SS4

The Footwear Sector in Pakistan
Export performance and potential
Implications of the WTO Agreements
September 2007
This publication has been produced with the assistance of the European Union (EU) as part of a EU-funded Trade Related Technical Assistance (TRTA) programme with the Government of Pakistan. The International Trade Centre (ITC) is implementing the programme. The content of this publication is the sole responsibility of the consultants. Facts and figures set forth in this publication are the responsibility of the consultants and should not be considered as reflecting the views or carrying the endorsement of the EC, ITC, UNCTAD, or WTO. The factual details and in-country resources in the publication have been researched and compiled by the consultants. ITC has not formally edited this report.
International Trade Centre (UNCTAD/WTO) Palais des Nations, 1211 Geneva 10, Switzerland Email: itcreg@intracen.org http://www.intracen.org Distribution: UNRESTRICTED September 2007
ITC: The Partner in Export Development

ITC Mission ITC enables small business export success in developing countries by providing, with partners, trade development solutions to the private sector, trade support institutions and policy-makers. ITC strategic objectives Enterprises Strengthen the international competitiveness of enterprises. Trade support institutions Develop the capacity of trade service providers to support businesses. Policy-makers Support policy-makers in integrating the business sector into the global economy.
Acknowledgements
The report was prepared by:

Morten Scholer, Senior Market Development Adviser, International Trade Centre (ITC), Geneva, Switzerland Wasim Zakaria, CEO, Footlib (Pvt.) Ltd and former Chairman of PFMA, Lahore, Pakistan Bastiaan Bijl, Trade Data Analyst, Independent Consultant, New Delhi, India Madiha Butt, Research Executive, Aftab Associates (Pvt.) Ltd, Lahore, Pakistan Inaam ul Haque, WTO Adviser, WTO Cell, Planning and Development Department, Government of the Punjab, Pakistan
Inputs and support were provided by:

H. Aftab Ahmad, CEO, Aftab Associates (Pvt.) Ltd, Lahore, Pakistan Quratulain Ibrahim, Executive Director, Aftab Associates (Pvt.) Ltd, Karachi, Pakistan Arif Ahmed Khan, ITC National Programme Coordinator, Islamabad, Pakistan Arooj Irshad, WTO Cell, Planning and Development Department, Government of Punjab, Pakistan Kaneez Fatima, Research Executive, Aftab Associates (Pvt.) Ltd, Lahore, Pakistan Muhammad Ali, Chairman, Pakistan Footwear Manufacturers Association (PFMA) Rasheed Ali, Language Editor, Pakistan Muhammad Ali, Language Editor, Lahore, Pakistan JulieAnne Lee, Business Advisory Services Consultant, ITC, Geneva, Switzerland Maryam Yunus, Formatter/Proof Reader, Lahore, Pakistan
The companies that provided input to our queries (in alphabetical order):

Bata Pakistan Ltd Brother Associates (Pvt.) Ltd East Pakistan Chrome Tannery (Pvt.) Ltd Footlib (Pvt.) Ltd Raja Industries (Pvt.) Sialkot Shafi (Pvt.) Ltd Starlet Products Ltd
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Abbreviations
ANWR ASCOBIPS AWE CBR CCCN CEN DDA EDF EOBI EU FPCCI FDC FDDI FTA GATS GATT GoP GSP ILO IMF IOCO IPO IPRs ISO ITC KCCI LCCI LDC MNF MoC MTN NAMA OHS PCP PCSIR PFMA PIFFC PSC PSFD PVC R&D RTA SAFTA SAPTA SMEDA SMEs SOP Ariston and Nord West Ring Association of Shippers Council of Bangladesh, India, Pakistan and Sri Lanka Average Weight Equivalent Central Board of Revenue Customs Cooperation Council Nomenclature European Committee for Standardization Doha Development Agenda Export Development Fund Employees Old-age Benefits Institution European Union Federation of Pakistan Chambers of Commerce and Industry Footwear Design Centre Footwear Design and Development Institute Free Trade Agreement General Agreement on Trade in Services General Agreement on Tariffs and Trade Government of Pakistan Generalised System of Preferences International Labour Organisation International Monetary Fund Input Output Coefficient Organization Intellectual Property Organization Intellectual Property Rights International Organisation for Standardisation International Trade Centre Karachi Chamber of Commerce and Industry Lahore Chamber of Commerce and Industry Least Developed Country Most Favoured Nation Ministry of Commerce Multilateral Round of Negotiations Non-Agriculture Market Access Occupational Health and Safety Pentachlorophenol Pakistan Council for Scientific and Industrial Research Pakistan Footwear Manufacturers Association Pakistan International Freight Forwarders Council Pakistan Shippers Council Pakistan School of Fashion Design Poly Vinyl Chloride Research and Development Ready-to-Assemble South Asian Free Trade Area SAARC Preferential Trading Arrangement Small and Medium Enterprise Development Authority Small and Medium sized Enterprises Standard Operating Procedures
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SPS SRO SWOT TBT TDAP TPR TRIMs TRIPs TRTA UAE WTO
Sanitary and Phytosanitary Measures Statutory Regulatory Order Strength, Weakness, Opportunity and Threat Technical Barriers to Trade Trade Development Authority of Pakistan (formerly Export Promotion Board) Thermo Plastic Rubber Trade-Related Investment Measures Trade Related Aspects of Intellectual Property Trade-Related Technical Assistance United Arab Emirates World Trade Organization
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Table of contents
Acknowledgements Abbreviations Executive summary Industry overview Trade issues in general Recommendations Implications of WTO Agreements 1 Background and objectives 1.1 EC TRTA Programme for Pakistan 1.2 Five sector studies 2 Footwear sector in Pakistan 2.1 The sector in general 2.2 Reasons for fluctuations in exports and imports 2.3 Pricing structure of footwear industry 2.4 The YATRA study 2.5 An overview of the footwear trade 3 Implications of the WTO Agreements 3.1 Background 3.2 Information on WTO issues 3.3 Implications of the WTO Trade Agreements 3.4 Trade conditions of Pakistans footwear sector 4 Obstacles and shortcomings to export 4.1 Obstacles and shortcomings exporters opinions 4.2 Obstacles and shortcomings importers opinions 5 Export services in Pakistan 5.1 Export service providers 5.2 Export services as they actually are expressed views 5.3 Export services as they should be expressed views 5.4 Export services in other countries some examples 6 Conclusion and recommendations 6.1 Conclusions and recommendations 6.2 The way forward if we had a million i iii 1 1 1 2 2 5 5 5 7 7 18 19 25 25 49 49 52 56 69 76 76 80 81 81 85 86 87 88 88 90
Annexes Annex A Operations involved in the manufacturing process Annex B Members of PFMA as per early September 2007 List of Tables
95 95 99
Table 2.1 Activity flow for manufacturing of export goods ................................................. 11 Table 2.2 Price trade structure .......................................................................................... 14 Table 2.3 Technology costs and source............................................................................ 17 Table 2.4 Average unit value in US$ (FOB Pakistan), 2000-2005 .................................... 19 Table 2.5 Overview of the Pirmazenser size range........................................................... 24 Table 2.6 Product classifications relevant to Pakistans footwear export sector ............... 26 Table 2.7 Pakistans total footwear exports and imports, 2001-2005 (US$ million) .......... 27 Table 2.8 Pakistans major export destinations by shoe category, 2005........................... 27 Table 2.9 Footwear exports Pakistan, India and Bangladesh, 2005 ............................... 29 Table 2.10 Pakistans major import origins by shoe category, 2005 ................................. 30 Table 2.11 World imports by shoe category, 2005 ............................................................ 33 Table 2.12 United States tariffs applied to imports from Pakistan..................................... 36 Table 2.13 European Union tariffs applied to imports from Pakistan ................................ 37 Table 2.14 Japan tariffs applied to imports from Pakistan................................................. 38 Table 2.15 South Korea tariffs applied to imports from Pakistan ...................................... 38 Table 2.16 UAE/Saudi/Oman tariffs applied to imports from Pakistan .............................. 38 Table 2.17 Yemen tariffs applied to imports from Pakistan ............................................... 39 Table 2.18 Imports of footwear parts and import tariffs applied, 2005............................... 40 Table 2.19 Pakistan-Turkey footwear trade, 2005............................................................. 43 Table 2.20 Pakistans exports of footwear, 2000-2005 (US$ million)................................ 44 Table 3.1: Top 10 footwear exporters to Pakistan, 2004 ................................................... 70 Table 3.2: Top 10 buyers of Pakistani footwear, 2005 ...................................................... 72
List of Figures
Figure 2.1 Footwear manufacturing process flow chart..................................................... 10 Figure 2.2 Share of production costs for leather shoe with rubber/TPR sole .................... 12 Figure 2.3 Trade and distribution channels for footwear in the EU.................................... 13 Figure 3.1 Functional scope of the WTO........................................................................... 50 Figure 3.2 Upward and downward information flow on the WTO ...................................... 53 Figure 3.3 Relevance intensity of the WTO Agreements .................................................. 58
List of Boxes
Box 3.1 Multilateral discipline of trade rules The WTO system ....................................... 49 Box 3.2 Regional Trade Agreements (RTAs) .................................................................... 60 Box 3.3 WTO Agreements in a nutshell ............................................................................ 68 Box 3.4 Import and export profile ...................................................................................... 69 Box 3.5 At a glance: Impact of the WTO Agreements on Pakistans footwear sector ....... 74
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Executive summary
Industry overview
Pakistan produces annually around 240 million pairs of footwear of which approximately 20 million pairs are exported. The industry has had a significant increase in export in recent years exports now stand at around US$150 million per year. Pakistan has a large footwear sector, which mostly belongs to the unorganized cottage sector. Craft manufacturers/cobblers cover a large portion of footwear manufacturing in Pakistan and only around 20% of the sector is organized. There is an immense export potential in the footwear industry of Pakistan, but also many hindrances. The main obstacle is time-consuming product development, for which new tools and material are required. The most important need of the industry is to create a long-term policy that can facilitate exporters in overcoming such limitations. Pakistan's share of the global footwear market of over US$70 billion is around US$150 million only. The region including India, China, Bangladesh and Viet Nam is well known for footwear manufacturing, so the major buyers cannot ignore Pakistan. However, the conditions for growth in export require a combination of product development and close cooperation with buyers in order to secure some flexibility from their side.
Trade issues in general

The Government, through the Trade Development Authority of Pakistan (TDAP), provides marketing and promotional support to the sector by subsidising exporters participation in trade fairs and trade delegations. For the fiscal year 2006-07, the Government announced 6% of its budget to be spent on research and development (R&D) activities. However, the implementation of government policies is so slow that they lose their impact. Moreover, the Governments repayment process of duty drawback and various taxes, such as sales tax and import duty, is very long and cumbersome. Delays in the repayment of duty drawback unnecessarily block exporters cash flows. The footwear industry in India is growing rapidly. Some key raw materials can be imported from India at competitive prices, but the Government of Pakistan has restricted imports of materials from India. The Pakistan Footwear Manufacturers Association (PFMA) has several times voiced its concern to the Government to liberalise import conditions, but no attention has been paid to their advice. Generally, the industry feels there is a lack of long-term policy and vision from the Government for the footwear sector of Pakistan. At company level, the most important strength is entrepreneurial commitment; there is a very strong desire to succeed in all kinds of circumstances. However, most companies and exporters are small and medium-sized enterprises (SMEs). The standard and process of product development is not very effective or efficient. Among exporters, there is a tendency to copy each others designs and, because of the overlapping product lines of most of the companies,
International Trade Centre
the interest of buyers has dropped tremendously. Foresight to train and develop human resources is also lacking because of limited financial resources.
Recommendations
It is proposed that a Footwear Training Institute is established. It should have all relevant facilities, like R&D, material testing, product testing and human resource development. Relevant parties and cost estimates are mentioned in section 6.2.5 If we had a million. Duty drawback rate is lower than the import duties paid. The rate must increase immediately to 8%. It is highly desirable to exclude footwear raw materials from the negative list of imports from India. It would help in improving competitiveness, speeding up the process of product development and also increasing product variety.
Implications of WTO Agreements

The implications of the WTO Agreements have been looked at from three angles:

WTO Agreements and their relevance to the sector Information flows on the WTO issues Trade conditions for the sector, including threats and opportunities.
WTO Agreements relevant to the footwear sector

The agreement of direct relevance to the footwear sector is GATT 1994. Other agreements having high relevance intensity are TRIPs, Technical Barriers to Trade (TBT), Rules of Origin and the Agreement on Customs Valuation.
Information flows on WTO issues

Exporters are not well informed about the WTO Agreements and their implications for their sector. Very little information on WTO issues and on where to get information is offered to the industry. A multi-organisational initiative is necessary to enhance the quality and easy accessibility of information the so-called downward flow of information. The Government of Pakistan regularly provides information on trade statistics to the WTO. However, these statistics are short on coverage, research design, and lack response from the industry. Companies are generally reluctant to share information about themselves. Information among entrepreneurs on how to reach government authorities or trade bodies is not even. A more formalised upward flow of information is recommended.
WTO Agreements implications for trade conditions

E x p o r ts
Better market access for Pakistan in the industrial countries markets. Reduction in prices and improvement in the quality of inputs.
Opportunities to intensify penetration in the US, Germany, UK, France, Italian and Turkish markets. Great potential for increasing exports, but the supply side problems to be tackled. Pakistan must learn to produce what is liked and required abroad and at competitive prices. Pakistan needs to do intensive research into the needs of foreign markets, including fashion trends and designs.
I m p o r ts
Substantial opening of Pakistans market, albeit at relatively higher duty. No serious threat at present (tariff rate at 25% is quite high) but problem is caused by malpractice of under-invoicing and misdeclaration, as well as smuggling. Import growth is increasing a potential threat.
1 Background and objectives

1.1 EC TRTA Programme for Pakistan
The International Trade Centre (ITC) is implementing, on behalf of the European Union (EU), a Trade-related Technical Assistance (TRTA) programme in Pakistan. The overall objective of the programme is to assist Pakistan to foster its integration into the world economy and, ultimately, to contribute to poverty alleviation through the achievement of trade-related conditions for sustained and stable economic growth. More specifically, the programme aims to enhance awareness among government officials, the business sector and civil society about the implications of the World Trade Organization (WTO) Agreements on the economy of the country, and to assist Pakistan in building the necessary capacity to address issues resulting from its participation in the WTO.
1.2 Five sector studies

Within this framework, the programme has undertaken five studies on sectors selected by the Ministry of Commerce in Pakistan: automotive parts, footwear, furniture, pharmaceuticals and sports goods. The studies have been undertaken by national consultants working in collaboration with the respective business associations, national and international experts and ITC. The studies identify export opportunities and threats in each sector and examine the implications of the WTO Agreements on these sectors. Specifically they include:

An overview of the sector and its relevance to Pakistan, including production processes, pricing and turnover performance, regulatory environment and export performance. A summary of other studies, reports, policy papers, strategies, etc developed in recent years for the sector. An overview of the sectors trading performance for key products, including the sectors global trade position, national sector data, imports and exports over the last 5 years, and the global position of key Pakistani companies. Identification of the WTO Agreements relevant to the sector and analysis of their implications for the sector globally and in Pakistan, both currently and in the future. This includes analysis of changed or new market threats or opportunities arising out of the emerging multilateral trading environment. An assessment of the availability and accessibility of relevant information on WTO, including the information flows between the Government and the business community. Identification of the key obstacles or shortcomings for improving the sectors export performance and provision of proposals for improvement or rectification. An assessment of the current export support services provided by the Government and suggestions on how these could improve the export performance in the relevant sector.
Recommendations aimed at individual companies, business associations and relevant government authorities including some hands-on suggestions in the form of scenarios with proposed partners and estimates of costs.
2 Footwear sector in Pakistan

2.1 The sector in general
2.1.1 Introduction
Pakistan's position in the global market is very small. Out of the total of around US$58 billion (US$70 billion at FOB) footwear business, Pakistans share is around US$150 million only. China is the largest footwear manufacturer and it is presumed that it has a machine capacity to serve at least 80% to 85% of the world footwear needs. Viet Nams footwear manufacturing sector is growing rapidly. About a decade ago and even earlier, when the shift was taking place from Europe, it was viewed that Pakistan could emerge as one of important footwear manufacturing countries. This thinking was supported by the fact that Pakistan has a strong leather base and leather tanning industry. As new investments in footwear were meagre and the existing manufacturing did not grow at successful pace, global buyers eventually lost interest. Despite the fact that Pakistan has a big leather tanning industry, most of the tanners have gone into leather garments manufacturing rather than footwear manufacturing, presumably because investment in leather garments is less capital-intensive and the technical expertise required not of a vast nature. On the other hand, footwear manufacturing needs more capital, skills, infrastructure, and the manufacturing process is far more complicated and intricate as compared to garments manufacturing. Even at those times, few investments, which were made in the footwear sector by various companies, did not turn out to be very successful. Due to the complex nature of business, there were no success stories to follow. Footwear trade remains difficult in Pakistan. This is predominantly because the industry does not have international standard vendors for supplying various components. In addition, it lacks tooling, which is essential and important for quality product development and footwear manufacturing. These components and tooling are in the form of lasts, moulds, soles top of encounter materials, decorative trims and various other grinderies and chemical products which are used in footwear manufacturing. Mould manufacturers are practically non-existent. This supporting industry is very important in improving cost-effectiveness of local manufacturers and in introducing turnaround time for taking good product to the global market/customer.
National sector data

The national footwear consumption is around 230 million pairs per year corresponding to 1.5 pairs per person. This consumption includes low priced sandals and slippers, Poly Vinyl Chloride (P.V.C)-injected footwear and shoes made by village cobblers. Today most of the shoes dont have leather soles -- they have synthetic soles or non-leather soles. The soles are made up of plastic based material, e.g. PVC, which is a widely used thermoplastic polymer.
Production capacity
Since the data available is not very reliable and most small manufacturers are unregistered, it is also hard to assess the exact production capacity. In recent times, footwear requirement has also been met by the increasing surge of imported Chinese footwear. It is assumed that imported footwear constitutes about 10% of the domestic requirement. The most reliable source of information/data would be the Federal Bureau of Statistics (FBS), Islamabad. It is unfortunate that no reliable research study on the footwear sector in Pakistan has been conducted in the past and no credible reports are available.
Total employment
The footwear sector is highly labour-intensive. Even within the mechanised sector, each machine needs an operator and a lot of work is still done manually. Several steps in shoe manufacturing still need to be performed manually, e.g. marking operations, lacing, folding operations, tread burning operations, etc. In cottage industry, where there is no existence of machines, artisans with the help of small shoe making tools perform all the steps involved in shoe manufacture.
Products
The domestic industry makes all types of shoes except winter boots. Pakistan has a large footwear sector, which mostly belongs to the cottage/unorganised sector. The local shops are dependant on the unorganised sector for their products. The style of these products is very good. The suspect raw materials used are purchased locally as well as imported (As the material does not stand any specifications, it is called suspect material). Most of these unorganised manufacturers are so small that their access to suspect raw materials is also limited. As the size of manufacturers and their requirement is small, large manufacturers do not entertain them. Therefore, off-the-shelf, B-quality material is available in the local market. Price conscious consumers nonetheless go for B-quality material. It is envisaged that 20% of the footwear sector is organised. Organised sector means capitalintensive factories or mechanised manufacturing process. However, craft manufacturers/cobblers do a large percentage of footwear manufacturing in Pakistan. Presently, the use of machinery is on the increase because of the closedown in Europe, which has made a lot of equipment available at very cheap prices. Secondly, machinery from china is also available at very cheap prices. Lots of small entrepreneurs/artisans do not hesitate to use equipment in their manufacturing process. Pakistan exports mainly mens shoes; both casual and city types made from leather uppers. Mens sandals, chapals and slippers are sent to Arabian and Middle Eastern countries. Cheap moccasins are also exported to these regions.
Image of Pakistan
The image of Pakistan can be viewed in two perspectives, i.e. the image of the footwear industry and the image of Pakistan as a country.
I m ag e o f f oo t w ea r indu s tr y
Because of the small size of the industry, very few investors show interest. The product range offered by the industry to the international market is very limited. Most of the companies have the same or overlapping product range. Very few players regularly attend international footwear exhibitions.
I m ag e o f Pa k is t an
The perspective of Pakistan as a whole is not very positive, e.g. law and order situation, occasional incidents of terrorism, protests against the West and other factors portray a very negative image. The Indian media also highlights all these issues. The foreign missions of the European Union put Pakistan on a negative travel list. Insurance companies are also hesitant to offer travel insurance for Pakistan. A general perception is that as the living styles of Pakistanis do not match with the Europeans, a public hostile environment is created when a foreigner visits Pakistan. Mostly the perception is wrong. Business visitors are pleasantly surprised at the existing reality, which is quite the contrary being positive. Efforts are lacking to overcome this perception both at industry and country level.
Production/manufacturing process
Firstly, raw materials are purchased. Major raw materials include leather and linings, sole or soling materials, grinderies, chemicals and components, buckles, threads, ribbons, packaging material, etc. Then these raw materials are sent to the cutting department, where leather is cut into components according to the shoe pattern. Components are prepared through the process of splitting, skiving, marking and numbering. In the end, quality check is done on the components before sending them to the stitching department. In the stitching department, the workflow or sequence of operations is arranged according to the upper design. The sequences of operations involved in the stitching department are stitching, folding, pasting, eyeleting and other operations necessary for completing the upper. At the end of the sewing conveyor, thread cutting, cleaning and quality check take place. To prepare the stitched upper for lasting, various operations are conducted to make the shoe according to the customers requirements. Moccasins are hand-stitched. Other types of shoes are prepared through back part moulding, toe puff attaching and upper mulling. To make the sole and insole, firstly all the prepared components are assembled on the lasting track to complete the shoe. The shoe then goes through the lasting operation, which is a series of operations performed to convert the upper into a finished shoe. When the shoe is ready, finishing, cleaning and polishing is done. In the end, it is packed, quality of the shoe is checked and the shoe is delivered to the finished warehouse. The process flow chart is given below in Figure 2.1. A list of definitions of operations is given in Annex A.
Figure 2.1 Footwear manufacturing process flow chart Cutting

Pattern making Upper cutting Splitting Skiving Tappering Stamping Upper marking
St itch in g
Different stitching operations Reforming and back forming
Thread clipping
Hand stitching
A s s e m b ly
Heating for reactivating cement after drying
Shoe lasting
Heel lasting
Roughing
Cementing of upper (first)
Cementing of soles
Joining of soles with upper
Stitching of sole with upper
Placing inner socks
Re-lasting
Heat setting
Chilling
Cleaning and was polishing
Spray application
Brushing finishing
Final operations like lacing
QC inspection
Packing
Table 2.1 Activity flow for manufacturing of export goods

No. 1. Activity Product development Information Design development provided by customer Windows in Europe and obtain samples to copy Trade magazines and trade fair Competitors Requested by customers obtained by exhibiting in trade fair Individual visits and meetings Email/photograp hs On order Emails, faxes and couriers Customer Customer *Min. 6 weeks required 1.25 Send by couriers like DHL, UPS, TNT, Federal Express 2 weeks 1.25 Input required Pattern making, new tooling, e.g., lasts, soles, moulds, leathers and accessories Source Trade fair in Italy, Portugal, Spain, Hong Kong, China, India, etc. Soles factories Mould factories Tanneries Time involved 8-10 weeks % of cost 3.5
2. Presentation to customers and if positive reaction, customer salesman asks for samples 3. Receipt of orders Sales confirmation Samples for lab tests and inspection companies
4.
Planning of raw material and new tooling on receipt of orders Issuance of purchase orders and contracts Receipt of raw materials
Customer order sheets Customer manuals Letter of Credit
Performa Invoice to customer for opening L/C for import
Local vendor and overseas suppliers for imported materials.
2 weeks
5.
Lead time 8 weeks Test of raw materials by customer suggested labs, mostly in Hong Kong and India for ECO friendly materials SGS, CTC mostly in Hong Kong or India 2 weeks 1.25
6.
7.
Subject to OK receipt of lab tests, start of production
2-3 weeks for one shipment
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No. 8.
Activity Inspection of finished/ packed order All development activity (1 8)
Information Factory
Input required Visual inspection by independent inspection companies Final product test of materials and products Time involved from new development to ex-factory
Source
Time involved 1 day
% of cost 1.25
9.
28 weeks
Total 7.25
* = Minimum 6 weeks are required to deliver the order for each size. Two weeks are required to deliver salesmen sample and sending sample for lab test or order confirmation samples if tooling is available. Source: PFMA
Figure 2.2 Share of production costs for leather shoe with rubber/TPR sole
R&D 5% Overheads 10% Wages / salaries 11%
Return 10% Leather 40%
Other materials 10%
Packaging 3%
Sole 11%
Source: PFMA
Trade structure
Trade or distribution channels may be described as the "paths of goods - and title to these goods - followed from manufacturer to consumer". As goods move from manufacturer to consumer, they may have to pass through various intermediaries. The characteristics of the footwear trade channels are discussed below.
T r a de c ha nn e ls
A wide range of market factors affects the structural characteristics of the footwear trade channels. The demand for footwear is growing and it is highly unpredictable and changing rapidly due to fashion-related and seasonal fluctuations. Furthermore, the range of products is very diversified (by gender, age, lifestyle, usage etc., each with different sizes and colours)
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which implies that the intermediaries need to have great flexibility to constantly adapt their range of offer.
Figure 2.3 Trade and distribution channels for footwear in the EU
Consumers
Independent footwear retailers
Footwear multiples
Chains of stores company owned
Chain of department stores
Super /hyper markets
Mail order companies
E - tailors
Importers / wholesalers
Agents
Buying groups
Importing manufacturers
Footwear manufacturers
The above figure shows the basic relationships between the manufacturers, importing manufacturers, importers/wholesalers, agents and retailers, whether or not organised into buying or selling groups. Depending on its position in the market, the functions of a particular distribution organisation will be linked with up- or downstream organisations with the same kind of specialisation. I t is also possible for a given organisation to take over (some of) the functions of the latter, in order to improve competitiveness (vertical integration). For instance, manufacturers, agents and retailer organisations, like departmental stores, may also function as importers/wholesalers. Each of these groups has a different approach to business and to the market, with its own specific interpretation of the marketing mix. It is essential for the potential exporter to know into which product/market combination his products fit (or "which kind of business he is in") as well as be familiar with the marketing and distribution characteristics of these product/market combinations. These may differ significantly from combination to combination.
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Table 2.2 Price trade structure

Raw materials Production price. including labour, administrative and overhead costs Selling costs Returns/margins Duty drawbacks Time involved in realization of duty drawbacks Research and development refunds Sales tax refunds 70% 12% 8% 5.5% 4.5% Duty drawback refunds realized with 68 weeks 6% This is a new refund so far not effected
15% Sales tax refunds are not realized for about 7 months
Source: PFMA
At times costs/selling prices by part-time exporters are over invoiced to claim higher duty drawback and sales tax refunds.
Intermediaries in the footwear market

Different sales intermediaries have their place between producers in export countries and consumers in European Union countries, for instance.
Impo r ter s /w ho les a lers
The role of importers/wholesalers is gaining importance as the traditionally strong European footwear industry is losing ground to other, mainly Asian, countries, due to the high production cost. Most importers/wholesalers cater to the independent footwear retailers as well as to the department stores, mail-order companies, selling and buying organisations and, to a lesser degree, to footwear multiples. The wholesaler purchases from manufacturers in and outside the EU and holds stock at their own risk. The mark-up of wholesalers is approximately 20-30%. The fact that many independent retailers as well as purchasing combinations and multiple stores are becoming more cautious about pre-ordering, preferring to sell from stock, is reinforcing the position of the wholesaler. On the other hand, large retail companies are increasingly purchasing abroad, thereby bypassing the intermediaries. The choice of whether to sell directly to a wholesaler or through an agent depends on the type of supplier organisation concerned and its product/market combinations. All the factors relating to pricing, collection forming, sampling, fashion trends, delivery times, delivery frequency, product quality, exclusiveness, labels, packaging and promotion may play a role in this respect. Mainly products like slippers, roped soles footwear and items with textile uppers are traded through the wholesale channel, but also leather and sports footwear.
I m po r t ing m an u fac t ur e r s
Manufacturing companies in importing countries play a vital role in the distribution system. Most footwear manufacturers wholesale their own goods to retailers and some even
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function as retailers as well. Manufacturers with their own stores are, e.g. C and J Clark Ltd in the UK, Groupe Eram in France and Bata in the Czech Republic. C and J Clark Ltd is one of the largest footwear producers, selling its footwear through its 550 Clarks, K Shoes and Ravel Fascias stores. Groupe Eram is France's leading footwear producer and second retailer. According to Euromonitor, Eram has nine factories in the Maine et Loire region, as well as one factory in Spain and one in Portugal. The Czech company Bata, a world leader when it comes to producing footwear, is also an important retailer, operating through its own stores. Like many EU producers, these producers have moved production (or part of it) abroad to remain competitive. Footwear producers generally sell their products (mainly brands) themselves and therefore they have a direct relationship with the distribution network. According to the importance of the distributor and the size of the company, it is the sales manager (or the managing director) or the sales representative of a region empowered by the manufacturer, who ensures business dealings between production and distribution. An increasing number of manufacturers of branded clothing have added footwear to their range: for instance, Tommy Hilfiger, Ralph Lauren, Marco Polo, Esprit, Mexx, Hugo Boss, Jackpot, Cottonfield, and More and More.
Im po r ting re ta ile rs
The bigger retail organisations (multiples with more than 20 outlets, department and variety stores, buying organisations, mail-order houses) do their own importing.
Buying groups
The role of buying groups is very important in the footwear market. Buying groups are individual dealers/wholesalers/retailers that join and cooperate as a single buying and marketing force. Membership of such a group by an individual company offers the opportunity to source around 50-90% of its footwear requirements, depending on the buying group, at a considerable discount. By becoming a member of such an organisation, the individual retailer aims to reduce his costs. The original function of the buying groups is, therefore, to reduce costs by centralising buying and logistics. However, participating in a buying group can involve a restriction of choice, if the group aims at maximising the volume of orders placed with producers. One of the biggest buying groups in the world is ANWR, a merger of Ariston and Nord West Ring. ANWR combines the purchasing for 2,000 members, which have more than 4,200 outlets and a combined turnover of 2.4 billion. The buying groups are particularly strong in the German and Dutch footwear markets.
Agents
Se lling ag en t
A selling agent is an intermediary who brings into contact a manufacturer and a buyer, covers a geographical territory and takes commission from the manufacturer. He/she is a wholesaler representative of the manufacturer.
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W h o les a ler
Is an importer/stockist who imports, completes all the import and custom formalities in his/her importing country and sells to various retailers, retail organisations, independent retailer or a retail chain in his own country. A wholesaler may be a contact through the sales agent or can also be a direct customer of the factory
B uy in g a gen t
A buying agent is like a buying house and is usually based in the country or in the region of the exporter. He/she represents the buyers interest and takes commission from the buyer for representing the buyer. The function of a buying agent is to introduce the buyer to various factories for a kind of product and get the best product at the best price for the buyer. In most of the cases, the buying agent administers the shipment and gives all the logistic information about shipments to the buyer.
Sa le s ag ent
The sales agent is an independent intermediary between the (foreign) producer and the retailer or retail organisation, receiving a commission from the former. The agent (or sales representative) covers a limited geographical area. The level of commission depends on a number of factors, including the turnover rate of the product concerned, but it averages an estimated 6-10% of turnover. Most agents represent more than one producer, although competition is avoided. More and more agents are starting to sell from stock, to meet their clients' short-term demands. Stock is often held on a consignment basis. If the agent builds up his own stock, he is in fact functioning as a wholesaler. The role of agents as described above, they are often used as selling agents. They operate mainly in the segments of high price/quality and in the middle/high price, classical and branded fashion footwear. Another type of agent is the so-called buying agent located in the supplying country, settles business on the instructions of his principals, mainly retail organisations and works on a commission basis too. Contacts with sales intermediaries can be made in several ways, such as consulting trade representatives' associations, chambers of commerce, fashion centres, trade publications, trade directories, etc.
2.1.2 Availability, quality and price of raw materials

In the last two to three years, the price of leather has gone up and there is a persistent shortage as well. During the October 2005 earthquake, the footwear sector suffered a loss of livestock and cattle, which was not reported, but the following season experienced a further raw material shortage and pressure on prices. Likewise, in the case of finished shoe production, the costs of inputs for all raw materials are going up, e.g. electricity, wages, local tariffs and federal governments taxes, while the quality available is of medium grade. However, our quality standards meet international specifications, but the feel of finished product lacks far behind. As there exists an upward pressure on raw material, the end consumer is always pressurising for price discounts. Therefore, profitability is under a constant pressure. Furthermore, it must be noted that petrochemical prices have increased very steeply in the last few years, i.e. all chemicals and soling material have also become very expensive.
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Generally, leather of certain types is available but footwear manufacturing remains highly import-based. All the soling material/soles, chemicals and other important raw materials used in footwear manufacturing have to be predominantly imported.
2.1.3 Other production inputs Local and imported technology

For shoe manufacturing, a lot of machinery is involved at all stages of the production process. In the cutting stage, mostly imported machinery is used. In the stitching stage, cut components are stitched to make uppers. Local machines are used but most companies use imported ones. For the lasting process, at times local machinery is used. The lasting procedure of assembling upper and sole is the most expensive area for using machines. For bottom component making, local machinery is used. Cutting and stitching account for 20% of the technology cost, lasting 45-60% and sole making, moulds and bottom component making 20-35% of the cost. Very basic technology, i.e. only 5-7%, is available locally in satisfactory quality. The remaining technology has to be imported. Quality-wise this technology is excellent.
Table 2.3 Technology costs and source Process Cutting Stitching Lasting Sole and bottom component making Cost of machinery 10% 10% 60% 20% low low high medium to high Origin of machinery Most footwear manufacturing technology is import-based. Italian manufacturers are the largest suppliers. Due to an upsurge in Chinese footwear manufacturing, one can now source shoes from the far East, e.g. China, Taiwan, Korea, etc. With a lot of closedowns in Europe, goods bargains are available for second hand machines. Some basic fabricated machines are available which at times can be adapted.
Source: PFMA
Packaging material
Good quality packaging material is available locally at a reasonable price. Part of packaging material is labelling which is very important, i.e. bar codes, pricing, customers brands, security chip label (imported), etc. Mostly, the client sends these things or asks the factory to contact its recommended supplier to get the labels made.
Labour force and salaries

Skilled labour is not available locally. There are no training institutes to train the talented workforce. On average, monthly salary in the organised footwear sector is approximately US$100. However, the minimum wage fixed by the Government is PKR 4,000/month (ca. US$70). The US$100 paid to the employer includes benefits like EOBI and Social Security. Most companies also additionally pay provident fund or gratuity, and sometimes
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both. The employees also enjoy 14 days casual leave and 10 days sick leave. If an employee does not avail of the entitled leave, he or she is also rewarded by receiving a payment for the untaken leave. Skilled workers in the footwear sector can earn as much as US$200 or more per month during peak production periods. The footwear sector is a good paymaster and an equal opportunity employer. Women have proved to be useful workers in stitching departments and earn the same wages as their male colleagues. At times, their professionalism and efficiency levels are even better.
2.1.4 Growth in the sector

Footwear exports have shown constant average growth of 25% annually in the last five years. As the footwear industry is very small and has a high degree of dependence on imported raw materials, this exceptionally good growth can give the wrong impression and needs to be viewed with caution. Part-time and dubious exporters often over-invoice to claim unjustified refunds from the Government. Of the total footwear exports from Pakistan, only 40% are destined to Europe and a large percentage is directed towards the Gulf States. The possibility of preparing over-invoiced documents for export to Gulf States is quite huge. However, the growth prospects still seem positive. The footwear industry has a good name in Europe. Pakistans products in the lower to middle range are well received. The country is recognised for its leather. With recent anti-dumping on China and Viet Nam and with the announcement in 2006 of 6% R&D, the Trade Policy provides a good platform for the footwear sector.
2.2 Reasons for fluctuations in exports and imports

2.2.1 Reasons for fluctuations in exports
Exports in the last five years showed an increase. As most of the big shoe manufacturers started importing shoes from China and Far East countries, small exporters started to move out. Before 9/11 in New York in 2001, the import duty was 4.5%. After that, the import duty was reduced to 0% for three years due to the Anti-Narcotics Act. While India at that time was paying 4.5% import duty, Pakistan had an edge over India. Exports are only in documents and false invoicing is done very frequently, to claim duty drawback and sales tax. After three years, the European Union did not accept Pakistans request to keep the duty rate at 0%. Unfortunately, the 4.5% duty was imposed again on Pakistani footwear manufacturers. Bangladesh and Sri Lanka now have preferential status, i.e. 0% duty on imports. The Bangladeshi market is growing very fast. Many big European companies have entered the Bangladeshi and Sri Lankan markets as buyers and their goods have a better image than Pakistans. In Europe anti-dumping was imposed on Chinese and Vietnamese products in March-April 2006 from 11% to 17% on leather/synthetic footwear. China was the largest supplier to the European Union, and 17% was a huge duty.
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Another big opportunity lies for Pakistan, as some importers now want to shift part of their buying to other countries. Nevertheless, there are many hurdles that need to be addressed. PFMA is asking the Government to give 8.5% R&D of the FOB value to the footwear industry so that exports can grow from around US$150 million to US$500 million in the next five years. The contribution is currently 6%. The following steps should be taken to improve footwear exports:

The R&D amount to be made available to exporters for better product development. Establish material testing labs, which have affiliation with known international laboratories. Establish a footwear institute that can provide direction, technical support and other assistance to the factories. Create a conducive environment to encourage investment in manufacturing of footwear lasts, moulds and soles. Sponsor international training of technicians in footwear factories.
2.2.2 Reasons for fluctuations in imports

In the last five years, imports have increased. Reasons for this increase are as follows:
From China, large quantities of synthetic shoes were imported in the last three to four years. These shoes are stylish and cheap. FOB prices are low. They are under-invoiced and misdeclared, although the import duty is 25%. This has drastically hurt local manufacturing. Big retailers like Bata and Servis started importing massively. Smuggling is a common practice.
2.3 Pricing structure of footwear industry

2.3.1 Pricing structure
Table 2.4 Average unit value in US$ (FOB Pakistan), 2000-2005 Unit
Total footwear Leather footwear Canvas footwear Other footwear
Source: PFMA
200001
5.55 6.79 1.57 3.49
200102
5.92 7.53 1.64 4.32
200203
6.46 8.76 1.99 3.12
2003-04
7.19 8.89 2.26 3.78
2004-05
7.36 9.64 2.32 5.01
Before 9/11 the conversion rate was PKR 64/US$1. Immediately after 9/11, it dropped to PKR 58/US$1.
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Duty drawback rates at 9/11 in 2001 were at 11%. These rates were slashed to 6% in mid2006; the duty drawbacks today are at 4.5% (leather).
2.3.2 Rules and regulations affecting the sector Material testing

The rules and regulations regarding the exports of footwear are increasingly getting difficult. A lot of stress is laid on the requirements of material testing. Almost all European customers want that materials should be free from prohibitive and adhesive substances. They have identified some adhesive substances, which Pakistani exporters have to take into account. Before production, companies have to send raw materials to the designated laboratories, identified by the international client, e.g. in China and Hong Kong. These laboratories are also present in EU countries.
Product testing
After the order gets complete, the finished product has to pass through certain tests, which are again specified by the client, e.g. with SGS, BV and Qualitests. The companies doing the product tests are international as well as local. These are third-party inspection companies appointed by the customer. Their job is to come to exporters factories, conduct visual inspections and check the quality of packed products. Product quality should be according to the sample given by the client. The product should have neat and clean branding and packaging, and labelling should also be as per the customers requirements. Shoes must be packed in cartons with assortment according to the clients need.
Lab testing
The laboratory testing of the products is done against internationally specified standards. Performance of the shoe is checked, i.e. whether it is showing wrinkles or not, thickness/elasticity of leather is fine, etc. These tests take place through designated laboratories, as specified by the client.
On receipt of lab reports

The customers logistic department allows the producer to give shipment to a designated freight forwarder, based on the laboratory report from the inspection company. A small importer would not make the exporter go through such extensive tests. However, he would require a certificate from the manufacturer to export.
Social audits
According to social and moral ethics, at local and international level, industrial production/management consultants inspect and check whether companies pay wages according to the labour laws. They also determine whether labourers are working according to the number of hours specified in the labour law, e.g. an industrial worker cannot work more than 45 hours in a week. If he/she is working more than 45 hours, the company must pay him or her overtime, i.e. 75% of the pay. They cannot work on Sundays. Amongst other aspects
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inspected by the consultants, it is also seen whether the factory has a trade union, do the employees have freedom of speech, what is the cleanliness level in the factory, is the factory well lit, does the factory have large corridors, what is the standard of family quarters, are workers getting standard food, etc.
Technical audits
The consultants ensure whether companies have enough machines, appropriate work force, breakdowns, health and safety conditions, frequency of use of inflammable substances, etc. Some clients are very specific as to how, for example, a broken needle gets disposed off, to ensure it was not just chucked away particularly during shoe processing. After inspection, the consultants give the company a score ranging from 1-10 (10 being the highest score). Every company has its own pre-defined ideal score. If the company is given a low score, then the consultant suggests recommendations to the company to improve the score by adopting certain methods in a specific period. If the company meets all the suggestions, the consultants refer buyers to contact that company. Small customers normally do not go for technical audits.
Rules and regulations related to imports

Import against indemnity. There are certain raw materials available in India, but for political reasons, Pakistan cannot import from India. European and Chinese raw materials are mostly used. The Footwear Association feels that companies should get permission to import raw materials from India as well. Shoes should not be made from the skin of endangered species. Sometimes the buyer or the buyers country requires certification for each shipment. For imported machinery, some companies also do inspection by a third party before shipment comes to Pakistan.
2.3.3 Non-tariff barriers Quality and standard for footwear

There is no European Union standard for footwear other than for safety footwear. Most of the importers (manufacturers, wholesalers, retail organisations, etc.) work with minimum requirements. Despite EU harmonisation, individual markets have different requirements regarding quality, materials, sizes, colours, etc. I n this respect, they have formulated and stipulated minimum quality requirements, relating to both materials and make. A great number of tests can be used to test if the applied materials (leather, textiles, etc.) meet the standards required by the customers. Ground properties common to any leathers concern mechanical strength-tests, like tensile strength and, more importantly, tear strength. Methods of testing (excluding footwear for professional use) are mainly based on European norms (EN) or national standards, and otherwise on ISO standards. Many countries have their own system of test methods as specified/used by their respective standardisation organisations: DIN in Germany, NEN in the Netherlands, BS in the UK and AFNOR in France. The CEN (European Committee for Standardisation) and ISO (International Organisation for Standardisation) are drawing up business-to-business standards, enabling footwear manufacturers to pursue a "total quality" policy if they so wish. CEN/TC 309 is preparing to standardise test methods, terminology and performance
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requirements for the components of footwear; test methods and terminology for the whole shoe; and the environmental aspects of footwear. These standards concern the end use of footwear. ISO/TC 216 is working on extending the CEN/TC 309 Standardisation worldwide. Its work excludes footwear for professional use (already covered by ISO/TC 94) and the sizing system designation and marking for boots and shoes (dealt with by ISO/TC 137). In the children's footwear sector, the European industry works with support from medical and scientific circles on the development of consumer information to identify goodquality children's shoes, in order to avoid health problems.
Trade-related environmental, social, health and safety issues

The following paragraphs concerning environmental, social, health and safety issues are derived from Access Guide, CBI's on-line database on non-tariff trade barriers at www.cbi.nl/accessguide.
P r odu c t leg is la t io n
Now the most important environmental and health issue in the footwear trade is product legislation. EU product legislation on environmental and consumer health and safety issues is compulsory, therefore of the utmost importance. For example, legal requirements on dangerous substances such as certain Azo dyes splitting off carcinogenic amines. In the Access Guide, an analysis of all necessary EU requirements, applicable in all EU countries, includes Azo dyes in footwear, nickel, cadmium, PCB/PCT and asbestos. In addition, legislative requirements in Germany (Azo dyes, formaldehyde, PCP, chromium, disperse dyes, dioxins and furans) and The Netherlands (azo dyes, formaldehyde in textiles with skin contact, PCP) are outlined when they are additional to the EU legislation. These two countries are highlighted because they are relatively pro-active in their legislation. However, one thing important to mention here is that this does not imply there is no additional relevant legislation in other EU countries. Most of the EU legislation mentioned is directly applicable to foreign firms supplying products to a European country, for instance through their own foreign sales outlet. However, products are often put on the market indirectly, through importers. I n most cases, this makes the importer responsible for the product. Importers might therefore encourage or even force foreign suppliers to meet certain standards, for example through legally binding guarantees. All the above-mentioned product legislation applies to Pakistan manufacturing.
S oc ia l r eq uir e me n ts ( la be ls , c ode s an d m an ag em en t s y s t ems )
Besides the legal requirements imposed by their own governments, exporters might be confronted with social requirements that are requested by EU buyers. More and more companies have laid down minimum standards in the so-called codes of conduct, or use labels and management systems to guarantee fair labour conditions. These social requirements are gaining importance in European markets and are becoming a precondition for international trade. In the Access Guide, the most important requirements, including an indication of the market impacts, can also be found by typing in the keyword search such as international social
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standards for textile and garments; ILO Conventions; SA8000 (International social management system).
Oc c up a t io na l h e a lt h an d s a f e ty ( OH S )
Standards and methods have been developed because of the growing concern in Europe about the local social conditions in which products are manufactured. OHS or labour conditions are an important issue when looking at the social standards that are more and more required for EU markets, especially in leather, occupational health and safety. More information can be found in the Access Guide.
Env ir on men ta l a nd c on su mer hea lth a nd s afe ty re qu ire me n ts ( ESP, la be ls , c odes a nd ma na ge me n t s y s te ms)
The environmental impact of leather, rubber and textile production is considerable. Environmental criteria are (among others) fire retardants, pigments and heavy metals in the various materials used to manufacture footwear. Several measures can be taken to reduce this environmental impact. Environmentally sound production (ESP) measures in the production process are not legally compulsory, as is EU product legislation, but you might be confronted with these requirements if they are requested by EU buyers. The environmental effects of leather can be limited by specifying criteria for chromium emissions to water, emission of organic solvents (e.g. with water-based finishes) and emission of wastewater (via a biological water treatment plant). This also applies to the criteria with regard to the emission of organic solvents, bleaching with chlorine-containing agents, treatment of the wastewater for textile and plastic leg and lining materials used. Environmental criteria can also be specified for plastic sole materials and rubber. There are many instruments, which are used like labels, hallmarks, management systems and codes of conduct. The number of ecolabels in the footwear sector is limited and some of them have only a small market impact. Detailed information on these requirements can be found in the Access Guide.
Packaging, size marking and labelling

Pack ag in g
Care must be given to the packaging of products if one intends to export to the EU countries. I t is obvious that packaging must be travel-resistant. As required, products should also be protected against the elements, changes of temperature, rough handling and theft. Besides these basic issues, some importers may have specific demands concerning packaging, like information concerning the order printed on the boxes (order number, box number, name department or contact person etc.). For environmental reasons packaging made from materials like PVC is less popular with consumers and in some cases is or will be forbidden by governments. Exporters in developing countries should be prepared to discuss this issue with potential clients and should anticipate the cost of special packaging in their selling price, if required. The European Directive on Packaging and Packaging Waste (94/62/EC) establishes overall legislation for the treatment of packaging waste, which consists of quantitative objectives to be achieved by each of the EU member states. The member states have responsibility for translating the directive into national legislation.
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66
It is becoming increasingly difficult and expensive to dispose off waste in Europe. In principle, the importer is held responsible for disposal of the packaging waste for all goods from outside the European Union. It is therefore crucial, when planning exports to the EU, to take the packaging of your products (both sales packaging and transport packaging) into consideration. To fulfil the requirements of the target market, good communication with the importer about packaging is necessary. Leather shoes are packed in individual boxes per pair and 12 to 18 pairs in a carton, but cheaper plastic and textile shoes may be packed in plastic bags or in bulk. Here too, importers will most likely specify their packaging requirements.
S iz e mar k in g
The International Organization for Standardization (ISO) published in 1994 standards concerning the Mondopoint shoe sizing system, covering length and width grading and the method of marking. However, the market has not adopted this size system. Two different size systems for footwear are used in the European Union in general, sometimes in combination: the English size system and the (mainly) French or (continental) European sizing system. In general, single unit sizes are demanded for textile and plastic shoes, whereas, leather and synthetic leather must also be made in half sizes. The normal size range for womens shoes is 36 to 41 and for men's shoes 40 to 45. Width sizes are given in capitals A to K, of which A is smaller than K and G represents the standard width size. Differing widths are rarely offered, except by more expensive European brands and by manufacturers of children's shoes. Importers purchase a minimum of 12 to 18 pairs of shoes per model. The size assortment for an order of 12 pairs (the so-called Pirmazenser size range) is given in Table 2.5.
Table 2.5 Overview of the Pirmazenser size range Number of pairs
Ladies sizes Mens sizes 36 40 36.5 40.5 37 41 37.5 41.5 38 42 38.5 42.5 39 43 39.5 43.5 40 44 40.5 44.5 41 45
Ladies full sizes Ladies half sizes Mens full sizes Mens half sizes
1 1 1
2 1 2 1 1 1
3 2 3 2 2 2
3 2 3 2 1 1
2 1 2 1 1 1
The footwear sector operates with three dominating size markings in USA, Europe and the UK. For example: USA men 8 is UK 7 and European 41.
L ab e ll in g
The aim of labelling is to foster trade, inform consumers and highlight the visibility. The obligatory labelling, as described in the EU shoe labelling directive 94/11/EC, concerns information about the parts of footwear, namely upper, lining and insole sock as well as the outer sole of the footwear article. The information must be conveyed by means of agreed pictograms or textual information, as defined and illustrated in the directive, and must relate to the material which constitutes at least 80% of the surface area of the upper, the lining and insole sock, and at least 80% of the volume of the outer sole. However, if no single material accounts for at least 80%, information must be given concerning the two principal materials in the composition of the product. The manufacturer or his authorised agent in the European Union has to use at least the language or languages of the EU member state of consumption.
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Exporters should be aware that labelling should involve affixing the required information to at least one article of footwear in each pair, either by printing, sticking, embossing or attaching a label. Moreover, labelling must be sufficiently large, visible and understandable so that the customer is not misguided. Currently, eco-labels are applied to footwear to a limited degree. The increasing market share of self-service outlets, like grocers' supermarkets and variety stores, has enforced the inclusion of information on packaging or product.
2.4 The YATRA study

The objective of the YATRA study was to see how Chinese footwear exports into Pakistan affect the local industry and how the Chinese footwear industry would influence the Pakistani market. The study was done by a Japanese consultant, with the long-term objective to see the influence of Chinese imports on the Japanese market and what further steps needed to be taken. Pakistan was given as a case study. At the time the YATRA study was conducted, the influence of Chinese footwear imports was increasing and had adverse effects on small cottage manufacturers serving the local market in Japan. The adverse effect was high because the Chinese shoes were of bad quality in terms of durability and comfort. The end-consumer eventually was not happy. Pakistan produces around 240 million pairs of footwear per year. Around 20 million pairs are exported and a similar or slightly higher number is imported but of a somewhat lower quality. Consumption in Pakistan is approximately 1.5 pair per person per year.
2.5 An overview of the footwear trade

2.5.1 Product classification
The HS classification system for traded goods was introduced in 1988, and has since then become an internationally accepted method of classification wherever products are traded. The HS classification is harmonised in relation to the classifications of the United Nations and the European communities. Goods are classified according to simple objective criteria and applications. The HS, a revision of the CCCN (Customs Cooperation Council Nomenclature), 1974 classification system, includes a six-digit sub-heading that was introduced for more precise tagging of products. Many countries that have adopted HS have added one or more digits to further classify products of particular national interest (8-digit or 10-didgit level). Pakistan started reporting its exports categorised according to the HS classification in 2002 up to the 8-digit level. The footwear sector is classified under chapter 64 that can be broken down into the categories 6401 to 6406 at the 4-digit level. The table below highlights the product classification relevant to Pakistans footwear export sector.
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Table 2.6 Product classifications relevant to Pakistans footwear export sector

HS code 6401 6402 6403 640312 640319 Waterproof footwear Uppers of rubber/plastic (sports footwear e.g. ski boots) Leather uppers Ski-boots, cross-country ski footwear and snowboard boots, with outer soles of rubber, plastics, leather or composition leather and uppers of leather Sports footwear, with outer soles of rubber, plastics, leather or composition leather and uppers of leather (excl. ski boots and cross-country ski footwear, and skating boots with ice or roller skates attached) Footwear with outer soles of leather, and uppers which consist of leather straps across the instep and around the big toe Footwear with leather uppers, made on a base or platform of wood, with neither an inner sole nor a protective metal toe-cap Footwear, incorporating a protective metal toe-cap, with outer soles of rubber, plastics, leather or composition leather and uppers of leather (excl. sports footwear and orthopaedic footwear) Footwear with outer soles and uppers of leather, covering the ankle (excl. incorporating a protective metal toe-cap, sports footwear, orthopaedic footwear and toy footwear) Footwear with outer soles and uppers of leather (excl. covering the ankle, incorporating a protective metal toe-cap, made on a base or platform of wood, without in-soles, with uppers which consist of leather straps across the instep and around the big toe, sports footwear, orthopaedic footwear, and toy footwear) Footwear with outer soles of rubber, plastics or composition leather, with uppers of leather, covering the ankle (excl. incorporating a protective metal toe-cap, sports footwear, orthopaedic footwear and toy footwear) Footwear with outer soles of rubber, plastics or composition leather, with uppers of leather (excl. covering the ankle, incorporating a protective metal toe-cap, made on a base or platform of wood, without in-soles, sports footwear, orthopaedic footwear and toy footwear) Uppers of textile materials Not elsewhere specified including uppers of composition leather Footwear with uppers of leather or composition leather (excl. with outer soles of rubber, plastics, leather or composition leather and uppers of leather, orthopaedic footwear and toy footwear) Footwear with uppers of textile materials (excl. with outer soles of rubber, plastics, leather or composition leather, orthopaedic footwear and toy footwear) Footwear with outer soles of rubber or plastics (with uppers other than rubber, plastics, leather or textile materials); Footwear with outer soles of rubber or plastics (with uppers other than rubber, plastics, leather or textile materials); Footwear with outer soles of leather or composition leather (with uppers other than leather or textile materials); Footwear with outer soles of wood, cork, paperboard, fur-skin, felt, straw, loofah, etc. (with uppers other than leather, composition leather or textile materials) Parts of footwear Uppers and parts thereof (excl. stiffeners and general parts made of asbestos) Product category
640320 640330 640340
640351
640359
640391
640399
6404 6405 640510
640520 640590
6406 640610
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HS code 640620 640691 640699
Product category Outer soles and heels, of rubber or plastics Parts of footwear, of wood Parts of footwear (excl. outer soles and heels of rubber or plastics, uppers and parts thereof, and general parts made of wood or asbestos)
2.5.2 Pakistans footwear exports

Pakistan footwear exports amounted to US$155 million in 2005, up 47% from the previous year. As a percentage of Pakistans total exports (1%), the sector is still relatively small, but definitely not insignificant. Footwear with uppers of leather or composition leather dominates the export sector, making up over 75% of the sectors exports. The uppers of composition leather are significant (43% of the sectors exports). Pakistan is globally a big player in the composition leather category -- ranks as the third largest exporter representing 11% of world exports in value terms. These shoes are primarily exported to the Middle East. Less than 10% of exports of this category of shoes are exported to the UK. There is room for much more expansion on this market, which is the worlds largest and growing at a rate of 12% per annum. Boots with uppers of leather and soles of rubber or plastic are also an important export product for the sector, making up 18% of the sectors exports. Again these are primarily destined for the Middle East -- UAE, Saudi Arabia and Yemen. The worlds major market for this product, the United States, is entirely untapped by Pakistan. Over a third of what the US buys in this category of shoe consists of uppers of pigskin, clearly not a segment for Pakistan; nevertheless the remaining two-thirds are worth further investigation. Other products exported include leather slippers (279 tons), leather uppers and leather soles below ankle (173 tons), leather uppers with metal toe-cap (240 tons), and leather uppers with non-leather soles below the ankle (387 tons). The United Kingdom and various Middle Eastern countries are key destinations.
Table 2.7 Pakistans total footwear exports and imports, 2001-2005 (US$ million) 2001 Exports Imports 45.3 3.7 2002 71. 3 6.6 2003 90.1 16.6 2004 105.4 19.7 2005 154.5 23.7
Source: Calculations from COMTRADE
Table 2.8 Pakistans major export destinations by shoe category, 2005

HS code 64 640110 640212 Product category Total footwear Waterproof footwear Ski-boots, snow-board boots, all rubber/plastic Value US$000 155,490 57 29 Quantity (Tons) 6 2 % change over prev. year 48% -34% -77% Main destination Saudi, UAE, Yemen UAE South Africa
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HS code 640219
Product category Sports footwear, soles and uppers of rubber/plastic Footwear of rubber or plastics, upper straps assembled to sole by plugs Rubber/plastic boots Footwear, outer soles/uppers of rubber or plastics, nes Ski-boots, snow-board boots, uppers of leather Sports footwear, outer sole of rubber/plastic/ leather and upper of leather Leather slippers Footwear, wooden, outer soles of rubber/plastic/ leather and uppers of leather Footwear, outer sole of rubber/plastics/leather, uppers of leather, metal toe-cap Boots with leather upper and leather sole Footwear, outer soles and uppers of leather, nes Boots with rubber/plastic soles and leather uppers Footwear, outer soles of rubber/plastics uppers of leather, nes Sports footwear, outer soles of rubber/plastics and uppers of textile materials Non-sports, outer soles of rubber/plastics and uppers of textile materials Footwear with outer soles of leather and uppers of textile materials Footwear with uppers of leather or composition leather, nes
Value US$000 149
Quantity (Tons) 13
% change over prev. year 548%
Main destination UAE, UK, Kuwait
640220
297
47
-44%
UAE, Switzerland
640291 640299
22 3,068
2 331
10% 251%
UK Afghanistan, UK, UAE France, UAE Germany, UK, UAE
640312 640319
94 226
4 12
96% -39%
640320 640330
5,408 17
279 1
110% -91%
UK, France, UAE -
640340
3,576
240
-32%
Yemen, Italy, UK
640351 640359 640391 640399
622 6,180 28,016 8,695
18 173 1,229 387
20,633 % 8% -6% 11%
Saudi, Korea, South Africa UK, Afghanistan, Germany Italy, UAE, Germany Germany, Belgium, UAE Saudi, UK, Yemen
640411
1,116
67
-59%
640419
1,316
129
25%
UAE, Afghanistan, UK France, UAE, UK
640420
1,935
68
36%
640510
67,644
3,894
93%
Saudi, Yemen, UAE
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HS code 640520
Product category Footwear with uppers of textile materials, nes Footwear, nes Uppers and parts thereof, other than stiffeners Outer soles and heels, of rubber or plastics Parts of footwear of wood
Value US$000 556
Quantity (Tons) 49
% change over prev. year -26%
Main destination UAE, Afghanistan, Sudan Afghanistan, UK, UAE Afghanistan, Nepal, USA Afghanistan, UAE, Sri Lanka Saudi Arabia
640590 640610 640620 640691
20,885 1,502 1,428 84
1,730 152 447 20
106% 287% 535% 22%
Source: ITCs Trade Map
Besides the Middle East, Europe is also an important destination. 37% of Pakistans total footwear exports are destined for Europe in 2005. The key European markets are UK, Germany and France. Exports to Europe are mainly in uppers of leather with non-leather soles form, of which the majority are above the ankle. In comparison with neighbouring competitors, Bangladesh and India, Europe has a smaller share of Pakistans exports.
Table 2.9 Footwear exports Pakistan, India and Bangladesh, 2005 Export destination World Europe
Pakistan US$155m US$58m
Bangladesh US$118m US$83m
India US$1.05b US$805m
Exports in value terms as reported in the trade statistics over the years must be treated with some care. Export values have been somewhat inflated due to the buyback sales tax returns on raw materials. A discrepancy with mirror statistics, i.e. import figures of Pakistans trading partners, also confirms this. The policies on these tax returns have changed in 2005 and figures can be deemed more accurate in the next FY06 data.
2.5.3 Pakistans footwear imports

Footwear imports have also increased significantly since 2001, from US$3.7 million to US$23.7 million in 2005, flooding in from China and to a lesser extent from Thailand. In 2005, 80% of Pakistans footwear imports came from China. For the time being the flood of Chinese imports does not need to be considered an immediate threat as they are not in the same category as Pakistans exports. The main imported shoe categories are textile upper footwear, sports footwear, rubber/plastic slippers and rubber upper footwear.
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Table 2.10 Pakistans major import origins by shoe category, 2005

HS code 64 640110 640199 640212 640219 Product category Total footwear Waterproof footwear, metal toe-cap Waterproof footwear, nes Ski-boots, snow-board boots, all rubber/plastic Sports footwear, outer soles and uppers of rubber or plastics, nes Plastic/rubber slippers Footwear, outer soles/uppers of rubber or plastics, nes Sports footwear, outer sole of rubber/plastic/leather and upper of leather Leather slippers Footwear, outer sole of rubber/plastics/leather, uppers of leather, metal toe-cap Boots with leather upper and leather sole Footwear, outer soles and uppers of leather, nes Footwear, outer soles of rubber/plastics uppers of leather, nes Sports footwear, outer soles of rubber/plastics and uppers of textile materials Non-sports, outer soles of rubber/plastics and uppers of textile materials Boots with leather upper and leather sole Footwear, outer soles and uppers of leather, nes Footwear, outer soles of rubber/plastics uppers of leather, nes Sports footwear, outer soles of rubber/plastics and uppers of textile materials Non-sports, outer soles of rubber/plastics and uppers of textile materials Value US$000 23,674 69 231 69 3,863 Quantity (Tons) 10 55 4 428 Main destination China, Thailand, UAE China China China China, Thailand, UAE
640220 640299 640319
1,351 1,328 4,934
297 173 285
China, Thailand, UAE China, Thailand China, Saudi, Malaysia
640320 640340
53 110
4 8
China China, USA, Italy
640351 640359 640399
26 64 1,241
1 3 69
China China China, Viet Nam, Thailand China, Thailand, Viet Nam China, Thailand, UK
640411
652
59
640419
2,245
267
640351 640359 640399
26 64 1,241
1 3 69
China China China, Viet Nam, Thailand China, Thailand, Viet Nam China, Thailand, UK
640411
652
59
640419
2,245
267
30
HS code 640420
Product category Footwear with outer soles of leather and uppers of textile materials Footwear with uppers of leather or composition leather, nes Footwear with uppers of textile materials, nes Footwear, nes Uppers and parts thereof, other than stiffeners Footwear with outer soles of leather and uppers of textile materials Footwear with uppers of leather or composition leather, nes Footwear with uppers of textile materials, nes Footwear, nes Uppers and parts thereof, other than stiffeners Outer soles and heels, of rubber or plastics Parts of footwear of wood Parts of footwear nes
Value US$000 1,264
Quantity (Tons) 111
Main destination China, UAE, Thailand
640510
495
47
China, Thailand, UAE
640520 640590 640610 640420
350 3,176 434 1,264
48 531 212 111
China, Thailand, UAE China, Thailand, UAE China, UAE, Hong Kong China, UAE, Thailand
640510
495
47
China, Thailand, UAE
640520 640590 640610 640620 640691 640699
350 3,176 434 1,460 36 193
48 531 212 870 20 86
China, Thailand, UAE China, Thailand, UAE China, UAE, Hong Kong UAE, China, Portugal UAE China, Ger.. Indonesia
2.5.4 World overview World producers/exporters

The major producers globally are China, India, Brazil, Italy and Spain. A shift has taken place away from the traditional European suppliers first to Taiwan and South Korea and now on to China, India, Indonesia, Thailand and Viet Nam. These Asian suppliers have taken over significant proportions of the worlds production purely as a result of lower labour costs. China is now a massive producer and in terms of export dominates all other producers, exporting US$19 billion worth in 2005 and expected to increase it in the coming years with the countrys accession to WTO and with the removal of certain quotas. Italy, Hong Kong (an effective gateway to China) and Viet Nam follow with a US$9 billion, US$6 billion and US$2 billion worth of shoe exports. Chinas share of world total footwear exports is 28%. Competition is largely by means of cutthroat pricing, so much so that China has frequently been accused of dumping. Italy and Spain are concentrated more in the high quality and trend-
31
setting design niches. Chinas major thrust is in the sports footwear both with uppers of textiles and leather. China poses more of a threat to Pakistans domestic footwear sector than to Pakistans export footwear sector, as sports footwear from China replaces other types of traditional footwear. China is less competitive in most of the footwear categories that Pakistans exports are in. This is to say it has less of an all-flattening effect as it does with sports shoes. Nevertheless, China is a major exporter of 640340 (leather upper with metal toe cap), 640391 (uppers of leather covering the ankle) and 640510 (uppers of composition leather), which are important shoe categories for Pakistan, but for the time being, luckily for Pakistan, China gets its major share from very large orders which tend to be concentrated in the United States. Looking in more detail at world exports for categories relevant to Pakistan:
6 40 32 0 Le a th er s l ipp er s
This is not the worlds major traded shoe category. Global exports in 2005 are estimated to be around US$258m. In both value and quantity, the worlds major supplier is India followed by China and Romania. Indias major markets are the UK and Germany supplying the bottom-end quality. China is focused more on the Central Asian, USA and Japanese markets, on a mid range segment. The more expensive slippers are supplied by Romania and Italy. India is Pakistans key competitor for leather slippers, especially in the Middle Eastern markets, supplying larger quantities at lower cost.
6 40 34 0 Le a th er u ppe r s w it h me t a l t o e c ap
This is an important category globally; total world exports in 2005 were estimated to be worth a billion dollars showing significant growth in supply over 2001-05. The major suppliers in this market are Italy and China, the former supplying primarily to its fellow European Union countries at high-end prices and the latter mainly to the US at bottom-end prices. Looking at the markets that Pakistan covers, other countries that supply at the similar price range include China, India, Tunisia, Bulgaria, Romania and Turkey.
6 40 35 9 Le a th er u ppe r s , lea t her s o les
Italy remains the worlds leader for this shoe category, holding almost 60% share of the value of world exports. Italys strong position on these markets is mainly in value terms as markets pay most for Italian shoes at least 50% more than the prices of Portuguese shoes and 100+% more than the prices of Indian and Chinese shoes. Italian shoes are known for their trend setting and luxury brands on the high- end of the market. Italys major market is the US, whilst Spain and Portugal supply more to the European Union. Having said this, Italy is also the major shareholder in most European markets as well as Japan. Other major exporters include France, Brazil and Hong Kong, not necessarily representing China (only 25% of Hong Kongs imports of this product category come from China).
6 40 39 1 U p pe r s o f lea t he r c ov er in g t h e an k le , n o n- leath er s o les
Italy, Viet Nam and China are the major players in this market. Global exports of this category were estimated at US$5.2bn in 2005. Again, Italys exports are geared towards the major EU markets Germany, France and the UK, whilst the lions share of Chinas 74.4 million pairs of
32
this category was exported to the United States and the Russian Federation. Viet Nams exports of these boots were destined for the United States and Europe. Viet Nam and Brazil respectively managed to wrestle themselves 5% and 4% share in the United States market in 2004 versus the 74% Chinese share. Pakistan has lifted its prices for this shoe category in the Middle East (US$21,000/ton) to a price range that is no longer in line with India (US$7,000/ton) in the lowest bracket, but now competing with Turkey and China.
6 40 51 0 C o mp os it ion le a th er u pp er s
Romania and China are the dominating forces in this market, exporting over 5,000 tons and 4,300 tons respectively in 2005. China exports mainly to the United States, Japan and the Russian Federation, whilst Romania supplies soles to the European Union and Switzerland. Pakistan was the third largest supplier in the world of this product, exporting 11% of total world exports, up from 7% in the previous year. Pakistan is by far the leading supplier in the Middle East of this shoe category, facing a little competition.
World imports major markets

Table 2.11 World imports by shoe category, 2005 HS code 64 640320 640340 640359 640391 640510 Product category Total footwear Leather slippers Leather uppers with metal toe cap Leather uppers, leather soles Uppers of leather covering the ankle, non-leather soles Composition leather uppers Value 2005 (US$ m) 73,161 137 1,326 3,640 6,962 423 Growth p.a. 2001-05 9% 20% 15% 7% 11% 8%
Source: Calculations from COMTRADE
6 4 Fo o tw e ar s ec tor
Looking at the footwear sector as a whole, global imports added up to some US$73.2bn in 2005. The US is the worlds major buyer with a 26% share of world imports. European Union countries account for 44%, with the major concentration in Germany, the UK, Italy and France. Italy and, to a lesser extent, France are also major exporters. Furthermore, Japan (5%), Canada (2%), China and Hong Kong (8%), Switzerland (1%), Australia (1%) and Korea (1%) are important markets at the global scale. Looking in more detail at the important export products for Pakistan:
33
6 40 32 0 Le a th er s l ipp er s
Leather slippers represent only a small segment of the worlds shoe industry, total world imports are estimated at around US$137m and showing a growth trend of 20% per year in value, with the United Kingdom buying just under a third. The demand for leather slippers is strong in the Middle East especially in the UAE and Oman. The most rapid growth rates are occurring in Europe the United Kingdom (37% per year), France (37%) and Italy (35%). Across markets, a willingness to pay more for slippers is evident as growth rates in value exceed growth in quantities. A wide range in value per pair exists from US$7.2/pair CIF (cost, insurance and freight) in Saudi Arabia to US$40 per pair CIF in Switzerland (AWE -Average Weight Equivalent of 600g leather slipper weight). Pakistan is a small supplier to the UK at a very low price range. It has a stronger foothold in the Middle East. Pakistan has only just started taking part in the fast growing Italian market, a fact worth investigating for further expansion.
6 40 34 0 Le a th er u ppe r s w it h me t a l t o e c ap
The world market in 2005 for this type of shoe is estimated at around US$1.33bn, with the United States as the key market buying over 20%, followed by a series of European countries and Canada. China has a very strong foothold in the US market, supplying 95%. The world import market for this type of shoe has been showing growth rates of 15% per year (the 200105 trend), the highest growth can be witnessed in Taiwan (11.9%), Spain (49%) and Poland (45%). None of these major buyers report buying this shoe category from Pakistan.
6 40 35 9 Le a th er u ppe r s , lea t her s o les
The world import market for the all-leather shoe is estimated to be worth US$3.64bn The United States buys just under US$1bn worth of this shoe type, by far the largest market, followed by France, the UK, Germany, Italy and Japan. Despite competition on many other fronts, Italy remains the worlds leader in all-leather shoes supplying over half of all the world markets in value terms. Amongst the top five markets, Italy has been showing the highest growth rates on average 23% annually over 2001- 05, reflecting a boost in its subcontracting for export business. Pakistan is also a supplier to these top markets, of significance only in the UK and Italian markets, supplying 1% of both countries imports in 2005.
6 40 39 1 U p pe r s o f lea t he r c ov er in g t h e an k le , n o n- leath er s o les
The world import market for this leather upper boot is estimated to be worth US$6.96bn. The United States (34%), Germany, the UK, France and Italy are the worlds major buyers of this shoe category. Basketball is an American game and this is clear from the basketball shoe component of this category 17% of US imports as compared to 1% in Japan. In both Europe and the US, the most important component (30%) is the ladies low ankle boot. Italy, China, Brazil and Viet Nam are the important suppliers of womens low ankle boots to the major markets.
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Pakistan is also a supplier to the European top countries in the form mainly of womens ankle boots, supplying comparatively very little (less than 1%; ranking 40th supplier). Nevertheless, it has its foot in the door of top markets.
6 40 51 0 C o mp os it ion le a th er u pp er s
A comparatively small market exists for this product category, the global import market is estimated at around US$423m. The market is showing significant growth, averaging 8% per year between 2001- 05. The United Kingdom, the United States and France are key buyers. Singapore and Ukraine also play smaller part. Though still very small, Libya stands out as a rapidly growing new market. Whilst composition leather shoes are one of Pakistans most important footwear exports, Pakistan does not appear in the list of suppliers to the worlds key markets.
Market access conditions in major markets

T ar iffs and q uo tas in ma jor ma rke ts
The lowest tariffs applied to the imports of footwear from Pakistan occur in Europe where Pakistan benefits from the preferential tariff for GSP countries and the Middle East the UAE, Saudi Arabia and Oman, which all have the same flat rate of 5% for footwear products. For the product categories highlighted as of importance to Pakistan in the previous chapter, the EU GSP rate is 4.5% in most cases with some exceptions. Category 640510 composition leather uppers is 0%. In the 640391 category uppers of leather covering the ankle there are two EU tariff lines specifying womens shoes with insoles of a length of more than 24cm at 1.5%. These categories are produced in Pakistan but not in large numbers. Though the GSP provides for a beneficial rate for Pakistani footwear exporters, it does mean extra paperwork. The tariffs imposed by Japan on imports of footwear products from Pakistan are comparatively very high, with the majority of tariff lines at a 27-30% rate. Japan only offers a GSP rate in the 640510 and 640590 categories, and only for specific lines 0% tariff for 640510300 and 640590200. It should be noted that many of the Japanese footwear tariff lines are subject to tariff quotas. For numerous tariff lines, the below quota rate is in fact zero. The above quota rate is very high as much as US$40/pair. In a similar fashion to Japan, the US has not included footwear in its GSP regime, at least not for the products being looked at for this overview. The usage of disposable footwear varies from one country to the other. For example, in Pakistan, footwear made up of leather upper and PVC is worn casually. Whereas in Australia this footwear is imported from Pakistan, India and China. It is worn only once and then thrown because it is available at very cheap prices, i.e. US$45. Having said that, the US tariffs are significantly less than Japans, ranging from 0 to 12.5%, averaging 7% for the product categories relevant to Pakistan. For specific lines in the 640340 (metal toecap leather upper), 640391(uppers of leather covering the ankle) and 640510 (uppers of composition leather), Japan also applies a tariff quota at a very prohibitive rate of US$40/pair, equivalent to well over 100% of the shoe values. South Korea applies a flat MFN rate of 13% and Yemen, which is still in the process of WTO accession, applies a flat general rate of 10%.
35
Table 2.12 United States tariffs applied to imports from Pakistan

HS codes 64032000 Product category Footwear w/outer soles leather and uppers consistiong of leather straps across the instep and around the big toe Footwear w/outer soles of rubber/plastics/leather/comp. leather and uppers of leather, w/protective metal toecap, welt Footwear w/outer soles of rubber/plastics/leather/comp. leather and uppers of leather, w/protective metal toecap, n/welt Turn or turned footwear w/outer soles and uppers of leather, not covering the ankle Footwear w/outer soles and uppers of leather, not covering the ankle, welt, nesoi Footwear w/outer soles and uppers of leather, not cov. ankle, n/welt, for men, youths and boys Footwear w/outer soles and uppers of leather, not cov. ankle, n/welt, for persons other than men, youths and boys Footwear w/outer soles of rubber/plastics/composition leather and uppers of leather, covering the ankle, welt Footwear w/outer soles of rubber/plastics/composition leather and uppers of leather, covering the ankle, n/welt, for men, youths and boys Footwear w/outer soles of rubber/plastics/comp. leather and uppers of leather, cov. ankle, n/welt, for persons other than men/youths/boys Footwear w/outer soles of rubber/plastics/comp. leather and uppers of leather, n/cov. ankle, made on a base wood Footwear w/outer soles of rubber/plastics/comp. leather and uppers of leather, n/cov. ankle, welt, nesoi Footwear w/outer soles of rubber/plastics/comp. leather and uppers of leather, n/cov. ankle, n/welt, for men, youths and boys, nesoi Footwear w/outer soles of rubber/plastics/comp. leather and uppers of leather, n/cov. ankle, for women/child./infants, val.n/o $2.50/pr Trade regime applied MFN Applied tariffs 0.00%
64034030
MFN
5.00%
64034060
MFN
8.50%
64035915 64035930 64035960
MFN MFN MFN
2.50% 5.00% 8.50%
64035990
MFN
10.00%
64039130
MFN
5.00%
64039160
MFN
8.50%
64039190
MFN
10.00%
64039920
MFN
8.00%
64039940
MFN
5.00%
64039960
MFN
8.50%
64039975
MFN
7.00%
36
HS codes 64039990
Product category Footwear w/outer soles of rubber/plastics/comp. leather and uppers of leather, n/cov. ankle, for women/child./infants, val. over $2.50/pair Footwear, nesoi, w/outer soles of other than rubber/plastics/leather/comp. leather and uppers of leather/composition leather, nesoi Disposable footwear, nesoi, designed for one-time use Disposable footwear, nesoi, designed for one-time use Footwear, nesoi, w/outer soles and uppers other than of rubber/plastics/leather/comp. leather/textile materials
Trade regime applied MFN
Applied tariffs 10.00%
64051000
MFN
10.00%
64059020 64059020
MFN Preferential tariff for GSP countries MFN
3.80% 0.00%
64059090
12.50%
Source: www.macmap.org.
Table 2.13 European Union tariffs applied to imports from Pakistan

HS code 640320 Product category Footwear, outer sole/upper of leather, strap across the instep/around big toe Footwear, outer sole of rubber/ plastic/leather, uppers of leather w/met toe-cap Footwear, outer soles and uppers of leather, nes Footwear, outer soles of rubber/plastic uppers of leather covering ankle nes Footwear, outer soles of rubber/plastics uppers of leather, nes Footwear with uppers of leather or composition leather, nes Footwear, nes Trade regime applied Preferential tariff for GSP countries Preferential tariff for GSP countries Preferential tariff for GSP countries Preferential tariff for GSP countries Preferential tariff for GSP countries Preferential tariff for GSP countries Preferential tariff for GSP countries No. of lines 1 Applied tariffs 4.50%
640340
4.50%
640359 640391
8 16
4.13% 4.13%
640399
17
4.15%
640510 640590
1 2
0.00% 5.95%
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Table 2.14 Japan tariffs applied to imports from Pakistan

HS code 640320 640340 640359 640391 640399 640510 640510 640590 640590 Product category Leather slippers Leather uppers with metal toe cap Leather uppers, leather soles Uppers of leather covering the ankle, non-leather soles Outer soles of rubber/ plastics uppers of leather, nes Composition leather uppers Composition leather uppers Footwear, nes Footwear, nes Trade regime applied MFN MFN MFN MFN MFN MFN GSP MFN GSP No. of lines 2 2 2 2 3 3 1 1 1 Applied tariffs 11% 61% 6% 29% 26% 26% 0% 30% 0%
Source: Based on calculations on from tariffs and tariffs quotas. For a more in-depth picture, readers are recommended to visit www.macmap.org.
Table 2.15 South Korea tariffs applied to imports from Pakistan

HS code 640320 640340 640359 640391 640399 640510 640590 Product category Leather slippers Leather uppers with metal toe cap Leather uppers, leather soles Uppers of leather covering the ankle, non-leather soles Outer soles of rubber/ plastics uppers of leather, nes Composition leather uppers Footwear, nes Trade regime applied MFN MFN MFN MFN MFN MFN MFN No. of lines 1 1 2 5 5 1 1 Applied tariffs 13% 13% 13% 13% 13% 13% 13%
Table 2.16 UAE/Saudi/Oman tariffs applied to imports from Pakistan

HS code 640320 640340 640359 640391 Product category Leather slippers Leather uppers with metal toe cap Leather uppers, leather soles Uppers of leather covering the ankle, non-leather soles Trade regime applied MFN MFN MFN MFN No. of lines 1 1 3 3 Applied tariffs 5% 5% 5% 5%
38
HS code 640399 640510 640590
Product category Outer soles of rubber/ plastics uppers of leather, nes Composition leather uppers Footwear, nes
Trade regime applied MFN MFN MFN
No. of lines 3 1 1
Applied tariffs 5% 5% 5%
Table 2.17 Yemen tariffs applied to imports from Pakistan

HS code 640320 640340 640359 640391 640399 640510 640590 Product category Leather slippers Leather uppers with metal toe cap Leather uppers, leather soles Uppers of leather covering the ankle, non-leather soles Outer soles of rubber/ plastics uppers of leather, nes Composition leather uppers Footwear, nes Trade regime applied General tariff General tariff General tariff General tariff General tariff General tariff General tariff No. of lines 1 1 1 1 1 1 1 Applied tariffs 10% 10% 10% 10% 10% 10% 10%
Raw material imports and duty structure

Apart from leather that is acquired from local tanneries, the sector is highly dependent on imports of raw materials. In addition to leather, the industry uses a series of plastic resins, rubber in various forms, synthetic leather, various footwear parts and machinery. Unfortunately, it is not possible to distinguish the materials from those imported for other industries when looking at national trade statistics. This does not apply of course to the imports of footwear parts. Footwear parts imported include uppers and parts thereof, 212 tons worth (2005) was imported mainly from China and the UAE, and outer soles of rubber or plastic (870 tons worth in 2005) originating mainly from the UAE, China and Portugal. Import duty rates for these parts are high 20% and 25% respectively. Import duties on raw materials as per general practice should be refunded at the time of exports in the form of daily drawbacks. The Input Output Coefficient Organisation (IOCO) based in Karachi administers the cost of imported raw material in the product and gives advice on duty drawback rates to the government or CBR. Unfortunately, in the case of footwear, IOCO has worked import duties on concessionary rates covered under special Statutory Regulatory Orders (SROs). However, most of the manufacturers do not import as per concessionary SROs and pay normal import duties rather than concessionary rates. Therefore, duty drawback rates are much lower than the desired level. The Footwear Association is struggling hard with IOCO to correct or increase the duty drawback rates in line with duty paid on imported materials.
39
Much of the rubber is sourced from fellow SAPTA countries, the footwear industry can benefit from a marginally lower than 5% duty rate, and 3.3% through a bilateral agreement with Sri Lanka. Import duties for raw material imports for this sector range from 5-25% ad valorem, machinery at the lower end and footwear parts, grindery, composition leather at the upper end. It is likely that the 25% duty for composition leather and grindery will come down in a few years' time as a result of WTO agreements, but for the time being this level of tariff may inhibit further growth of the sector.
Table 2.18 Imports of footwear parts and import tariffs applied, 2005
HS code 640610 Product description Uppers and parts thereof, other than stiffeners Imports Total China UAE Hong Kong Italy 640620 Outer soles and heels, of rubber or plastics Total UAE China Portugal Thailand Others 640691 640699 Notes: 1. 2. Value = FOB value + freight Import duty (custom duty) 10% (supposed) on above value + sales tax 15% on above value + income tax 6% an above value On some components, sales tax is refundable. It takes 7 to 8 months after exports to claim sales tax return. 6% income tax is adjustable during annual tax return. Parts of footwear of wood Parts of footwear nes Total Total Value US$000 434 280 80 58 11 1460 541 312 171 140 296 36 193 Tons 212 134 36 32 9 870 328 231 65 80 166 20 86 1.8 2.2 US$/Ton CIF 2 2.1 2.2 1.8 1.2 1.7 1.6 1.4 2.6 1.8 Import tariff 20% 25% 25% 25%
3.
Source: www.trademap.org and www.macmap.org.
2.5.2 Examples of trade data three case stories

A significant part of the trade data in this report is taken from three websites owned and operated by the International Trade Centre, ITC, www.intracen.org. These website are Trade Map, Market Access Map and Product Map. ITCs Trade Map at www.trademap.org provides import and export data for over 200 countries and territories for over 5,000 product categories in a fully interactive environment. The above insights were straightforwardly acquired from the data the website provides.
40
ITCs Market access Map at www.macmap.org provides information on tariffs and market access measures for 178 importing countries and 200+ exporting countries on an easy to use web platform. ITCs Footwear product Map at www.p-maps.org/footwear provides extensive market intelligence in the form of directly downloadable market studies, a gateway to market information on the Internet and numerous online company directories. These websites have a wide range of users: enterprises, associations, government authorities, financial institutions, statistical bureaus, researchers, academia, press etc. Interested users in Pakistan can request passwords to access these online sources from TDAP, SMEDA, ITCs Islamabad office, LCCI, KCCI or FPCCI. Below are the case stories relevant to the footwear sector in Pakistan. They are based on data taken from the three websites - purely as examples of the waste amount of data available.
Case story I: Insight into trade in leather slippers

The United Kingdom is the worlds largest importer of leather slippers, importing some US$39 million worth in 2005, down from US$46 million in the previous year but significantly up from US$14 million in 2001. Pakistan is a small player on this market, supplying a mere 23 tons (equivalent to 38,333 pairs using a conversion of 600g per pair). Many of the suppliers to the UK market are EU countries, headed by Italy supplying 34% of UKs imports in value terms, though India having gained significant market share recently by 2005 had captured 5% of the United Kingdom import market. Like Pakistan, India faces a tariff of 4.5% under the GSP regime. Other countries like Bangladesh that have an LDC status, can access the European Union free of duty. On average the UK imports leather slippers at CIF value of US$39,000 per ton (equiv. US$23/pair). By destination this does range enormously. Higher value and presumably high quality slippers are imported from Italy at an average CIF value of US$71,000 per ton (equiv. US$43/pair), while the CIF value of slippers imported from Pakistan is a mere US$3,174 per ton (equiv. US$1.90/pair). While the Italian figure seems unrealistically high, the difference in value compared to slippers from Pakistan cannot be ignored. Italy is itself a significant leather slipper market, buying 352 tons (equiv. 588,000 pairs) in 2005 worth US$5.7m. It is not immediately obvious to determine what portion of the Italian imports are sold to Italian consumers and what portion gets value addition and is exported on to a third destination. What is clear though is that Italy adds significant value importing at an average CIF value of US$16,300 per ton (equiv. US$9.80/pair) and exporting at an average FOB value of US$66,300 per ton (US$40/pair). Like the UK, the Italian leather slippers market is looking very healthy; Italy imported 35% more leather slippers every year over the period 2001-2005. 40% is supplied by India while Germany and Romania supply 27% and 17%, respectively. Pakistan has just managed to poke the point of its foot in the door of this market supplying 12 tons (equiv. 20,000 pairs). How does a Pakistani leather slipper differ from the Indian leather slipper? Are the quality standards of the UK and Italian markets beyond the reach of the Pakistan slipper exporters?
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One needs to keep in mind, of course, that India is a massively larger supplier; the worlds largest in fact exporting 12,900 tons (equiv. 21.5 million pairs) in 2005, up 50% from the previous year. The worlds second largest supplier is China, exporting mainly to Central Asia, the United States, Japan and Russia and operating in a higher price echelon compared to India. Romania is the worlds third largest supplier and supplies solely to EU countries taking advantage of its bilateral agreement that provides duty-free access. Markets are not exclusively one quality of shoe or the other. Japan for example buys high-end leather slippers from France (US$54,000 per ton CIF equiv. US$32/pair) but also buys significant quantities of low-end from Bangladesh (US$11,500 per ton CIF equiv. US$7/pair). It is interesting to note that Japan buys 40% of its leather slippers from Bangladesh and not from Pakistan or India. This can be explained by the fact that Bangladesh benefits from the 30% import duty advantage as an LDC. Australia is an extremely dynamic market showing a sudden large intake of low-priced slippers from India (equiv. US$8/pair CIF) and China (equiv. US$7/pair CIF) since 2003. At these rock-bottom prices, Pakistan may not be able to compete. Looking closer to home at Middle Eastern markets Oman and the United Arab Emirates are the other obvious choices for expansion. Pakistan exported just over 279 tons in 2005; a two-fifth was destined for the UK, France, and Germany. This is a significant change from 2004 when the United Arab Emirates was the main market. Non-tariff barrier information covering items such as social requirements, health and safety standards, environmental standards, packaging size marking and labelling requirements, are provided in detail in some of the market surveys that can be downloaded directly from ITCs Footwear Product Map. Note: Data needs to be treated with some care, as some countries seem to be declaring exports at significantly higher values than their trading partners e.g. Italy and Russia.
Case story II: Trade potential in the footwear sector between Pakistan and Turkey
Once trade links between two countries in a certain sector have been established, there may be no harm in taking a cross-sectional look at further trade potential. Whilst Turkey is a significant exporter of footwear, its imports exceed exports. Turkey imports double the value of Pakistans footwear exports and is showing import growth rates that are significantly more rapid than world imports. Turkey currently only imports a mere US$171,000 worth directly from Pakistan. The figure would most likely increase if the indirect passage via the UAE is taken into account. Nevertheless, Pakistan could potentially export a lot more footwear to Turkey. The countries have similar tastes and styles, are within close proximity to each other and there are matches between the footwear categories exported by Pakistan with the ones that Turkey imports.
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Table 2.19 Pakistan-Turkey footwear trade, 2005

Pakistans exports HS code Product description To World US$000 640320 640340 640359 640391 Leather slippers Uppers of leather with metal toe cap Uppers and soles of leather Uppers of leather, nonleather soles, covering ankle Uppers of leather, nonleather soles, nes Uppers of composition leather Footwear, nes 5,408 3,576 6,180 27,879 To Turkey US$000 31 0 0 137 US$000 149 2,299 15,208 33,142 Turkeys imports from world Annual growth 2001-05 34% 40% 13% 83%
640399 640510 640590
8,695 67,644 20,885
0 0 0
109,979 526 1,974
58% -11% 32%
Source: www.trademap.org.
Pakistans current footwear exports to Turkey are in two shoe categories boots with uppers of leather and non-leather soles, and leather slippers. As highlighted in the table, there is a vast scope for Pakistani expansion onto the Turkish market in four categories especially: 640340, 640359, 640291 and 640399. In terms of market access, Turkeys tariffs for footwear products are quite favourable, especially taking into consideration the GSP preference that Turkey applies to imports from Pakistan. Turkeys GSP tariff is 4.5% for almost every category, with the exception of 0% for category 640510 and 0-12% for category 640590. The numbers clearly invite further investigation. Perhaps a first next step would be to identify some prospective buyers to talk to. The LeatherNet Directory at www.leathernet.com, ITCs www.leatherline.org and Turkish Business Guide at www.turkindex.com are useful for identifying companies. You may also wish to identify a trade fair where more investigative inquiries could be carried out. ShoeInfonet at www.shoeinfonet.com has a calendar of footwear events. The International Footwear Industry Trade Fair in Istanbul listed in Shoe Infonets calendar may be just the fair to attend.
Case story III: The Swiss footwear market

Known for its global brand Bally, Switzerland is definitely a producer and exporter of footwear, but imports far exceed exports. In 2005, Switzerland imported close to US$870 million worth of footwear to meet its exceptionally high consumption of over 5 pairs per capita (EU countries consume 1.8 pairs per capita). 1 It is not a surprise that Italy is Switzerlands major supplier bordering Switzerland from the south and being the top footwear producer globally. 34% of Switzerlands footwear imports
1
EU report on competitiveness of the footwear sector. Informal footwear market overview in Switzerland.
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were of Italian origin in 2005. This proportion is a lot higher if we look at the shoe category that Italy is most competitive in leather upper and sole, here Italy has captured 74% of the Swiss import market. The flow of shoes into Switzerland is not only heading northwards, the northern neighbour also has a large 20% slice of the Swiss import market. Other important suppliers to Switzerland include China and Viet Nam, which are the major source of sports footwear for Switzerland. Two-thirds of the shoes that Switzerland imports have leather uppers. Amongst these there are three types of shoe that stand out: (a) the normal shoe with leather sole and leather upper, (b) leather upper with rubber or plastic soles covering the ankle, (c) an interesting category for further research HS 640399 code uppers of leather with rubber/plastic soles not elsewhere specified. Import values for this category are very high US$345m almost half of Swiss footwear imports. The description of the category is insufficient to immediately understand what type of imported shoes has been classified here. A guess would be that these are used by the military or for farming. Without further research, it is very difficult to pinpoint, but definitely intriguing. The sheer size of imports in this category merits further investigation. The other third of Swiss footwear imports consists mainly of sport and casual shoes with plastic, rubber or textile uppers. There appears to be no market for shoes with composition leather uppers. This is not surprising considering the high-income levels and the Swiss preference for high quality. Since mountain sports play an important role in Switzerland, past times ski and hiking boot imports are important. Whilst ski and snowboard boots are clearly classified by the HS code, mountain boots are not. Mountain boots are becoming more and more of lighter synthetic textile fabrics, replacing the old fashioned heavy leather boot, so these are likely to be classified more in the 6404 (textile upper) group. Most categories are showing stable market trends. There are, however, a few exceptions in which notable growth is occurring. Although market size is not yet very large, Swiss imports of leather slippers are growing at 14% per year in value over the last five years. India is gaining market share very rapidly by offering leather slippers at much lower prices than Italy and Germany. Another category that is showing growth is shoes with leather uppers and a metal toe-cap (HS -640340) growing at 18% per year over 2000-05. Looking at the market access conditions for footwear exports to Switzerland, the market is completely open for developing country suppliers through the Swiss GSP zero tariff rate for all footwear imports. Developing countries are not in any particular advantage versus Switzerlands main suppliers in the EU since these countries benefit from a bilateral agreement between Switzerland and the EU through which footwear imports are also at zero tariffs.
Table 2.20 Pakistans exports of footwear, 2000-2005 (US$ million) Export category Total footwear Leather footwear Canvas footwear Other footwear
Source: PFMA
2000-01 43 35 41 36
2001-02 57 49 34 42
2002-03 86 74 50 80
2003-04 89 78 40 70
200405 138 108 70 23
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2.5.3 SWOT analysis of Pakistani footwear companies

The following strengths, weaknesses, opportunities and threats have been short-listed based on interviews conducted of exporters and on the consultants own views and observations.
Strengths
Major strengths identified are:

Good image and tradition of Pakistan as a leather country. Pakistan is still a low wage country like Bangladesh.
Other strengths are:

Labour is easily available. Support from TDAP/EPB for marketing, i.e. exhibitions, trade fairs, etc. The infrastructure of the footwear industry in Pakistan is better than other countries like India and Bangladesh etc.
Weaknesses
Major weaknesses identified are:
Non-existent footwear component and support industry, which makes product development lengthy, time-consuming and costly. Consequently, producers have to rely on imported components. Production lead times thereby tend to be longer. Industry size is generally small to attract buyers of large volume.
Other weaknesses are:

Potential new buyers reluctant to pay first time. Costs of production like utilities and taxation are much higher than in neighbouring competitive countries. Poor infrastructure in terms of shipping services. Lack of product development and R&D facilities at country level. No research is done in terms of product development or in finding new buyers/markets. Companies follow local successful companies, approach their customers, copy their products, cut prices and eventually deplete their product.
Opportunities
Major opportunities identified are:
Due to anti-dumping duty imposed on Chinese imports into EU, which ranges from 9% 17%, an opportunity has been created for countries like Pakistan, India and Bangladesh
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since the Chinese footwear exports have become more expensive. How successful it would be, is yet to be seen.
The EU has imposed anti-dumping duty on the import of Chinese shoes. This decision was finalised in October 2006, which created a great opportunity for Pakistani shoe manufacturers. In order to remain competitive, the European importers will certainly look for alternative sources of supply. Therefore, Pakistan shoe manufacturers have the likelihood of attracting buyers. This opportunity has been well recognised even at government level, and for strengthening the footwear industry, the government has approved 6% for research and development. Long-term view other countries economies are growing but growth in Pakistans economy is relatively slow. Despite a lot of scope, some companies in faster developing economies will shift their production towards making other products like computers, cars, etc., while Pakistans economy, which is not growing, can focus on making shoes and be successful in this sector.
Other opportunities are:

Potential to grow in exports. A lot of room is available. Footwear manufacturing is a labour-intensive industry. Pakistans industry has a big pool of labour, which can be trained as semi or fully skilled footwear workers. If footwear manufacturing is expanded, it has the potential to absorb a lot of workforce.
Threats
Uncertain political conditions, i.e. regular public demonstration against the West, acts of terrorism, uncertain and continuously changing conditions across the borders, nonexistence of a long-term business policy at government level and the negative image of Pakistan. Internal inefficiency at company level.
Other threats are listed below

Various decisions by government, such as unpredictable sanctions, prove very unhealthy for the sector. Faster growing economy in the footwear producing world, e.g. Bangladesh, India, etc. Political unrest in Pakistan. Exporters being faced with imported products and import duties decreasing.
2.5.4 Footwear association and its role

The Pakistan Footwear Manufacturers Association (PFMA) (www.pakfootwear.pk) is a trade association representing Pakistani footwear manufacturers, importers of raw materials and components and traders. It has 55 industry members and 37 trade members. The Ministry of Commerce and the government of Pakistan duly approve the association. It is incorporated under the Company Ordinance of 1984. It is a member of the Federation of
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Pakistan Chamber of Commerce and Industry (FPCCI). The association has been formed to protect and safeguard the interests of footwear manufacturers and traders by applications, deputations, delegations, petitions and memoranda to the government of Pakistan or the provincial governments. The association was established to assist the members by investigating their problems and finding ways to improve their current situation. The main objectives for the association are:

To provide a meeting place for exchange of views by all interested companies. To provide a channel of communication with similar and allied associations or societies in other countries. To arrange suitable demonstrations and take part in domestic and foreign exhibitions and delegations. To investigate problems particular to this industry and trade with a view to cause improvements and progress. To spread knowledge regarding the latest information pertaining to this industry and trade. To protect, safeguard and further the interests of the footwear manufacturers and trade by applications, deputations, delegations, petitions and memoranda to the government of Pakistan or to the local and provincial governments and any other government or public body, local or supreme; to endeavour to bring about suitable changes and alterations in the legislation or rules in the interest of this industry and trade. To obtain and disseminate industrial and other necessary information to the members. To provide means of co-operation and technical and social intercourse between parties and persons engaged or interested in the industry. To promote goodwill between members and settle amicably any differences arising between the members or between any members and outsiders. To establish and maintain library or libraries and information bureau/s, institutes, colleges or other institutions for technical education or a fashion design centre etc. Collect models, designs patterns and other things of interest in connection with the footwear manufacturing industry and provide facilities to its members in the use of gazettes, trade directories and other informative publications. To subscribe to or become and continue to remain a member of the Federation of Pakistan Chambers of Commerce and Industry and procure from and communicate with any incorporated organisation of commerce and industry such information as may be likely to forward the objects of the association. To frame rules and regulations in the interest of consumers regarding the standard of the footwear products and take necessary steps to educate the public. To assist members in manufacturing, marketing, import and export of footwear and allied commodities. Maintain contact with foreign trade, commerce and industry missions and cooperative advertising bodies. Collect information and explore facilities and possibilities for manufacturing and import and export, and assist members thereof.
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To endeavour with other recognised organisations and/or registered bodies to form a National Arbitration Association of Pakistan and to seek affiliation or liaison with similar bodies abroad. To endeavour with other recognised chambers and associations acting through the Federation of Pakistan Chambers of Commerce and Industry to form a National Committee of International Chambers of Commerce. To make representations to the government, central or provisional and other authorities or bodies as and when deemed necessary, and to secure an organised action, direct or indirect, for the fulfilment of any or all of the objects mentioned herein. To undertake manufacturing, trading or import and export business activities, approved by the association on a non-profit making basis to facilitate the industrial and trading activities of individual members. To convey to the government the problems facing the industry. To suggest corrective policy matters for the growth of the footwear industry. To coordinate with TDAP/EPB on participating in footwear exhibitions around the world. To recommend to TDAP/EPB trade delegations to different markets. To pursue at different government levels removal of irritants affecting the business operation of its members. To send recommendations to the Government, Ministry of Commerce, Central Board of Revenue and Finance Ministry regarding import tariffs To give feedback to the government about various decisions taken by them. To appraise the government about any issues taken up by the governments of the importing countries and their implications on Pakistani exports. To arrange a footwear exhibition within Pakistan and attract foreign buyers, as well as machinery and raw material suppliers. The objective of this exhibition is also to educate the members and other footwear manufacturers about the technology and materials available worldwide, thus contributing to the transformation of unorganised sector into a mechanised sector. To protect and promote the interest of the footwear manufacturing and all those deals in any category of footwear manufacturing industry and trade.
2.5.5 Anti-dumping
Pakistan is not taking any anti-dumping measures against the Chinese imports of footwear in Pakistan. The Pakistan Footwear Manufacturers Association moved an application a few years back for protective measures against Chinese footwear imports to Pakistan, but no headway has been made in this direction. In fact, the import of Chinese footwear is on the rise. Some of the major retailers are patronising these imports. The government of Pakistan is also working on signing FTA with China so the likelihood of any anti-dumping is removed.
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3 Implications of the WTO Agreements

3.1 Background
3.1.1 Multilateral discipline of trade rules
International trade for nearly six decades has been subject to the discipline of multilaterally agreed rules by which countries are required to abide in their trade relations with one another 2 . The institution responsible for overseeing this rules-based system is the World Trade Organization (WTO, www.wto.org) established in January 1995. The WTO is the successor to the General Agreement on Tariffs and Trade (GATT), which had been performing a similar role since January 1948.
Box 3.1 Multilateral discipline of trade rules The WTO system

International trade is subject to the discipline of multilaterally agreed rules by which countries are required to comply with in their trade relations with one another. The World Trade Organization (WTO) oversees this multilateral system. Its Agreements aim to help international trade flow smoothly, freely, fairly and predictably. Under the WTO trade regime there are both opportunities and challenges for Pakistan. It is for business community supported by the Government to convert tariff reductions and liberalization commitments into opportunities for trade. Likewise concerted action needs to be taken by both the public and private sectors to adequately meet challenges.
Source: WTO Cell, Planning & Development Department, Government of the Punjab
This chapter is divided into four main sections:

General background Information on the WTO issues Implications of the WTO Agreements Trade conditions as a result of the WTO Agreements.
3.1.2 Purview of the WTO

The WTOs purview encompasses three agreements, relating to trade in: (1) Goods; (2) Services; and (3) Trade-Related Intellectual Property Rights. In addition, there are twelve associate agreements relevant for trade in goods.
ITC; Business Guide to the World Trading System (1999), p.3
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3.1.3 Functional scope

The functional scope of the WTO is depicted in the diagram below.
Figure 3.1 Functional scope of the WTO
WTO
Intellectual property rights
Trade in goods
Trade in services
General Agreement on Tariffs and Trade (GATT 1994)
General Agreement on Trade in Services (GATS)
Trade Related Aspects of Intellectual Property Rights (TRIPS)
These Agreements seek to establish a trading system that is: non-discriminatory, freer, predictable, more competitive and arguably more beneficial to developing countries
Associate Agreements on:

Agriculture Application of Sanitary & Phytosanitary Measures (SPS) Product standards (TBT) Trade-related investment measures (TRIMs) Anti-dumping Pre- shipment inspection Rules of origin Import licensing Subsidies Countervailing measures Measures for safeguards
Business and professional services Communication Distribution services Educational services Environmental services Construction and related Engineering services Financial services Health services tourism and travel-related services Recreational, cultural and sporting related services Transport services Other services
Patents Copyrights Trademarks Industrial designs Geographical Indications Undisclosed information
Customs valuation 3.0.5
3.1.4 Dispute resolution

For disputes arising under GATT 94, GATS and TRIPs there is a common dispute resolution mechanism embodied in the WTOs Disputes Settlement Understanding, (DSU).
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3.1.5 Focus on trade in goods

In this report focus is on trade in goods. Hence, further reference will not be made to the GATS while the TRIPs will be referred to wherever it is relevant.
3.1.6 Obligation of conformity

Each member country of the WTO is obliged to ensure the conformity of its laws, regulations and administrative procedures with the agreements of the Organization (Article XVI (4) of the Marrakech Agreement Establishing the WTO).
3.1.7 Opportunities and challenges under the WTO regime Overview

The central objective of the WTO is to help international trade flow smoothly, freely, fairly and predictably. The WTOs rules with their trade liberalization orientation, have indeed led to a rapid expansion of the world trade. In ranking the many achievements of the GATT-WTO system, among the most significant is the deep reduction in developed-country tariffs from high double-digit figures in 1947 to low single-digit numbers today 3 . There have been also significant reductions in other barriers to trade. Under this liberal international trade regime there are both opportunities and challenges for Pakistan. No doubt Pakistan faces many challenges. At the same time, the multilateral trade dispensation has created many opportunities. If a proper strategy is adopted and the Government plays a supportive and facilitative role, it can lead to a significant increase in international trade and substantially contribute to the economic growth. Hopefully ongoing trade negotiations would add to these opportunities. However, the WTO is about providing opportunities it does not provide guarantees nor does it provide all the conditions for participation in the global economy. 4 In short, Pakistan has to put its act together, for realizing the potential that has become available due to the trade liberalization. Action is to be taken by government agencies, trade bodies and, above all, by entrepreneurs themselves. As it has been aptly observed the business community has the primary responsibility for converting tariff reductions and liberalization commitments into opportunities for trade by adopting appropriate export promotion and development strategies. 5
Current status of efforts to liberalize trade

Currently (mid 2007), the ninth (and the first under the WTO) Multilateral Round of Negotiations (MTN) called the Doha Development Agenda (DDA) is in progress 6 (more
3
See Patrick F. J. Macrory, Arthur E. Appleton and Michael G. Plummer, The World Trade Organization: Legal, Economic and Political Analysis, Volume-I (2005) p.109. See WTO The Future of the WTO (2004), p.16. See Supra note 1 at 23. See Hong Kong Ministerial Declaration, WT/Min (05), 22 December 2005, and for updates on the latest developments and pending issues visit Hwww.wto.orgH.
4 5 6
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correctly in a state of suspended animation). Earlier rounds have given great impetus to the growth of international trade by slashing tariffs mostly in industrial countries as well as elimination of non-tariff barriers such as quantitative restrictions. Following the Uruguay Round (the most important MTN held so far), average tariff rates in developed countries on manufactures stand at an average of 3 % on imports down from the 5.5 % pre-Uruguay Round average, a 45 % reduction. Tariffs; however, on goods of export interest to developing countries still remain relatively high, 7 e.g. on clothing and footwear. DDA has been launched to improve the situation of developing countries in the multilateral trading system through focusing on issues of principal concern to them. The progress of negotiation has been so far very slow and deadlines for reaching agreement have been repeatedly missed. Meetings to take forward the DDA process held in 2006 and 2007 turned out to be inconclusive and negotiations have been suspended. One comment from an influential periodical graphically describes the situation as the Doha Round lying comatose after five years of fruitless negotiations. 8 Negotiations under the DDA on the Non-Agriculture Market Access (NAMA) cover the sector under study. Modalities are yet to be finalized on a Swiss formula, i.e. envisaging rate of reduction for a higher tariff to be greater than that for a lower one. (For further details see: www.wto.org.)
3.2 Information on WTO issues

Information flows, both upwards and downwards, regarding the WTO are depicted in Figure 3.2 below. The present arrangements leave a lot to be desired in terms of their content, sources, destination, user friendliness and nature of information i.e. optional or compulsory. There are markedly divergent perceptions among entrepreneurs about the nature and frequency of such flows. Despite contrary claims made by individual entrepreneurs, one cannot help reaching the conclusion that flows are erratic in both directions.
See I. Haque, Doha Development Agenda: Recapturing the momentum of multilateralism and developing countries, American University International Law Review, Volume 17 Member 5 Footnote 36. Also See Bernard Hoekman, Strengthening the Global Trade Architecture for Development: The Post Doha Agenda, Nov. 2001, at 2. The Economist, November 4, 2006, p.40.
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Figure 3.2 Upward and downward information flow on the WTO
WTO, Geneva
WTO Mission of Pakistan, Geneva
Ministry of Commerce/TDAP
Ministry of Industry
Chambers of Commerce and Pakistan Footwear Manufacturers Association
Entrepreneurs
Source: WTO Cell, Planning & Development Department, Government of the Punjab.
3.2.1 Information flow - upwards, i.e. from companies via government to the WTO Government driven flows upwards
There is no problem in respect of information transmitted by the Government of Pakistan to the WTO as an obligation of the membership of the organization. Regularly, the Ministry of Commerce sends necessary information about notifications to the WTO as agreed in the
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Ministerial Decision on Notification Procedure. 9 Some of the items that are notifiable are: Tariffs, Generalized System of Preferences (GSP), provisions, Custom valuation, Rules of origin, Safeguard actions, details regarding exports subsidies and concessionary export financing.
T r a de s t a t is t ic s
As regards trade statistics, the Government of Pakistan is obliged to furnish data for the integrated database of the WTO. These figures are based on data of the custom stations and are reliable. However, there has been a lag in furnishing these statistics. The problem is being sorted out. Another compulsory upward information flow is generated from the Census of Manufacturing Industries (CMI) conducted every five years. 10 Results of CMI suffer from problems of coverage, research design and lack of adequate response from the industry. Further, these at best are historical data.
Information through co n s u lt a t iv e m ee t in gs
The Government of Pakistan gets itself informed about problems faced by industry and suggestions made by the private sector, in meetings preceding the formulation of each years trade policy. Apart from the Federations of Pakistan Chambers of Commerce and Industries (FPCCI), the regional Chambers of Commerce and sectoral associations, which are registered with the Government, are invited. However, as regards associations, some selection is made to ensure that representation is adequate in terms of both sectors and regions.
Information flow upwards: Exporters opinion

S e m i v o lu nta r y a nd s po r a d ic
In the footwear industry, it was found that companies were very hesitant to share information e.g. pairs sold or exported, the organizational hierarchy, clients details etc. One reason is the predominance of cottage industry segment, which lacks capacity to organize and transmit information. As a matter of fact in a recent seminar a consultant commented on the hesitation of companies in sharing confidential information about their company i.e., sales records, clients details, profitability etc. Statistics regarding imports and exports are transmitted by the Government to the WTO database on the basis of information provided by the Customs authorities.
I n f or ma t io n a bo u t th e c once r n ed g ov e r n me nt a ge nc ies /d ep ar t men t s
A majority of exporters generally had an idea that complaints/suggestions about the WTO can be made to Ministries of Commerce & Industries or TDAP. They were also aware of websites of the concerned government organizations.
WTO: Decision on Notification Procedures, Ministerial Decisions and Declaration adopted by the Trade Negotiations Committee on December 15, 1993. The census is undertaken under the Industrial Statistics Act, 1942 for industrial units employing 10 and above workers registered or qualifying for registration. Information is treated confidential.
10
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On the other hand, some entrepreneurs thought that there was no organization to which they can make complaints nor they were aware of any procedure for making their voices heard by the relevant government authorities. In short, information among entrepreneurs about reaching out to the government authorities or trade bodies is not even. More enlightened entrepreneurs are aware of what to do while others remain ignorant of avenues of articulation available to them.
3.2.2 Information flow - downwards, i.e. from the WTO via government to companies Complaints about the lack of information about the WTO
In January 2005 several management consultants, bankers, and government bodies, i.e. TDAP, SMEDA, and Chambers of Commerce, organized seminars on the WTO to create awareness within the business community. According to industry sources after these events, no seminars were organized. As a result, companies have no access to up-to-date information related to the WTO.
Knowledge about implications of the WTO Agreements

People earlier thought that the WTO would bring no change. However, entrepreneurs now have a general idea of the effects of the WTO agreement on the footwear sector but they do not have any professional information about this subject. To improve the current situation, the local consultant recommended that the Ministry of Commerce should become more proactive. TDAP should circulate newsletters, make information available on websites, conduct seminars, visit trade associations and invite companies for open dialogue. SMEDA should also come forward by organizing tailor made seminars and other promotional activities. The Ministry of Industry should also take part in such activities. In short a multi-organizational initiative has been found to be very necessary to enhance the quality and easy accessibility of information.
Existing information flow downwards

With respect to downward flow, the website of Ministry of Commerce (www.commerce.gov.pk) and other ministries, TDAP (www.tdap.gov.pk) and the WTO Cell of the Government of the Punjab (www.wtopunjab.gov.pk) have been playing a useful role. However, here again it was found that various notifications issued by the WTO Secretariat and which are regularly sent to the Ministry of Commerce are not put on the website. The plea taken in this regard was that this information was available from the WTO website. Pakistan Footwear Manufacturers Associations website (www.pakfootwear.org) has no information on the WTO or markets. However, it is felt that the Government of Pakistan and its export/trade development organizations must play a more proactive role. The WTO, in collaboration with ITC and the European Commission (EC/EU), has established WTO reference centres in the Ministry of Commerce, TDAP, and the Lahore Chamber of Commerce & Industry (LCCI). WTO references centres have also been established by the FPCCI, selected Chambers of Commerce & Industries and the Planning & Development Department of the Government of the Punjab.
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Demand for proactive supportive role of the government

Pakistans shoe industry, according to entrepreneurs, has been adversely affected by the low cost imports of shoes from China. However, the anti-dumping complaints lodged by two main local shoes manufacturers was not entertained as their combined shoes production was less than 20% of total shoe production in the country. The footwear entrepreneurs were of the firm view that the Government should create greater awareness about the WTO issues by, regularly organizing focused seminars, workshops and discussions, circulating newsletters, magazines and creating websites. TDAP, Chamber of Commerce & Industry and the Pakistan Footwear Manufacturers Association should also come forward in creating awareness. The Government should compile a mailing list and regularly circulate updates on the WTO agreements to exporters/manufacturers.
Recommendations
The situation as to information flows is not satisfactory. A proactive role is required on the part of Ministry of Commerce and the Trade Development Authority of Pakistan. The TDAP organization should provide leadership and collaborate efforts with other relevant agencies, e.g. Chambers of Commerce, SMEDA and Provincial Governments WTO Cells and trade associations. Funds are not an insurmountable problem because the Ministry of Commerce and TDAP have ample resources in the form of the Export Development Fund (EDF). The real challenge is to organize a system that is user friendly and available in virtual real time. Technical assistance from the ITC to set up/improve such an information system should be very much welcome. TDAP should intensify its activities for capacity building, specifically for the better use of opportunities and coping with challenges emanating from the WTO system. Among other things, the following measures are recommended:

The present system of generalized information in the WTO should be changed to one disseminating focused information regularly on concrete issues. A comprehensive plan for dissemination of sector-specific information may be prepared by TDAP in consultation with stakeholders. A helpline, professionally manned, should be established in TDAP. Sector specific experts should be available to callers. Special meetings/workshops/seminars for educating entrepreneurs about the WTO issues should be organized by the TDAP preferably in partnership with concerned trade associations at least four times a year at different places.
(Action: Ministry of Commerce, TDAP and ITC)
3.3 Implications of the WTO Trade Agreements

3.3.1 The WTO Agreements relevant for the global and Pakistani footwear sector
The WTO Agreements in terms of degree of their relevance for the footwear sector can be divided into three categories: high intensity relevance, low intensity relevance and contingent
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relevance. Agreements possessing contingent relevance refer to those that come into effect in certain situations only. The degree of relevance of these agreements for the footwear sector is the same in Pakistan and elsewhere, i.e. in other WTO member countries as well. The agreement of direct relevance to the footwear sector is GATT 1994. Other agreements having high relevance are TRIPs, Technical Barriers to Trade (TBT), Rules of Origin, and the Customs Valuation. The agreements of lesser relevance are: Application of Sanitary and Phytosanitary Measures (SPS), Pre-Shipment Inspection, Import Licensing Procedures and Trade Related Investment Measures. In the category of contingent relevance are agreements on Anti-Dumping, Subsidies, Countervailing, Safeguards and the DSU. The WTO Agreements not only influence the volume of trade but also affect the operational space of a policy-maker and market access of an individual exporter. A diagrammatic representation of the degree of relevance of the WTO Agreements for the footwear sector is given below in Figure 3.3.
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Figure 3.3 Relevance intensity of the WTO Agreements
11
TRIPS
Rules of Origin*
Custom Valuation SPS
TBT
GATT 1994
Footwear
Preshipment inspection
DSU** TRIMS Antidumping
Import licensing procedure
Agreement on SCM***
High intensity relevance Low intensity relevance Contingent relevance
*
** ***
Acquires high intensity relevance in the context of Regional Trading Arrangements and where any scheme of preferential tariffs has been adopted. Dispute Settlement Understanding Subsidies & Countervailing Measures
11
Texts of Agreements are available on the WTOs website Hwww.wto.orgH.
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3.3.2 Relevance of specific WTO Agreements for the footwear sector General Agreement on Tariffs and Trade 1994
The structure of GATT 1994 that lays down the framework within which the international trade of goods takes place rests upon five pillars that constitute the core of the legal obligations of the member countries.
The Most-Favoured-Nation (MFN) obligation (Article-l)

Every member of the WTO is required to treat imports from all other members on an equal, non-discriminatory basis vis--vis all other members imports. Thus if a country grants a special favour to another country (e.g. lower customs duty rates) the same treatment has to be extended to all other WTO member countries.
I m p l ica t io ns f or th e foo t w ea r s ec t o r I m p o r ts
Pakistan or any other WTO member country while importing footwear has to extend the same treatment to the same products of all the member countries. They are not allowed to give a differential treatment to any trading partner who is member of the WTO. This obligation leads to non-discriminatory trade and provides level playing field to every member of the WTO.
E x p o r ts
For Pakistani exports non-discriminatory market access to other markets is legally assured. This does not; however, indicate the rate of tariff that is leviable on footwear items. Market access will be virtually blocked if tariff rates are excessively high. Likewise, exports will be adversely affected if importing countries are using non-tariff barriers.
E x c e p t io n to t he pr inc ip le
Some exceptions are permitted from this principle such as:

Preferential tariff rates given to countries that are members of a free trade area/regional trading arrangements under Article XXIV of the GATT. Preferential tariff rate arrangements among developing countries permitted under the Enabling Clause 12 (see Box 3.2.) Special access to markets of industrial countries at lower tariff rates granted to developing countries, e.g. Generalized System of Preferences (GSP) 13 . Member countries are allowed to introduce trade restrictions in case of balance of payment difficulties.
WTO, Guide to the Uruguay Round Agreements (1999), p.40. The GSP was proposed at UNCTAD II in 1968. It entered into force in 1971 and gives developing countries a margin of preference in the tariff rates their goods face in the markets of developed countries. In this way GSP increases their competitiveness.
12
13
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However, all these exceptions are allowed under strict conditionalities.

Box 3.2 Regional Trade Agreements (RTAs) Governments often take action to liberalize trade on a regional level through formation of free trade areas or preferential trade areas. Under these arrangements, goods can enter each others country market either without payment of any tariff or on some preferential terms and conditions. RTA, which includes bilateral free trade agreements between countries that are not in the same region, have become so widespread that all but one WTO member are now parties to one or more of them. It is estimated that more than half of world trade is now conducted under RTAs. Some 197 such agreements in force have been notified to the GATT/WTO. Many experts regard these arrangements as building blocks for a freer non-discriminatory multilateral trading system. However, many other experts perceive these arrangements to be obstacles to the growth of a multilateral system. Regional arrangements are allowed (as exception to the Most Favoured Nation principle) under Article XXIV of the GATT 94 as well as under the Enabling Clause (trade arrangements between developing countries). Pakistan is a signatory to an Agreement on South Asian Free Trade Area (SAFTA) that is a transformation of the SAARC Preferential Trading Arrangement (SAPTA, operational albeit half-heartedly since 1995) into a Free Trade Area among the SAARC members (Bangladesh, Bhutan, India, Nepal, Maldives, Pakistan and Sri Lanka). SAFTAs framework agreement envisages reduction of tariffs to 0-5% level and removing quantitative barriers to trade (a) within 10 years by its LDCs membersNepal, Bhutan and Maldives and (b) between 7 8 years in case of India, Pakistan, Bangladesh and Sri Lanka. In addition to the above, a FTA has been signed with Sri Lanka. Early harvest agreements have been signed with China and Malaysia. Besides this a FTA agreement has been signed with China in November 2006. Negotiations are ongoing for signing FTA with Bangladesh, Turkey and Kenya. Discussions are also ongoing with Indonesia, Laos, Singapore and Thailand for exploring the possibility of entering into FTAs.
Source: WTO Cell, Planning & Development Department, Government of the Punjab
National treatment obligation (Article III)

Once foreign goods have entered a countrys market, these and locally produced goods are to be treated equally (as if foreign goods have acquired importing countrys nationality). This article embodies the same principle of non-discrimination as set out in the MFN commitment. It also establishes the principle that no tax will be imposed on imports in excess of the amount of the indirect taxes levied on the like domestic products.
Reduction and bindings of national tariffs (Articles II, XI)

In order to make trade predictable, the WTO member countries are generally binding their commitments (Article XI), i.e. ceilings are imposed on tariff rates that can be charged by a country. 14 . Under the WTO system tariffs (i.e. custom duties) are the only form of the permissible measure for trade protection (Article II & Article XI). The bound tariffs cannot be increased above the bound rates unless compensation is paid to the other adversely affected WTO member.
14
Pakistan has bound more than 99% of tariff lines.
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In case of developing countries, imports often take place on lower than the bound rates these are called applied rates which can be increased up to bound levels without consultation with anyone. Reduction of tariffs is an important aspect of trade liberalization. As a matter of fact rates of tariffs have been constantly coming down since the GATT became operational in 1948. Industrial countries tariffs in most of the traded items have fallen down to less than 4%. Such a significant reduction in tariff barriers has been very helpful for increasing trade. However, as stated above, on many items of interest to developing countries, tariff rates remain relatively high e.g. textiles and clothing.
Elimination of quantitative restrictions (Article XI)

Member countries are required to eliminate quantitative restrictions on imports and exports. However, there are a number of exceptions to this rule. For example export restrictions can be applied on export of goods to prevent or relieve critical shortages, Article XI-2 (a).
R e leva nce to the foo tw ear s ec tor E x p o r ts
Pakistani exports of footwear do not, by and large, face significant non-tariff barriers in industrial countries market. They mainly face tariff barriers, which have also substantially come down. In other words, for the footwear sector of Pakistan market access is not a problem as such. This indicates a great scope for increasing export in this item provided Pakistan has the right products at the right prices.
I m p o r ts
The combined effect of Articles-II and XI is that foreign footwear goods enjoy reasonable access to Pakistans market though tariffs are relatively high (25%). Imports should prove a tonic effect for Pakistans domestic industry. This infusion of competition is expected to have a positive effect on footwear manufacturing units. Pakistans exports have in fact better opportunities in markets of industrial countries on account of their comparatively lower tariffs.
Transparency of Government regulations affecting trade (Article X)

Members are obliged to publish relevant laws, regulations, administrative rulings of general application including those pertaining to the classification of the valuation of the products etc. The governments are also required to disclose their policies and practices publicly within the country as well as by notifying the WTO. With a view to ensuring that members adhere to their obligation, their trade policies are examined through a surveillance mechanism called the Trade Policy Review Mechanism. This examination of the trade policy and results of examination becoming a part of public domain also contribute to greater transparency.
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R e lev a nce f o r th e fo o tw ear s ec tor
Transparency in government regulations, in Pakistan and abroad, helps in smoother flow of trade. It is in essence due process guarantees and a partial shield against arbitrary government action.
Trade Related Aspects of Intellectual Property Rights (TRIPS)

Many countries entered into international agreements (non WTO) to protect creative ideas and new knowledge by giving the creators of these knowledge based assets (called the intellectual property rights) the following:

The right to prevent others from using their inventions, designs or other creations, 15 and The ability to negotiate payment for their intellectual property (IP) rights.
However, protection given to IPRs (by several international agreements) was found to be inadequate. This was particularly true as to the level of protection, implementation and enforcement. It was, therefore, agreed to develop new internationally agreed rules. The result was the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) negotiated in the Uruguay Round of MTN, which sought to reduce distortions and impediments to international trade through promoting effective and adequate protection of intellectual property rights. The Agreement spells out the way that basic principles of trading order and other intellectual property agreements should be applied. The MFN and national treatment requirement have constituted key elements of the architecture of the agreement on the TRIPs. This Agreement has also required Members to comply with pre-existing agreements governing IPRs. It was explicitly provided that nothing in the TRIPs Agreement shall derogate from existing obligations as spelled out in the Paris Convention, the Berne Convention, the Rome Convention and the Treaty in respect of Integrated Circuits. The TRIPs Agreement markedly narrowed the gaps in the manner these rights were recognized, protected and enforced among trading nations. It also provides for settlement of disputes through the WTO dispute settlement system. Pakistan, in compliance with the TRIPS Agreement, has enacted new legislation (IPO law) as well as effected amendments in the existing laws relating to patents, copyrights and trademarks.
TRIPs Agreement is directly relevant for the footwear sector. In the current business environment, the primary source of competitive advantage for all businesses, including those in the fashion industry, is innovation and original creative expressions. Business managers need to identify such valuable intangible assets in a timely manner, determine their business relevance, and agree on those to be protected and leveraged through the intellectual property (IP) system. As the sector becomes more sophisticated its relevance will increase further.
15
This Agreement fixed minimum levels of protection that each member of the WTO is required to provide to the intellectual property of other members.
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Protection of designs and trademarks

Footwear designs can now be protected by registration under the Registered Designs Ordinance, 2000. Likewise, well-established companies are advised to get their trademarks protected. The quality of protection has significantly improved. By the same token, the footwear industry in Pakistan cannot copy some one elses designs or trademarks. In case a violation occurs in respect of IPR of Pakistani rights holders, they would be well advised to take advantage of protection provided by the TRIPS Agreement. (Action: Footwear Industry/Exporters)
Agreement on Technical Barriers to Trade (TBT)

Every WTO Member while allowing imports has the right to adopt standards considered by it to be appropriate for human, animal or plant life or health or for the protection of the environment or for prevention of deceptive practices. TBT seeks to assure that regulations, standards, testing and certification procedures do not create unnecessary hurdles to trade. However, with a view to preventing excessive diversity, TBT encourages member countries to use international standards where these are appropriate but it does not oblige them to change their levels of protection in the process. TBT contains a code of good practice for the preparation, adoption and application of standards. It lays down that procedures used to determine whether a product conforms to the national standards have to be fair and equitable. It does not approve of any methods that would give domestically produced products an unfair advantage. It also encourages countries to accord recognition to each others testing procedures. To help the stakeholders to know about the latest standards in the prospective markets, all the WTO members are required to establish a national enquiry point. The TBT gives decisive advantage to industrial countries as they have superior technologies and do follow more rigorous and higher standards. On the contrary, Pakistan being a developing country has yet to progress to those relatively sophisticated standards. In particular, there are not enough laboratories. This puts Pakistan at a disadvantage.
In most of the developed countries governments and businessmen respond to the civil societys preference for ecologically friendly production and consumption systems and consequential enforcement of high environmental standards. Leather industry in this respect is getting a lot of attention because tanneries are contributing significantly to pollution. Indirectly leather products like footwear in view of this are subjected to rigid scrutiny There is also the possibility that protectionist interests in importing countries may insist on laying down unrealistic standards that might have the effect of obstructing trade. In such cases, Pakistani exporters may be well advised to plead that the arbitrary standards have been creating unnecessary hurdles to trade and constitute a violation of the TBT Agreement. There are various government institutions through which awareness regarding environmental standards and regulations can be/should be disseminated regularly to the export sector. These
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include the Ministry of Commerce, Ministry of Industries and Ministry of Environment, Trade Development Authority of Pakistan and provincial department of environment protection. The lack of such information can lead to loss of markets. The Ministry of Commerce may also consider including a trade and environment section in the cell that deals with the WTO and draw on the relevant expertise from the other ministries. (Action: Ministries of Commerce, Industry & Environment, TDAP)
Agreement on the Application of Sanitary and Phytosanitary Measures (SPS)

Member countries of the WTO are allowed under Article XX of the GATT 94 to regulate trade with a view to protecting human, animal or plant life or health. Under the Agreement on Sanitary and Phytosanitary Measures (SPS), the WTO has disciplined the exercise of discretion by member countries by disallowing them to discriminate or misuse this authority serving as a form of disguised protectionism. Members of the WTO are allowed to establish their own standards but it is stipulated that the relevant regulations must be based on science and applied only to the extent necessary to protect human, animal or plant life or health. They are not allowed to arbitrarily or unjustifiably discriminate between countries, where identical or similar conditions prevail. Member countries are encouraged to use international standards, guidelines and recommendations if these are available. In order to make the process fair from the perspective of exporters, standards different from those already prescribed, can be applied. Similarly, different methods of inspecting products can be adopted. In order to make this happen exporters demonstrate that the measures which exporting countries have applied are at the same level of health protection as adopted by importing countries. Once that is done, an importing country is expected to accept the exporting countrys standards and methods. This agreement also lays down that governments must provide advance notice of new or changed SPS regulations. They are also required to set a national enquiry point to provide up-to-date information.
Apparently, the agreement on SPS should not be relevant for the footwear sector. However, protectionists interests can assume any garb and come up with objections as to the imported footwear on the ground of it being harmful to human, animal or plant health. In particular, such a stand can be taken somewhat easily in respect of the components of footwear and readyto-assemble parts. It may be argued, for example, that tanneries or polish on the footwear are emitting certain substance that is harmful to the human, animal and plant life. In such a situation, it would be open for Pakistani exporters to press into service provisions in the agreement against untenable standards. (Action: Entrepreneur/Association and GOP)
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Customs Valuation under the GATT Implementation of Article VII of the GATT
The provision regarding customs valuation under the GATT seek to establish a fair and uniform system for the valuation of goods that provides protection to international traders from fixation of arbitrary values by customs authorities of importing countries. The agreement lays down that the customs value of the imported goods in the case of unrelated parties will be the transaction value. This really means the price actually payable for the goods when sold for exports. Additional considerations apply where the importer and exporter are related entities. Some costs such as freight, packaging, commissions, etc, may be added for the purpose of working out customs value. The agreement however excludes items that are regarded irrelevant for fixing custom value e.g. the price of goods on domestic market of the exporting country. If the custom authorities of a country have doubts about the declared value, they may determine the value by sequentially adopting one of the five options: (a) the value of identical goods, (b) the value of similar goods, (c) the imported price of identical or similar goods less applicable deductions for costs, (d) computed value and (e) if none of these methods work, reasonable means may be used for determining value.
Serious problems can arise if custom authorities of a country choose to fix arbitrary values. If values fixed are excessive, trade liberalization policy can be effectively neglected. In case values are on the low side the tariff protection given to domestic manufactures will cease to be effective. If footwear importers and domestic producers in any country find this misuse of custom processes then they can agitate the matter with the relevant revenue authority (Customs and Central Board of Revenue).
Rules of Origin
The WTO agreement on Rules of Origin contains a work-programme seeking to bring about in the long terms harmonization of these rules. The issue of Rules of Origin does not arise in cases where import and export take place on MFN basis. It is relevant in cases where a country is to benefit from the lower tariff available through GSP or under regional trading arrangement. Such concessional arrangements rightly require scrutiny of imported goods to ensure that they are coming from the eligible sources.
Where footwear exports are destined for a country either granting GSP or for a member of a regional arrangement of which Pakistan is a member, rules of origin acquire special importance. Exporters will be advised in these cases to obtain complete documentation, certifying the Pakistani origin of the concerned articles. Importers should, likewise, insist on getting proper documentation from the importing country. The Trade Development Authority of Pakistan issues certificates of origin. Exporters are advised to approach the local office of the bureau. (Action: Entrepreneur/Association and GOP)
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Agreement on Trade-Related Investment Measures (TRIMs)

At times, local content requirements and performance requirements have been, inter alia, employed by host countries as an instrument to promote development objectives, such as industrialization, import-substitution and export growth. Such requirements can affect international trade. For example, a requirement of local content in a product may prevent or limit the use of imported inputs. Any investment related measure of this type has been now prohibited as a trade distorting measure. (This agreement, as such, is not relevant for the footwear sector.)
Anti-dumping Agreement on Implementation of Article VI of GATT 1994

Article VI of the GATT 94 finds the practice of sale of products of a foreign country at less than the normal value of the products in the exporting country (called dumping) objectionable if: (a) the price level causes or threatens material injury to an established industry in the importing country or (b) the price level materially retards the establishment of a domestic industry. Article VI (2) of the Agreement permits a country to offset or prevent dumping by levying on the concerned product anti-dumping duty not greater in amount than the margin of dumping. The margin of the dumping is the price difference determined in accordance with the Article VI (1). Under the anti-dumping agreement, a country is allowed to act in a way that would normally infringe the GATT principles of binding a tariff on MFN basis because anti-dumping action means charging extra import duty on a particular product from a particular exporting country. Detailed procedures have been laid down on how anti-dumping cases are to be initiated, how their investigations are to be conducted and conditions for ensuring that all interested parties get an opportunity to present evidence. Normally, anti-dumping measures expire five years after the date of imposition, unless an investigation shows that ending the measures would lead to injury. Anti-dumping investigations are required to end immediately in cases where it is determined that the margin of dumping is insignificantly small (defined as less than 2% of the export price of the product). Likewise, proceedings must end if the volume of dumped imports is negligible. The agreement lays down that the member countries must inform the WTO about all preliminary and final anti-dumping actions promptly as well as report on investigations twice a year.
The agreement on anti-dumping is important both for importers and exporters of footwear. If an actionable dumping takes place in the Pakistani market, one can have recourse to the National Tariff Commission (www.ntc.gov.pk) for seeking relief. If necessary the Government of Pakistan also can, on the basis of Anti-dumping Agreement, agitate the matter in the Dispute Settlement Mechanism of the WTO. The Ministry of Commerce, Government of Pakistan is the concerned agency. (Action: Entrepreneurs and Ministry of Commerce) In case export of footwear from Pakistan faces anti-dumping proceeding in an importing country or in the dispute settlement system of the WTO the Government of Pakistan has to argue (and present evidence) that dumping has not taken place or the margin of dumping is
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insignificantly small. However, given the extremely small quantum of footwear exports from Pakistan, there is little likelihood of anti-dumping action against Pakistan in the near future. Action is to be taken at the instance of the industry by the Ministry of Commerce. (Action: Entrepreneur/Association and Ministry of Commerce)
Agreement on Subsidies and Countervailing Measures

This agreement disciplines use of subsidies and also regulates the actions that can be taken by the countries to counter effects of subsidies. A country can have recourse to the WTOs dispute settlement mechanism and seek the withdrawal of the subsidy or the removal of its adverse effects. Another alternative is to launch its own investigation and charge extra duty (known as countervailing duty) on the goods in question to nullify effects of subsidy given by our trading partners. The agreement defines a subsidy and also introduces a concept of a specific subsidy i.e. a subsidy available only to an enterprise/group of enterprises. The discipline applies only to specific domestic or exports subsidies. The agreement deals with the following two types of subsidies:
Pr oh ib ite d s ubs id ies
Requiring recipients of subsidies to achieve certain exports targets or to use domestic goods instead of imported goods in their manufacture. Such subsidies (trade distorting) can be challenged in the WTOs dispute settlement mechanism. In case, it is found that the prohibited subsidies have been given, the respondent country will be ordered to withdraw it immediately. In case the respondent fails to comply, the complaining country can levy countervailing duty on such subsidized products after following the prescribed procedure.
A c t io na b le s ubs id ies
This category is less objectionable than prohibited subsides. Here a complaining country has to demonstrate that the subsidy has an adverse effect on its interests. The agreement defines three types of damage that can be caused by this class of subsidies: (i) Domestic industry of the importing country is being hurt, (ii) Rival exporters from another country may be hurt when the two compete in third markets, (iii) Domestic subsidies in one country can hurt exporters trying to compete in the subsidizing countries domestic market.
E x c e p t io n
Subsidies given by LDCs/developing countries with GNPs of less than US$1,000 per capita per year are exempted from subsidy regime.
In case prohibited and actionable subsidies are given to promote export of footwear, affected interests in Pakistan can request the National Tariff Commission to impose countervailing duties. On the other hand, if allegations about subsidies (trade distorting) on the part of Pakistan are made by an importing country, this agreement provides the exporter with wherewithal to show that countervailing duty should not be imposed. Should the matter require reference to the WTO, the Ministry of Commerce would have to be approached. (Action: Footwear Industry and GOP)
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Agreement on safeguards
This agreement disciplines initiation of emergency safeguards measures by laying down requirements for safeguard investigations. These have to be transparent as well as oblige Member countries to follow established rules and practices. The criteria for serious injury caused or threatened to be caused have been also laid down. The agreement also sets time limit on all safeguard actions (4 years) and addresses grey area measures by providing that the members must not seek/take or maintain any voluntary export restraints, orderly marketing arrangements or any other similar measures. An import surge that triggers action under this agreement is defined to be a real increase in imports i.e. an absolute increase or an increase in the import share of a shrinking market (even if the import quantity has not increased).
This agreement can be used wherever any importing country finds that there has been a surge in imports, causing injury to the domestic industry. Affected parties are well advised to approach the Government of Pakistan for remedial steps in such a case. By the same token, the exporting country can always show that action under safeguards provisions is not transparent or does not meet the criteria of serious injury or threat of serious injury. 16 (Action: Footwear industry and GOP)
Box 3.3 WTO Agreements in a nutshell
General Agreement on Tariffs and Trade (GATT 94) regulates the international trade in goods and rests on five pillars: Most-Favoured-Nation (MFN) Obligation, National Treatment Obligation, Elimination of Quantitative Restrictions, Transparency of Government Regulations Affecting Trade and Tariff Bindings. Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) seeks to reduce impediments to international trade through promoting adequate protection of intellectual property rights. TRIPS Agreement is especially relevant for the pharmaceutical industry. Agreement on Technical Barriers to Trade (TBT) contains a code of good practice for the preparation, adoption and application of standards. Agreement on Sanitary and Phytosanitary Measures (SPS) disciplines exercise of discretion when a country wishes to disallow import of any item on the ground that it would be hazardous to life or health of human being or disallowing import to protect human, animals or plants. Customs Valuation under GATT Implementation of Article VII. This agreement seeks to establish a fair and uniform system for the valuation of goods that provides protection to international traders from fixation of arbitrary values by customs authorities of importing countries.
16
In 1995, the government of Argentina increased tariffs on certain textile, apparel and footwear imports to levels substantially above their WTO bound rates, which for footwear was 35 %. Subsequently, a WTO dispute settlement panel found the duty increase on textile to be illegal, but the Government of Argentina was able to avoid such a determination on footwear by reimposing the higher duties under the WTO-legal safeguard rules. This action stymied the efforts of several US exporters of branded athletic footwear to increase exports to Argentina.
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Agreement on Rules of Origin seeks to clarify and harmonize rules of origin in member countries and in particular requires members to ensure that such rules do not create distorting or disruptive effects on trade. The rules of origin are of special relevance in cases where a country is to benefit from the lower tariff available through GSP or under a regional trading arrangement. Agreement on Trade-Related Investment Measures (TRIMs) seeks to prohibit investment related measures that are trade distorting e.g. local content requirements and performance requirements. It is of special relevance for automotive parts sector. Agreement on Implementation of Article VI of the GATT 1994 (Anti-dumping) regulates the practice of dumping i.e. the sale of products of a foreign country at less than the normal value of the products in the exporting country if the price level causes or threatens to cause material injury to an established industry in the importing country. Agreement on Subsidies and Countervailing Measures disciplines the use of subsidies and also regulates the actions that can be taken by the countries to counter the effects of subsidies. Agreement on Safeguards disciplines initiation of emergency safeguards measures by laying down requirements for safeguard investigations.
3.4 Trade conditions of Pakistans footwear sector

Market access for Pakistan has improved and also for its trading partners. As a result of the WTO agreements, market access for the Pakistani footwear in industrial countries market has improved as tariffs have come down. Further, there is now protection available to Pakistan against any discriminatory treatment in our trading partners markets. Further, Article XI of the GATT 1994 has eliminated quantitative restrictions.
Box 3.4 Import and export profile Exports

2005: US$154 million Rank as exporter in world trade: 35 Major export destinations: Saudi Arabia, United Arab Emirates Yemen, Afghanistan and United Kingdom. 2005: US$24 million Rank as importer in world trade: 91 Applied tariffs: 25% Major import sources: China, Thailand, United Arab Emirates, Saudi Arabia, and Hong Kong.
Source: ITC calculations based on COMTRADE statistics
Imports

Pakistan has also opened its market substantially, among others, in respect of footwear (albeit on 25% of duty, higher as compared to that of industrial countries). Since 1998, Pakistans import regime has been significantly liberalized through reduction in tariffs, rationalization,
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and removal of import quotas, import surcharges and regulatory duties. The unweighted (i.e. simple) average statutory tariff has come down from 47.1% in 1997-98 to 14.4% in 2006-07. The process in fact started in 1988 after the agreement on Structural Adjustment Programme was concluded with the International Monetary Fund (IMF). In the case of Pakistan unilateral liberalization has been the principal avenue of liberalization of trade. Pakistan has been complying with all its commitments under the WTO. The net actual liberalization on the part of Pakistan has been much more than multilaterally required in Pakistans WTO agreements. Some experts are of the view that we should not have unilaterally reduced tariffs to such a steep extent. Competition has led to reduction in prices: Pakistani footwear makers have now entered an era of increasing competition, as opening up of trade impacts both exports and imports. New tougher requirements for producing domestic footwear according to stricter standards and more elaborate designs are being progressively adopted. The WTO regime is not static but is dynamically evolving. The way negotiations on DDA proceed and the ultimate agreement reached will hopefully influence the landscape of international trade.
3.4.1 Other countries access to Pakistan (threats) Rapid growth of imports

Exports of footwear from Pakistan are around six times of its imports: ca. US$154 million compared with US$24 million with both figures increasing. The MFN duty applied by Pakistan to the imports of different footwear products is 25%. 17 This is relatively high as compared to a large number of other countries. Despite this a rapid growth of imports under the WTO liberalized import regime has taken place. Market share of main footwear exporting countries in Pakistans economy is increasing with a rapid pace. For example the export growth of China in the footwear sector to Pakistan is 104% for the period 2001-05. Other developing countries, like Thailand, Viet Nam and Indonesia, are also exporting more and more to Pakistan. The reason for the increase in imports from these countries is that Pakistani buyers find the footwear produced by them attractive on account of the quality and price. The following table shows this import growth, including the share in Pakistans imports and value of footwear products by top 10 supplying countries to Pakistan.
Table 3.1: Top 10 footwear exporters to Pakistan, 2004 Exporters China Thailand United Arab Emirates Saudi Arabia Hong Kong/China Imported value 2004 (US$ million) 18.6 1.6 0.94 0.59 0.23 Share in Pakistans imports (%) 79 7 4 2 1 Export to Pakistan growth 2001-05 (%) 104 37 36 n.a. 65
17
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Exporters Viet Nam Portugal Malaysia Indonesia United States United Kingdom
Imported value 2004 (US$ million) 0.20 0.18 0.17 0.16 0.14 0.12
Share in Pakistans imports (%) 1 1 1 1 1 1
Export to Pakistan growth 2001-05 (%) -23 647 55 3 178 -9
Does liberalization of trade pose a threat to the footwear industry of Pakistan? Not really. Pakistans tariff rates are relatively high. Further, Pakistans bound rates are much higher than the applied tariff rate. The real problem is menace of under-invoicing and mis-declaration as well as smuggling. These in particular pose a real threat to smaller manufacturers. Some of these manufacturers have reportedly closed down their production facilities. In order to protect themselves from unfair competition the affected industries can approach the National Tariff Commission (NTC), which provides an institutional mechanism for trade remedial actions. However, it has been reported that the affected parties did not find access to the NTC easy. More importantly the NTC can only help against the regular imports. If competition is with the under invoiced or smuggled goods any increase in duty (anti-dumping or countervailing) will not prove effective. Pakistans tariff rates are likely to come down further after an accord on NAMA (Non-Agricultural Market Agreement) under the DDA. This may create some problem for domestic manufacturers. One cannot hope for a closed economy in a globalized world: In the liberalized world of today one can not expect a closed economy and should not be upset about flow of imports. However, the rate of growth in imports should be a matter of concern. If imports show an exponential increase it would not certainly be good news for the domestic footwear industry.
3.4.2 Pakistans access to other new markets (opportunities) Improved market access
Exports of footwear decreased by 17% between 1995-96 and 2000-01. This cannot be attributed to the liberalized WTO regime - it was coincidental. In all probability it was a supply side problem. From 2000-01 to 2004-05 there was a 224% increase in exports. Though it cannot be claimed that the WTO is the only factor underlying this growth, it can be assumed that the better market access opportunities provided by the liberal trade regime (from 1995 onwards) made an important contribution to better export performance. In this connection a study of tariffs in our trading partner countries would be instructive. A table setting out tariff rates in the various export destinations for Pakistans footwear products and exported value in 2005 is given below. Countries in the table are arranged according to their share of Pakistans footwear exports.
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Table 3.2: Top 10 buyers of Pakistani footwear, 2005 Importers European Union Saudi Arabia United Arab Emirates Yemen Afghanistan United States Oman Kuwait Sri Lanka Sudan Applied tariff 18 6.62% 5% 5% 10% n.a. 12.5% 5% 5% 18.8% 35.7% Exported value (US$ million) 56.4 22.8 22.6 20.7 19.4 2.2 1.4 1.2 1.0 0.98 Share of Pakistans exports (%) 37 15 15 13 13 1 1 1 1 1
Source: ITC calculations based on COMTRADE statistics.
Market access is not a problem for Pakistan in respect of footwear. The main problem faced by Pakistani exporters is on the supply side. Pakistans share in the total world export of footwear, in spite of its resources and easy availability of raw materials, is only 0.2%. That is very low compared to other developing countries like China (28%), India (1.5%), Indonesia (2.1%) and Viet Nam (7.2%). Pakistans ranking in world exports is 37. R&D support of 6% was given to footwear in the 2006-07 Trade Policy. To realize export potential, among other things, it would be certainly helpful if some improvements in the footwear industrys processes and products were made. Accordingly, it was decided to provide this sector with a subsidy of 6% of FOB value of its exports for R&D. This should stimulate R&D and help the industry to improve its competitive edge.
3.4.3. Third parties/countries access to other markets (threats/ competition) Competition/potential

Pakistani footwear exports represent a very nominal share in world exports, but there is great potential for improvement. With the enforcement of the WTO regime, Pakistan has been enjoying better market access in this sector. It should fully use this opportunity and take maximum benefit from its cheap production factors, e.g. lower wages and cheaper raw materials. As the raw materials and footwear parts are required for a good finished product, this industry should be further facilitated. Better mechanisms should be adopted to ensure duty free imports of components used in the finished products for export. A welcome decision was taken by the Government in the Trade Policy 2006-07 to hire an international consultant to advise on measures to help in attracting foreign direct investment (FDI) to Pakistans footwear sector and to transform the local industry to become a major
18
For more detailed tariff information per shoe category see overview of trade section 2.5.
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player in the world market. It has been further decided that Footwear Development Centres will be setup by the PFMA at Lahore and Karachi with financial assistance from the Export Development Fund (EDF). The production and cost effectiveness of Pakistans shoe industry will be further increased if the Government allows imports of shoe components from India. Pakistani shoe producers have been importing almost 50-60% shoe manufacturing components from Europe and USA. They have been paying very high prices for these, whereas the same quality items are available from India at much lower rates. Though some of the parts are included in the positive list of importable items from India, others remain non-importable. Currently Pakistani entrepreneurs get Indian products irregularly by importing these via Dubai, which makes them almost 20% more expensive than the direct route and also takes much more time 19 . If all the items could be imported from India, preferably via the land route, it would have a positive impact on the quality and price of the products.
Need for greater compliance

Pakistani exporters will have to become more careful about compliance with other countries standards, especially in view of the strong consumer lobbies demanding high environmental standards in developed countries. In order to access and increase exports in developed countries, Pakistani exporters should consider adopting a system of eco labelling. Cases have been reported where products from Pakistan were banned, e.g. in 1990 when Germany imposed a ban on leather treated with pentachlorophenol (a carcinogenic chemical preservative). Subsequently, several European countries have imposed a ban based on the use of azo dyes. Information of this type is not shared evenly in the industry. There is need on the part of PFMA and TDAP to widely update the footwear industry about the environmental compliance requirements. (Action: TDAP and PFMA)
Opportunities and competition

Many opportunities have become available after the conclusion of the WTO Agreements and consequential trade liberalization. Needless to say, Pakistan is not alone in the field and competition is intense. Two factors have been taken into consideration while identifying opportunity offering markets: (i) the size of the market, and (ii) the degree of presence of Pakistani products. The size of the market has been given greater weight because Pakistan should aim to substantially increase exports, which would be possible only in bigger markets. Six markets have been identified as being very promising for export growth.
U n ited S t a te s o f A meric a ( U SA)
USA is the top import market for footwear in the world with 26% import share. Despite USAs import potential and low tariff rates, Pakistans share to the US is only 2% of its total footwear exports, with growth of 2% per annum. Its share in the USAs imports is negligible and it does not even figure in the list of the 10 largest buyers of Pakistani footwear. China accounts for 69% market share in the USA market with rapid rate of growth of their exports.
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The Nation, Lahore, Wednesday, 29 June 2005.
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G er ma ny
Germany is the fifth export destination of Pakistan and the second largest importer of footwear in the world. But Pakistan stands way below other exporters when it comes to sale to Germany. Italy, Viet Nam, China, Portugal, Austria, The Netherlands and Romania are top players having more than 56% of the German market.
U n ited King do m (U K)
The UK is also a big import market, where Pakistans import share is nominal. The UK is Pakistans fourth major export destination yet its market share with Pakistan is insignificant. However, Pakistans 16% export growth in 2003-04 was encouraging.
F r a nc e
France is the fifth largest importer of footwear in the world and sixth export destination of Pakistan. Pakistans share in its imports is a low 0.11%; in addition, negative export growth was recorded in 2003-04. Italy, China, Viet Nam, Spain and Portugal are the top exporters having more than 65% of the market.
Italy
Very recently the European Commission (EC) implemented anti-dumping taxes on footwear originating from Viet Nam and China. After the imposition of the tax many Vietnamese footwear producers turned to markets outside the EU, thus providing a good chance for Pakistan to increase its presence in this market which is the sixth largest in the world. Pakistani industry should, inter alia, appoint Italian consultants and follow their design pattern for penetrating more effectively into the Italian market.
T ur k ey
Turkey import shoes worth US$303 million per year. Despite its relative proximity and friendly relations with Pakistan, the export figures are still very small. The potential of this market for Pakistani products needs to be actively investigated.
Box 3.5 At a glance: Impact of the WTO Agreements on Pakistans footwear sector Exports

Better market access for Pakistan in the industrial countries markets. Reduction in prices and improvement in the quality of inputs. Opportunity to intensify penetration in the US, Germany, UK, France, Italian and Turkish markets. Great potential for increasing exports but Pakistan has to tackle supply side problems. Pakistan must learn to produce what is liked and required abroad and at competitive prices. Pakistan needs to do intensive research into the needs of foreign markets, including fashion trends and designs.
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Imports

Substantial opening of Pakistans market albeit on relatively higher duty. No serious threat at present (tariff rate at 25% is quite high) but problem is caused by malpractice of under-invoicing and misdeclaration as well as smuggling. Trend of import growth increasing potential threat.
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4 Obstacles and shortcomings to export

4.1 Obstacles and shortcomings exporters opinions
The obstacles and shortcomings mentioned below are based on interviews conducted with footwear manufacturers/exporters in Pakistan and the national consultants observations.
4.1.1 Major obstacles and shortcomings Government policies

Inconsistent and non-focused government policies and rapid changes in them are also viewed as a bottleneck for any long-term planning. Examples are set out below. Duty drawback for export is nominal - Duty drawback rates have been reduced from 11% to 1.8% without the consent of the footwear industry. It was a gradual decrease from 11-6-4.8-1.8%. As exports are made for future period, exporters quote price keeping in view the current rates. However, sudden and uninformed changes in the duty drawback rate decrease or increase the price. In the trade policy of 2004-05, the commerce minister deliberately announced that they would hire two international consultants to give advisory services to the government. However, it has been 18 months, but no such consultant has been hired. The government does not even understand the economics, e.g. for export marketing companies pre-sell for about 6-8 months. On the other hand, when the government is making policies it increases utility prices, taxes and wages of workers. Unnecessary taxation suffocating the cash flows of exporting companies, e.g. sales tax. The Government should introduce completely free exhibitions at shoe fairs worldwide, e.g. GDS - Germany, WSA Shoe Fair - USA, Expo Riva - Italy, etc. which are held twice in a year. Simplification of procedures. The Government has consented to the footwear industrys request for reducing duty tariff on few raw materials to 10%, but the process for getting concessional rate under SRO 555(1)/98 dated June 12, 1998 is a lengthy and cumbersome process. It involves CBR/IOCO survey, which takes a long time and complies with certain conditions that are very difficult to fulfil. In reality, the government allows free import and free export. But exporters have to sign an indemnity bond saying their imports are to be used for exports and not to deduct duty on imports. These are temporary in nature but the exporters have no option. A draft/cheque of the duty is also attached with the indemnity bond. When it is confirmed that export is made, exporters can take their cheque and that indemnity bond gets cancelled out. But most of the companies dont have well established export departments to fulfil all these formalities.
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Role of export promotion bodies

Need to enhance the role of TDAP and make it more active. Presently, it plays a dormant role with a limited focus on promotion. Pakistani stands at industrial exhibitions are deplorable. TDAP should do a better job. The displays are poorly managed. They should be well decorated and should be attractive to buyers. Rather than portraying a positive image, a negative image is portrayed. TDAP can decide to participate in selective exhibitions, but they should participate with full preparation and display good stands. Some countries also hold fashion shows at their stands. However, this creates a non-serious environment.
Designs
Lack of innovative designs. Footwear buyers throughout the world have become choosier about designs and quality. The overall trend is towards buying more innovative designs and smaller quantities. In order to survive in the international market, companies must keep themselves abreast of the latest designs in the world market and assess their capabilities in order to update their processes and machinery accordingly. The Government should invite highly qualified technicians from abroad and arrange seminars/workshops to create awareness among the industry people about latest technology, fashion, trends, etc. Only a liberal policy of import for machinery and local taxes on production will encourage producing new designs easily. It is vital for competition in the international market.
Environment
The environment is highly volatile, making it insecure for local and especially foreign investment. Law and order issues scare export customers: buyers are hesitant to visit Pakistan due to apprehension about personal security. The image of Pakistan is that of a high-risk country to travel. For example, in 2005 a company was invited to participate in EXPO, but that day turned out to be the worst day. Due to security reasons, entry into EXPO was extremely difficult.
Vendor industry
Vendor industry is miserably lacking in Pakistan. The footwear industry has neither big suppliers nor a wide variety of accessories, like buckles, ornaments, thread, etc. Thus, all these materials are imported, which tends to be very expensive and very timeconsuming. Latest designs need latest materials, so sourcing of new materials has to be done vigorously. The local suppliers are not capable of providing a wide range of material. This is also a major reason why companies cannot control the quality of materials. As component industry is almost non-existent in Pakistan and as it requires heavy investment, the import duties on the import of shoe chemicals, shoe lasts and old and reconditioned shoe machinery should be reduced to 5%. To support the footwear or component industry, the Government should give a five years tax holiday.
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Training institute/ human resources
Lack of training institutes, research work and quality control laboratories in the footwear industry. The Government should work with a positive mind by encouraging existing players by providing them with adequate facilities to establish training institutes. Very few training institutes for footwear designing are using modern technology. Most labour learns the process of shoe making on the job. Footwear development centre lacks technical and supervisory staff that are essential to meet the challenges of the international market. There is a dire need for a fashion and design development institute equipped with latest CAD/CAM system. Scholarships for higher studies abroad. The Government should grant scholarships to promising persons engaged in the footwear industry for courses in footwear design that are not being offered in Pakistan. These trained personnel will not only be an asset to the industry, but will also form nucleus for training the students in the Footwear Development Centre, when operational. The European Union should send three to four experts/technical people who can identify four or five factors and work on various aspects of workers training. In this way, the quality of shoes produced will improve. The creation and upgrading of R&D and research laboratories is highly required. The Pakistan Council for Scientific and Industrial Research (PCSIR) standards has long become obsolete.
4.1.2 Other obstacles and shortcomings

Poor retail structure. Low per capita consumption and highly inconsistent consumption pattern. Shoes rank low in priority in overall apparel expenditure in Pakistan. Cultural limitations, i.e. in lifestyle in terms of dress code, eating/drinking habits of foreign importers. Reduce input cost, i.e. electricity, oil, gas, etc. This is a major factor that increases the shoe cost. The cost of manufacturing in Pakistan is higher than in other countries, especially in Far East. As a result; companies cannot offer competitive prices to the importers leading to low profit margin for producer. Declining living standards. Finger dexterity: prejudice against employment of women. Buyers may point out why exporters have not hired women or Christians or their proportion is less. This problem can also arise during a social audit. Shortage of leather in Pakistan. Besides the shortage of leather, its prices are increasing everyday. Despite having abundant leather, the tanners do not finish each type of leather. They do not cater to special requirements as it is small in quantity and a special type of finishing is required. The Government should reduce duties on raw hides to fulfil the requirement for leather.
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Chinese footwear captured the shoe market by offering cheaper and quality products. Huge influx of cheap footwear from Far East. Shoes originating in some of the countries are highly subsidised and some importers continue under-invoicing their value. SMEs cannot make use of latest technology, which is needed for quality products. Due to limited resources, product development is not of export standards. For good product development, the procedure is very time-consuming, as components are not available locally and companies have to rely on imported components. As a result, companies outtime themselves. Export is a time sensitive activity. Exporters have to meet certain deadlines for delivery of orders or samples. Moreover, the small size of the footwear industry makes larger importers hesitant to start business, as they are not aware of the export market and how to start their business. Major competitor is India. India gets raw materials and components at very cheap prices. The export subsidies are much higher than those provided to Pakistani footwear manufacturers. Duty drawbacks are lesser compared to India so they offer their products at competitive prices. The Government must provide 12% R&D to the footwear industry, as R&D is very crucial but its costs are very high. Long lead times. Open the gate on Indian investment for raw material and expertise. Removal of all inland taxes on shoe industry also can help a lot in promoting shoe exports. The Government should incur travelling cost for world-renowned customers for visiting their annual fair. Like Thailand gave training to Toyota management about how to invest in their country. The Government should provide loans to the footwear industry at very low rates. The current interest rates are very high. Participation in international exhibitions/extensive marketing. There should be active participation in international fairs and exhibitions abroad where export opportunities are tremendous. Presently, companies are participating in only two international exhibitions (GDS in Germany in March and September) every year. In addition, an international footwear exhibition is also held every year in Lahore. The Government must invest in foreign trade missions abroad and ensure that they employ commercial counsellors who have trade-specific knowledge and experience. These counsellors must have sufficient funds to promote trade. At foreign exhibitions, the Government and TDAP must play a more aggressive role. Footwear delegations should visit foreign countries in order to explore export possibilities. For all above activities, companies need a subsidy of at least 75% of their expenses from the Government (out of EMDF). Otherwise, companies cannot manage participation or organise exhibitions within their own resources, which are very meagre. The Government must undertake a study to understand the global footwear industrys requirements and what the Pakistani footwear industry is doing about it.
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The European Union should give funds to donors or associations to set up machinery and build up training institutes. It should also give funds to send technicians to train abroad. Credit extension to the market in terms of produce. The whole of Europe is ready to buy more shoes. Customers want competitive prices and timely delivery. However, due to the above obstacles, Pakistans industry staggers behind in exports. But it is still not too late. The Government can take the initiative and act now.
4.2 Obstacles and shortcomings importers opinions

Importers who were interviewed mentioned the following obstacles and shortcomings.
4.2.1 Obstacles

Product development takes considerable time. Quality issues: Quality of the shipment does not match with the samples. Delays in deliveries, not complying with contracts, etc. Buyers are not comfortable to visit Pakistan. Communication issues: Exporters are very slow in responding to buyers queries.
4.2.2 Shortcomings
Exporters cannot go into good development programmes, due to limited resources. They are small and medium scale so they do not have resources to do what they want, e.g. if an exporter wants to build a quality-testing lab in his factory, it becomes very difficult for him. Invest into HR development programmes. Improve product development. Forecasting and proper planning for exports. Proper cost management.
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5 Export services in Pakistan

5.1 Export service providers
5.1.1 Trade Development Authority of Pakistan - TDAP
In late 2006 the Trade Development Authority of Pakistan (TDAP) (www.tdap.gov.pk) succeeded the Export Promotion Bureau (EPB) as the primary agency engaged in the promotion and boosting of export. Since EPB's inception in 1963 as an attached department of the Ministry of Commerce, it has facilitated exporters in overcoming difficulties faced by them on the supply and demand side of exports. On the demand side, TDAP helps exporters to participate in exhibitions abroad and sends delegations to export markets with a view to exploring new markets and developing the traditional markets. On the supply side, TDAP has established over 32 training institutes and projects in various export sectors to train necessary manpower that can manage the export trade and industry professionally, meeting the requirements of the export markets. Export promotional activities are carried out in co-ordination with trade bodies at home and Pakistan's trade missions abroad. TDAP has its head office in Karachi, the main industrial and commercial centre and a major export outlet of the country. TDAP has a staff of around 800 of which close to 600 are permanent. Services provided by TDAP are as follows:

Export facilitation committee Resolving problems in exports Simplification of procedures Export procedures handbook Establishing buyer-seller contacts Fax on demand and the website Interface with chambers/trade associations Settlements of trade disputes
Regulatory services include the following:

Formulation of proposals for the trade policy Implementation of the trade policy Textile quota management Registration of importers/exporters Registration of export contracts Determination of minimum export prices Issuance of GSP certificates
Functions of TDAP are listed below.
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Marketing

Market research Fairs and exhibitions - local and international Trade delegations Overseas and local publicity Participation in trade-related events Expo Centre - holding of exhibitions Facilitation through trade officers abroad Seminars/conferences/workshops
Communication

Publication of trade inquiries/opportunities Library Export intelligence bulletin Counselling Year Book - statistics
Human resource development

Training institutes Seminars on ISO 9000 and 14000 TQM Social sector concerns Environmental concerns
5.1.2 Small and Medium Enterprise Development Authority - SMEDA

The premier institution of the government of Pakistan under the Ministry of Industries, Production and Special initiative, SMEDA (www.smeda.org.pk) was established in October 1998 to take on the challenge of developing small and medium enterprises (SMEs). With a futuristic approach and professional management structure it has its focus on providing an enabling environment and business development services to small and medium enterprises. SMEDA is not only an SME policy-advisory body for the government of Pakistan, but also facilitates other stakeholders in addressing their SME development agendas. SMEDA has its head office in Lahore and regional offices in Lahore, Karachi, Peshawar and Quetta. SMEDA offers the following services:

Assistance in raising finance Financial advice Project identification Business plan development Technical advice Marketing advice (branding, labelling, packaging, distribution, promotion, etc) Company incorporation, export registration and regulatory advice Sales tax, custom duty, excise duty, etc Training and development
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Information services (library, databases, project briefs, pre-feasibilities) Business matchmaking
5.1.3 Federation of Pakistan Chambers of Commerce & Industry FPCCI

Mr. G Allana originally formed the Federation of Pakistan Chambers of Commerce & Industry (FPCCI) (www.fpcci.com.pk) in 1949 but its membership then was confined to a limited number of bodies. The FPCCI is the supreme trade and industrial body in the country. It enfolds all chambers and national associations representing specific trades and/or industries. Indeed, it is compulsory for all chambers and associations of commerce and industry to become members of the federation. Being federal in its constitution, the federation takes up only such issues and matters as concern the country's trade and industry as a whole; in other words, the interests of all chambers and associations together, e.g. economic planning, investment schedules, tax policy, money and credit transport and communication, export promotion, organisation of general trade missions to foreign countries, receiving general trade missions form abroad etc. Matters concerning specific trades and/or industries (e.g. cotton or steel) or individual firms and companies are left to associations and local and regional chambers. The head office of FPCCI is based in its own building, Federation House, in Karachi. FPCCI has zonal offices in Lahore and Peshawar, which mainly deal with the provincial governments. FPCCI has a branch office in Islamabad to liaise with the federal government. FPCCI offers the following services.
Trade promotion
FPCCI acts as a forward post of Pakistan's private sector abroad. In the first place, it maintains constant liaison with the diplomatic and commercial missions abroad and takes special care to develop, promote and strengthen cooperation and contacts with its counterpart bodies abroad through exchange of delegations, literature, directory(ies), business information, etc
Cooperation agreements
FPCCI has signed cooperation agreements with a number of foreign counterpart chambers of commerce including those of Japan, South Korea, France, Netherlands, Germany, Turkey, Bangladesh, Hungary, Romania, Malaysia, Philippines, Singapore, Oman, Australia, Brunei Darussalam, Indonesia and Syria. These agreements envisage a regular exchange of data and information on trade and investment opportunities, visits of trade and investment delegations and participation in trade fairs and exhibitions. With the signing of cooperation agreements, joint business councils/economic cooperation committees have been set up in FPCCI and its counterpart chambers, which keep constant liaison with each other throughout the year. They have obligation to meet alternately once a year to dispose of agreed agenda, which pre-dominantly relates to the promotion of two-way trade, narrowing down trade gaps, identification of new commodities for mutual exchange, etc. Investment affairs, transfer of technology and training of personnel are the other areas normally deliberated on.
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Bilateral trade committees

A large number of bilateral trade and industry committees have been set up with several countries of the world for the promotion of trade, joint ventures and economic ties. These committees invite trade missions, trade officials and diplomats of the countries concerned for exchange of views and review of difficulties in the fields of trade, joint venture, investment, etc.
Standing committees
FPCCI has constituted a number of standing committees, which deliberate intensively on different problems and issues being confronted by the trade and industry in the country; prepare suitable pragmatic recommendations for their resolution and submit the same to the government for consideration. These standing committees have been established on the important subjects of banking, taxation, exports, imports, industry, investment, agriculture, planning and economic affairs, privatisation, research and development, ports and shipping, environment, health, transport, labour, tourism and many others.
Exhibitions
FPCCI also undertakes the responsibility to organise, in consultation with Export Promotion Bureau, Pakistan's participation in international trade fairs and holds single country exhibitions of Pakistani goods and services in selected countries. At home, it also organises international trade fairs (such as PITF-84) and national industrial exhibitions and fairs of specialised single commodities.
Export trophy awards

To encourage the export of Pakistan's goods and technical/ consultative services, FPCCI instituted export trophy awards in 1976-77. The awards are given every year to those who excel in promoting the export of goods and services both in quantum, value and to new directions. In addition, the federation has instituted a 'Businessman of The Year award, which is conferred on a businessman/industrialist who, in the judgment of FPCCI, has made an outstanding contribution to the growth of national economy. A 'President of Pakistan' trophy is also conferred on a business house has made the overall best and highest performance in exports. FPCCI has also instituted a Best Lady Exporter gold medal, which is conferred on a lady who, in the judgment of FPCCI, has made the best export performance during the year.
Arbitration
FPCCI has set up arbitration machinery under Section 12 of the Trade Organisations Ordinance, 1961, to arbitrate in matters of disputes arising between member bodies of FPCCI and its members.
Pakistan Shippers Council (PSC)

The Pakistan Shippers Council, having the status of a Standing Committee of FPCCI, works for the protection and furtherance of the interests of exporters and importers in Pakistan in relation to the transportation of goods by sea, land and air, and undertakes studies on problems
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affecting shippers in Pakistan. PSC is affiliated to the Association of Shippers Councils of Bangladesh, India, Pakistan and Sri Lanka (ASCOBIPS), as a member.
Pakistan International Freight Forwarders Council (PIFFC)

PIFFC is another specialised agency of FPCCI functioning to safeguard the interests of freight forwarders who facilitate the transportation of import and export cargo of Pakistan. PIFFC is affiliated with the International Federation of Freight Forwarders Association (FIATA).
Trade delegations
FPCCI sponsors general and specialised trade delegations to various destinations in the world to promote export of goods and services and to locate most competitive sources of imports to save foreign exchange. Public sector industries and business houses representatives are also associated with such missions. Similarly, buyers and sellers missions from abroad are invited by FPCCI besides investment and joint venture delegations.
Pakistan's trade missions abroad

Briefing of Pakistan's trade officials abroad and an exchange of information, country profiles with them is the hallmark of FPCCI on this front. Since economic considerations have overtaken political considerations in the present world environment, even ambassadors/high commissioners and commercial counsellors of Pakistan posted abroad visit FPCCI for individual or collective briefing on economic and trade ties/issues before taking up assignment and during the course of assignment.
International symposia/seminars/workshops
Holding of international seminars/workshops/symposia in cooperation with international agencies in the fields of trade, industry, joint venture, training of manpower, etc is a regular feature of FPCCI. The programmes familiarise participants from business and industry with the latest market trends, the state of competitiveness, trade regulations, customs procedure, duty structure, port facilities, containerisation system, incentives offered by competitors, etc.
5.2 Export services as they actually are expressed views

Export services being provided by various export promoting bodies are as follows.
5.2.1 TDAP
TDAP is playing a pivotal role in boosting exports of Pakistan. Following are some of the services that TDAP is providing to footwear exporters.
A 50% subsidy is provided for participation in international trade fairs. In 2007, TDAP will provide a 50% subsidy for participating in the trade fair at Las Vegas organised by Western Shoe Association (WAS). Similarly, the same subsidy will be provided to the participants of the trade fair at Riva Jarda, Italy.
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Sponsors trade delegates to destinations suggested by the footwear association. Delegates get a 50% subsidy on economy tickets and US$100 per day. Single country participation: When the prime minister makes an official tour to any country, industry and trade representatives also accompany him. He may suggest holding an exhibition of all the products that are manufactured and exported by Pakistan. This exhibition involves all the products for instance. TDAP also sponsors footwear exhibitions in Pakistan called JUFT. Invites various international companies by giving those free tickets and hotel stay to visit exhibitions and engage themselves in business-to-business meetings. Partly freight subsidy is also provided on the exports of non-traditional products to nontraditional countries. Although footwear exports do not come under this category, footwear exporters try to bring it under non-traditional items to benefit from the subsidy.
TDAP is trying its best to provide everything that they offer. However, there is still a lot to be done and there definitely exists room for improvement. The subsidy is provided to exporters only for participation in trade fairs. It should be provided to other exporters from Pakistan as well. The effectiveness of the services can be improved further.
5.2.2 SMEDA
SMEDA prepared a sector brief report providing an overview of the footwear sector, global trade of the product and Pakistans status. A 10-year manufacturing plan was also provided. The plan was sent for recommendations to the Government but was not brought into practice. Currently, SMEDA focuses more on providing consultancy and making feasibilities and business plans for SMEs. SMEDA is not playing an active role as far as footwear manufacturing and exports are concerned.
5.2.3 FPCCI and LCCI

FPCCI provides representation to the private sector. It supports Pakistani delegates to participate in international exhibitions and trade fairs in consultation with TDAP. Trade officers and commercial counsellors abroad provide information about the economy and market of importing countries to the exporters. Trade counsellors abroad give information about the countrys economy and market. Trade promotion and marketing facility is minimal. FPCCI and the Lahore Chamber of Commerce & Industry (LCCI) are not actively participating in boosting footwear exports. Their role is nominal.
5.3 Export services as they should be expressed views

At international exhibitions, importance should be given to setting up good export stands. TDAP should take this responsibility and pay attention to the decor, appearance and presentation of the stand. A professional image should be portrayed. For this purpose, TDAP should hire the services of professional stand builders, developers and designers.
Trade delegations are not well managed by trade counsellors abroad. TDAP should guide them by highlighting the importance of attending those trade fairs. The preparation work
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for export delegations is not finalised until the last moment. Some major exporters miss the opportunity to participate in trade fairs because the process takes a very long time.
Footwear policy is not devised. It is recommended that a footwear policy be made by TDAP in consultation with the PFMA. For the fiscal year 2006-07, the total export target of Pakistan is US$18 billion, while the global footwear business is around US$70 billion. Pakistans footwear exports are a mere US$155 million. This suggests an immense global opportunity and market that Pakistan can successfully tap, provided it has a long-term footwear policy that adopts measures to facilitate footwear production and exports. Contribution of the Export Development Fund to the footwear sector is 25% of footwear exports, i.e. US$35 million.
5.4 Export services in other countries some examples

5.4.1 India
Considering the potential of the footwear sector, the Indian Government, in consultation with the Indian Leather Council, identified footwear as a growth area. The Indian Government established the Footwear Design and Development Institute (FDDI) that provides technical, managerial, human resource and marketing services and assistance to footwear manufacturers and exporters. The testing centre of FDDI provides a wide range of laboratory testing expertise and services internationally. However, Pakistan also recognises the importance of this sector but no practical steps have been taken to grab the opportunity.
5.4.2 Portugal
The Foreign Trade Development Authority (FTDA) sponsors the footwear sector, which is the largest foreign exchange earner for Portugal. FTDA encourages investment in support industries like soles, moulds and last making.
5.4.3 China
Chinas footwear sector is well developed. The Government provides export subsidies to footwear manufacturers. China encourages investment for footwear manufacturing as well as for manufacturing of raw materials. In addition, the ability of the exporters to respond quickly to international orders at proper time makes China the worlds largest supplier of footwear.
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6 Conclusion and recommendations

6.1 Conclusions and recommendations
Inconsistent and non-focused government policies serve as a hurdle in long-term planning. The policy made by government lacks a long-term vision. The Government, with the help of international consultants and the PFMA, should develop a footwear vision. Duty drawback for export is nominal. The duty drawback rate has been reduced from 11% to 1.8% without the consent of the footwear industry. It was a gradual decrease from 11-6-4.8-1.8%. However, uninformed changes in the duty drawback rate put the industry into a loss as duty drawbacks are included in costing. Exporters take these rates into consideration when quoting prices. Pakistans immigration authorities have the policy of granting visas to business visitors on arrival. However, documentation is so stringent and cumbersome that this facility is hardly availed. It is proposed that all business visitors should be issued hassle-free visas at the immigration counter at airports. Immigration staff should have clear instructions about this. The Government does not understand the economics of trade, e.g. export marketing companies pre-sell about 6-8 months ahead. On the other hand, when the Government is making policies, it increases utility prices, taxes and wages of workers without any notices, increasing cost inputs. The Government should introduce completely free exhibitions at shoe fairs worldwide, e.g. GDS - Germany, WSA Shoe Fair - USA, Expo Riva - Italy, etc. which are held twice a year. At the moment, TDAP only subsidises the cost of stand. Other expenses include stand decoration and entertainment of customers at the Pakistan pavilion plus advertisement costs at the exhibition grounds/sites. Simplification of procedures. The Government has a policy to allow the import of certain materials under SRO 555(1)98 with no or concessionary import duties. However, once again the procedure to import under this SRO is quite complicated and many small to medium-sized manufacturers/exporters are unable to benefit from this scheme. It is recommended that the procedure/documentation should be simplified so that business can easily benefit from such schemes/incentives. Export promoting bodies, especially TDAP, should play an active role in representing footwear exporters at international level. Pakistani stands at industrial exhibitions are deplorable. The displays are poorly managed. They should be well decorated and should be attractive to buyers. The Government should adopt a liberal policy for the import of footwear machinery and raw material. Importing raw material from India would be cheap and help exporters offer their products at a competitive price in the international market. The Government should allow the import of raw material from India by excluding footwearrelated raw material from the negative list.
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Creation and upgrading of research and testing laboratories is highly required. The Pakistan Council for Scientific and Industrial Researchs (PCSIR) standards have long become obsolete. The environment is highly volatile making it insecure for local and especially foreign investment. Buyers are hesitant to visit Pakistan due to apprehension about their personal security. The image of Pakistan is that of a high-risk country for travel. The vendor industry is lacking in Pakistan. The footwear industry neither has big suppliers nor a wide variety of lasts, moulds, soles and other accessories. Thus, all these materials are imported which tends to be very expensive and time-consuming. Local suppliers are not capable of providing a wide range of material. It is proposed that the Government should encourage investment in the above areas. Investment will attract foreign companies and local investors alike. Footwear buyers throughout the world have become choosier about designs and quality. In order to survive in the international market, companies must keep themselves abreast of the latest designs in the world and assess their capabilities in order to update their processes and machinery accordingly. There is a lack of technical and supervisory staff, which is essential to meet the challenges of the international market. There is a dire need for a fashion and design development institute equipped with the latest CAD/CAM system. The Government should grant scholarships to promising persons engaged in the footwear industry for such courses in footwear design that are not being offered in Pakistan. The European Union should send three or four experts/technical people who can identify four or five factors and work on various aspects of workers training. In this way, the quality of the shoes produced will improve. Most European customers require social, technical and safety audits of factories that they work with. Exporters must ensure that their workplaces qualify with these requirements/audits and to be mindful of all the above aspects in employment and working conditions. SMEs cannot make use of the latest technology, which is needed for quality products. Due to limited resources, product development is not of export standard. Moreover, the small size of the export-oriented footwear industry makes larger importers hesitant to start business, as they are not aware of the volume they would be able to source from Pakistan. It is recommended that two or three companies jointly offer to large buyers, providing economies of scale. Furthermore, the perception of Pakistan as a potential large footwear producer should be promoted. Long lead times. For good product development, the procedure is very time-consuming as components are not available locally and companies have to rely on imported components. As a result, companies out-time themselves in necessary sampling. Simplified import procedures and technical developments can help overcome this limitation.
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6.2 The way forward if we had a million

Here is a list of hands-on projects that could improve the conditions for production and trade in the sector. It is a wish list based on meetings with parties who assisted in the preparation of the study. Most of the project proposals are related to some of the conclusions and suggestions in the study. All costs are early-stage estimates inserted to ease discussion of follow-up from the study. The project proposals are independent of each other (unless otherwise indicated) and are listed in no order of priority. The study does not speculate on possible funding for the implementation of the projects proposed. Funding could be from the Government of Pakistan, a trade promotion organisation, the sector associations and their members, an external donor or in some cases from selfgenerated funds (selling services).
6.2.1 If we had US$200,000 Information cell on WTO and other export related issues
Back gr ound
There is a need for a WTO-related information system, which is userfriendly and available in virtual real time. The weakest link in the chain has been the PFMA. The association should be able to (1) receive, assimilate and analyse information (downwards from WTO via the government and the association to the producers and exporters), and (2) help producers and exporters give information (upwards) to the federal government and eventually to WTO. The PFMA information cell would also deal with other export-related issues details to be decided.
C os ts
Unit cost (US$) Establishment cost Consultancy charges for establishing the Information center (one time) Rent of premise Furniture/fixture Computer/equipment Total establishment cost Operational cost (3 years) Professional (salary) Secretary Telecom Other utilities Travel 1,500/m * 36 250/m * 36 500/m * 36 600/m * 36 750/m * 36 2,500 1,000/m 4,000 6,000
Total (US$)
2,500 36,000 4,000 6,000 48,500 54,000 9,000 18,000 21,600 27,000
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Printing, etc. Misc. Total operational cost Grand total Reserve
500/m * 36 100/m * 36
18,000 3,600 151,200 199,700 300
6.2.2 If we had US$250,000 Export marketing assistance programme

R a t ion a le
Most members of PFMA are small and medium-sized exporters. They do not have enough resources to participate and market their products at individual level in various international footwear exhibitions. To establish a Pakistani pavilion at two large international footwear exhibitions for a period of two to three years. The members of the PFMA should be able to continuously take part and display shoes at those identified exhibitions. Their regular presence in trade fairs will help them to meet existing clients and potential new buyers. Following are two recommended exhibitions that are arranged bi-annually:

D e ta i led p r o pos a l
REVA GARDA WSA
C os t
US$250,000 for a period of two years. Assuming 15 exporters would attend four exhibitions for a period of two years. Costs per year (US$125,000):

C os t b r e ak d own
Space allocation, stand building and decoration: (70%): US$87,500 Marketing and promotional activities at the exhibition site: (15%): US$18,750 Air travel and stay (15%): US$18,750.
S im i lar p r o jec t s Parties
This kind of market development and export marketing assistance is provided for footwear producers in some countries. PFMA
6.2.3 If we had US$350,000 A CAD/CAM system within the premises of PFMA

R a t ion a le
A CAD/CAM system will facilitate all members of the association to get their design needs promptly fulfilled.
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Most of the members do not have an efficient design department and lack response to various product development requirements by customers. Therefore, they lose the opportunities that exist in the market.
C os t
US$350,000. The cost breakdown would be:

Upfront cost (85%): US$297,500 Training cost (Training to be provided as to how to operate machines/equipment) (2%): US$7,000 Running costs (13%): US$45,500.
Note: Running/operating costs mentioned above is for a period of one year. For future, it would generate revenue from various activities, e.g. product designing, development, etc
Parties
PFMA
6.2.4 If we had US$500,000 Overseas training of personnel from the footwear industry
R a t ion a le
Many possibilities exist in Europe for training within the footwear industry. Courses are available in production, design and development. Courses are also available for technical managers in footwear manufacturing. Most of the producers in Pakistan are either unaware of the options or shy away from such human resource development programmes to avoid expenses.

PFMA to shortlist 10 companies from the industry. Two people from each company would be selected for overseas training. Short-term, i.e. 3 to 6 months, diploma courses available in production, design and development are recommended to start the process. Italy and England are the countries recommended for these training courses.
C os t
US$500,000 Note: 70 % of the above cost would be incurred on tuition fees and the remaining 30% would be spent on board and lodging for the participants/trainees.
Parties
PFMA
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6.2.5 If we had US$1 million Footwear Training Institute (FTI)

R a t ion a le
Establishment of a Footwear Training Institute (FTI) is highly recommended. The objective of FTI is twofold:
Enabling the footwear industry to capitalise on the export opportunities that exist today. Footwear Design Centre (FDC) as part of FTI to start part operations and be able to generate some funds. Organise technical collaborations for FDC with some international footwear institutes.
A FTI equipped with all the facilities for the development of footwear designs, research, laboratory testing, new sample development, technical training for skill development, etc. Key elements should be:

A two-year designer course with CAD/CAM facility. Consultancy services for footwear manufacturers, in-house training and customised courses. A testing laboratory with accreditation from an international laboratory so that all customers worldwide should be able to accept the test results of FDC. An R&D Centre, which should include technical books and manuals on footwear and a database of the global footwear industry, can benefit from this source. Services like
Product development Mould making Last making Promotion of footwear exports
C os t
Promotion of vendor industry investments in joint ventures.
Total cost: US$1,000,000:
Part 1: US$100,000 for stitching courses. School of Fashion Design would use funds to purchase sewing and cutting machines (50% operational costs). Part 2: US$650,000 to purchase lasting equipment to assemble shoes. (100% operational cost). Part 3: US$250,000 for laboratory equipment and testing materials. (70% upfront cost).
Note: Operating/running cost would be borne by the Pakistan School of Fashion Design. The association/industry would be responsible for absorbing all the people who will come out of the institute.
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S im i lar p r o jec t s Parties
FDDI: Footwear Design and Development Institute (India).
TDAP, PFMA and Pakistan School of Fashion Design (PSFD) should club their resources to facilitate and expedite the establishment of Footwear Institute. PSFD should manage and run the institute whilst PFMA would be acting as an advisory body. This institute would be having the support of TDAP. Furthermore, the Government would provide land.
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Annexes
Annex A Operations involved in the manufacturing process
Cutting
Process Pattern making Upper cutting Description Designer makes pattern during sampling according to the design of the shoe. Cutting is done of the leather in different parts as per design. The cutting process is carried out on clicking/cutting presses with the help of cutting dies, which are engineered as per pattern designs. Being a natural material, leather does not have uniform thickness within the same skin. Different parts/areas of the skin have different character/thickness. For example, leather from the shoulder area is different from the belly area. In order to maintain uniform thickness in cut components the leather is split. The edges of the components are skived in areas where stitching is required. The objective is once again to have uniform thickness. It is a process done in order to achieve uniformity and craftsmanship when two main components like the plug and vamp are hand-stitched. It is mostly done for moccasin construction. Other construction may not follow tapering. A stamping machine is used for size number, brand and pairing. Marking is done for components joining.
Splitting
Skiving Tapering
Stamping Upper marking
Stitching
In the stitching department, workflow and sequence of operations is organised according to the upper design. Following operations are performed in stitching:

Fitting/joining of cut components. Stitching of the same. During the stitching process certain components are required to be folded and then stitched. Some uppers require eyeleting. Various processes in stitching can be zigzag, such as decorative stitching and the stitching to join two parts and various components. Once the upper is ready it needs finishing which involves cleaning, removing of glue, which might have been used while pasting of various components. Cutting of excessive threads.
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The upper now needs to be given shape according to the human foot. The process is called performing which is done for the fore and heel parts.
Stitching workflow
The stitching department is engaged in different types of stitching and relevant operations after cutting of components received from gutting section. Generally, stitching section performs following stitching operations:

Zigzagging the back of quarters in order to stitch two parts together. Stitching the outer counter with quarters for strengthening the back part of shoe. Joining of lining with quarters Cementing of stiffener and pasting with quarters for reinforcement of shoe (to maintain the shape). Trimming collar lining for shaping sharp edges of collar. Fitting foam in the collar and cementing, pasting collar lining with quarter. Cementing for folding facing edges. Cementing/pasting eyelet stays for making it stiff. Folding edges of facing for better look and moulding (railing). Edge stitching of facing and stitching foam inside quarter. Punching holes for such design, which are with eyelets. Eyeleting according to design requirement, folding lining and foam quarter. Cementing for folding tongue Folding tongue edges. Cementing / pasting lining with tongue. Edge stitching of tongue for better look. Joining tongue with vamp. Stitching and locking of quarters and vamps. Cementing and pasting socks decoration piece with socks. Stitching decoration piece with socks. Cutting extra threads from upper. Burning small thread edges for better finishing of stitched upper. Cleaning cement and spots from upper. In case of Boat Shoes, performing operation is done for maintaining exact and better shape of the shoe.
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Assembly
Process Shoe lasting Heel lasting Roughing Description Lasts are used as per requirement for shoe style. Lasts give permanent shape to shoes. Heel is shaped with the help of heel lasting machine. Finished leather is a smooth surface and will not achieve good adhesion between upper and sole. Therefore, to achieve good adhesion, the upper is roughed. Dismecol cement and other adhesives are applied for attaching with sole. Cement is used at the sole after roughing of sole for attaching it with upper. The roughed and cemented sole and upper are given time to dry on the track before assembling/placing the two together. The dried cement/glue is reactivated with heat in order to achieve bonding between upper and sole. Once the upper and sole are placed together these are pressed with machine, which applies pressure uniformly distributed so that the sole is completely bonded to the upper. The shoes are then passed through a heating chamber and thereafter a chiller. The instant hot and cold process helps leather to achieve good and long lasting shape according to the last. Shoes are then cleaned, polished and finished to give them a nice and crisp look. Quality is inspected and, if approved, final packing is completed.
Cementing of upper Cementing of sole Heating for reactivating cement after drying
Soles attaching
Heat setting/chilling
Finishing QC inspection
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98
Annex B Members of PFMA as per early September 2007

Industry members
M/s A & E Enterprises M/s AES / AET M/s Al-Hassan Enterprises M/s Al-Huda Trading Co. M/s Ahsan Elahi & Co. M/s Akhtar Enterprises M/s Army Welfare Shoe Project M/s Ayesha Export Linkers M/s Bama Footwear M/s Bata Pakistan Ltd M/s BAS Enterprises M/s BISMA Enterprises M/s Bravo Sports M/s Brothers Associates (Pvt.) Ltd M/s Darvesh Exporters M/s Elegant (Pvt.) Ltd M/s EPCT (Pvt.) Ltd M/s Expertise M/s Falk Shoes International M/s Fircos Shoes (Pvt.) Ltd M/s Firhaj Footwear (Pvt.) Ltd M/s FM Shoes Industries M/s Footlib Ltd M/s Franco Industries M/s Geo International M/s Ghazi Industries M/s Khokar Enterprises M/s K Shoes (Pvt.) M/s Laurel Co (Pvt.) Ltd M/s Lyra (Pvt.) Ltd M/s Ramzan Tanneries & Footwear Industry (Pvt.) Ltd M/s Mansha Khan Leather Merchant M/s Mehr Dastgir Leather & Footwear Industry (Pvt.) Ltd M/s Mehran Traders & Footwear Industry (Pvt.) Ltd M/s Prime Naalain (Pvt.) Ltd M/s R Shoes Industries Ltd M/s Raja Industries (Pvt.) Ltd M/s Sartaj Shoe Factory M/s Service Industries Ltd M/s Shafi (Pvt.) Ltd M/s Shakhiz Industries (Pvt.) Ltd M/s Sigma Shoes (Pvt.) Ltd M/s Simba Enterprises M/s Starlet Products (Pvt.) Ltd M/s Sohail Qamar Enterprises M/s Sumayyah Enterprises M/s Supreme Exports M/s Taba Enterprises M/s Talon Sports (Pvt.) Ltd M/s Topfitt Shoes Industries M/s Trust Shoes International M/s U.E. (Pvt.) Ltd M/s Zak Impex (Pvt.) Ltd
Trade members
M/s A & A International M/s Al-Noor Traders M/s ATS Synthetic (Pvt.) Ltd M/s B&T Laminates (Pvt.) Ltd M/s Bond Street M/s Boots M/s Borjan (Pvt.) Ltd M/s Chic Leather M/s Crescent Art Fabrics (Pvt.) Ltd M/s Fazeel Enterprises M/s Haroon Shoes Company M/s Ideal Rubber & Engineering Industries M/s Idrees Brothers M/s Imran Trasers M/s Insaf Chemical Store M/s Intra Chimie M/s Krayons M/s Long View (Pvt.) Ltd M/s Matchlock Trading Co. (Pvt.) Ltd M/s Modila Industries M/s Paramount Trading Company M/s Prowess Footwear Marketing M/s Quadri Brothers M/s Rana-Rani Exports M/s Shoeline International (Pvt.) Ltd M/s Siltex (Pvt.) Ltd M/s Stylo Shoes M/s Super Cromption Industries M/s Tauheed Leather Industry M/s Urban Sole
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M/s Five Star Marketing Ltd M/s Footwear Consultancy Services M/s Global Enterprises
M/s Mohsin Mubasher Corporation M/s New Akbar Slatch & Co. M/s Noble Shoes Industries
M/s Zeens International
Source: PFMAs website, www.pakfootwear.pk.
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The Footwear Sector in Pakistan

Export performance and potential

Implications of the WTO Agreements

ITC: The Partner in Export Development

Inputs and support were provided by:

Trade issues in general

International Trade Centre

Implications of WTO Agreements

WTO Agreements relevant to the footwear sector

Information flows on WTO issues

WTO Agreements implications for trade conditions

International Trade Centre

International Trade Centre

International Trade Centre

1 Background and objectives

1.2 Five sector studies

International Trade Centre

International Trade Centre

2 Footwear sector in Pakistan

National sector data

International Trade Centre

International Trade Centre

International Trade Centre

Figure 2.1 Footwear manufacturing process flow chart Cutting

Cementing of upper (first)

Joining of soles with upper

Stitching of sole with upper

Placing inner socks

Cleaning and was polishing

Final operations like lacing

Table 2.1 Activity flow for manufacturing of export goods

Customer order sheets Customer manuals Letter of Credit

Performa Invoice to customer for opening L/C for import

Local vendor and overseas suppliers for imported materials.

Subject to OK receipt of lab tests, start of production

2-3 weeks for one shipment

International Trade Centre

Activity Inspection of finished/ packed order All development activity (1 8)

Time involved 1 day

R&D 5% Overheads 10% Wages / salaries 11%

Return 10% Leather 40%

Other materials 10%

International Trade Centre

Independent footwear retailers

Chains of stores company owned

Chain of department stores

Super /hyper markets

Mail order companies

International Trade Centre

Table 2.2 Price trade structure

Intermediaries in the footwear market

International Trade Centre

International Trade Centre

2.1.2 Availability, quality and price of raw materials

International Trade Centre

2.1.3 Other production inputs Local and imported technology

Labour force and salaries

International Trade Centre

2.1.4 Growth in the sector

2.2 Reasons for fluctuations in exports and imports

International Trade Centre

2.2.2 Reasons for fluctuations in imports

2.3 Pricing structure of footwear industry