Pakistan & MFA's demise

By Shahid Javed Burki

Cotton in the countryside and the textile industry scattered throughout urban Pakistan provide sustenance to tens of millions of people. A dramatic change in the fortunes of both - cotton, the crop and textile the product it produces - should obviously be the subject of deep analysis by policymakers in Islamabad.

I will begin with a short history of how rich countries have tried for more than half a century to protect their cotton growers and textile workers from competition from the parts of the developing world that had clear advantage in both activities. In fact, the story of distortions introduced into the cotton and textile sectors goes back much further than that.

In the late 1800s and the early decades of the 1900s, the British rulers of India provided incentives to their own mills to compete with the handloom products produced by hundreds of thousands of poor textile workers in the subcontinent.

The loss of Indian jobs as a result of these moves by the imperial power caused enormous distress and was the reason why Mohandas Karamchand Gandhi put the charkha in the middle of the flag of the Indian National Congress.

The spinning wheel served as a powerful symbol with which the Indians could easily relate. Gandhi's focus on the problems that the British trade policy had caused for countless Indian workers turned his campaign against the British rule into a mass political movement.

However, even after London ended its colonial rule in India, it used its economic muscle to keep the playing field tilted in its direction. In this endeavour it was joined by a number of other developed countries, particularly the United States.

In the 1950s, a few years after granting independence to India and Pakistan, Britain joined hands with America and concluded bilateral agreements with Hong Kong, China, India and Pakistan to restrict textile exports from these countries and territories. Washington, however, was interested in putting a more formal agreement in place.

In 1961, it initiated the Short Term Agreement with several textile exporters, going beyond the four countries covered under the previous understanding. The STA was the first multilateral agreement to introduce formal restrictions on trade in cotton products.

This was still a US initiative; since other textile importers wanted to impose similar restrictions they went to Geneva, the headquarters of the General Agreement on Tariffs and Trade (GATT), to provide them with a legal cover in the form of international arrangement.

In 1962, the Long Term Agreement restricting trade in textiles was signed by both textile exporting and importing countries under the auspices of the GATT. This agreement was amended - tightened, perhaps is a better word - to provide increased protection to the industries and workers in the rich countries. The LTA was the foundation on which the Multifibre Agreement (MFA) was built.

As the name suggests, the MFA went beyond restricting trade in cotton textiles; it also included artificial fibres and textiles using all kinds of man-made materials. By that time - the early 1970s - several relatively more advanced developing countries, including Pakistan, had acquired chemical industries to produce the raw material for man-made fibres.

The developed countries were concerned that by allowing man-made fibres and fabrics into their markets they would open a huge hole for developing countries' access. Silk was the only fibre that was not included in the MFA since, barring Italy, there were not many developed countries that were large producers of this particular item.

The MFA was negotiated to last for only four years, but in trade, protective barriers produce powerful vested interests. There was no appetite for ending the MFA in 1978. It was extended after the European Union and the United States broke the ranks of the developing world.

This they did by granting preferential access to a number of small countries either in their vicinity (for example the Caribbean in the case of the US) or with whom there were strong political ties (for example small African, Caribbean and Pacific states for the EU).

In 1995, the Agreement on Textiles and Clothing (ATC) was negotiated as a part of the Uruguay round of trade negotiations. This was done to get the developing world to agree to the round's conclusion and to agree also to the replacement of the GATT with the World Trade Organization.

The WTO was given real teeth in the sense that it had the power to entertain complaints from its member countries in case its rules were violated. The creation of such an organization was resisted for four decades by the US since it would have meant the surrender of some sovereignty to an international body.

The EU wanted a WTO type of body to be put into place so that it could bind Washington to good behaviour in the conduct of international trade. The EU agreed to the ATC to get support from the developing world.

The ATC committed WTO members to eliminate all quotas incorporated in the MFA by January 2005. This agreement also included the provision for progressive liberalization of the quotas before the deadline was reached.

Had that been done, the demise of the MFA would not have come suddenly; it would have died a slow death. But all major importers of textiles did little to ease the pain of adjustment in the period after 1995.

Consequently, as one analyst puts it, there will be a "brutal and messy restructuring of a basic manufacturing activity that is estimated to employ at least 40 million people world wide, most of them in poorer countries, and generates trade worth more than $350 billion a year."

Exports of more than 30 countries including some of the largest developing countries such as Bangladesh, India and Pakistan are subjected to quotas. China which entered the WTO in 2001 is subjected not only to quotas but will continue to face them a few years after the phasing out of the MFA. It had to agree to this extension as a condition of its joining the WTO.

How is the textiles and clothing market structured at this time? As already indicated, global exports are valued at about $350 billion, with about $180 billion accounted for by clothing and the remaining $170 billion by textiles. Almost four-fifths of the total exports come from developing country suppliers, including Pakistan. The largest share among major suppliers is held by China with 17.5 per cent of the total and the lowest by Pakistan with 2.2 per cent.

Among the 10 largest producers of textiles two are developed trade blocs countries - The EU accounts for 12 per cent of the total and America another 4.5 per cent. There is even greater concentration among importers.

The top 10 account for 72 per cent of the global imports with the United States purchasing 24 per cent and the European Union another 19 per cent. China, Mexico and South Korea are the only developing countries that are among the top 10 importers. Their imports are mostly for re-exports.

The imposition of quotas has seriously distorted the textile industry. It has kept millions of people out of work in many developing countries that have a distinct comparative advantage in this industry.

Pakistan is one such country. In 2003, some four million people worked in textile and associated industries. If the country had not been subject to quotas the number of people working in this part of the economy may have been perhaps 15 million.

MFA quotas have also distorted prices consumers pay in developed countries. According to the studies carried out by the European Union and the World Trade Organization, merchandise imported from China cost 52 per cent more in the United States and 25 per cent more in Europe had they not been restricted by quotas.

The same is true for exports from India and Pakistan. Consumers in America pay 43 per cent more on South Asian imports and those in Europe pay an additional 25 per cent.

Looking at the total cost to the consumers, one study estimates that they pay $70 billion a year more for clothing purchases as a result of quotas. This burden falls hardest on poor families who spend a high proportion of their incomes on clothing.

As already indicated, the main reason for the imposition of quotas by the West and Japan was to save jobs in the domestic industries. Each job saved in the American industry has cost the country's consumers an average of $170,000.

This is, in fact, a subsidy provided mostly by low income earners all across the United States to keep a few textile workers employed mostly in the states of North and South Carolina. Moreover, a job successfully protected in the United States results in the loss of about 35 jobs in a country such as Pakistan.

One of the political economy lessons to be learned from all this data about the cost of quotas is that a well organized group such as the textile owners in the states considered important by the US.

White House for electoral reasons can obtain benefits that far outweigh the costs of providing them. If the political world worked according to basic economic principles, it would promote everybody's welfare if the textile workers in the Carolinas were to be paid their full wages for being laid off rather than inflicting such a heavy cost on the country's consumers, as well as those who would find jobs in the developing world.

Textile industry is not the only area where such absurd outcomes result from public policy. As I have discussed earlier, much the same can be said about the way the western nations and Japan protect their agriculture sector. According to the estimates made by the World Bank and International Monetary Fund, quotas on textile exports have reduced world income by $137 billion annually.

The cost to developing countries is estimated at $40 billion in lost export earnings and 27 million loss of jobs. Not only have the developed country consumers suffered enormously as a result of the distortions introduced by the MFA quota regime, the loss to the developing countries has been much greater. Will the demise of the MFA regime bring an end to this distortion? I will discuss this issue next week.

[taken from http://www.dawn.com/2004/08/17/op.htm]

Date/Time Page Created: 12/01/2004

Date/Time Last Modified: 12/1/2004 8:30:11 AM

© 2004, Human Development Foundation. All rights reserved.
1350 Remington Road, Suite W, Schaumburg, Il. 60173
Toll Free: (800) 705-1310 | Email: info@yespakistan.com | Privacy Policy