WTO -- opportunities and uncertainties

The government response to withdrawal of Generalised Preference System by EU for Pakistani exports leaves much to be desired

By Andleeb Abbas

The Export Promotion bureau ran a thought provoking media campaign at the beginning of this year. The theme of this campaign was to reassure exporters that WTO (World Trade Organisation) is not going to have an adverse impact on their trade and would in fact provide many opportunities as quotas will disappear. Let us hope that this claim proves true as the year ended at a rather disappointing note for exporters.

Trade deficit

2004 ended with trade issues taking a rather unfavourable turn; while exports went down, imports rose substantially causing the trade deficit to rise.

Pakistan's export of textile manufactures declined by 13.7 per cent to $606.871 million in December 2004 as against $703.180 million in the same month in 2003.

Official figures released here last Saturday by Federal Bureau of Statistics showed that export of cotton yarn declined by 34.74 per cent, cloth by 19.86 per cent, knitwear by 4.60 per cent, readymade garments by 12.67 per cent, tents, canvas and tarpaulin by 53.50 per cent and art, silk and synthetic textile by 23.46 per cent during December 2004 against the figures for same month in 2003.

The value of total textile manufactures during the first half year of the current fiscal year declined by 2.50 per cent to $3.736 billion compared to $3.831 billion in the same period of the last fiscal year.

Further data on textile manufactures showed that export of cotton yarn declined by 13.37 per cent, bed wear by 23.01 per cent, readymade garments by 20.30 per cent, tents, canvas and tarpaulin by 46 per cent and art, silk and synthetic textile by 45.55 per cent during July-December 2004 against the figures for the same period in 2003. The export figures further revealed that export of cotton cloth, knitwear, towels and made-up articles registered growth during the period under review over the corresponding period of the last year. The export of cotton increased by 2.24 per cent, knitwear by 41.32 per cent, towels by 20.19 per cent and made-up articles by 13.01 per cent during the first six months of the current fiscal year over the same period last fiscal year.

On the other hand, massive growth in imports of four categories of items during the first half (July-December) of the current fiscal year increased the trade deficit by 233.07 per cent to $2.409 billion as against $00723 Billion over the same period of the last fiscal year.

The official figures showed that import of metal group increased by 49.16 per cent, of petroleum group by 37.92 per cent, of agricultural and other chemicals group by 37.49 per cent, of machinery group by 33.59 per cent, textile group by 24.79 per cent and food group by 17.15 per cent (July-December) of the current fiscal year over the same period last fiscal year.

The statistics showed that the import of iron and steel scrap increased by 79.41 per cent, iron and steel by 48.86 per cent and wrought aluminium by 13.10 per cent during the period under review. In the petroleum group, the import of petroleum crude increase by 34.80 per cent and petroleum products by 40.40 per cent during the July-December period of the current fiscal year against what they were in the same period last fiscal year.

In the agriculture and other chemical group, import of manufactured fertilizer rose by 29.49 per cent, insecticide by 48.13 per cent and plastic materials by 49.69 per cent. However, import of medicinal products declined by 5.51 per cent during the period under review over the same period of last fiscal year.

The increase in the import of machinery group was attributed to a significant rise in the import of textile, construction and mining machinery. The import of textile machinery rose by 69.93 per cent, construction and mining machinery by 42.08 per cent, agriculture machinery and implements by 66.90 per cent, office machine including data processing equipment by 11.27 per cent and power generation machinery by 19.44 per cent during the months under review.

The beginning of the

WTO era

The actual impact of the free quota regime on Pakistan's exportable products will be assessed during the next few months particularly in the garment sector. Though the quotas have been removed, many other subsidies and concessions which the Pakistani industry was enjoying, are also going to disappear. Unfortunately the industry is not prepared for this.

Price war in post-quota free regime has already started pinching Pakistani textile sector. Prices and production have fallen down by 12 and 25 per cent respectively for the first month after removal of Genera1ised System of Preferences (GSP). The GSP, offered by the European Union to Pakistan, has been suspended from 1st January after Pakistan ceased to qualify for it because its exports to EU exceeded one per cent. Pakistan share of EU clothing imports has reached 1.7 per cent at present. Therefore it is no more entitled to GSP. Reports are suggesting that Pakistan will have to wait for another five months to avail GSP Plus, another European Union trade regime.

"About 70 per cent garments factories are reporting under utilisation," said Muhammad Naseer Malik, former Chairman Pakistan Readymade Garments Manufacturers & Exporters Association (PRGMEA) North. He added that the initial estimates showed that the utilisation had come down to 65 to 70 per cent from 90 per cent. The price factor has actually crippled the garments industry particularly because of the removal of GSP, he further said. According to him, buyers are not ready to absorb the blow of 12.5 per cent duty that has made Pakistani products uncompetitive in the EU. The duty was restored by the EU for Pakistan's clothing shipments with the withdrawal of GSP from 1st January 2005 and majority of the buyers are now shifting orders to Bangladesh (declared as the Least Developed Country) because of duty fee entry of its consignments to the EU. According to some estimates, order placing for Pakistani garments has reduced by 25 to 30 per cent by February.

The total number of machines installed in different readymade garments units in Pakistan is around 450,000, according to the Secretary PRGMEA, an organisation which has around 1200 members. The industry sources believe that most of the garment units will have to face tough times in coming months, as it happened earlier in case of knitwear after 9/1I due to the price factor.

Most of the unit-holders have started compromising on their profits simply to protect their contacts in the EU market. According to them, the profit margins have come down to 6 to 7 per cent, which are not enough to bear the day-to-day production cost. They are supposed to pay from their own pockets in most of the cases. Meanwhile, a number of the exporters now feel that they have to focus on other markets around the world if they have to survive.

Actions and Reactions

Unfortunately the stance of both exporters and government has as usual not been timely. While the exporters are constantly seeking government support, the government is still not fully understanding the complexity of the situation. Subsidies are being planned and other incentives sought, but is that enough to sustain the industry in the face of the increasingly open competition they are likely to face in the coming years when more and more cheaper sources of supplies will be available to foreign buyer?

Every trade policy is announced with heavy claims of addressing these issues. A lot of grand initiatives are announced in every policy, with little follow up or action on most of them. Almost 50 per cent of announcements made in the trade policy of 2003-04 still require action while those announced in 2004-2005 policy are barely touched. Serious initiatives like technology upgradation and marketing of Pakistani products are the prime casualties. The ministry of commerce says that its job is to make policies while it is the job of Export Promotion Bureau (EPB) to implement them. EPB meanwhile blames the ministry for making the procedures too cumbersome for speedy implementation to be possible.

The problem seems to stem from the fact that no one seems to still comprehend and understand the exact impact of the post-WTO scenario on trade. It is hard to fathom why the expected withdrawal of GSP status was not taken care of and transition from it not planned much earlier. The EPB instead of celebrating the withdrawal of quotas should have made an awareness campaign for exporters warning them that since Pakistan's share of textile exports was exceeding one per cent it was time for them to search for other markets. Ideally EPB should have facilitated the exporters to find other markets and made them less dependent on EU. Unfortunately the whole industry has been thrown into a panic due to negligence of the concerned authorities and the lack of knowledge of the exporters themselves. As the exporter is pushed back to the wall he has no option but to lower his price and suffer declining profits.

Textiles are not the only suffering export. Rice is another of our main export that has suffered a big setback as the export of its Irri-6 variety is losing its main market in Kenya. The duty structure has been revised by the Kenyan government and has been increased from 35 per cent to 70 per cent, making Pakistani rice exports to that country uncompetitive. Government's reaction has followed the usual chain of denial, reaction and little action.

The government has not done any impacts study and thus is taking things as they come. It is imperative that the government initiate a study on the major political and legal risks the country's exports face in the major markets.

It should hire professionals to do an in depth study on the market reactions of the major importing countries. This should include a study of the country's trade policies, especially towards our major exporting items. The study can have following ingredients:

I The study should cover not only trade barriers but non-trade barriers as well which Pakistan is likely to face in the next five years.

II It should suggest alternative actions for negotiating with export markets and underscore other legal and marketing measures for safeguarding the risks of losing these markets.

III On the basis of these findings the government should carry out awareness campaigns to prepare exporters for the market reactions of their buyers well in time and facilitate them in preparing alternative strategies.

This approach is based on the premise that it is never too late. In fact, it is high time that instead of holding general purpose seminars on WTO, a more specialised and detailed approach is finally be adopted to stop crying wolf after the damage has been done.

A proactive approach is the only way of facing an increasingly competitive global world where uncertainty is the only certainty in forecasting trading trends.