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| SPDC Press Release. SPDC Seminar on Elimination of Textile Quotas and Pakistan -EU Trade |
Karachi-March 14, 2007.
Under the World Trade Organization's (WTO's) Agreement on Textile and Clothing (ATC), quantitative restrictions (quotas) on imports from developing countries have been removed, on all textile and clothing items, as of January 1, 2005. Since these restrictions varied from country to country and from product to product, their removal will alter the competitiveness differently for different countries. Countries that are relatively more competitive internationally are likely to observe gains in their existing market shares. It is thus, expected that this new environment would have a substantial impact on countries that are major exporters of textiles and clothing.
Pakistan's economy depends heavily on the exports of textile and clothing for earning foreign exchange. In 2004, these exports accounted for 69 percent of the country's total exports. There are apprehensions among the policymakers and the business community as to how much Pakistan can compete in the quota-free environment. As far the textile and clothing sector, the European Union (EU) is a major trade partner of Pakistan. In 2004, about 27 percent of Pakistan's textile exports destined to the EU market. SPDC's research on "The Elimination of Textile Quotas and Pakistan-EU Trade" is an attempt in assessing Pakistan's position in the post-quota environment in the European market. It aims to evaluate the effects of the removal of quantitative restrictions on Pakistan's trade with the European Union (EU) and tries to explore that how does the removal of these restrictions affect the welfare of the consumers in the EU, through changes in import prices.
The analysis presented in the study is confined to the EU-15. The data show that during 1995-2004, imports of clothing by the EU-15 items increased substantially by 82 percent while those of textile items increased only by 4.8 percent. China has been the major supplier of textile and clothing items to the EU-15. In 2004, imports from China amounted to i14 billion followed by Turkey and India, from where imports by the EU-15 worth i10 billion i4.3 billion, respectively. Imports from Pakistan have increased but from a small base, moving up from i1.2 billion in 1995 to i1.7 billion in 2000 and then to i2.3 billion in 2004. It is found that Pakistan's position is relatively better in the exports of textile items compared to that in clothing items. Among a selected group of 16 countries (Pakistan and its 15 competing countries in the EU-15 market ), Pakistan ranked at number 6 in textiles with a share of 7½ percent in the EU-15 imports of textile in 2004 while it ranked at number 9 with a share of 3½ percent in the EU-15 imports of clothing. It is also observed from the data that the EU-15 remained an important market for Pakistan until 2002. Pakistan's textile and clothing exports constituted 64 percent of total exports of Pakistan in 2002 and of these 38 percent were destined to the EU-15 market. However, in 2004, Pakistan's textile and clothing exports constituted 66 percent of total exports of Pakistan and of these, only 27 percent were marketed to the EU-15.
The study also makes a comparison of Pakistan's top 25 items at the 6-digit HS code level in each of the two broad categories of textiles and clothing that it exports to the EU-15 with those of its major competitors. The findings indicate that, in spite of having a larger share in the EU-15 imports of textile, Pakistan seems to have captured the market share relative to its competitors in 3 items related to the categories of woven fabric of polyester/ synthetic staple fibers. Alternatively, in clothing, it appears to have had a niche in 5 items mainly related to categories of bed-linen of synthetic/cotton fibers, jackets and blazers of cotton, and toilet and kitchen linen of cotton. In addition, Pakistan's major competitors in its top 25 textile items exports are Turkey, India and China. In clothing items, while Turkey has emerged as its major competitor, Pakistan faces quite a tough competition with rest of the competitors.
The trade patterns and Pakistan's position vis-à-vis its competitors in 105 common items of textiles (40 items) and clothing (65 items) that are identified for the empirical analysis are also studied. These are the items which Pakistan exports significantly but is not a major player in. These 105 items constituted over 90 percent of Pakistan's exports to the EU-15. Pakistan was granted high quotas in the textile items and was able to meet a majority of these quotas, measured as a fill rate of 90 percent or greater. It is noted that Pakistan maintained and even gained market share during 1995-2004, if all of the 40 textile items are added together. In spite of this the performance of some key competitors like China and Turkey over the same period has been stronger. On the other hand, Pakistan is much less of a player in supplying clothing items to the EU-15. However, there is some evidence that Pakistan has been increasing its share in clothing items and thus making some inroads in moving up the value chain to clothing items from textile items. During the review period, Pakistan had a clearly strong niche in exports of bed linen to the EU-15.
The empirical analysis of the study suggests that: (1) imposition of tariff reduces the price exclusive of tariff by about 0.9 percent and raises the price inclusive of tariffs by roughly 0.1 percent; and (2) import quotas on textile products by the EU that prove to be binding, increase the import price of textile and clothing by an average of 8.9 percent, thus making these goods considerably more expensive to the EU consumers.
The study also attempts to predict the effects of abolition of quantitative restriction on Pakistan's exports of textile and clothing to the EU-15 and on the import prices that the EU-15 consumers face for textile and clothing products. Out of 105 items included in the sample which constitute 90 percent of the value of total exports to the EU-15, there were 25 items related to textiles and 14 items related to clothing, where exports were restricted by quotas and these quotas were binding (having a fill rate of over 90 percent). The findings reveal that exports from Pakistan to the EU-15 would potentially be higher after quota removal in only a relatively few number of those items. Of the 25 textile items, growth of exports from Pakistan is predicted to be higher after quota removal in only seven items related to categories of woven fabrics of cotton/ synthetic staple fibers and different types of single cotton yarn. Similarly, of the 14 clothing items that had quotas which proved to be binding for Pakistan, export growth would be higher with quota removal for only 4 of those items.
The study concludes that Pakistan's export performance in the post-quota world in which other potential exporters, such as China and India, also stand to gain from the quota removal, will depend on how competitive Pakistan will prove to be, relative to these countries. In this regard, according to the Global Competitiveness Report, Pakistan ranks behind India, Thailand, China, Turkey and Indonesia in global competitiveness. The likely factors attributed for low relative competitiveness of Pakistan's exports are the high cost of production, cumbersome sales tax rebates, low productivity, inadequate technological up-gradation and investment in worker training and skill enhancement, poor quality of lint, concentration of exports in a few items, lack of innovation in design and style, insufficient infrastructure facilities, delays in shipment and deliveries of consignments, less reliable and uncompetitive modes of transport, and inefficient custom procedures.
It is asserted that only firms having potential in promptly meeting changing patterns of consumer demand in style and design, offering better quality of products at competitive prices and timely shipment and delivery of orders can make inroads into capturing the international market. The role of government in this regard is to facilitate firms and industries in achieving international competitiveness with supportive policies. This, in turn, requires the government to design a broader and more meaningful investment policy, and to promote an investment-friendly business environment which can foster competitive strength. While progress has been made on this front in some dimensions, the overall investment-to-GDP ratio at 17 percent for Pakistan remains low, compared to its competitors such as China (38 percent), Thailand (36 percent), India (24 percent).
According to the opinion of leading experts within the textile and clothing industry, it is likely that Pakistan would become a supplier of raw materials to China and India in the post quota regime, given its competitiveness in low value-added items and in certain end products. The government policies did not provide any support to the value-added sector, according to these experts. The growth in textiles would have been much higher had the incentives been provided at a time when competition was about to start. The textile experts feel that it is required that the Government of Pakistan (GoP) formulate textile policy by studying the textile policies that Pakistan's competitors are pursuing in order to provide a level playing field to local producers. They recommended that cotton growing and ginning, the value-added sector and human development are the areas where massive investment is needed.
The literature suggests that, increase in productivity of local firms is a prerequisite for increase in output and hence in exports. In a report related to Pakistan's growth and export competitiveness, the World Bank emphasized microeconomic fundamentals of competitiveness, such as enhancement in total factor productivity and an appropriate investment climate that accelerates productivity. They illustrate how this climate could affect efficiency and competitiveness at the level of firms. The report states: "In today's highly dynamic global markets under much reduced protection levels, competition is increasingly shaped by cost-competitiveness advantages. Pakistan needs to improve its microeconomic fundamentals to boost export competitiveness and promote export diversification. Given the relatively small size of its domestic economy, strong export performance will continue to be critical to sustaining higher growth."
In the light of the findings, it can be said that after the abolition of quotas and in the environment with greater competition Pakistan may have potential for enhancing its exports but its performance will depend on how competitive it will prove to be against potential competitors such as China, Turkey and India. In this regard, the study suggests formulating and implementing a broader and more meaningful investment policy for the textile and clothing sector of Pakistan that can help improve the performance of factors responsible for enhancing productivity and international competitiveness.
Finally, regarding the impact of removal on quotes on consumers in the EU-15, who import these products; the results of the study predict that the import prices in the EU-15 of all products subjected to quotas that proved to be binding in at least some countries for at least some time period would decline once these quantitative restrictions are abolished. For any product, the greater the number of years for which binding quotas were in place and the greater the number of countries on whom binding quotas were imposed, the greater will be the price reduction occurring for that product when the quotas are eliminated. Thus, keeping other things fixed, European consumers should accrue substantial welfare gains with the elimination of textile quotas, according to the study estimates.
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