cotton industry, analysis

1. INTERNATIONAL TRADE
CHALLENGES AND OPPORTUNITIES FOR
PAKISTAN COTTON-TEXTILE AND
APPAREL SECTOR
By
Raana Ahsan
PhD. Thesis
NATIONAL UNIVERSITY OF MODERN LANGUAGES
ISLAMABAD
June 2008

2. International Trade: Challenges and Opportunities for
Pakistan Cotton - Textile and Apparel Sector
By
Raana Ahsan
Msc Quaid-e-Azam University
A THESIS SUBMITTED TO THE
NATIONAL UNIVERSITY OF MODERN LANGUAGES
ISLAMABAD
DOCTOR OF PHILOSOPHY
In Management Sciences
To
FACULTY OF ADVANCED INTEGRATED STUDIES AND RESEARCH
(MS/HRD)
NATIONAL UNIVERSITY OF MODERN LANGUAGES ISLAMABAD
JUNE 2008
© Raana Ahsan, 2008

3. ii
DISSERTATION AND DEFENSE APPROVAL FORM
The undersigned certify that they have read the following dissertation,
examined the defense, are satisfied with the overall exam performance, and
recommend the thesis to the Faculty of Advanced Integrated Studies & Research for
acceptance:
Dissertation Title: International Trade: Challenges and Opportunities for Pakistan Cotton -
Textile and Apparel Sector ___
Submitted By: Raana Ahsan Registration #:130-PhD/HRD/2003
Doctor of Philosophy
Management Sciences
Dr. Zafar Altaf
Name of Research Supervisor Signature of Research Supervisor
Prof. Dr. Shazra Munnawar
Name of Dean (FAIS&R) Signature of Dean (FAIS&R)
Prof. Dr. Aziz Ahmad Khan
Name of Rector Signature of Rector
____June 2008 ___
Date
NATIONAL UNIVERSITY OF MODERN LANGUAGES FACULTY OF ADVANCED INTEGRATED STUDIES & RESEARCH

4. iii
CANDIDATE DECLARATION FORM
I RAANA AHSAN
D/o: MR. ZIA MALIK
Registration No: 130-PhD/HRD/2003
Discipline: Management Sciences
Candidate of Doctor of Philosophy at the National University of
Modern Languages do hereby declare that the dissertation: International Trade: Challenges
and Opportunities for Pakistan Cotton -Textile and Apparel Sector
submitted by me in partial fulfillment of PhD degree in discipline/department Faculty of
Advanced Integrated Studies & Research is my original work, and has not been submitted or
published earlier. I also solemnly declare that it shall not, in future, be submitted by me for
obtaining any other degree from this or any other university or institution.
I also understand that if evidence of plagiarism is found in my dissertation at any stage, even
after the award of a degree, the work may be cancelled and the degree revoked.
June 2008 Signature
Date
Raana Ahsan
Name

5. iv
ABSTRACT
The purpose of this research was to provide a comprehensive analysis of international trade
in order to evaluate and determine the challenges it poses, and opportunities, it offers to Pakistan’s
Cotton, Textile and Apparel Sector. The research is based on secondary data sources. World Bank,
WTO, UNCTAD, and a lot of other valuable and authentic reports from the authors of repute have
been consulted to understand the increasingly complex international trade relations in a globalizing
world. Volumes of government reports, position papers, handouts and books have been searched to
appreciate the dynamics of Pakistan Cotton, Textile and Apparel Sector.
The research thesis endeavors to capture where the challenge is. What is at stake? Who are
the players? What are the opportunities in the international market place? How these challenges can
be translated in to opportunities? Brief account of recent trade development and the relationship
between global and domestic trading arrangements have been discussed. Role of politics in shaping
decisions and managing power both at domestic and global level, significance of international
commitments, and influence of historical, cultural back grounds, shared ideas and beliefs, and
individual mind set in competing interests in the domestic economy have also been dilated upon.
Analytical findings reveal that Pakistan has comparative edge on the basis of comparative
advantage, reveal comparative advantage, relative trade advantage, and trade complementarities. The
estimated value of revealed comparative advantage of cotton in Pakistan is 18 which is very high
than unity which implies that Pakistan has great opportunities in the export of cotton and cotton
manufacturing. Moreover, the estimated values of balasa and Lafay index for all cotton and cotton
products are very high which reveal that Pakistan has trade competitiveness in the cotton and cotton
manufacturing. The estimated value of relative trade index for primary products, cotton seed, cake of
cotton seed and cotton linter, are positive which imply that these products are highly competitive,
while oil of cotton seed and cake of cotton seed are uncompetitive. Furthermore, the value of trade
complementarities variable for USA, EU, Japan and Canada (trading countries) are greater than unity
except SAARC countries. This means that trading with SAARC countries in cotton and cotton
products is less profitable as compared to other countries where cotton trading is highly profitable.
Still domestic resource cost analysis (DRC) proves that Pakistan has greater opportunities in cotton
production. The values of reveal comparative advantage and relative trade advantage further suggest
that Pakistan has greater opportunities and prospects for exporting cotton and cotton manufacturing.
Similarly trade complementarities show and suggest that Pakistan should focus on Middle East
market with highest trade complementarities, followed by Canada, USA, EU, SAARC countries and
then Japan. Bt transgenic cotton is widely grown in the cotton growing areas of Sindh and Punjab.
Bt cotton can play a significant role to enhance agricultural productivity as the productivity
of cotton in Pakistan is 0.5 ton/ha as compared productivity of Bt cotton in China is 9 ton/ha which
implies a huge cotton productivity gap. This gap can be narrowed down by the adoption of Bt cotton
in Pakistan which will have major impact on food security efforts in the country. Urgent efforts are
required to focus on cost efficiency, higher productivity with quality of cotton, export diversification
of cotton products, export oriented policy and market perspective to become more competitive in the
global cotton market. There is also a need to strengthen the cotton - textile value chain with back
ward and forward linkages. Unique products have to be developed, and a shift from comparative
advantage to competitive advantage is the way forward.

6. v
TABLE OF CONTENTS
Chapter Page
DISSERTATION AND DEFENSE APPROVAL FORM ii
CANDIDATE DECLARATION FORM iii
ABSTRACT ……………………………………………………….. iv
TABLE OF CONTENTS ………………………………………….. v-ix
LIST OF TABLES …………………………………………………. x
LIST OF FIGURES ………………………………………………… xi
LIST OF CHARTS …………………………………………………. xii
LIST OF APPENDICES …………………………………………… xiii
LIST OF ABBREVIATIONS ……………………………………… xiv-xvii
DEDECATION ……………………………………………………… xviii
ACKNOWLEDGEMENT …………………………………………... xix
POLITICAL ECONOMY …………………………………………... xx
RESEARCH HYPOTHESIS ………………………………………... xxi
1. INTRODUCTION
1.1. Background of Study …………………………………………… 1
1.2. Economy of Pakistan …………………………………………… 2
1.2.1. Historical Perspective …………………………………….. 2
1.2.2. Recent Economic History …………………………………. 3
1.2.3. The Economy Today ………………………………………. 4
1.3. International Trade ………………………………………………. 20
1.4. Aid, Debt, Trade ………………………………………………. 22
1.4.1. Aid …………………………………………………………. 22
1.4.2. Debit …………………………………………………………. 23
1.5 Trade Not Aid ………………………………………….................... 24
1.6 Rationale of the Study ………………………………………….... 26
1.7. Limitations ………………………………………………….......... 26

7. vi
2. LITERATURE REVIEW
2.1 Origin of Trade …………………………………………………… 30
2.2 Evolution of Trade and Trade Theories ……………………..…… 30
2.3 Trade and Development ………………………………………….. 37
2.3.1 Why Trade ..………………………………………………… 37
2.3.2. The Benefits of Trade ………………………………………. 38
2.4 Globalization: A World without Borders…………………………. 41
2.4.1 WTO and the Agreement on Textiles and Clothing ………... 43
2.5 Regional Trading Arrangement …………………………………... 44
2.6 The Trade Policy Instruments ………………………………….. 46
2.7 Some other Important Concepts. ……………………………… 47
3. RESEARCH METHODOLOGY
3.1 Introduction ……………………………………………………… 60
3.2 Methodology and Research Design ……………………………… 61
3.2.1 Revealed Comparative Advantage ………………………… 61
3.2.2 Relative Comparative Advantage ………………………… 62
3.2.3 Opportunities for Supply Chain Integration……………… 63
3.2.4 Trade Complementarities …………..…………………… 63
3.3 Research Objectives…………… ……………………………… 64
3.4 Statement of Hypothesis………… ……………………………… 64
4. INTERNATIONAL POLITICAL ECONOMY
4.1 International Political Economy ………………………………... 67
4.2 Role of National Governments in International Political Economy…. 68
4.3 Political Economy of International Trade ………………………. 68
4.3.1 Trade Policy before World War I, 1860-1914 ……………. 68
4.3.2 International Trade from 1918 to 1939 …………………… 71
4.4 International Financial System ………………………………….. 76
4.4.1 International Monetary Fund (IMF)………………………… 77
4.4.2 Pakistan and IMF………………….………………………… 80

8. vii
4.4.3 The World Bank (WB)……………………………………… 80
4.5 World Trade Organization (WTO)………………………………. 82
4.5.1 Principles of Trading System ……………………………… 82
4.5.2 WTO Agreements ………………………………………… 84
4.5.3 Chronology of Key Events ………………………………... 85
4.5.4 Institutional Structure ……………………………………... 89
4.6 New Economic World Order ……………………………………. 91
4.6.1. Foreign Direct Investment (FDI)…………………………… 92
4.6.2 Multinational Corporations (MNCs)……………………… 94
4.7 Globalization …………………………………………………….. 96
4.8 Politics of Trade, Power and Money …………………………….. 99
4.8.1. Richest People in World …………………………………… 101
4.9 Political Economy of information ……………………………… 101
5. PAKISTAN COTTON-TEXTILE AND APPAREL SECTOR
5.1. International Trade of Cotton-Textile and Apparels ……………. 107
5.1.1. Trends in Clothing and Textile International Trade ………. 108
5.2. Pakistan Trade of Textile and Clothing …………………………. 110
5.3. Global Cotton Market …………………………………………… 111
5.4. Analyzing Opportunities for Pakistan Cotton-Textile and
Apparel Sector ………………………………………………..… 113
5.4.1 Revealed Comparative Advantage……………………….. 113
5.4.2 Itemized Trade Performance of Cotton and Cotton
Manufacturing ………………………………………….. 114
5.4.3 Relative Comparative Advantage………………………... 114
5.4.4 Trade Complementarities……………………………….. 115
5.5 Pakistan Cotton-Textile and Apparel Sector- The Value Chain…. 116
5.5.1 Pakistan Cotton Situation ………………………………….. 116
5.5.2 Ginning Sector …………………………………………….. 119
5.5.3 Spinning Sector ……………………………………………. 120
5.5.4 The Textile Sector …………………………………………. 122

9. viii
5.5.5 Issues in Yarn Production …………………………………. 123
5.5.6 Production of Cloth and Fabric ……………………………. 123
5.5.7 Textile Made-ups ………………………………………….. 125
5.5.8 Towels and Cleaning Cloths ………………………………. 126
5.5.9 Bed Wear and Linen ………………………………………. 127
5.5.10 Apparels ………………………………………………….. 129
5.6 Cotton Vision 2015 ……………………………………………… 131
5.6.1 Textile Vision 2005 ………………………………………… 131
5.7 Significance of Agriculture Sector for Pakistan …………………. 133
5.8 Opinion around the World ………………………………………. 134
5.9 Challenges in the Pakistan Cotton Yarn, Textile & Apparel Sectors 137
5.10 Concessions ……………………………………………………. 139
5.11 Politics of Concessions and Rebates ……………………………. 140
5.12 Opportunities and Future ……………………………………….. 141
6. TRADE AND INDUSTRIAL REGIME OF PAKISTAN
6.1. Institutional Framework for Trade ……………………………….. 146
6.1.2. Trade Regime ………………………………………………. 148
6.1.3 Trade Policy of Pakistan …………………………………… 150
6.1.4 Trade Policy Reforms ……………………………………… 150
6.1.5 Trade Policy 2006-07 ……………………………………… 152
6.1.6 Trade Policy 2007-08: Speech by the Commerce Minister ... 153
6.2 International Trading System and Pakistan ……………………… 156
6.3 WTO and Pakistan ……………………………………………….. 158
6.3.1 Trade Policy Review ……………………………………….. 158
6.3.2 WTO Notifications …………………………………………. 162
6.4 Industrial Sector of Pakistan ……………………………………… 162
6.4.1 Ancillary Textile Industry …………………………………. 163
6.5 Small and Medium Enterprises ………………………………..….. 165
6.6 Investment Policy ………………………………………………… 166
6.7 Industrial Policy ………………………………………………….. 166

10. ix
6.8 Textile Policy …………………………………………………….. 168
6.9 Private Sector Stake holders ……………………………………... 168
6.10 International Trade and Developing Countries ………………… 169
6.11 Economic Structure and Economy of Income ………………….. 170
6.12 Aim of Trade …………………………………………………… 171
6.13 Trade has worked for Pakistan …………………………………. 171
7. DEVELOPMENT OF BT COTTON IN PAKISTAN
7.1 Introduction ……………………..………………………………… 174
7.2 Background of Bt Cotton in the World……….. ………………… 175
7.3 Is there a Need to Grow Bt Cotton in Pakistan?………………….. 176
7.4 Development of Bt Cotton in Pakistan…………………………….. 177
7.5 Global Adoption of Bt Cotton …………………………………... 178
7.6 Adoption of Bt Cotton in Pakistan……………. ………………… 180
7.7 Impact of Bt Cotton in the World…………… ………………….. 180
7.8 Performance of Bt Cotton in Pakistan…………………………… 184
7.9 Conclusions and Suggestions… …………………………………. 187
8. CONCLUSIONS AND RECOMMENDATIONS…………………... 192
8.1. Recommendations ………………………………………………….. 194
8.1. Future Research ………………………………………………….. 196
BIBLIOGRAPHY ……………………………………………… 198

11. x
LIST OF TABLES
Table Page
1. Sectoral Share in Gross Domestic Product (GDP)---------------------------------- 5
2. Sectoral Contribution to the GDG growth (% Points)------------------------------ 6
3. Composition of GDP growth (Point Contribution) --------------------------------- 6
4. Structure of Exports 2007-08 --------------------------------------------------------- 8
5. Export of Textile Manufactures ------------------------------------------------------ 9
6. Major Export Markets ------------------------------------------------------------------ 10
7. Structure of Imports -------------------------------------------------------------------- 11
8. Pakistan’s Major Imports -------------------------------------------------------------- 12
9. Unit Value Indices and Term of Trade (Base year 1990-91=100)---------------- 13
10. External Debt and Foreign Exchange Liabilities ($ Billion) ---------------------- 15
11. Applied tariff rates of major traders in 1925 ---------------------------------------- 73
12. GATT and WTO Trade Rounds------------------------------------------------------- 87
13. Distribution of World GDP, 1989 ---------------------------------------------------- 99
14. Top Companies sorted by Market Value--------------------------------------------- 100
15. Imports of Textile and Clothing in to Major Markets by Origin (2006) --------- 109
16. Pakistan Export of Textile Products -------------------------------------------------- 111
17. Itemized Trade Performance of Cotton & Cotton Manufacturing (2006)-------- 114
18. Competitive advantage of Cotton Products Based on the RTA Index-------------115
19. Trade Complementarities -------------------------------------------------------------- 115
20. Number of Ginning Factories and Machines ---------------------------------------- 119
21. Industry Losses due to Cotton Contamination, 2004-05--------------------------- 120
22. Installed and Working capacity in the Spinning Sector , All Pakistan
Installed Capacity (000) Working Capacity (000) Capacity Utilization (%)---- 121
23. Quality of Cloth Production, Mill Sector (% distribution)------------------------- 124
24. Exports of Textile Made-ups ---------------------------------------------------------- 126
25. Major Exports of Towels and Cleaning Cloth--------------------------------------- 127
26. Composition of Pakistan’s Exports of Bed Wear ----------------------------------- 128
27. Major Country Destination of Exports of Bed Wear from Pakistan-------------- 128
28. Export of Clothing ---------------------------------------------------------------------- 130
29. Loans to Textile Sector----------------------------------------------------------------- 141
30. Main Ministries and Agencies Responsible for Trade-Related Issues ----------- 147
31. Pakistan’s Tariff Structure: 2001-02 and 2004-08---------------------------------- 160
32. Preferential Rules of Origin and Tariffs in Trade Agreements, 2007 ------------ 161
33. WTO Notifications, 2001 to end-September 2007---------------------------------- 162
34. Profile of Textile Industry ------------------------------------------------------------- 164
35. Investment Policy Matrix -------------------------------------------------------------- 167
36. The Economic structures of Low-Middle-and High-Income Countries --------- 170

12. xi
LIST OF FIGURES
Figure Page
1. Contribution to GDP growth--------------------------------------------------------- 7
2. Major contributors to additional export economy -------------------------------- 8
3. Sources of Imports-------------------------------------------------------------------- 12
4. Current Account deficit (Month Wise)--------------------------------------------- 14
5. External Debt and Liabilities-------------------------------------------------------- 15
6. Inflation Rate by Group-------------------------------------------------------------- 17
7 & 8. Revenue and Expenditure: budget estimate 2006-07----------------------------- 18
9. Foreign Direct Investment Inflows ($ billion) ------------------------------------ 19
10. Top Investing countries -------------------------------------------------------------- 19
11. Investment Inflows by Sector ------------------------------------------------------- 20
12. Real Merchandise Trade Growth by Region 2006 ------------------------------- 21
13. Growth in the Volume of World Merchandise Trade and GDP 1996- 2006-- 21
14. Export of Textile Manufactures 2005-06 ----------------------------------------- 110
15. Share of Cotton Production---------------------------------------------------------- 112
16. Nominal Cotton Price: Cotlook A and B Indices and U.S Price---------------- 113
17. Capacity Utilization in spinning Sector-------------------------------------------- 121
18. Pakistan Major Exports 2005-06---------------------------------------------------- 149
19. Trade as Percentage of GDP -------------------------------------------------------- 149
20. Tariff Averages ----------------------------------------------------------------------- 161

13. xii
LIST OF CHARTS
Chart Page
1. World Merchandise Export, 1900-1950 ------------------------------------------- 74
2. World Merchandise Export Prices, 1900-1950 ----------------------------------- 75
3. Volume Growth of World Merchandise Export, 1900-1950 ------------------- 75

14. xiii
LIST OF APPENDICES
Appendices Page
A. Installed Capacity in the Textile Sector (For month of Dec 2007) -----------xxii
B. Dewan Salman Fiber Ltd-----------------------------------------------------------xxxv
C. Nishat (Chunian) Limited----------------------------------------------------------xxxvi
D. Ibrahim Fibers (IBFL)--------------------------------------------------------------xxxvii
E. The Crescent Textile Mills Limited ----------------------------------------------xxxviii

15. xiv
ABBREVIATIONS
ADB : Asian Development Bank
AMIC : Agri - Marketing Integrated Centers
AOA : Agreement on Agriculture
APEC : Asia Pacific Economic Cooperation Group
APTMA : All Pakistan Textile Mills Associations
ASEAN : Association of South East Asian Nations
Association
ATC : Agreement on Textiles and Clothing
BMR : Balancing Modernization Replacement Program
CAFTA : Central American Free Trade Area
CARs : Central Asian Republics
CEC : Cotton Export Corporation, Government of Pakistan
CETP : Combined Efferent Treatment Plants
CIF : Cost Insurance and Freight
CKD : Complete Knock Down
CPI : Consumer Price Index
CPI : Consumer Price Index
DDA : Doha Development Agenda
DSU : Dispute Settlement
DTTs : Double Taxations Treaties
ECC : Economic Coordination Committee
ECO : Economic Co-operation Organization
EDL : External Debt Liabilities
EOU : Export Oriented Units
ESCAP : Economic and Social Commission for Asia and Pacific
Region
EU : European Union
FBR : Federal Board of Revenue
FDI : Foreign Direct Investment

16. xv
FI : Foreign Investment
FPCCI : Federation of Pakistan Chamber of Commerce and Industry
FTA : Free Trade Area/Free Trade Agreement
GATS : General Agreement on/Trade in Services
GATT : General Agreement on Tariffs and Trade
GCC : Gulf Cooperation Council
GDP : Gross Domestic Product
GNP : Gross National Product
GOP : Government of Pakistan
GSP : Generalized System of Preference
GWP : Gross World Product
IDA : International Development Association
IDBR : International Bank for Reconstruction and Development
IIAs : International Investment Agreements
ILO : International Labor Organization
IMF : International Monetary Fund
ITA : Information Technology Agreement
ITO : International Trade Organization
LCV : Light Carrier Vehicle
LDCs : Least Developed Countries
LTF-EOP : Long Term Financing of Expert Oriented Projects
M&As : Mergers and Acquisitions
MFA : Multi-Fiber Arrangement
MFN : Most Favored Nation
MMF : Man-made Fiber
MNC : Multinational Corporation
MOU : Memorandum of Understanding
MTN : Multilateral Trade Negotiations
NAFTA : North America Free Trade Agreement
NTC : National Tariff Commission
NTTFC : National Trade & Transport Facilitation Committee

17. xvi
NWFP : North West Frontier Province
OIC : Organization of Islamic Countries
PCFAMEA : Pakistan Cotton Fashion Apparel Manufactures and
Exporters
PHDEB : Pakistan Horticulture Development & Expert Board
PTA : Preferential Trade Agreement
QIZs : Qualified Industrial Zone
R & D : Research and Development
ROZs : Reconstruction Opportunity Zones
RTA : Registered Trade Agreements
SAARC : South Asia Association of Regional Co-operation
SAPTA : South Asian Preferential Tariff Arrangement
SME : Small & Medium Enterprise
SMEDA : Small & Medium Enterprise Development Authority
SPI : Sensitive Price Index
SPS : Sanitary and Phyto-sanity Measures
SRO : Statutory Regulatory Order
TBT : Agreement on Technical Barriers to Trade
TDAA : Trade Development Authority Pakistan
TDPA : Trade Development Pakistan Authority
TMB : Textile Monitoring Body
TNC : Trade Negotiating Committee
TNCs : Transnational Corporations
TPRB : Trade Policy Review Body
TPRM : Trade Policy Review Mechanism
TQMD : Textile Quota Management Directorate
TRB : Trade Review Body (WTO)
TRIPs : Agreements on Trade Related Aspects of Intellectual
Property Rights
TSB : Textile Surveillance Body
TTFP : Trade & Transparent Facilitation Project

18. xvii
UK : United Kingdom
UN : United Nations
UNCTAD : United National Conference on Trade and Development
UNICEF : United National Children’s Fund
USA : United States of America
USDA : United States Agricultural Department
WEF : World Economic Forum
WPI : Whole Sale Price Index
WTO : World Trade Organization

19. xviii
DEDICATION
To
DR. ZAFAR ALTAF
My Research Supervisor
His one sentence,
“Raania, prove it to yourself”
changed my mindset.

20. xix
ACKNOWLEDGEMENT
“All glory goes to Allah”
Thank you Ammi Jan, what ever I am today, I owe it to you. You taught me how to
face the challenges with smile and keep on struggling. Years ago you left us but your love
and care still warm my heart. I love you Ma!
Thank you Daddy for making me a better human being with faith, values and
principles!
I deeply appreciate my siblings for their affection, encouragement and practical help
in my efforts to produce something worth while.
My friends …. “Every time when I was down, they always come around and put my
feet back on the ground.” Thank you friends!
I am indebted to my colleagues and co – workers for their cooperation and support.
They made things easier for me.
Very humbly, I present tributes to all those economists and scholars whose vision
and knowledge; I deeply benefited from in my research endeavors.
Writing this thesis was a test of my commitment, patience and professionalism, and I
am extremely obliged to all those who directly and indirectly helped me in achieving the
target.

21. xx
POLITICAL ECONOMY
Of course, as in the instances of alchemy, astrology, witch- craft, and
other such popular creeds, political economy has a plausible idea at the root
of it. “The social affection,” says the economist, “are accidental and
disturbing elements in human nature; but avarice and the desire of progress
are constant elements. Let us eliminate the constants, and, considering the
human being merely as a covetous machine, examine by what laws of labor,
purchase, and sale, the greatest accumulative result in wealth is obtainable.
Those laws once determined, it will be for each individual afterwards to
introduce as much of the disturbing affectionate element as he chooses, and
to determine for himself the result on the new conditions supposed.”
JOHN RUSKIN
The Genius of John Ruskin
Editor: J. D. Reseuberg
Houston, Mifflin Company Boston, 1963

22. xxi
RESEARCH HYPOTHESIS
Pakistan is facing a new structure in international trade and the country should be;
• Able to work its strengths
• Develop itself from a low income country to a middle level country through its trade
in Textiles

23. 1
CHAPTER 1
INTRODUCTION
1.1 Background of the Study
The Indus Valley civilization, one of the oldest in the world and dating back at least
5,000 years, spread over much of what is presently called Pakistan (The World Fact Book,
2007). In the 21st
century, Pakistan is a rapidly developing nation, strategically located, has
plenty of natural resources, and with a growing market of 160 million people.
Pakistan has a very narrow export base. The Cotton-Textile and Apparel Sector
accounts for more than 60 percent of Pakistan’s export earnings. According to Altaf (2007),
what happens to the economy of Pakistan is very much dependent on the cotton- yarn-
textile-apparel complex.
After the elimination of MFA and related quota regime, the international market
place has become aggressively competitive with challenges at one hand and on the other lots
of opportunities for smart players. The international trade of cotton-textile and apparel poses
huge challenges to this important sector of Pakistan’s economy.
This thesis aspires to establish that a vibrant and profound trade regime can give a
boast to the economy of Pakistan. The cotton-textile –apparel sector as the central pillar of
the trade regime can contribute significantly towards welfare and prosperity of the country.
It argues that macroeconomic (over all policy) and microeconomic (firm level) frameworks
have complementarities that reinforce each other for desired economic outcomes. It further
suggests that business friendly not businessmen friendly domestic trade policies can create a
business and entrepreneur’s culture that can address the supply side constrain, and can act as
a trouble shooter. It also deliberates the role of state and institutions in the international and
domestic economies, and how international political dynamics and commitments affect this
role and policies. It has also been argued that economic activities are determined by
historical norms, culture, and the political systems. Advancement of technology,

24. 2
information, knowledge and other dimensions of globalization have deeply affected the way
of doing business.
This thesis, while giving the recount of the challenges for cotton-textile and apparel
sector of Pakistan in international trade arena, dilates upon the silver lining therein, and
suggests the way forward for positioning itself with in the global markets. “The canvass is
big and the brush should be big enough to match the canvass”.
1.2 Economy of Pakistan
1.2.1 Historical Perspective
Pakistan was a poor, resource less and predominantly agricultural economy at its
creation in 1947 (Wikipedia, 2007), after division of the sub-continent. The creation of
Pakistan, in economic terms was the break –up of a customs union that had lasted for nearly
three hundreds years, (Altaf 1983). Agriculturally, the area was the granary for the
undivided India and provided cotton and jute for the industrialized part of the sub-continent,
(Altaf, 1983). While calling Pakistan an “economic monstrosity”, he further mentions that
Pakistan inherited industrial assets worth only Rs. 580 million.
During 1950-60, this policy paid dividends but at the cost of the agriculture sector
and growth was sluggish. Attempts were made to correct the situation by an increased
inflow of aid. Further, the support price for agricultural products was increased, though still
below market prices.
The decade of 1970s witnessed the withdrawal of these economic incentives either
partially or completely. The private sector started taking capital out of the country to invest
in other third world countries, and the foreign loan commitments in the public sector swelled
up. The small entrepreneurs were burdened with the liability of repayments of these extra
loans, Altaf maintains. However, growth rates indicate, “Development was emphasized”
during this period.
Nationalization of private enterprises during late 1970s was a blow to private sector
participation in economic activities. However, in early 1980s, government began a policy of

25. 3
greater reliance on private enterprise to achieve economic goals. This policy continued
throughout the late 1980s and early 1990s. The GDP growth rate was 6.5 percent in
the1980s, and the trade gap was $ 2.5 billion.
The government of Nawaz Sharif (1990-93) introduced a program of economic
reforms aimed at privatization, deregulation, and liberalization. Priority was given to
denationalizing. Abolishing government’s monopoly in the financial sector, and selling
utilities to private interests were the hall mark of this period. Though government made
progress in liberalizing the economy, however, it failed to control a growing budget deficit.
The government of Benazir Bhutto (1994) continued the policies of both
deregulation and liberalization, and the tighter fiscal policies. The government devoted
significant resources to health, education, and especially for women.
1.2.2 Recent Economic History
In 90s, Pakistan experienced severe fiscal imbalances, and its debt grew rapidly. The nuclear
tests of May 1998 and imposition of economic sanctions by the G-7 triggered the situation.
In early 1999 Pakistan narrowly escaped defaulting on its debt. Although the country had
been receiving IMF assistance, the government faced difficulty in meeting the
conditionalities. The IMF program was suspended in July 1999, and resumed later during
Musharraf’s government. In 2004, government announced that IMF assistance was no
longer required. Thus program ended in that year, (Daily Times, 2004). Musharraf's
economic revival agenda continued to include measures to widen the tax net, formation of
private sector assets, governance reforms, privatization, and deregulation.
Pakistan's nominal gross domestic product (GDP) in 1997 was US$ 75.3 billion.
However, in 2002, it came down to US$ 71.5 billion. During this period, the real GDP grew
by 3.0 per cent on an average. Government debt was 82 per cent of its GDP in 2002. Over
one-third of the government's revenue was being used up in servicing of the debt and
liabilities.

26. 4
The stagnant economy showed miraculous growth in 2002 after economic sanctions
that were imposed in aftermath of the 1998 nuclear tests lifted. The economy grew at 5.1
percent in 2003, 6.4 percent in 2004 and 7.0 per cent in 2005.
The US$ 72 billion economy of 2002 turned into a US$ 108 billion economy in
2005. During 1997-2002, average export growth was 1.2 percent per year and it went up to
13 percent per year during 2003-05. In 2005, debt as a percentage of the GDP came down to
59 percent from 82 percent in 2002. Government's interest payment as a percentage of
revenue collection came down to 23 per cent in 2005, which was 35 per cent in 2002.
According to many sources, the government made substantial economic reforms
since 2000; therefore prospects for job creation and poverty reduction were the best in a
decade. Despite all this, inflation increased in 2005 because of higher food prices, rising
property prices and rentals. Inflation (consumer priced index) went up to 9.3 percent, and
transport costs also jumped due to high oil prices.
1.2.3 The Economy Today
Pakistan is one of the fastest growing economies in the region along with China,
India and Vietnam, (Economic Survey of Pakistan 2006-07). The good performance was a
combination of sound economic polices, on going structural reforms, and a benign
international economic environment.
According to the Economic Survey, (2006-07) average real GDP growth during
2003-07 was the best performance since many decades. With economic growth at 7.0 % in
2006-07, Pakistan’s real GDP has grown at an average rate of 7.0 % per annum during the
last five years and over 7.5% in the last four years (2004-07). The size of economy has
reached $145 billion with per capita income at $ 1000. All the three major sectors;
agriculture, industry and services have provided support to strong economic growth. The
commodity-producing sectors (agriculture and industry) contributed 2/5th and services
sectors contributed remaining 3/5th to GDP growth. Within the commodity-producing
sectors, the contribution of agriculture alone has been 15 percent (or 1.1 percentage point)

27. 5
while 25 percent (or 1.8 percentage point) contribution came from industry. Services sectors
contributed almost 60 percent (or 4.2 percentage points).
Table 1: Sectoral Share in Gross Domestic Product (GDP)
Structure of Economy
The Economic Survey (2006-07) further maintains that all three sectors; agriculture,
services and industrial/ manufacture contributed to GDP. Agriculture remains the single
largest sector of the national economy, and main source of foreign exchange earnings. It
accounts for 20.9 percent of GDP, employs major share of the total work force, and supplies
raw materials to industry as well as a market for industrial products. However, the internal
composition of the agriculture sector has changed gradually.
The share of crops sub-sector in agriculture has gradually declined from 65.1% in
1990-91 to 47.9% in 2006-07, and the share of livestock in agriculture has increased from
29.8% to 49.6% in the same period. The contributions of fishing and forestry have been
insignificant with only 0.3% and 0.2% respectively.
Share of manufacturing in the GDP has increased from 14.7 percent in 1999-2000 to
19.1% in 2006-07. Large-scale manufacturing accounting for 69.9% of overall

28. 6
manufacturing, registered a growth of 8.8% in 2006-07. The services sector accounts for
53.3 percent in the GDP, and consists of wholesale and retail trade; transport, storage and
communications, financial and insurance services. The services sector grew by 8.5% in
2004-05, by 9.6% in 2005-06 and by 8.0% in 2006-07. Finance and insurance sectors have
been the major drivers of the growth, and showed growth of 30.8%, 33.0% and 18.2%,
respectively in these three years. The following Table will further illustrate the sectoral
contribution of these sectors to GPD.
Table 2: Sectoral Contribution to the GDP Growth (% Points)
SECTOR 2002-03 2003-04 2004-05 2005-06 2006-07
Agriculture 1.0 0.6 1.5 0.4 1.1
Industry 1.0 3.8 3.1 1.3 1.8
Manufacturing 1.1 2.3 2.7 1.8 1.6
Services 2.7 3.1 4.4 4.9 4.2
Real GDP (Fc) 4.7 7.5 9.0 6.6 7.0
Source: Economic Survey 2006-07
Consumption, investment and exports contributed to economic growth. Following illustrates
composition and contribution to GDP growth.
Table 3: Composition of GDP Growth (Point Contribution)
FLOWS
2000
2001
2001
2002
20022003 20032004
2004
2005
2005
2006
2006
2007
Avg
2003
2007
Private Consumption
Public Consumption
Total Consumption [C]
Gross Fixed Investment
Change in Stocks
Total Investment [I]
Exports
(Goods & Serve.) [X]
Imports
(Goods & Serve.)[M]
Net Exports [X-M]
Aggregate Demand
(C+I+X)
Domestic Demand
(C+I)
0.4
-0.5
-0.1
0.7
0.0
0.7
1.6
0.3
1.3
2.3
0.7
1.0
1.2
2.2
-0.1
0.0
0.0
1.5
0.4
1.0
3.7
2.2
0.3
0.6
0.39
0.6
0.4
1.1
4.5
1.6
2.8
6.5
2.0
7.1
0.1
7.2
-1.0
0.1
-0.9
-0.3
-1.3
1.0
6.0
6.3
8.7
0.1
8.8
1.8
0.7
2.5
1.7
5.4
-3.7
13.0
11.3
2.4
3.9
6.4
2.5
-0.5
2.0
1.8
3.2
-1.5
10.2
8.4
3.0
0.2
3.2
3.3
0.1
3.4
0.1
0.2
-0.2
6.6
6.5
5.3
1.1
6.4
1.7
0.1
1.8
0.8
1.9
-1.1
9.0
8.1
GDP MP 2.0 3.2 4.8 7.4 7.7 6.9 6.4 7.1
Source: Economic Survey 2006-07

29. 7
Figure 1: Contribution to GDP growth
Exports
Pakistan is dependent on agriculture–based exports. Pakistan’s export is based on
commodities and not on products. Commodities tend to be more volatile in price while
products have to compete with other countries, the only exception being a unique product,
(Salicornia, Seabuckthorn). In 2005-06 exports were $ 13.46 billion, whereas in 2006-07,
export target was $ 18.6 billion, (12.9 percent higher than last year). During the first ten
months (July-April), export went up by 3.4 percent: a modest rise from $ 13.46 billion to $
13.9 billion in the same period last year. Export of textile manufacture grew by 6.2 percent:
Knitwear (13.9%) ready made garments (6.8 %) made up articles (8.9%), cotton yarn (4.6
%), towels (2.6%) and other textile material (17.2 %). However, export of raw cotton, cotton
cloth and bed wear declined. Export of food group also declined by 3.5 percent due to
decline in export of rice and fruits. Like wise, exports of petroleum products declined by 2.7
%. Engineering goods showed a growth of 6.7 % and over all exports went up by $ 452.1 in
the first ten months of 2006-07 and the textile sector contributed $ 516.1 in this increase.

30. 8
Figure 2: Major contributors to additional export earnings (Jul-Apr 06-07)
Others, 64.8
Food Group,
13.1
Other
M
anuf acturer,
65.6
Textile
M
anuf acturer,
114.1
Textile
M
anuf acturer
Other
M
anuf acturer
Others
Food Group
Source: Economic Survey (2006-07
Table 4: Structure of Exports 2007-08

31. 9
Pakistan has a very narrow export base and exports are highly concentrated in a few
items cotton, textile manufactures, leather, rice, synthetic textiles and sports goods are the
main export commodities, and accounted for 77.2 percent of total exports during the first
nine months of 2006-07. Cotton manufacturers contributed 61.5 percent, followed by leather
(4.5%), rice (6.6%), synthetic textiles (3.0%) and sports goods (1.6%).
Table 5: Export of Textile Manufactures
ITEM 99-00 00-01 01-02 02-03 03-045 04-05 05-06 06-07*
Cotton Yarn 19.2 18.7 16.1 12.9 14.0 12.7 13.7 13.3
Cotton Cloth 19.6 17.9 19.6 18.6 21.3 23.3 21.6 18.5
Knitwear 15.9 15.8 14.6 15.9 18.1 18.9 17.6 18.3
Bed war 12.7 12.9 15.9 18.4 17.2 16.4 20.8 18.1
Towels 3.5 4.2 4.6 5.2 5.0 5.9 5.8 5.5
Tents, Canvas &
Tarpaulin
0.9 0.9 0.9 1.0 0.9 0.8 0.3 0.7
Readymade Garments 13.8 14.4 15.1 15.1 12.4 12.9 13.9 13.1
Synthetic Textiles
Total
8.2 9.5 7.1 7.9 5.9 3.5 2.0 4.7
Made up Articles 5.5 5.7 6.1 5.0 5.2 5.5 4.3 4.1
Others 0.7 - - - - 0.1 0.1 2.9
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
*July-March (Provisional) Source: FBS & Finance Division
The structure/ composition of export have gone through changes with time. The
share of exports of primary good has declined and exports of semi- manufactured and
manufactured goods have gone up gradually.
Pakistan’s exports directions are highly concentrated in few countries. The US, UK,
Germany, Japan, Hong Kong, Dubai and Saudi Arabia are the traditional export
destinations. These countries account for one-half of Pakistan’s exports. The US alone
accounts for 28 percent of Pakistan exports.

32. 10
Table 6: Major Export Markets
Imports
Since 2003 imports were on the rise, but in 2006-07 the import growth declined. In
2005-06 imports were $28.6 billion. In 2006-07, imports were targeted to decline by 2.1
percent. Growth in import decelerated to 8.9 percent during the first ten months (July-April)
of 2006-07 as against the increase of 40.4 percent in the same period last year. The decline
was due to pursuance of tight monetary policy, softening of international oil prices, decline
in the imports of fertilizer, and iron & steel products. Pakistan's imports are highly
concentrated in few items: machinery, petroleum & petroleum products, chemicals, transport
equipments, edible oil, iron & steel, fertilizer and tea. The eight categories accounted for
75.5 percent of total imports during 2006-07. Among these, machinery, petroleum &
petroleum products and chemicals accounted for 57.7 percent of total imports. Pakistan’s
imports sources limited, and over 40 percent of the imports come from the USA, Japan,
Kuwait, Saudi Arabia, Germany, the UK and Malaysia.

33. 11
Table 7: Structure of Imports

34. 12
Figure 3: Sources of import
USA, 8.1
Japan, 5.7
Kuw ait, 5.4
Saudi Arabia,
11.5
Germany, 4.1
U.K, 2.3
Malaysia, 3
Others, 59.9
USA
Japan
Kuw ait
Saudi Arabia
Germany
U.K
Malaysia
Others
Source: Economic Survey 2006-07
Table 8: Pakistan’s Major Imports
Trade Balance
Despite decline trend in imports, the merchandise trade deficit widen due to fall in
exports. The merchandise trade deficit widen to $11.1 billion in the first ten months (July-

35. 13
April) of 2006-07 as against $9.5 billion in the same period last year. However, trade deficit,
as percentage of GDP is likely to be narrow down to 9.0 percent in 2006-07 as against 9.5
percent last year.
Term of Trade
With base year 1990-91 (equal to 100) the term of trade aggregated to 64.4 during
2006-07. It was 66.4 in 2005-06, thus registered a decrease of 3.4 %. The increase in unit
prices of petroleum and machinery caused this decline.
Table 9: Unit Value Indices and Term of Trade (Base Year 1990-91=100)
Current Account Balance
The current account deficit widened to $ 6.2 billion (4.3% of GDP) in the first nine
months (July-March) of the 2006-07 from $ 4.6 billion (3.6% of GDP) in the same period
last year. Despite the decline in the import growth (10.2 percent), the current account deficit
has widened due to “not satisfactory” performance of exports, and deficit in services sector.

36. 14
Figure 4: Current account deficit (month wise)
Source: Pakistan Economic Survey 2006-07
Workers’ Remittances
Workers’ remittances are the third largest source of foreign exchange inflows after
exports and foreign investment. The inflows maintained the rising trend. Workers’
remittances totaled $ 4.45 billion in the first ten months (July-April) of the fiscal year as
against $ 3.6 billion in the same period last year, depicting an increase of 22.6 percent.
Debt and Liabilities
This includes all Government debt and liabilities denominated in foreign currency.
Pakistan’s total stock of external debt grew at an average rate of 7.4 percent per annum
during 1990-99, rising from $ 20.5 billion to $ 38.9 billion in 1999. However, there was a
slight decline in 1999-2000 ($37.9 billion.) It grew again by 1 percent in 2005, 2.9 percent
in 2006 and 4.4 percent in 2007, making the total external debt liabilities (EDLs) $ 38.86
billion at the end of March 2007.

37. 15
Figure 5: External debt and liabilities
Source: Pakistan Economic Survey 2006-07
However, EDLs as a percentage of GDP have declined from 51 percent in 2002 to
29.4 percent in 2006 and 27.1 percent in 2007. EDLs are medium and long term borrowing
from multilateral and bilateral lenders.
Table 10: External Debt and Foreign Exchange Liabilities ($ Billion)

38. 16
Debt Servicing
The averaged debt servicing during 1999- 2000 to 2003-04 was above $ 5 billion per
annum. This came down to $ 3 billion in 2005 - 06. Whereas an amount of 2.2 billion were
paid in 2006-07 (July- March) and the rolled over amount declined from $ 4.1 billion in
1999- 2000 to $ 1.1 billion in 2006-07.
Pakistan and International Capital Markets
Pakistan participates in the global capital markets by issuance of bonds both
conventional and Islamic. In 2006 Euro bond of $ 500 million (10 year) and $ 30 million (30
year) were issued. In 2005 Islamic Bond (Sukuk) worth $ 600 million was issued, and was
successful in the Middle East markets. Euro bonds worth $ 750 million at a fixed rate of
6.875 percent were issued in 2007; the issue was “oversubscribed by 7 times”. The
international magazine “Business Week” has declared Pakistan’s KSE 100 Index the best-
performing stock market index in the world in the past few years. In 2005, the stock market
capitalization of listed companies was valued at $45,937 million by the World Bank.
Inflation
The Consumer Price Index (CPI) based inflation was 7.9%, and Sensitive Price
Index (SPI) inflation was 11.1% in 2006-07 (July–April). The food group was largest
component of the CPI and it showed an increase of 10%. The non-food prices grew at a
slower rate and showed average inflation of 6.2 %. The increase in Wholesale Price Index
(WPI) in 2006-07 was lower than of the last year.

39. 17
Figure 6: Inflation rate by group
Foreign Exchange Reserves
At the end of April 2007, the total liquid foreign exchange reserves were $ 13.3738
billion. They were sufficient to meet over 6 months of imports. Last year’s reserves were $
13.137 billion.
Exchange Rate
Exchange rate remained quite stable during 2007. Though, rupee depreciated slightly
(0.7%) from Rs.60.2138 per dollars as at end June 2006 to Rs.60.6684 as of end April 2007.
Fiscal Budget
Fiscal year starts from 1 July and ends at 30 June.

40. 18
Figure 7 & 8: Revenue and expenditure: budget estimate 2006-07
Total Revenues,
1163
Total Expenditure,
1536.6
Total Revenues
Total Expenditure
FBR Revenue, 835
Provincial Tax
Revenues, 44.8
Others, 5.9
Non Tax Revenues,
277.3
Current Expenditure
(Federal &
Provincial), 1106.5
Development
Expenditure ^Net
Lending, 312.3
FBR Revenue
Provincial Tax Revenues
Others
Non Tax Revenues
Current Expenditure (Federal &
Provincial)
Development Expenditure ^Net
Lending
Source: Ministry of Finance (Budget Wing)
Foreign Direct Investment (FDI)
According to different reports, Pakistan is now the most investment-friendly nation
in South Asia. The World Bank (2006) has ranked Pakistan at 74th
position in the world on
ease of doing business that is much ahead of China and India, which are at 93rd
and 134th
respectively. The Foreign Investment (FI) flows were US $ 8.4 billion in 2006-07. Foreign
Direct Investment (FDI) was $5.125 billion in 2006-07, with an increase of 46%.
Privatization proceeds in 2006-07 were $266.4 million. Private portfolio investment was

41. 19
$1,820 billion in 2006-07. The USA was the largest investor in 2006-07 followed by the
UK.
Figure 9: Foreign direct investment inflows ($ billion)
1,524
3,521
5,125
237 335 306 354 442
1,102
682 601 472 470 322 485
0
1,000
2,000
3,000
4,000
5,000
6,000
9
0
/
9
1
9
1
/
9
2
9
2
/
9
3
9
3
/
9
4
9
4
/
9
5
9
5
/
9
6
9
6
/
9
7
9
7
/
9
8
9
8
/
9
9
9
9
/
0
0
0
0
/
0
1
0
1
/
0
2
0
2
/
0
3
0
3
/
0
4
0
4
/
0
5
0
5
/
0
6
0
6
/
0
7
Source: Board of Investment
Figure 10: Top investing countries
Source: Board of Investment
0
200
400
600
800
1000
1200
1400
1600
U
S
A
U
A
E
U
K
N
e
t
h
e
r
l
a
n
d
s
C
h
i
n
a
S
w
i
t
z
e
r
l
a
n
d
S
a
u
d
i
A
r
a
b
i
a
2004-05
2005-06
2006-07

42. 20
The sectors that contributed to this record level of investment flows were telecom,
financial services, oil & gas, power and manufacturing.
Figure 11: Investment inflows by sector
Source: Board of Investment
1.3 International Trade
According to World Trade Report 2007, the strong global macroeconomic scenario
created favorable situation for growth of international trade. The world merchandise exports
grew by 8 percent (real terms) as compare to the last year of 6.5 percent.
The EU market showed a come back both in exports and imports. The US
merchandise export rose by 10.5 percent, the highest growth rate since 1997 and two times
faster than its import growth. China’s merchandise trade expansion was outstanding in 2006.
Beside office and telecom equipment China benefited from the traditional export of clothing.
Asia’s real merchandize exports grew by 13.5 percent, the most out standing amongst all the
regions. China and Japan were the major traders of the region. India and Viet Nam recorded
a strong expansion in trade, in the range of 20 percent to 35 percent in 2006. The imports
and exports of these two countries are showing remarkable growth since 1995, and have
expanded faster than Asia’s total trade.
Europe recorded a growth of 7 percent in merchandise exports. Commonwealth of
Independent States (CIS) showed impressive import and export growth due to strong fuel
0
500
1,000
1,500
2,000
2,500
T
e
l
e
c
o
m
m
u
n
i
c
a
t
i
o
n
M
a
n
u
f
a
c
t
u
r
i
n
g
F
i
n
a
n
c
i
a
l
B
u
s
i
n
e
s
s
O
i
l
&
G
a
s
a
n
d
M
i
n
n
i
n
g
S
e
r
v
i
c
e
s
P
o
w
e
r
2004-05
2005-06
2006-07

43. 21
and metal prices in the world markets. Africa’s merchandise exports increased by 21
percent; faster than its imports. Middle East trade was affected by oil market development
and grew only by 19 percent. Over all exchange rate development had a moderate affect on
the dollar price level of trade goods. However, a weaker yen contributed to a weaker dollar
export prices of Japan, where as Euro and Pound balanced each other during 2005-06.
World merchandise exports in dollar terms were $11.76 trillion, and inflation factored in
about 40 percent of this value change. Commercial services exports rose by 11 percent ($
2.71trillion) in 2006.
Figure 12: Real merchandise trade growth by region 2006 (Annual Percentage Change)
Figure 13: Growth in the volume of world merchandise trade and GDP 1996-2006 (annual
percentage change)

44. 22
Pakistan ranked 65 in global merchandize exports and 50 in imports during 2006. Its
share in global exports and imports is 0.14 and 0.24 percent in 2006, (UNCTAD, Trade
Profile 2007).
1.4 Aid, Debt, Trade
Equitable economic growth means employment and opportunity for all. It holds the
key to long-term development. However, in the prosperous world with an “up beat” growth,
poor countries face tremendous barriers to unleashing their economic potential for
development.
Burdensome debt payments, trade barriers, lack of money and balance of payments
problems are among the key obstacles to achieving sustainable development. Global poverty
will always be unresolved agenda without addressing the issues of aid, debt, and trade
according to NetAid, an initiative of Mercy Corps.
1.4.1 Aid
Bilateral aid is given by a single country and multilateral aid is funded jointly by the
developed nations and is co-coordinated by many different agencies. The UN co-operates
with the independent charities in relief operations and fieldwork. Charities vary considerably
in their approaches, some concentrate in providing money to relieve suffering during
emergencies; others prefer to invest in long- term projects. Aid can be distributed either by
government bodies, or by businesses and voluntary agencies. Mostly aid is given on certain
conditions. A common condition is that the money must be spent on products or services
from the donor country. Aid or Overseas Development Assistance (ODA) is a controversial
area because aid/ grants are largely considered politically motivated.
In the article “Trade not Aid”, Anthea Spitaliotis, mentions the Brandt Report (1980)
by the former German Chancellor, Willy Brandt, which argues for an increase in aid to the
third world, “it is a moral responsibility to solve the problems of the poor countries and
remove the injustices that have prevented their development in the past. Secondly, since the
two are dependent on each other economically, the future prosperity of the developed

45. 23
countries relies on development in the third world… It could be made to work from a
practical point of view, the crucial question though is whether the political willingness exists
to achieve these goals”, the writer argues.
“Bilateral donors, in particular, provide aid for many reasons that includes political,
strategic, commercial and humanitarian. In 1988, 41 percent of external assistance went to
middle and high income countries, largely for political reasons.” (World Development
Report, 1990).
Similar apprehensions have been expressed by James Shikwati, Director of the Inter-
Region Economic Network, Nairobi… Handouts from the rich nations too often fill the
pockets of dictators rather than the bellies of the starving. He further says that…aid gives
untrustworthy leaders the resources with which to engage in violent and repressive acts.
Mengistu (Ethiopia), Pol Pot (Cambodia) and Idi Amin (Uganda) are among the more
infamous recipients of foreign aid. By 1982 Zaire (now Democratic Republic of Congo) had
accumulated a foreign debt of $5 billion. Its president, Mobutu Sese Seko, had accumulated
a personal fortune of $4 billion.
Mr. Shikwati maintains that…aid also undermines the democratic accountability of
government. By offering governments a non-tax source of revenue, it enables them to ignore
the wishes of citizens and reduces their incentive to deliver public services efficiently and
effectively. It also exacerbates cronyism. Why not award valuable contracts to your brother-
in laws more expensive (and less efficient) building company if you know the people can't
complain”?
1.4.2 Debt
Debt retards the economic development. Poor countries with enormous amounts of
debt are deprived economically, therefore, can not meet even the basic needs of their people.
The money flows out of the country for “debt servicing” instead of invested within. One
international aid group remarked that global poverty "of which debt repayments are a major
cause" kills as many people as the tsunami every week, NetAid quotes.

46. 24
Jones, (1989) observes that it is not just that development has been stopped or
retarded in the third world; the hope of development of a better future has been lost. In
psychological terms, it is a greater loss than some of the human tragedies.
“The debt problem which was thought to be temporary has persisted with increasing
force and perversity. It has gone deeper into the social fabric of third world countries and
has become malignant”, (Schatan, 1987).
Richard Jolly of UNICEF at the Conference “Growing out of Debt” 1988 quoted
former President of Tanzania Julius Nyrere, “must we starve our children to pay our debts”.
Jolly observed: “that question has been answered in practice and the answer has been
‘Yes’…Hundreds of thousands of children in the developing world have given their lives to
pay their countries’ debts, and many millions more are still paying the interest with their
malnourished minds and bodies”.
According to Harry L, Freeman of American Express, “Developing countries debt
has become an economic millstone around the necks of both the debtor countries and the
creditor countries to trade with them”.
In Pakistan, the component of consultants in the World Bank funded projects is
between 80 to 90 percent of the total project funding, (Economic Affairs Division).
1.5 Trade Not Aid
The current argument and debate is whether donor loans do lead to development, or
do they shift focus. “But "aid" can not stimulate development. Only trade can do that. Since
the 1960s, over $500 billion has been given to the governments of African countries in the
form of grants and soft loans. Yet the results have been less than spectacular,” Mr. Shikwati
declares. He further maintains that, “the rich world can help - by opening its markets to
textiles, agricultural goods, and other products from the poor world. Trade will lead to
production that will lift the standards of living in poor countries. It could also remove its
agricultural subsidies, which reduce world market prices of these goods, reducing the
amount poor-world producers can obtain for their goods.”

47. 25
The case for trade as the engine for economic development is indisputable. The need
for trade has caused wars, driven colonial domination and helped to create the current
international trade system. The economic expansion of India, Japan, Thailand, Singapore
and China testifies that trade stimulates growth. These countries have developed an
industrial capacity to export that has been instrumental in producing the accelerated growth
of their economies, (Goodafrican).
Reason Magazine in the article Trade, not Aid (Marian Tupy and Christopher Preble)
quotes Uganda's President, Yoweri Museveni stating during his meeting in 2003 with
President Bush, "I don't want aid; I want trade. Aid cannot transform society." The message
has been stressed by the development economists for years!
The “subsidies plus aid” forces taxpayers to pay twice - once to sustain the
inefficient subsidies, and then again to pay for aid programs. William R. Cline, senior fellow
at the Institute for International Economics and the Center for Global Development,
estimated that global trade liberalization would save the developed nations $141 billion a
year and deliver economic benefits worth $87 billion a year to developing countries.
(Reason Magazine)
While lamenting the damage aid has done to Africans: “the poison was aid and its
consequential economic distortion and dependency”, Simon Jenkins of The Times, London,
states that the one help Africa most needs is trade. It needs Western markets open to its
primary produce.
Mary Robinson, former President of Ireland and former United Nations High
Commissioner for Human Rights emphasises the importance of trade for development and
economic growth and says that if poor countries could increase their share of world exports
by just one percent, they could lift 128 million people out of poverty. She observes that,
“We need to bring home the fact that trade is not only a key engine of development; it is also
a crucial factor in economic justice. Trade policies can directly affect people's access to
fundamental rights – to an adequate standard of living, health, food, and education.”

48. 26
In the Doha Round, known as Doha Development Agenda, (DDA) developed
countries were urged to lower agricultural and textile subsidies. But it was politically
difficult, since many domestic farmers and workers depend on these subsidies to make a
living. To sum up, developing countries do not need aid. They need fair access to global
markets where their products are competitive, and sustain economically.
1.6 Rationale of the Study
Previous researches on the challenges and opportunities generally highlight the role
of the government in enhancing the performance of the sector, thus suggest the policy tools
and incentives for making the sector competitive. Many reports have suggested economic
parameters to up lift the sector to face the challenges of the international trade at the cost of
the other sectors.
Hardly any report has touched the dynamics working with in the sector for the last 60
years retarding the growth and expansion of the sector. There was enough room for a
research that narrates this “untold story”, with objective analysis and deep examination
keeping in view the domestic and global dimensions of the issue. Moreover, also suggests
cost effective and practical measures to over come the road blocks for competitive
positioning of the sector in international markets.
1.7 Limitations
Finding relevant and reliable material and data was very difficult. The official data
on the same subject from different sources hardly coincide. Very few reports and books are
available on cotton-textile and apparel sector’s performance after post quota. Available
material mostly is focused on the policy side of the subject, and limited information is
available on the actual performance and “behavior” of the sector and the players that
dominate the sector. More over, material on international trade mostly gives the theories and
models thus limiting the scope of its use in a research thesis for a variety of audience. Lastly,
the researchers always run against the wind in terms of time and research facilities available.

49. 27
References
A. Gledhill, Pakistan (Stevens, London, 1957), Altaf Zafar, Dr, (1983): Pakistani
Entrepreneurs; Their Development, Characteristics and Attitudes, Croom Helm Ltd,
Provident House, Burrell Row, Beckenham, Kent BR3 1AT, Australia
Altaf Zafar, Dr, (1983) : Pakistani Entrepreneurs; Their Development,
Characteristics and Attitudes, Croom Helm Ltd, Provident House, Burrell Row, Beckenham,
Kent BR3 1AT, Australia
Board of Investment, Ministry of Investment (BOI), Government of Pakistan:
http://www.pakboi.gov.pk
CIA: The World Fact Book - Pakistan: https://www.cia.gov/library/ publications/the-
world-factbook/rankorder/2003rank.html
Concluding remarks at the Pakistan Development Forum, 2006 by John Wall, World
Bank Country Director for Pakistan: http://www.worldbank.org/html
Daily Dawn Annual Budget, 2007; June 9, 2007: http://www.dawn.com
Doing Business in 2006: South Asian Countries Pick up Reform Pace says World
Bank Group; Pakistan Among Top 10 Reformers (September12, 2005), http://worldbank.org
Economy of Pakistan: Wikipedia:http://.enwikipedia.org/wiki/ economy_of_pakistan
Good Africa: http://www.goodafrica.net/index.asp. Retrieved on 2007-03-23
Government of Pakistan, Islamabad: http://www.pakistan.gov.pk
Government of Pakistan: Ministry of Commerce: http://www.commerce.gov.pk

50. 28
Hertz, Noreena, (2004): The Debt Threat. Harper Collins Publishers, 2004 NY.
Ishrat Husnain - Economy of Pakistan. Article by the Governor of State Bank of
Pakistan; http://www.bis.org/review/r050217g.pdf
James Shikwati, (2002): http://www.smh.com.au
Jones, S. Griffith, (1988): “Debt Crisis Management in the Early 1980s: Can Lesson
be Learnt”? Development Policy review, Vol.6. 1988
Jones, S. Griffith, (1989): Growing out of Debt: A Conference organized by the
British All parliamentary Group on Overseas Development
Mary Robinson, former President of Ireland: Africa needs friar Trade, not Charity:
Yale Global Online: http://yaleglobal.yale.edu
Net Aid: http://www.mercycorps.org: retrieved on 22- 02-2007
Nicholas Louise, (2007): Comparative Prospects for Growth of Real GDP:2000-
2015:
World Economic Prospects 2007 http://www.euromonitor.com/: Retrieved in 2007
Pakistan – The Economy; Retrieved on 2008-04-12. http://www.mongabay.
com/reference/country_studies/pakistan/ECONOMY.html
Pakistan Economic Survey, (2006-07), Finance Division, Government of Pakistan,
Islamabad
Pakistan Economy Profile 2007: Retrieved on: 2007-12-20: http://www.
indexmundi.com/pakistan/economy_profile.html

51. 29
Pakistan ends 15-year ties with IMF; Daily Times, 7 September 2004, Pakistani
Newspaper Article, 2004. http://www.daliytimes.com.pk
Reason Magazine: Trade, not Aid; http://www.reason.com Retrieved on 2008- 02-25
Richard Jolly, (1988); UNICEF: Growing out of Debt: A Conference organized by
the British All parliamentary Group on Overseas Development.
Schatan, J (1987), World Debt- Who is to pay? English edition, Zed books, London
Simon Jenkins: Do not patronize Africa: give Trade, not Aid:
http://www.thirdworldtraveler.com: Retrieved on 2007-01-28
Telegraph Daily; (newspaper): http://www.telegraph.co.uk: Retrieved on 2007-04-23
Trade not Aid: Time Magazine: http://www.time.com
Trade, not aid, is what Africa needs: the Financial Express; (newspaper): Retrieved
on 2007-12-28: http://www.financialexpress.com
USA History; Trade not aid, (Anthea Spitaliotis): http://www.usahistory.com
World Economy: Wikipedia, the free encyclopedia; http://wikipedia.org: Retrieved
on 2008-03-22
World Development Report, (1990): World Trade Organization, Switzerland, United
Nations Conference on Trade and Development, Publication. New York and Geneva,
World Trade Report, (2007): World Trade Organization, Switzerland, United
Nations Conference on Trade and Development, Publication. New York and Geneva,
WTO 2007: Trade Profiles, (2007): World Trade Organization, Switzerland

52. 30
CHAPTER 2
LITERATURE REVIEW
2.1 Origin of Trade
“The study of international trade and finance is the oldest among the specialties of
economics, conceived in the sixteenth century, a child of Europe’s passion for Spanish gold,
and grew to maturity in the turbulent years that witnessed the emergence of modern nation
states”, (Kenen, 1994).
2.2 Evolution of Trade and Trade Theories
Trade started with the beginning of communication in prehistoric times. Trading was
common between prehistoric people, who bartered goods and services before the innovation
of the modern day currency. Watson, (2005) argues that the history of long-distance trade
and commerce started from circa 150,000 years ago.
It is believed that trade has taken place throughout the human history, and the
exchange of obsidian and flint during the Stone Age was common. Since 3000 BC materials
used for making jewelry were traded with Egypt. There are evidence of long-distance trade
routes in the 3rd millennium BC, which supports that Sumerians in Mesopotamia traded
with the Harappan of the Indus Valley. The Phoenicians were sea traders, and traveled
across the Mediterranean Sea, and as far north as Britain, and established trade colonies the
Greeks called emporia. In the 5th century, trade brought spice to Europe from the Far East,
including China. Trade strengthened the Roman Empire, and Romans established a stable
and secure transportation system that enabled the shipment of trade goods without fear of
piracy.

53. 31
The fall of the Roman Empire brought instability to Western Europe and the trade
network almost collapsed. Some trade did occur. Radhanites and Jewish merchants traded
with the Christians in Europe and the Muslims of the Near East.
The caravan merchants of Central Asia dominated the East-West trade route known
as the Silk Road from the 4th century AD up to the 8th century AD. From the 8th to the
11th century, the trade was dominated by Vikings and Varangians as they sailed from and
to Scandinavia and Russia. Between the 13th and 17th centuries, the Hanseatic League an
alliance of trading cities maintained a trade monopoly over most of Northern Europe and the
Baltic.
In 1498, Vasco da Gama restarted the European spice trade. The spice trade with
Europe was controlled by Islamic powers especially Egypt, prior to his sailing around
Africa. Holland was the centre of free trade and free movement of goods in the 16th century.
Trade in the East Indies was dominated by Portugal in the 16th century. The 17th
and 18th
century’s trade was dominated by the Netherlands and the British respectively. The Spanish
Empire established regular and organized trade links across the Atlantic and the Pacific
Oceans.
Around the 16th century trade became part of national policy. During this period,
European countries gained wealth and precious metals from their colonies and trading
partners. This system of international trade, called “mercantilism”, remained active from the
16th to the 18th centuries. Mercantilism was a sixteenth-century economic philosophy that
upheld that a country's wealth was measured by its assets of gold and silver, (Mahoney,
Trigg, Griffin, & Pustay, 1998).
The philosophy of mercantilist was that one country's gain through international
trade was another country's loss. Hence, mercantilist’s belief was that international
commerce and trade always had a loser. During this period the European empires tried to
increase and maintain the power by gathering gold and silver and simultaneously imposed a
number of trade restrictions and introduced protectionist policies to ensure that they export

54. 32
more than they import to maintain a positive and favorable balance of trade. Mercantilism
was popular with manufactures and their workers. Export-oriented manufacturers favored
mercantilist trade policies, and grant of subsidies and tax rebates, because it stimulated their
sales to foreigners. In the same vein the domestic manufacturers threatened by imports
support mercantilist trade policies, such as imposing tariffs or quotas, because it protected
them from foreign competition, (Mahoney, Trigg, Griffin, & Pustay, 1998).
In the 17th and 18th centuries, the development of nation-states facilitated
international trade to evolve towards its present state. It was realized by the leaders that by
promoting and facilitating trade, they could not only increase their wealth and power, but
also strengthen the power and stability of their respective nations. During this period,
economists began formulating theories of international trade and conceiving of liberalized
trade policies.
Adam Smith (1723-1790) is considered as the founder of theoretical study of
international trade. Smith developed the theory of "absolute advantage” based on doctrines
of the French economist François Quesnay (1694-1774). He argued that with in their limited
natural resources, countries should produce only those products which can be manufactured
more cheaply and efficiently than their trading partners. In other words, the theory of
absolute advantage, suggests that a country should export only those goods and services for
which it is more productive and efficient than other countries, and import those goods and
services for which other countries are better than it is, (Mahoney, Trigg, Griffin, & Pustay,
1998).
Smith attacked the philosophy of mercantilism, and expressed that mercantilism
actually weakens a country. In An Inquiry into the Nature and Causes of the Wealth of
Nations, (1776), Smith argued that a country’s true wealth is measured by the wealth of its
citizens, not just that of its monarch, (Mahoney, Trigg, Griffin, & Pustay, 1998). Smith was
of the view point that a greater division of labor could bring more productivity to
international trade, and therefore, the workers should be allowed to specialize in production
of specific goods.

55. 33
According to Gans, King, & Mankiw (1999), the term absolute advantage is used by
the economists to compare the productivity of one person, firm or nation with that of
another. It means that a producer who requires a smaller quantity of inputs to produce a
good has an absolute advantage in producing that good.
In 1815 English economists Robert Torrens (1780-1864) and David Ricardo (1772-
1823) suggested that countries import and export goods according to the principle of
"comparative advantage." According to this theory no trade would take place if one country
has an absolute advantage over both products. The difference between absolute and
comparative advantage theories is delicate. It suggests that “absolute advantage looks at
absolute productivity differences, comparative advantage looks at relative productivity
differences”, (Mahoney, Trigg, Griffin, & Pustay, 1998).
In 1817, David Ricardo, James Mill and Robert Torrens in the theroy of comparative
advantage demonstrated that free trade would benefit both weak as well as the strong
countries industrially. In Principles of Political Economy and Taxation, Ricardo pointed
out…When an inefficient producer sends the merchandise it produces best to a country able
to produce it more efficiently, both countries benefit. In other words, a country can still
produce and export a product even though it cannot produce the product as cheaply as some
other country, on the premise that this more expensively produced product can fetch more
revenues in a foreign market than in the domestic market.
In the mid 19th century the rise of free trade was essentially based on national
advantage. The rise of “national” economist was a key step in the development of
contemporary international trade. These economists proposed theories aimed at the interests
and benefits of their respective nations. These theories received further acceptance on the
ideas of American politician Alexander Hamilton (1755-1804) and others in the late 18th
and early 19th centuries. Hamilton in a way facilitated the concept of political economy to
develop, which implies active government involvement in economics including international
trade. Hamilton argued that to avoid reliance on importing essential goods, resources and

56. 34
equipments, Congress should enact such policies that would make the United States self-
sufficient.
John Stuart Mill (1806-1873) suggested that in international market a country with
monopoly pricing power could influence the terms of trade through maintaining tariffs, and
getting reciprocity in trade policy. This theory was given by David Ricardo and others
earlier. It was believed that trade surplus would grow following reciprocal, rather than free
trade policies. This was against the philosophy of free trade. Within a few years the infant
industry scenario was presented by Mill. The theory promoted that government had the
"duty" to protect young industry, and to facilitate it to develop to full capacity. The policy
was attractive to many countries on the way to industrialization. Milton Freidman also
supported this thought, and demonstrated that under certain circumstances tariffs might be
beneficial to the host country but not for the world at large.
Keynesianism and Keynesian theory is based on the ideas of 20th century British
economist, John Maynard Keynes. According to this theory actions of individuals and firms
at micro level can affect aggregate macroeconomic out comes, and the economy operates
below its potential in output and growth. Many classical economists had supported Say’s
Law, that supply creates its own demand; however, Keynes maintained that aggregate
demand for goods might not be sufficient in recession, thus could lead to high
unemployment and loss of out put. He argued that government policies should aim at
increasing aggregate demand to enhance economic activity and reduce inflation and
unemployment. The neoclassical macroeconomists of 1960s-1970s had criticized Keynesian
theories.
In the 20th century, the Heckscher-Ohlin theory (H-O model) of international trade
was the most influential version of the comparative advantage theory. Heckscher and Bertil
Ohlin proposed that countries would export goods that they could produce efficiently given
their land, labor, natural resources, and production technology, and import goods they could
not produce efficiently had the same factors. Heckscher and Ohlin believed that countries
could achieve comparative advantage through a combination of factors such as financial

57. 35
resources, natural resources, and production technology. This was in contrast to Ricardo's
version of comparative advantage based on labor productivity. Factor Endowment theory
analyzed the effects that international trade has on the earnings of factors of production in
the two trading nations (Salvatore, 1999). According to Ball McCulloch (1999), the
Heckscher-Ohlin theory suggested that international and interregional differences in
production costs could occur because of the differences in the supply of production factors.
Country similarity theory was formulated by a Swedish economist named Steffan Linder,
(Mahoney, Trig, Griffin, Pustay, 1998). The concept of intra industry trade is important in
country similarity theory. Intra industry trade refers to trade between two countries of goods
produced by the same industry, and it accounts for around 40 per cent of world trade,
(Mahoney, Trig, Griffin, Pustay, 1998). Linder argued that international trade of
manufactured goods between countries having the same stage of economic development and
sharing the similar consumer preferences and choices. The country similarity theory
presents that most trade in manufactured goods should take place between nations with
similar per capita incomes, and that intra industry trade in manufactured goods should be
common, (Mahoney, Trig, Griffin, Pustay, 1998). Staffan Linder's theory holds that if a
company launches a product in response to domestic market demands; it will seek out bound
markets with similar consumer demands and similar per capita income to trade. In other
words, countries import goods from other countries with similar consumer tastes and levels
of income.
The international product life cycle theory provides an instrument for analysis the
effects of product evolution on the global scale. The theory generally applies to established
companies in industrialized countries expanding their product range.
Some economists believe that the principle of comparative advantage has failed to
appreciate a variety of economic and trade phenomena, and also “encourages” lack of
competitiveness. Contemporary explanations of why countries engage in export and import
is based on concepts of competitive advantage, overlapping demand, economies of scale,
and economies of scope. According to the competitive advantage theory of Michael E.
Porter, a country can marvel in trading provided it has the right demand conditions,
competitive environment, production factors, supporting industries, adequate structures, and

58. 36
strategies. In the absence of these conditions for a particular industry or a product, import of
these goods becomes inevitable.
The "new trade theory" assumes that the global economy can support only a limited
number of companies producing similar goods. Hence, the companies to produce certain
goods first will capture a significant share of the market, hold patent rights, lead in
development, therefore, certainly achieve economies of scale and scope. Economies of scale
give countries trade advantages, because companies can charge less for products after
increasing the size of their production facilities, because this increase will enable them to
produce more goods. Economies of scope apply to integration of supplier, manufacture, and
retail activities into a single company. This integration will allow the company to produce
and sell goods at a less cost than individual manufacturers and retailers. Once a company
achieves these advantages, other companies will find it hard to compete against it.
However, Porter argues that companies should be “participating in national markets
with the strongest rivals and most demanding customers, in order to build international
competitiveness”, (Yip, 1995). In the words of Porter (1980)… the pattern of rivalry at home
also has a profound role to play in the process of innovation and the ultimate prospects for
international success.
Finally, the growth of multinational corporations, especially in the 1980s and 1990s,
contributed to the importance and necessity of international trade. With production and
marketing operations in many countries, these corporations account for a significant amount
of the world's sales, assets, and human resources in both home and in host countries. Many
contemporary economists view multinational corporations as the facilitators of efficient
international trade. Multinational corporations also have access to the raw materials and
natural resources of a number of countries, and traditional comparative advantage theories
do not hold ground here. According to Mahoney, the Global Strategic Rivalry theory was
developed in the 1980s as a means to ‘examine the impact on trade flows arising from global
strategic rivalry between Multinational Corporations.’ (Mahoney, et al 1998)

59. 37
2.3 Trade and Development
There is no major disagreement on the role of trade in development. Rather the
fundamental proposition is always supported that international trade and investment are
engines of growth for developing countries through many mechanisms: foreign exchange
earnings, learning, technology transfer, innovation, and productivity improvement.
International trade rules could have a positive effect for market development, for
transparency and for good governance. The perspective on the role of trade in development
reinforced after the Asian crisis of 1999, when the commitment of countries throughout the
world to open trade and investment policies did not reverse.
However, there is also a widespread consensus that an outwardly-oriented trade
policy regime is not sufficient, nor could it be a substitute for sound development policy
which entails a stable macro-economy; investment in education, infrastructure, and
institutions; social policies and environmental protection, with a sufficiently strong national
political consensus on these strategic orientations. This consensus on trade and development
rests on thorough recognizing the positive relationship between openness in trade, finance
and development, yet does not recognize it automatic or exclusive because the development
policy is something much more complex and varied. Indeed, development is a multifaceted
transformation of societies.
It would be wrong to blame trade liberalization or "globalization" for the failure to
achieve development goals (living standards, equity, education, nutrition, and housing) that
could not reasonably be expected from trade alone in the first place, or only with an
excessive optimism about its power for development. There is a need for more access to the
developed countries’ markets, and for more flexibility and for more technical assistance for
the developing countries, (José Manuel Salazar-Xirinachs, 1999).
2.3.1 Why Trade
In order to overcome local scarcity of goods people have traded with each other for
centuries. However, scarcity is not the only reason to engage in international trade. Trade is
also seen as a route through which ideology can be disseminated, for example the USA has

60. 38
used trade as a foreign policy tool and encouraged trade to foster economic links, encourage
international security and promote their “way of life”. Trade is also used to generate
economic and political leverage. There are psychological, cultural and social reasons for
trade. For example, in some societies, trade may be a way of maintaining or reinforcing
social bonds.
Many economists, businesses, and politicians continue to rely on the principle of
comparative advantage and it still influences import theories and policies. Consequently,
countries continue to import products because they can obtain them less expensively abroad.
Moreover, while trade policies, regulations, and theories have undergone numerous changes
over the centuries, a basic motivation for countries to import goods from other countries
remains the same. When certain countries lack goods and resources, they either must import
them or make do without them.
In addition, given the technology, labor costs, government incentives, and subsidies
of different countries, one country may be able to produce goods more efficiently than other
countries. Hence, other countries will seek to import these goods because of price and
perhaps quality advantages. For example, other countries import aircraft from the United
States, while the United States imports clothing from other countries such as India and the
Philippines. Recently trade is viewed as a route to development. Many economists and
politicians have promoted trade as a mean to increase economic growth and wealth.
2.3.2 The Benefits of Trade
More over, there are a number of other benefits the citizens and firms of a country
may enjoy as a result of being able to trade freely with the citizens and firms of another
country such as:
• The benefits of specialization
• The benefits of competition
• The benefit of choice
These tangible benefits are economics of diminishing returns, (Altaf, 2007)

61. 39
Financial benefits aside, there are important spin off in other aspects of the personal and
social life. These intangible benefits are:
• Quality of living
• Fair and just trade
• Equity and trust
There are increasing returns based on these intangibles, (Altaf, 2007)
Exporting
It is the act of producing goods or services in one country and then selling or trading
them abroad. Exporting is usually conducted by the company that manufactures the product
or provides the service, through either direct or indirect channels. Exporting is just one of
several methods that companies use to participate in economies outside of their home
country.
Exporting has played an important role in global trade throughout history. For
example, the United States has always been heavily dependent upon exports. Even before its
Declaration of Independence, the United States relied on exports of cotton, tobacco, and
other agricultural products. The U.S. merchants were penalized by duties and restrictions in
Europe. However, those impediments prompted new trade ties with overseas buyers in
Africa, India, and East Asia, laying the groundwork for a legacy of U.S. trading overseas.
The major goal of any export venture is usually to maximize profits by exploiting
opportunities in foreign markets that usually don't exist in the domestic market. Products
that become obsolete in the local markets can be marketed very successfully abroad. Like
wise, many producers are able to continue to achieve steady sales and profit gains through
cross-border sales though the domestic markets are saturated and mature. By increasing a
product's life span, a manufacturer is able to reduce new product development costs and
capitalize on learned efficiencies related to production, distribution, and marketing.
More over, as manufacturing volume grows, benefits related to economies of scale
may improve the exporter's competitiveness in both foreign and domestic markets. In

62. 40
addition to the profit opportunities available in untapped markets, another major benefit of
exporting is market risk diversification. Through exports, a company can generally lessen its
vulnerability to cyclical economic downswings or regional disturbances by extending its
geographic reach. Geographic diversification also lessens risks affiliated with the seasonality
inherent in some products and increased competition in individual regions.
Importing
Importing is the purchasing side of trade and takes place when one region acquires
goods or services from another region. Seller of the goods or services is the exporter,
whereas the buyer of the goods or services is the importer. Importing is linked with
international trade and generally is distinguished from trade within a specific nation because
importing involves government regulation, whereas interstate importing does not. Countries
lacking in certain resources, or capacity to produce and manufacture, import them from
other sources. In addition, various economic factors facilitate producing goods or offering
services in one region or country, but not in another.
Raw materials such as aluminum, steel, glass and wood, as well as finished products
such as automobiles, appliances, furniture, and clothing are generally on the import lists of
many countries. Countries also import partially finished products, which they in turn finish
and sell domestically or export to other countries.
Country's imports in relation to its gross national product indicate the significance of
imported goods to its economy. Imports generally increase in tandem with exports as
countries become accustomed to international trade and trading with specific partners.
Importing allows countries to achieve higher standards of living by obtaining products and
resources that cannot be obtained domestically.

63. 41
2.4 Globalization: A World Without Borders
Globalization has been defined as the process “by which markets and production in
different countries are becoming increasingly interdependent due to dynamics of trade of
goods and services and the flows of capital and technology,” (OECD,1993).
Globalization is often referred to as a major challenge of worldwide economic
integration based on:
• The international trade liberalization along with capital mobility
• Faster technological process and initiation of the information society
• Deregulation and withdrawal of the state interventions in certain areas of economic
activity
From business perspective, it is a process of worldwide economic integration,
however, from a broader perspective; it portrays the process of cultural diffusion throughout
the world. Where as a result of intermingling of people and various forces like trade,
commerce, travel, customs, spread of language; communication levels have increased
velocity (speed & direction).
In some cases, the term is often used without clear definition. For example, Ramesh
Diwan, Professor of economics at Renssalaer Polytechnic Institute, says, "Globalization has
become a buzz word." He continues, "Like other similar buzz words, such as sustainable
development, it is rarely defined but used to promote arguments favoring business interests."
The globalization factor involves government and international organizations such as
World Trade Organization (WTO) having world wide membership. At one hand, national
governments are changing their outlooks, and on the other hand, the supranational
organizations are coming up with new rules and law, and international bodies for
enforcement of these laws. These agreements and organizations are facilitating economic
integration on a regional and worldwide basis.
There are competing definitions of globalization, some favorable and others not so
approving. Somesh (2004), calls the rising ratio of world trade output as an indicator of

64. 42
globalization. However, along with the rising ratio of trade output, increased foreign
investment, international joint ventures and mergers, inter firm agreements, diminishing
trade barriers, emergence of open international trading system, unilateral and regional trade
liberalization efforts, liberal trade policy instruments, information and communication
technology revolution are major contributors towards globalization. Globalization has
various effects; both positive and negative. It promotes cultural homogeneity. Common
demands, common consumer preferences, and large pools of common information can blend
the cultures and remove differences. It has also changed the role of government and
enhanced competition. The assumption is that increased competition will lift the poor
nations to a higher level of performance. The assumptions occasionally do not hold.
According to Claude Smadja, Managing Director of the World Economic Forum
(WEF), “it is forcing governments to redefine their role at the national level.” Governments
should formulate and implement policies that facilitate economic activity, prevent social and
political instability, and provide citizens with education and skills crucial to function in a
global economy. Smadja further asserts that governments must try to provide a
counterbalance to the negative forces of globalization like insecurity created by speed,
flexibility, and permanent change.
Increased industrialization resulting from economic globalization could lead to
environmental pollution. As world is getting more connected economic problems in one
region can be felt throughout the world, (such as Asian Financial Crisis of 1999). The most
alarming effect is that globalization increases the gap between the rich and the poor.
Globalization has imposed many opportunities and constraints. The challenge of
globalization is not to stop the expansion of global markets but to find prudent and judicious
rules and institutions for stronger and reasoned governance; local, national, regional and
global to preserve the advantages of global markets and competitions. The need is to provide
enough space for human, community and environment resources to ensure that globalization
works for people, (UNDP, 1999).

65. 43
Business firms want to globalize in order to expand their markets, increase sales, and
profits. There is unlimited ability to expand especially if the firms are operating at high
technological and productivity levels. Free trade agreements facilitate these activities and
promote economic globalization. Such agreements vary in scope. Some are bilateral such as
the U.S. - Canada Free Trade Agreement, and others are multilateral and regional such as
North American Free Trade Agreement (NAFTA), the 18-member Asia Pacific Economic
Cooperation Group (APEC), and the European Union (EU).
2.4.1 WTO and the Agreement on Textiles and Clothing
Since 1 January 1995, international textiles and clothing trade has gone through a
fundamental change under the 10-year transitional program called Agreement on Textiles
and Clothing (ATC). WTO Members have committed themselves for the ultimate removal
of quotas to integrate the sector fully into GATT rules. Before this agreement a major
portion of textiles and clothing exports from the developing countries to the industrial
countries was through quotas under a special regime outside GATT rules.
Multi Fiber Arrangement (MFA) 1974 -1994
Up to the end of the Uruguay Round, textile and clothing quotas were negotiated
bilaterally and governed by the rules of the Multi Fiber Arrangement (MFA). Under the
MFA, selective quantitative restrictions were applicable. The Multi Fiber Arrangement was
a major departure from the basic GATT rules and the principle of non-discrimination.
WTO Agreements on Textiles and Clothing (ATC) 1995-2004
The ATC was a transitional instrument, and was built on the following key principles:
• product coverage: yarns, fabrics, made-up textile products and clothing
• progressive integration of textile and clothing products into GATT 1994 rules
• a liberalization process to progressively enhance existing quotas till their removal
by increasing annual growth rates at each stage

66. 44
• a special safeguard mechanism to deal with new cases of “serious damage or
threat” to domestic producers during the transition period
• establishment of a Textiles Monitoring Body (TMB) to supervise the
implementation of the agreement
• some other provisions including rules on circumvention of the quotas, their
administration, treatment of non-MFA restrictions, and commitments undertaken
under the WTO's agreements and procedures
2.5 Regional Trading Arrangement (RTAs)
The rapid growth in the number of regional trade arrangements (RTAs) has led to
concern about the weakening of the multilateral trading system. Modern RTAs have a much
wider network of participants and involve a number of countries at different levels of
economic development. 0ver 190 RTAs are in force and another 60 are operational though
not notified. The total number of RTAs in force might approach 300 by 2005,
(Understanding the WTO, 2003).
Though seems contradictory and violating the WTO principle of equal treatment for
all trading partners (MFN), the RTAs can support the WTO’s multilateral trading system
while allowing the groups of countries to negotiate those rules and commitments which were
not possible multilaterally. Services, intellectual property, environment standards,
investment and competition policies are such issues, which were raised in regional
negotiations and eventually developed into agreements/ topic in the mainstream discussions
of WTO.
GATT’s article 24 allows setting up of the RTAs and says… if a free trade area or
customs union is created, duties and other trade barrier should be reduced or removed on all
sectors of trade in the group. Non members should not find trade with the group any more
restrictive then before the group was set. Article 5 of general agreement on trade in services
encourages the economic integration agreements in services in 1996, the WTO General
Council made a regional Trade Agreement Committee to examine and assess regional
groups and their conformity with WTO rules, (WTO website).