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NAFTA and its sectoral impact on Pakistan textiles and apparel.

The paper was read at NAFTA Seminar held on January 4.5 this year. The Seminar was organised by Pakistan Readymade Garment Manufacturers and Exporters Association in Collaboration with Export Promotion Bureau.

On September 18, 1992, President George Bush submitted the North American Free Trade Agreement (NAFTA) text along with the U.S. Industry Sector Advisory Committees' Reports to the U.S. Congress. Ninety days later, on December 17, 1992, he signed it. Thus ending the first part of the began with a joint statement issued June 10, 1990. The completed document - almost 1,000 pages of text now begins a journey through the U.S. Congress and implementing legislation which may see the NAFTA take effect by January 1, 1994.

Among the many sectors covered by the NAFTA, I will address the one pertaining to textile and apparel trade. The specific pages relating to this area of trade account for over 10 per cent of the total NAFTA text. The current reaction to these pages by importers, retailers, exporters, and the U.S. domestic industry has been one of cautious anticipation. Generally the feeling is that it will provide a more liberal environment for this trade; however, the opportunities permitted and the degree of change can only be the subject of speculation.

The framework for this speculation must involve aperception of the U.S. textile and apparel restraint program.

For over 31 years the United States has vigorously controlled access to its textile and apparel market. It has done so variously, but continuously, through international arrangements such as the "Short Term Arrangement", the "Long Term Arrangement", and their successor document, the Arrangement Regarding International Trade in Textiles, "the MFA".

Currently the U.S. maintains restraints on textile and apparel trade from some 46 countries involving over 70 per cent of the quantity and value of all U.S. textile and apparel imports. For apparel products the coverage is over 82 per cent. Only Western Europe, Canada, and Australia have been spared the imposition of quotas.

There has been minimal relief from these applied quantitative restrictions. Some suppliers have been able to renegotiate their agreement to provide for greater access, or reduce coverage. This is an aim of the Uruguay Round, but as these talks appear stalled, so too does the timing of promised relief.

Other suppliers, Caribbean Basin countries and Mexico, currently enjoy a semblance of greater access to the U.S. market through an agreed Special Regime (Mexico), or through the U.S. guaranteed access level program (GAL). These mechanisms allow these countries to export in greater quantities, or even quota free, those products which normally would be subject to severe quantitative restraints.

Under these mechanisms, apparel trade from the Carribean Basin countries have grown from 450 million SME (8.3 per cent of the U.S. apparel imports)in 1987, to a current annual level of 1.1 billion SME (15.5 per cent of the U.S. apparel imports). Apparel imports from Mexico during this same time period grew from 134 million SME to 258 million SME (2.5 per cent of the U.S. apparel imports to 3.7 per cent). Apparel imports from Pakistan, without these benefits, grew from 76 million SME (1.4 per cent)in 1987 to 124 million (1.8 per cent) for the year ending October 31, 1992.

In addition to the imposition, and maintenance, of quantitative restrains, the U.S. has been very successful in keeping its tariff barriers very high. During the various GATT rounds, while other tariffs were being reduced, the U.S. resisted tabling meaningful cuts on textile and apparel tariffs. Therefore, the average U.S. tariff on fabrics and apparel have been in the 14 to 21 per cent range. The overall, average tariff rate for U.S. imports is only 4 per cent.

There has also been some relief in the application of these tariffs, but it is limited to the required use of fabric cut in the U.S. This tariff relief, know as "Item 807", allows products to be assembled offshore from materials cut in the U.S. and duty rates are applied only on the value added offshore. During the last twelve months (year ending October 31, 1992) over $ 3.7 billion of apparel, 13 per cent of all U.S. apparel imports, entered under this duty preference provision saving hundreds of millions of dollars in duty payments by the importers. Mexico. with all of its labor and its proximity of the U.S. market, accounted for only 21 per cent of this trade. The majority of this trade is supplied by Central American countries and the Carribean Islands. This indicates that factors other than duty rates play an important role in determining the suppliers of apparel to the U.S. market.

These have been small, guarded steps, selectively applied, to enhance the use of U.S. Fabrics with the least amount of disruption, politically or economically, to the U.S. market. During the last five years it does not appear to have been trade diverting, nor unfortunately has it been expanded in scope or application. Perhaps in the NAFTA we will see at least an expansion in scope that can be carried into whatever results may be forthcoming from the Uruguay Round, or in the renegotiation of bilateral agreements with other suppliers.

The major elements in the NAFTA that will work towards improving the trade environment in these products are the phaseing out of tariffs and quotas, and the establishment of a more secure investment environment. The phasing out of tariffs and quotas will directly improve the market access, while the improvements in investment regulations will foster new firms, and the merger and acquisition of existing firms associated with document processing for NAFTA qualifying goods in terms of Customs submissions and record keeping costs. This may be effect smaller companies more than the larger ones who already have the administrative capabilities in place.

Each of the above factors will play a role in any business decisions concerning the increased U.S. sourcing of apparel products from Mexico. The combined assessment of each company involved in this trade will have to be made within the overall U.S. market for apparel. The aggregation of these assessments and the resulting decisions will, I believe, result in increased sourcing of Mexican made apparel for the U.S. market.

In 1990 the U.S. apparel market was $84 billion. Of this the domestic contribution was $62 billion with imports accounting for the remaining $22 billion. Current estimates are that the apparel market will grow by 2 to 3 per cent throughout the 1990's with the domestic contribution increasing by 1 per cent. Thus, by 1996 the U.S. apparel market is expected to be in the range of $100 billion with the domestic contribution accounting for $65.8 billion. The difference, to be made up by imports, would require imports of $34.2 billion, or a 7.7 per cent annual increase from the $22 billion imported 1990.

Using an estimated import growth of 7.7 percent per year from 1990 to 1996 would result in total U.S. apparel imports, in quantity (Square Meter Equivalent), of 9.4 billion SME by 1996. Apparel imports from Mexico averaged 14.3 per cent growth per year from 1989 to date.

Doubling this average annual growth to 28 per cent per year and applying it through 1996 would result in Mexico supplying 700 million SME or 7.5 per cent of the projected U.S. apparel imports.

This projected growth in apparel trade from Merxico will be somewhat inhibited by the quantitative restraints and the possible unavailability of NAFTA "yarn forward" materials. Nonetheless, I would expect apparel trade from Mexico to expand significantly with the introduction of additional yarn spinning operations and the expansion of U.S. fabrics exported to Mexico for use in apparel products. Some of the increased Mexican apparel production will be sold into the Mexican market but, I suspect, a good portion of the increased production will find its way into the U.S. market.

There are no numbers currently available, but it appears evident that the increased production in Mexico may in fact be a shifting of U.S. apparel production from the United States to Mexico. The greater freedom to invest, the availability of relative lower labor costs, the relaxation of quota restriction, and the advantage of duty free entry would have the greatest, immediate attraction to those companies currently producing in the U.S. at higher labor costs. As more spinning and weaving capacity is installed in the United States, and the infrastructure improved in Mexico, the shift of production from the United States to Mexico can be expected to accelerate.

Will this increased production in Mexico have a negative impact on the apparel trade from Pakistan? I think not. One easy reason is that the labor cost disparity is too great to be overcome with duty reductions (7 to 8%). Other reasons are the lack of sufficient infrastructure, low productivity, competition for labor from other industries, and a growing Mexican consumer demand and. None of these are easy to overcome, particularly in the short term.

Will increased sourcing from Mexico have a negative impact on the apparel trade from Pakistan? Again, I think not.

Any shifts in sourcing patterns that are in excess of U.S. increased demand will first be felt by domestic production and Puerto Rican production (5.00/hr wages). Also, shifting some of the GAL (807A) production from the Carribean Basin suppliers would be primary as the fabric is already NAFTA qualifying. This, of course, would depend on economic factors other than ust a reduction in duty rates.

Finally, apparel imports from Hong Kong, Taiwan, Korea and Japan have declined from a 37 per cent share of 29 total U.S. apparel imports in 1988 to a current share of per cent. Their share has been picked up by the ASEANS, Carribean countries, Mexico, and South Asia. This trend, with or without the NAFTA, will continue.

No, Pakistan's future is in ensuring that it continues gaining greater access to the U.S. market through its bilateral agreement, developing trade in non covered products, and working with the international community to bring about the goals and objectives of reducing the continued barriers to this trade.






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Author:Stack, Clinton
Publication:Economic Review
Date:Jan 1, 1993
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