (9%, 6%), Rest of Americas (16%, 5%), European Union (5%, 0%), Taiwan (4%, 0%), The Philippines (4%, 2%), Indonesia (4%, 2%), Bangladesh (4%, 2%), Thailand (0%, 3%), Sri Lanka (0%, 2%) Rest of the world (24%, 10%).
Meanwhile, in respect of source of imports of textiles to the US, Pakistan's share has been 3 per cent in 1995 and it rose to 5 per cent in 2002 but in respect of clothing to the US, its share was nil. China's share in textiles remained static at 14 per cent in both periods, and in respect of clothing it rose from 15 per cent to 16 per cent.
China was the world's largest exporter of both textiles and clothing in 1995 as well as 2002. Its world market share (excluding intra-EU trade) increased from 22.5 per cent to 30 per cent over this period in the clothing sector and from 16 to 22 per cent in the textile sector.
The other dominant exporters of textiles in both years were Italy, Germany, South Korea, Taiwan, France, Belgium, Japan and the UK, while Turkey and India had made it to the top 10 list in 2002. Developed countries thus dominated exports in the textiles sector.
In the clothing sector the major exporters in addition to China were Italy; Hong Kong; Germany; France; Turkey; India; Indonesia; South Korea and Thailand. Mexico had made it to the top ten in 2002, ranking fifth, mainly due to NAFTA.
Since 1995 the share of Canada, the EU and the United States in imports of textiles has increased from about 35 per cent to 43.5 per cent in 2002 (excluding intra-EU trade). The increase was mainly due to a rise in the US's share from 14 to 21 per cent while the shares of EU and Canada remained stable at about 19 and 2.7 per cent respectively.
In respect of clothing, these countries' share of world imports has increased from 62 per cent to 67 per cent during the same period. Canada's share has increased, but is only about 2 per cent in 2002, while the EU and the United States are moving in opposite directions - the EU's share declined slightly from about 32 per cent to about 30 per cent, while that of the US increased from 30 per cent to 35 per cent. Thus, these countries are relatively more important markets for exporters of clothing than for exporters of textiles.
The second half of the 1990s saw changes in both the EU and the United States in relation to the sourcing of textile and clothing imports, reflecting regional trade agreements and structural changes in the textile and clothing sectors.
The WTO study takes into account recent developments in the organization of the textiles and clothing sector, where vertical specialization has become an important feature.
It implies that the inputs embodied in the final product cross borders several times and such trade is very sensitive to the tariff level. Hence the outcome of the phasing out of quotas will depend much more on the prevailing tariff rates.
Second, time to market is important, particularly in the fashion clothing sector. The countries close to the major markets are likely to be less affected by competition from India and China than has been anticipated in previous studies.
Mexico, the Caribbean, Eastern Europe and North Africa are likely to remain important exporters to the US and EU respectively, and possibly maintain their market shares. Thus, having a common border with the importer and facing low or zero tariffs have a substantial impact on bilateral trade.
The countries that are most likely to lose market shares, the WTO study says, are the ones located far from the major markets and which have had either tariff and quota-free access to the United States and EU markets, or which have had non-binding quotas. These countries will undoubtedly face adjustment challenges.
The developed countries have "temporarily" protected their textiles and clothing sectors for 40 years and these two sectors have represented anomalies in the GATT ever since the LTA (Long- Term Agreement) came into force in 1962.
Among the most distorting measures to have prevailed so far have been import quotas allocated to some, mainly developing countries on a country-by-country and product-by-product basis, but not applied on others.
This has led to a pattern of specialization where countries with the strongest comparative advantage for textiles and clothing, such as China and India, face binding quotas, while others receive investment in the sector motivated by unfilled quotas and may well find that these investments are unsustainable in a trade regime based on the principles of the GATT.
Quotas are, in other words, non-tariff barriers and have been a major hurdle in the way of both free and fair trade. Estimates of the tariff equivalents of the quotas applied by the EU in 1997 varied from 1.3 per cent to 21.6 per cent for textiles and from 3 per cent to 34.8 per cent for clothing.
In both sectors the lowest barriers were towards Central and Eastern Europe, while the highest barriers were towards Asian countries, e.g. China, India, Malaysia, Indonesia and the Philippines.
The tariff equivalents of the quotas have been by far higher than the average tariffs facing manufactured imports to the EU and the United States. The ATC quotas were, therefore, based on discrimination against the developing countries.
Besides, quotas are also a tax on exports in the exporting country. An estimate of the equivalent average export tax for India showed that it varied between 24 per cent (in 1997) and 40 per cent (in 1999) during the period 1993-99 for exports to the United States and between 14 per cent (in 1994) and 19 per cent (in 1999) for exports to the EU.
India also has a number of domestic distortions that if eliminated can improve the performance of the clothing and textiles sector substantially. A World Bank study says that the welfare gains to India from the elimination of the ATC quotas can be three times high if combined with domestic reforms.
It goes without saying that the developed countries have always been extraordinarily protectionist in trade with the developing countries but not without preaching free trade to the latter.
And protectionism in the textile and clothing sector has a long history in United States and Europe. In the 1950s, Japan; Hong Kong; India and Pakistan agreed to voluntary export restraints for cotton textile products to the United States.
In 1962 a Long Term Agreement Regarding International Trade in Cotton Textiles (LTA) was signed under the auspices of the GATT (replacing a 1-year short-term agreement). The LTA was renegotiated several times until it was replaced by the Multi- Fibre Agreement (MFA), which came into force in 1974. The MFA, as the name suggests, extended restrictions on trade to wool and man-made fibres in addition to cotton.
The MFA was renegotiated four times, the last time in 1991, and it finally expired in 1994. Six developed countries applied quotas under the MFA during the final years of the agreement (the EU, Austria, Canada, Finland, Norway and the United States), and the quotas were applied almost exclusively to imports from developing countries.
The expiry of the MFA did not, however, mean an end to quotas on textile and clothing exports from developing countries. Instead the MFA was followed by the Agreement on Textiles and Clothing (ATC), which came into force with the establishment of the WTO in 1995.
The ATC was not an extension of the MFA. Rather it was a transitory regime between the MFA and the full integration of textiles and clothing into the multilateral trading system.
Ironically, no integration took place and the MFA restrictions were carried into the ATC by Canada, the EU, Norway and the United States. Now after more than 40 years of import quotas, the textile and clothing sector will become subject to the general rules of General Agreement on Tariffs and Trade from January 1, 2005.