Chapter Preview: Sustaining Reform with a US-Pakistan Free Trade
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1366.ch03.qxd 10/17/06 12:52 PM Page 77 3 Textiles and Clothing Access to the US textiles and clothing (T&C) market may well present the toughest challenge in the negotiation for a US-Pakistan FTA. Historically the US T&C market has been highly allergic to trade liberalization, and it is currently under intense pressure following the termination of the Multi- Fiber Arrangement (MFA) in January 2005. In FTA talks, it is predictable that Pakistan will strive for maximum market access for T&C, its leading export sector. Such access implies a rapid reduction of US tariffs, liberal rules of origin, and no new quotas. A US-Pakistan FTA should strive to reach these goals. At the same time, Pakistan must dismantle its own bar- riers to US T&C exports. By eliminating barriers in both countries, and by introducing reasonable rules of origin, the agreement will promote the vertical integration of T&C production between the United States and Pakistan, thereby creating new market opportunities for producers in both countries.1 This chapter is structured in four sections. The first section provides a brief account of the industries in both countries and the trends in bilateral trade. The second section reviews trade barriers that persist since the MFA quota system was dismantled in January 2005. The second section also reviews the partial resurrection of quotas with respect to Chinese 1. Throughout this chapter, the words “textiles” and “clothing” correspond with the WTO product classifications. Textiles include inputs used in the clothing sector, such as yarn and synthetic fibers, as well as various items for household use, such as bed and bathroom linens and carpets. The abbreviation T&C thus refers to the entire textile and clothing industry. 77 Peterson Institute for International Economics | www.petersoninstitute.org 1366.ch03.qxd 10/17/06 12:52 PM Page 78 T&C exports in the fall of 2005. The third section describes the T&C ne- gotiating experiences of both countries in prior FTAs, focusing on phase- out periods, rules of origin, and safeguards. Finally, in the fourth section, we present our recommendations for a US-Pakistan FTA. Textile and Clothing Production and Bilateral Trade Pakistan and the United States are both major world producers, exporters, and importers of T&C. The United States is a leading textile exporter and one of the largest importers of T&C (20 percent of world imports).2 Ac- cordingly, US trade policy has important effects on world T&C trade (WTO 2004a), particularly in finished clothing, which accounts for 80 per- cent of US imports. With an export share of 2 percent of world T&C trade, Pakistan is a second-tier supplier of total T&C products, although it is a leading world producer and exporter of cotton-based products, particu- larly textiles.3 The importance of the domestic T&C industry for each national econ- omy is quite different. Based on US Census Bureau (2004) data, the con- tribution of T&C manufacturing to the US economy is quite modest, in terms of both output (3 percent of manufacturing value added and just under 0.5 percent of total GDP) and employment (5 percent of employ- ment in manufacturing and 0.7 percent of total employment). Moreover, the T&C industry has been declining in relative terms since at least 1980 (table 3.1).4 By contrast, T&C is the leading manufacturing sector in Pak- istan (9 percent of total GDP), the largest employer outside of agriculture (35 percent of the nonagricultural labor force), and the principal source of foreign exchange earnings (67 percent of merchandise export sales) (Gov- ernment of Pakistan 2005a, World Bank 2004b). 2. In 2004, US imports ($96 billion) were significantly higher than extra-EU imports of the European Union ($40 billion). However, the relation changes if intra-EU imports ($169 bil- lion) are considered. If the European Union and China/Hong Kong are regarded as unified trading blocs, the United States is also the third largest world exporter of T&C products ($16 billion), mainly textiles (WTO 2005b). 3. Pakistan has the world’s third largest installed capacity of short-staple spindles for spun cotton yarn (USITC 2004a). In 2004 Pakistan supplied nearly 30 percent of world cotton yarn exports and 8 percent of world exports of cotton products. WTO statistics rank Pak- istan as the 9th world exporter of textiles (Government of Pakistan 2005a). 4. The relative importance of the US T&C industry is also slightly lower than it is in the Eu- ropean Union, where it accounts for 4 percent of manufacturing value added and 7 percent of manufacturing employment (Nordas 2004). The decline of the US T&C industry acceler- ated after 1995, particularly in terms of employment. 78 SUSTAINING REFORM WITH A US-PAKISTAN FTA Peterson Institute for International Economics | www.petersoninstitute.org 1366.ch03.qxd 10/17/0612:52PMPage79 Table 3.1 Long-term trends in the US textile and clothing industries, 1980–2002 (billions of US dollars) Indicator 1980 1983 1986 1989 1990 1993 1995 1998 2000 2002 Manufacturing GDP 581 683 832 966 1,040 1,131 1,289 1,344 1,426 1,352 Textile and clothing value added 37 38 41 45 47 53 52 53 52 46 Share of textiles and clothing in 6.4 5.6 4.9 4.7 4.6 4.7 4.0 4.0 3.6 3.4 manufacturing GDP (percent) Imports and exports of textiles and clothing Exports 5 3 4 7 8 11 14 18 20 17 Imports 11 14 25 32 34 44 52 69 83 84 Net imports 4 10 21 26 26 33 38 51 64 67 Net imports to textile and clothing 12 27 51 57 55 63 73 96 123 146 value added (percent) Textile and clothing productivity and employment Value added in constant 2002 dollars 16 20 25 31 34 43 36 48 49 46 (billions) Number of employees (thousands)a n.a. 1,906 1,753 n.a. 1,630 n.a. 1,502 1,172 1,091 846 Value added per employee in constant n.a. 10,500 14,100 n.a. 20,700 n.a. 24,000 41,200 45,000 54,400 2002 dollarsb n.a. ϭ not available a. Values correspond to data for nearest available year when data for column year were not available. Years used: 1982 for 1983; 1987 for 1986; 1991 for 1990; and 1997 for 1998. b. Figures rounded to the nearest hundred. Note: Figures may not add to line totals due to rounding. US import and export figures differ slightly from values in tables 3.3, 3.4, and 3.6 as data is based on dif- ferent sources. 79 Sources: US Census Bureau (1990, 1993, 2001, and 2004); WTO (2005b). Peterson Institute for International Economics | www.petersoninstitute.org 1366.ch03.qxd 10/17/06 12:52 PM Page 80 The long-term decline of the US T&C industry has been particularly felt by US clothing firms. As a result, textiles have become the largest sub- sector in the industry, in terms of both shipments and employment. The US textile sector still supplies the bulk of US domestic demand, as indi- cated by the fact that, in 2002, imports amounted to only 20 percent of do- mestic textile shipments. Despite high tariffs and quota protection, US imports of T&C have experienced sustained growth since the early 1980s (table 3.1), at a much faster rate than overall US imports of manufactures.5 Rising imports of clothing are associated with the emergence of powerful retailing firms with strong connections to foreign suppliers.6 Two other stylized factors provide the bedrock for import growth: the relaxation and eventual elim- ination of MFA quotas, and the vertical integration of the T&C industry, especially in the Western Hemisphere. Until 1994, world trade in T&C was rigidly channeled by the MFA, which allowed developed countries to protect their domestic industries through detailed line item quotas.7 These quotas limited the overall growth of imports and distributed shares in the US market between competing for- eign suppliers. The result in practice was to severely limit market access for the most competitive foreign producers such as China, India, and Pakistan. For example, in 1996 Pakistan shipped only 9 percent of its total textile ex- ports to the US market (table 3.2). China and India faced a similar situation. Correspondingly, the quota system created an incentive for firms to estab- lish production in a wide range of countries that were not particularly com- petitive but were also not constrained by their assigned quota levels. In 1994 the WTO Agreement on Textiles and Clothing (ATC)—the successor to the MFA that was negotiated in the Uruguay Round—mandated an eventual end to the quota system, following a 10-year transition period. However, the ATC allowed backloaded phaseout schedules; consequently, the highly restrictive effects of textile quotas on the most competitive sup- 5. The ratio of net imports to domestic T&C value added jumped from 12 percent in the early 1980s to 63 percent in 1993, and approached 150 percent in 2002, when the ratio of net imports of all manufactures to all manufacturing value added was around 30 percent (Coun- cil of Economic Advisers 2004, 63–64). 6. Gereffi and Memedovic (2003, 7) define this phenomenon as the rise of “vertical retailing, whereby a diverse array of national department stores (e.g., JC Penney and Sears), discount chains (e.g., Wal-Mart and Kmart) and specialty retailers (e.g., Gap, Limited Inc., and Benet- ton) have taken on manufacturing responsibilities to produce private-label or store-brand lines.