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Reduce Textile Tariffs to Aid Pakistan

Pakistan's textile industry

The devastation caused by flood waters that have submerged twenty percent of Pakistan will leave lasting scars across the embattled nation for years, if not decades to come. Terrorist militants are using the opportunity to launch suicide bomb attacks on soft targets including mosques in an attempt to destabilize the democratic government, and patience is wearing thin among a war-weary public. While the US has given over $150 Million in aid for flood relief, as well as $7.5 Billion in civilian aid via the Kerry-Lugar bill, Pakistan needs more than just a handout. The US should remove tariffs on Pakistani textiles to provide Pakistan sustainable economic growth and political stability.

Sustainable Economic Growth

Waqar Khan, secretary of Pakistan’s Textile Ministry, told the Wall Street Journal earlier this week that,

“Clearly a big crisis is looming on the horizon for the textiles sector, which is the mainstay of the country’s economy. Yarn shortage is inevitable. Market access will greatly mitigate the imminent disaster.”

This isn’t a case of teaching a man to fish. Pakistan knows the textile sector, and provides inexpensive and efficient production that benefits both domestic employment while lowering the price of goods in other countries. This is a case of giving a man access to the pond.

The country’s textile sector directly employs 3.5 million people, accounting for 40% of urban factory jobs. Textile-product exports were $10.3 billion—just over half Pakistan’s total exports—in the last fiscal year. About $3 billion of those goods went to the U.S. and a similar amount to Europe.

But the sector has faced a slump in the past 18 months, due in part to competition from China’s much-larger industry, which uses its size to win big U.S. orders and keep costs down. While China’s textile-goods exports have powered ahead over the past three years, Pakistan’s have stagnated. Some producers, also hurt by the rising cost of raw materials like yarn and by more expensive electricity, have been forced out of business.

Additional global macroeconomic benefits could be reaped by reducing textile tariffs as well. Presently, the primary competitor for Pakistan is China, whose economy is overly dependent on exports, creating an artificial trade imbalance. While many economists call on China to allow the Renminbi to float freely, such a move is politically unlikely in the near future. However, by reducing textile tariffs for Pakistan, the US could create structural changes that level the playing field for Pakistani goods, thereby reducing China’s ability to dominate markets with their ability to operate with massive economies of scale.

Most importantly, though, lowering textile tariffs would allow Pakistan the opportunity to grow its economy naturally, unfettered by artificial constraints imposed from without. Vietnam can serve as an example here. Despite being ruled by a communist party, Vietnam has increased its exports to the US over recent years, growing its economy rapidly. In turn, it has begun to discover consumerism and promises to balance its economy between imports and exports in the long term, providing a reciprocal market for US goods and services.

US Imports from Pakistan and Vietnam, 2000-2009

Political Stability

Whether in main street America or main street Pakistan, politics largely boils down to President Clinton’s famous maxim: “It’s the economy, stupid.” And the devastation of the flooding threatens Pakistan’s already struggling economy.

Coping with the social and economic costs of the catastrophe will strain the government’s finances. The budget deficit was already on track to reach 4.5% of gross domestic product in the fiscal year ending June 30 before the crisis but now could widen to as much as 6% to 7% of GDP, said Mr. Mitra. That’s a grim prospect for a country, which had external debt totaling $55.63 billion as of June 30.

President Asif Ali Zardari’s government has been reaching out to other countries for help. A delegation met with IMF officials Monday in Washington. Donors including the U.K. and the European Union have so far pledged almost $500 million in additional help.

Moody’s is unlikely to upgrade Pakistan’s credit rating in coming months due to the devastation from the floods and other challenges, but the country’s current B3 rating “adequately captures the risk” of the likely economic slowdown and is unlikely to be downgraded further, said Mr. Mitra. A B3 rating is just one notch above the C level, which applies to countries in effective sovereign default, and makes it hard for a country to issue bonds in the international market.

As important as relief aid is, it is structural changes such as tariff reduction that will give Pakistan access to markets where it can compete and provide sustainable growth to the nation’s economy. This will demonstrate that its leaders are effectively promoting Pakistan’s interests in the world community, and quell popular dissatisfaction as people become better able to provide for themselves and their families

Moreover, improving Pakistan’s economy through actual economic growth rather than aid gives Pakistanis an ownership over their own nation that is too often missing in countries that require substantial amounts of foreign aid. Questions surrounding condition-based aid such as those that arose in the debate over the Kerry-Lugar bill and IMF programs would be moot, as Pakistan’s economy would be free to grow naturally. No longer could democratic political leaders be accused of “selling the country for peanuts” by anti-democratic forces.

The unprecedented destruction of Pakistan’s floods combined with continued attacks from extremist militants pose an existential crisis for Pakistan. American aid and generosity, as well as our ability to organize effective international relief is vital. But Pakistan cannot live on aid alone. If we are to truly help our friends in Pakistan, we must use our standing as a global economic power to hold open the door to international markets so that Pakistan can develop its own sovereign economic strength. Then we will truly see democracy and justice in Pakistan.