INTRODUCTION WTO AND TEXTILES

An important achievement of the Uruguay Round was the decision to phase out
restrictions on imports of textiles and clothing. These restrictions were imposed by
certain developed countries. The Agreement on Textiles and Clothing (ATC) of WTO
which replaced the Multi Fiber Agreement (MFA), provided for the removal of these
restrictions in four phases over a period of 10 years. The phasing out program ended on
January 1, 2005. As a consequence the quotas have been completely abolished and the
importing countries can no longer discriminate between exports of textiles and clothing.
Moreover, the trade in textiles and clothing has now completely integrated into General
Agreement on Tariffs and Trade (GATT) 1994 and will continue to be governed by its
rules.
Pakistan was the greatest sufferer of the quota regime as it had a high percentage of
textiles and clothing exports which were restrained due to quotas by importing countries.
Pakistan can, therefore, benefit greatly from the present non-quota regime of WTO in
textiles and clothing sector.
However, there are a number of opportunities and challenges awaiting the textiles and
clothing industry of Pakistan in the international market place. For instance, it is being
expected that the importing countries would subsequently try to resort to other trade
restrictions to take the place of quotas. These can be in form of non-tariff barriers such as
importing countries’ requirements for the industry to comply with environmental, labor,
sanitary, phytosanitary or technical regulations. The compliance to quality standards and
regulations is a cost factor, which the industry will have to face and prepare for.
Moreover, countries like China and India have already began giving a tough competition
to Pakistan’s industry under the present quota free environment. A strategy needs to be
made in this regard as well.
As the future global market is of clothing, Pakistan has been advised by certain analysts
to concentrate more on value addition. Moreover, the success of Pakistan in the WTO
regime lies not only in diversification of quality but also in the direction of trade.
Majority of the exports are directed towards Europe and North America. It would be
worthwhile for the industry to workout new markets in other parts of the world.
 INTERNATIONAL TRADE ARRANGEMENTS
IN TEXTILES AND CLOTHING

Multi Fiber Arrangement (MFA) 1974-94

Under the Multi Fiber arrangement (MFA) developed countries controlled inputs of
textiles and clothing into their countries through quotas on a country-by-country basis
when increase in imports threatened their industries. Furthermore, it allowed bilateral or
unilateral arrangement for not only quota imposition but also in the case of product
categories, restrained levels and administrative arrangements. Under this agreement the
developed countries were required to enhance their quotas at the growth rate of 1% to
6%. The MFA became effective since 1974 and lasted until the end of 1994 when
Uruguay round negotiations was applied. It was an extended 5 times during the 21 year
period and enlarged the product coverage for restrictions from cotton products to wool
and man made fiber products and certain vegetable fiber products since 1986. MFA had
44 members, which were less than half of the GATT members but accounted for most
members with an interest in textiles and clothing trade.
MFA was not successful because:

 It did not protect jobs in developed countries.

 It led to loss of consumer surplus in importing countries.
 The producers had to purchase quota rights (corruption).
 The production decisions were based on quota restrictions and not on optimal
economic considerations.
 It led to oversupply and depressed world prices: loss to producers.
Agreement on Textile and Clothing (ATC) of WTO

Since 1995, the WTO’s Agreement on Textiles and Clothing (ATC) took over from the
Multi fiber Arrangement. But from 1st January 2005, this Agreement has expired and the
sector has been fully integrated into normal GATT rules. The quotas have thus come to
an end, and importing countries are no longer able to discriminate between exporters.

Textiles and clothing products have returned to GATT rules over the 10-years period.
This happened gradually, in four steps, to allow time for both importers and exporters to
adjust to the new situation. The respective durations and characteristics of the four phases
for the elimination of quotas under the Agreement on Textiles and Clothing beginning
from 1st January 1995 and ending on 31st December 2004 are as follows:

% of Products to be % of Products to be
brought under GATT brought under GATT
4 Step Phase
(including removal of (including removal of
any quotas) any quotas)
16% (minimum, taking
Step 1: 1 Jan 1995 to 31st Dec 1997 6.96% per year
1990 imports as base)
Step 2: 1st Jan 1998 to 31st Dec 17% 8.7% per year
Step 3: 1st Jan 2002 to 31st Dec 2004 18% 11.05% per year
Step 4: 1st Jan 2005 49% (maximum) No quotas left
Source: World Trade Organization

With the commencement of WTO, the world markets

will be open for free trade. Like the textile industries
of other developing countries, the textile industry of
Pakistan will also be exposed to intense international
competition. Participation in the global textile export
market will be determined solely by the capability of
the concerned industry to produce and supply textile
products of the required quality at competitive price.
Thus, to demonstrate the capability of textile industry
of Pakistan to face the challenges of free trade and
compete with confidence GOP has formulated Textile
Vision-2005 policy.
STRENGTHS & WEAKNESSES
Strengths
The low labor cost, along with availability of workforce and other raw materials are the
basic strengths of textile and clothing (T&C) industry of Pakistan. The T&C industry is
of immense importance to Pakistan as it provides an alternative to advance early stages of
industrialization with high potential of employment generation and export expansion. It
has traditionally been the stepping-stone towards industrialization. The sector not only
forms a significant share of GDP and foreign exchange earnings, but it also contributes to
human development objectives such as (female) employment, diffusion of knowledge
and technology, and generation of revenue.

Weaknesses
Some of the basic weaknesses of the textile and clothing (T&C) industry of Pakistan are
as follows:
Cotton issues
The industry faces a demand and supply gap of cotton. Moreover, contamination of
cotton results in its low quality.
Industry Issues
The low labor productivity, along with high-energy cost and subsequent high input costs
are serious weaknesses of the industry. Moreover, lack of research & development has
made the industry uncompetitive. Besides the poor infrastructure of the industrial sectors
and the high utility expenses are also obstacles to proper growth. There is also a lack of
some coordination and synergy between the public and private sector.
Absence of the right linkages and integration

 Cotton growing and cotton ginning are completely independent sub-sectors

with no linkages at the ownership level. Vertical integration comprises the
processes of spinning, weaving, processing, finishing, and garment making,
including towel- making, bed sheet production. There are over a dozen large-
scale organized units, which are vertically integrated, in some cases without a
spinning process.
 The major part of the textile and clothing industry is not vertically integrated.
The clothing sector operates quite independently of the weaving sector. Only
the knitwear industry does its own knitting, utilizing circular knitting and flat
knitting machines. These units source their yarn from local mills. The woven
garment sector is dependent on the national weaving and processing industry.
 There is also no formal horizontal integration. The various sub-sectors do
complement one another but there is no national or regional scheme that
provides dependable linkages between the sub-sectors and the supply of goods
and related services is not guaranteed. The textile and clothing sector in
Pakistan is characterized by the fact that a horizontal integration of the
industry is missing. Only, lately first attempts of a horizontal integration in the
textile sector were made.
 There is no formal regional integration, but there are industrial clusters within
the industry in different regions of the country. Spinning, weaving and
processing sectors are clustered in Karachi, Faisalabad, Lahore and Multan.
The power loom sector is clustered in Faisalabad, Multan, Kasur and
Hafizabad, in the Punjab province. There are no formal structures for the
integration of the industry. All in all, the system has worked quite
satisfactorily. In fact, independent operations from ginning to spinning to
weaving and finally producing value added garments, help the sub-industries
to specialize their operations so as to increase value-addition at each
production stage.
  There is no pursuance of sub-regional clustering with neighboring countries
like India, Bangladesh, and Sri Lanka. A number of Pakistani entrepreneurs
operate their clothing manufacturing units in the Gulf countries, Morocco,
Jordan and South America, relying on supplies of materials and labor from
Pakistan and other countries of the region. This could be seen as of cross-
border cooperation in the manufacture of textiles and clothing. Pakistan has
concluded a Free Trade Agreement with Sri Lanka.

Lack of business-to-business partnerships

There are virtually no alliances in terms of business-to-business partnerships but there are
important linkages between the textile mills and the value-added textiles through the
Textile Associations.
Low value added capability
Garments and apparels is Pakistan's weakest sector. Appropriate measures need to be
taken in this sector to meet global trade challenges. This essentially requires enhancing
value added capability of this sub-sector.
Narrow product and market base
Unlike other countries Pakistan has failed to diversify its exports and still a major chunk
of exports depends on cotton production and associated textile industry. Such a high
degree of concentration of exports in a few items is a major source of instability in export
earnings. A poor cotton crop would thus seriously affect total export proceeds, as has
been the case in the past.
Lack of improvement in the blended sector
There is an urgent need to bring improvement in the textile production, especially in
blended sector. Blended products made from a combination of natural and man-made
fabrics, are preferred in clothing the world over. Moreover, as the global production and
consumption trends show, the man made fibers (MMF) are taking the lead. It is a high
time that Pakistan begins focusing on the MMF rather than relying too much on cotton.