Saturday, May 7, 2011

WTO: IS PAKISTAN’S TEXTILE SECTOR READY, GET SET, AND GO?

(Presented at the National Consultative Workshop on “Strategy for WTO” organized by Small & Medium Enterprise Development Authority (SMEDA), Experts Advisory Cell (EAC), and WTO Watch Group (WWG) on September 03, 2003 at Marriott Hotel, Islamabad)

Preamble:
Pakistan’s textile sector is at a crossroads. A mere fifteen months away, the world would be transformed thru an avalanche of change, perception, and guidelines that have been seriously thought of and are ready for application. The advent of the full force of WTO rules and eventual ramifications would bring about a myriad of opportunities in global trade. There would also be new challenges arising out of specific threats from intense competitiveness, from a paradigm shift, and from the elimination of supportive prices.

The importance and gravity of this transformation has not fully settled in since there has been no impressive across the board seriousness among those in the textile sector. Although the big players have initiated programs per force to get their act together, the vast majority is still waiting for the water to rise before any concrete long-term strategies or frameworks are contemplated.

There has been, however, a planned move to introduce new machinery, new processes, and new ideas in many areas with a view to upgrade production facilities, improve productivity and quality, and conceive marketing policies, etc. Entrepreneurs have accepted and complied with various requirements demanded by their buyers in order to maintain their market positions or business relationships. Whether it was ISO-9000, ISO-14000, or SA-8000, gradually and surely, those companies that have the most exposure complied and do continue to adhere to the arrangement. Many of them also subscribe to the Code of Conduct demanded by large buyers of their products. The payback for these companies has been either in the form of continued and extensive orders, or more importantly, an edge over those that have not yet taken this route. This strategy would sustain them in the future too, since they have a head start and their track record manifests compliance.

Notwithstanding this pro-active approach, the fact of the matter is that the vast majority of enterprises many of them either small or medium size, have yet to adapt to the concepts of the future. The straightaway argument is that the cost of compliance is exorbitant for them and implementing the conditionalities results in their units becoming non-feasible. Moreover, they do not have the facilities nor do they have the expertise to maintain these conditions. This has created a discouraging situation for them and thus a large number are adopting a “wait-and-see” policy or a causal attitude.

Impact of the WTO Rules:
The Pakistany textile industry has to accept the fact that the Agreement on Textile and Clothing would be terminated by the end of December 2004 and the dawn of the new year would see bilateral textile quotas totally removed. The full application of WTO rules would be introduced to the textile and clothing sector and their impact would be felt on this trade. The proponents of this transition are very bullish and are hailing the new multilateral trading system as progressive since there would be a more open, transparent, and non-discriminatory trading regime. The application of the WTO rules would ensure that tariff preferences for developing nations under various initiatives would continue to remain and applied. Regional trading agreements and free trade agreements would continue because of their preferential features, such as market access, etc. The rules of anti-dumping would be available alongwith the rules on safeguards so that misuse of trade facilities are addressed. The dispute settlement mechanism clause would also apply to resolve any trade disputes.

The question then is whether the domestic manufacturers are attuned to the thinking of the proponents of WTO. At the same time, what about the government? Are those that determine the policies in this country taking the impact of the WTO rules with the same seriousness or are they also displaying complacency? For a nation that after years of struggle managed to achieve double figures in exports, and that too on the solid performance of the textile sector, is there any hope in the future or would the exports be hostage to global pressure? In fact, is there any system evolved to tackle this pressure?

There are many views of globalization. Pakistan’s policymakers must decide if globalization is the panacea for all her ills or that it is another roadblock in her march towards progress. Would the new world order bring about poverty alleviation, would it increase the quality of life, and would it get the nation out of the economic whirlpool? Or do the policymakers consider globalization as a challenge and an opportunity that would bring about modern technology, increased market access, substantial foreign direct investment, new avenues of trade, rapid job creation, and successful implementation of the policies of privatization, SME development, and poverty alleviation?

Ways and Means:
It is, therefore, advisable to look within, fathom the strengths and weaknesses, and then formulate pragmatic policies and actions that would enable the country to increase the share in global trade from a measly 0.17% to a more worthy figure. The three stakeholders who represent the nation are the government, the employers, and the workers. The effectiveness of any strategy would depend on the conformity of views of all three and would entail a common and unified approach.

Pakistan is one of the 146 members of WTO and has the distinction of being one of the original 124 signatories on April 15, 1994 of the agreement that became known as the Marrakesh Declaration that established WTO. The government of that time immediately took the step of allowing textile goods to freely enter the country and compete with the local products. This unprecedented step undertaken without consulting the stakeholders ensued into a scenario where this facility was viciously and criminally misused, and thus under-invoiced and mis-declared textile products flowed into the country.

It has to be understood that taking advantage of globalization would be a difficult venture unless the government adopts a pro-active approach and resolves issues thru this new perception. There are certain key issues that must be highlighted and then a comprehensive mechanism must be put in place so that the nation moves ahead and those that have to survive in the global marketplace are able to do so.

The Finance Minister has categorically announced that the country is in a position to move out of the IMF-dictated syndrome and the government would set its own parameters and course. This implies that the new thinking is based on the successful achievements of the macro-economic factors due to prudent financial management and progressive economic development. The Commerce Minister has in his Trade Policy outlined removal of bottlenecks, gave more incentives, and announced provision of facilities for exporters. Yet there are still many factors that impede industrial development, that retard industrial growth, and that increase production costs.

A short mention of the latest economic situation is worth it. The GDP growth of 5.1% is the highest in seven years, the fiscal deficit is 4.6%, interest rates are historically at the lowest with T-bill yield at 1.2%, manufacturing growth is over 8.2%, CBR revenues on the rise with targets being easily met and expectations for next year a whopping 510 billion rupees, exports growing over 20% inspite of a 10% rupee appreciation, the KSE being the best performing market in the world for two years running, privatization picking up steam, and foreign direct investment crossing the US$ 800 million mark.

The government is still unable to provide the ingredients that accelerate industrial activity. The infrastructure situation is still pathetic and the cost abnormally on the higher side. It is still a Herculean task to obtain power connections, get proper water supply, and traverse on serviceable roads. KESC, for example, has a distribution loss in excess of 42%, SITE Karachi, where 40% of the country’s textile processing industries are located, has a water quota that is less than 25% of the estate’s requirements, and billions are spent by the government to build and maintain a low-grade road network that soon requires extended maintenance.

What to do:
The government must accept the fact that although it introduced policies that were market-oriented, that were attractive for exporters, and that were imperative to face the WTO conditionalities, it was not able to successfully implement these in the letter and spirit in which it were planned. At the same time, there is still no cohesion among the various government departments and ministries, and this has affected the practical implementation of the policies. The government agencies must work in tandem with the same sincerity of purpose if the objectives are to be achieved. As Stephen R. Covey remarked, “Motivation is a fire from within. If someone else tries to light that fire under you, chances are it will burn very briefly.”

The first and foremost priority is that whenever the government announces incentives and measures, it must ensure that a framework is already in place because a lot of essential time is wasted away before these are implemented. At the same time, the enterprises also lose the momentum required to take advantage of the policies. The exporters struggled to cross the US$ 11 billion mark with garments, bedwear, and knitwear entering the billion-dollar club. This was inspite of such regressive situations as withholding of sales tax refunds, erratic infrastructure, inspections, audits, and checkings, political instability, poor law and order conditions, corruption in the lower and middle tiers of the government, lack of a level playing field, and the unpredictable price increases frequently announced by NEPRA, OGRA, and OCAC, etc.

Humare Phool Humara Chaman Hamari Bahar
Humeen Ko Ja Nahin Milti Hai Ashainay Mein

The Commerce Minister, in his Trade Policy speech also announced the appointment of six Regional Trade Commissioners for the six regions of the world. This was very much appreciated and it is hoped that they would soon be nominated. However, it must be noted that these six Commissioners must be well-versed about their regions and must have wide-ranging knowledge and up-to-date database about the countries in the regions. It is proposed that before they take on the task, they must be provided solid training so that they are aware of the countries that would be under their jurisdiction. EDF resources could be utilized to impart this extensive training to them. Moreover, they must be appointed for atleast three years so that there are no repeated changes.

The Commerce Minister also disclosed that an inter-ministerial committee consisting of four Federal Ministers would be set up to deal with the issues and problems faced by the exporters. This is an excellent concept and has been successful in Sri Lanka where nine Ministers are in this type of a committee.

The labor laws are still prime impediments for the exporters. It is much too cumbersome and futile for the employers to comply with all laws and at the same time, enhance productivity and reduce cost. The archaic laws have not been removed from the statute books and the labor department officials are still in a time warp. The employers have had much success in getting quality production out of contract workers whose main consideration is producing more and producing fast. These are non-unionized and migrant workers and tend to have scant affinity with the enterprise. The agreement between the principal employer and the contractor is based on piecework output devoid of other privileges such as bonus, gratuity, leave encashment, and other facilities as laid down by the law. Contract work has to be sustained and has to be promoted. Legislation to this effect must be introduced, as this is a proven mode of higher output and industrial peace. The latest Labor Policy announced by the government has been vociferously criticized and blatantly rejected by the worker representatives. Employer organizations also have their reservations about it too.

There is also a need for the government to interact with the worker representatives with regard to the ramifications of the WTO rules. The worker hierarchy is still unable to truly grasp the impact of globalization and is still content to letting the employers bear the consequences. What many fail to comprehend is that an enterprise’s success and existence would depend on a skilled workforce that is able to provide higher productivity, that is able to operate latest machinery, equipment, and processes, and that is able to achieve quality standards as demanded by the buyers. The workers’ leadership must change its mindset and must ensure that industrial peace is maintained and the enterprise is smoothly operated. The workers’ representatives must realize that the social compliances rules are not a license for strikes and slow-downs. The Global Compact, proposed by UN Secretary General Kofi Annan and launched on July 26, 2000 by UN, could be embraced as the new code of business and industrial relations. This is a voluntary corporate citizenship initiative showing their attitude towards social compliance.

The three stakeholders must also ensure that human resource development is intensified. There are many technical institutions that need upgradation so that these are able to impart practical skill development training that is the need of the hour. The Pakistan Japan Business Forum, in collaboration with JETRO, proposed certain projects that are in various stages of governmental approval. These include the upgradation of PITAC, PTC, and AT&TC, enhancement of cotton production, control Pink Bollworm contamination, and cotton quality improvement, and setting up of technical facilities for textiles in Faisalabad, Sukkur, Hyderabad, Nooriabad, and Rawalpindi, etc. The Skill Development Councils alongwith WEBCOP can be effective mediums too. In India, the Geneva-based International Trade Center of UNCTAD/WTO is taking up a project to assist the Indian textile and clothing industry to improve its competitiveness after the phasing out of the quota system. The textile and clothing small and medium enterprise clusters would be targeted under this project. Pakistan’s delegation in WTO should ensure that this is emulated here too.
An example of Cambodia is pertinent. It is developing a reputation among socially conscious buyers in America, Europe, and elsewhere for its efforts to improve working conditions and labor rights. As a consequence, large buyers that are concerned about protecting their corporate reputations are willing to pay a premium to have their products produced in Cambodia. Cambodia’s garment industry earned 1.3 billion dollars in export earnings in 2002, which accounted for 96.5 percent of all foreign receipts and made up 36 percent of that year’s gross domestic product.

The EPB needs to orient the stakeholders with the WTO rules and conditionalities. It could finance from the Export Development Fund the publication of a book in Urdu and even in English that would in effect be ‘WTO for Idiots’, on the same pattern as those published on various subjects in USA. This exercise would be immensely beneficial in understanding the impact of WTO.

Market Access:
The government must assist the exporters in vigorously presenting the case for market access for the textile products. Inspite of being an active ally in the war against terrorism, Pakistan was not able to receive substantial market access. The outcome of added market access facility would have formidable advantages, such as:
 Increase in employment of workers, especially from rural areas.
 Augmentation in foreign exchange reserves.
 Expansion in capital investment.
 Reduction in cost of production due to decrease in quota value and financial charges.
 Establishment of new SMEs in textile industry, notably in apparels and made-ups.
 Optimum utilization of yarn, fabric, and processing industries, resulting in cost-savings.
 Faster repayments of external debt leading to contraction in debt figures.
 More revenue for the Exchequer in terms of income tax, sales tax, excise, and duties.
 Addition in disposable income ensuing in more purchases of consumable merchandise.

Anti-Dumping:
The anti-dumping laws would be a very devastating instrument and could have a negative influence on the textile sector. The elimination of the textile quotas would end the front-loading of quota surcharge on the product, and this would entail a commensurate reduction in the price of the exported product. This could then lead to a Catch-22 situation where the product could become susceptible to anti-dumping duties. Pakistany companies have faced the brunt of this clause and the chances of intensive anti-dumping actions in the future cannot and should not be discounted. There should be a two-year moratorium on activating the anti-dumping clause against developing nations.

There have been two cases where Pakistany manufacturers have been successful in convincing the National Tariff Commission that the imported products are being dumped into the country and that anti-dumping duties must be imposed on these products. Siddiqsons Group was able to prove that the South African tinplate manufacturers were exporting to Pakistan at a price that was below their domestic cost.

The Pakistany industries are facing the worst kind of smuggling of foreign goods into the country. The government has been totally ineffective in dealing with smuggling, under-invoicing, and mis-declaration. The inflow of fabrics from China, Far East, and India has sounded the death-knell for the domestic producers. These goods are cleared with the active connivance of custom authorities and the border guards. Every Dry Port of Pakistan has assumed a position of a state-within-a-state. It is a sad fact of life that the government has skewed the very concept of a Dry Port. Dry Ports are meant to be facilities for exporters and not importers. The reverse is the norm in this country. The government must withdraw the clearance of imported goods thru these Dry Ports, as these are nothing but sanctuaries for smugglers.

How can a domestic fabric producer file a case of anti-dumping against an importer of fabrics when the goods are cleared clandestinely or in an illegal manner? The CBR must institute a committee that includes representatives of fabric producers, and each consignment must be examined and the contents analyzed. This is the pragmatic way to ensure that the fabrics are imported at true value.

The National Tariff Commission took more than 18 months to decide on the Siddiqsons case. This lethargic approach must be changed. The NTC must act with zeal and protect the domestic industries. There has to be an increased representation of private sector in the NTC if it is to play a determined role in the protection of local industry.

Regional Trade:
Pakistan must focus on increased regional trade and cooperation. The Free Trade Agreement must be signed not only with Sri Lanka but also with other SAARC countries. The Indo-Sri Lanka FTA has increased bilateral trade between the two countries in excess of a billion dollars. Pakistan has missed the golden opportunity to have a larger bilateral trade with Sri Lanka, a country that is going places. Negotiations must be held sincerely among SAARC countries so that SAPTA and SAFTA become realities. Trade with India must be enhanced and there should be no qualms about granting MFN status to India.

Unfortunately, the businessmen in Pakistan are able to exercise far less influence over their government than their counterparts in India can. The prime reason is that CII and FICCI in India are led by top industrialists while generally here a lot of business leaders are elected more on biradari and influence with the “godfathers” rather than their personal (or their Group’s) clout and power. Secondly, the “sacrosanct” clause that is affecting the proliferation of trade with the eastern neighbor is the Most Favored Nation clause. This nomenclature, conjured up by some lexicon wizard, is not palatable to a strong lobby in Pakistan who ignorantly equate this to sleeping with the enemy. The third factor that is impeding trade is that the smugglers and the border eyes and ears mint a lot of moolah in undocumented Indo-Pak trade worth over US$ 1.5 to 2.0 billion. They are not keen on “opening” up trade and aiming for SAFTA. They have a formidable approach to many who make policies and thus are able to “influence” policy decisions. The proponents of Indo-Pak trade have always maintained, "Let not trade be hostage to politics."

Over five decades of sustained hostility has made it nearly impossible for the two countries to consider a vital issue such as trade outside the ambit of politics when the whole world is moving towards the notion of borderless trade. In the American continent, the tri-lateral trade agreement NAFTA has vastly improved trade in the region benefiting manufacturers and consumers in all the three countries: the US, Canada and Mexico. In the Indo-Pak region, smugglers have thrived over the years, moving goods across the borders at will. Dope peddlers on both sides have ganged up too. For them politics and religion are no obstacles, but the consumers are left holding the bag of high prices because of the artificial barriers to trade.

Conclusion:
Pakistan’s textile sector entrepreneurs would be required to adapt to the ground realities and accept the fact that globalization means a new way of working. There would be change in their thinking and they would have to pay added attention to the needs and dictates of the discerning consumer. The governments of the buyers’ countries or even the importers may not lay harsh conditions or barriers, but the consumer in those countries would have a different mindset and would demand compliance accordingly.

These entrepreneurs must know that even though there would be a quota-free regime, even though the quality may be acceptable and the prices reasonable, and even though there would be social compliance, they would still be susceptible to geo-political exigencies, to religious prejudices, and to governmental interferences. They must also understand that competition from counterparts in other countries would be severe and ruthless, technological superiority of their competitors may also affect them invariably, and most of all, the support and assistance given by foreign governments to their manufacturers may be more visionary and meaningful than provided by the Pakistany government. Survival in these circumstances would be imperative for the textile sector of Pakistan. The foreigners believe the Pakistany textile sector will sustain, and rightly so. According to people who matter in the Italian textile industry, the one country that would be a formidable player in the global textile trade in the future would be none other than Pakistan. Thus the question: Is the Pakistany textile sector ready, get set, and go in the WTO race?

Sahil Kareeb Dekh Kar Yunh Mutmaeen Na Ho
Aksar Safinay Doobay Hain Sahil Kay Aas Paas

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