The Sports Goods Sector in Pakistan - TRTA i

The Footwear Sector in Pakistan— Export performance and potential— Implications of the WTO AgreementsSeptember 2007

SPSSROSWOTTBTTDAPTPRTRIMsTRIPsTRTAUAEWTOSanitary and Phytosanitary MeasuresStatutory Regulatory OrderStrength, Weakness, Opportunity and ThreatTechnical Barriers to TradeTrade Development Authority of Pakistan (formerly Export Promotion Board)Thermo Plastic RubberTrade-Related Investment MeasuresTrade Related Aspects of Intellectual PropertyTrade-Related Technical AssistanceUnited Arab EmiratesWorld Trade Organizationiv

Table of contentsAcknowledgementsAbbreviationsiiiiExecutive summary 1Industry overview 1Trade issues in general 1Recommendations 2Implications of WTO Agreements 21 Background and objectives 51.1 EC TRTA Programme for Pakistan 51.2 Five sector studies 52 Footwear sector in Pakistan 72.1 The sector in general 72.2 Reasons for fluctuations in exports and imports 182.3 Pricing structure of footwear industry 192.4 The YATRA study 252.5 An overview of the footwear trade 253 Implications of the WTO Agreements 493.1 Background 493.2 Information on WTO issues 523.3 Implications of the WTO Trade Agreements 563.4 Trade conditions of Pakistan’s footwear sector 694 Obstacles and shortcomings to export 764.1 Obstacles and shortcomings – exporters’ opinions 764.2 Obstacles and shortcomings – importers’ opinions 805 Export services in Pakistan 815.1 Export service providers 815.2 Export services as they actually are – expressed views 855.3 Export services as they should be – expressed views 865.4 Export services in other countries – some examples 876 Conclusion and recommendations 886.1 Conclusions and recommendations 886.2 The way forward – if we had a million 90v

Executive summaryIndustry overviewPakistan produces annually around 240 million pairs of footwear of which approximately20 million pairs are exported. The industry has had a significant increase in export in recentyears – exports now stand at around US$150 million per year.Pakistan has a large footwear sector, which mostly belongs to the unorganized cottage sector.Craft manufacturers/cobblers cover a large portion of footwear manufacturing in Pakistan andonly around 20% of the sector is organized.There is an immense export potential in the footwear industry of Pakistan, but also manyhindrances. The main obstacle is time-consuming product development, for which new toolsand material are required.The most important need of the industry is to create a long-term policy that can facilitateexporters in overcoming such limitations. Pakistan's share of the global footwear market ofover US$70 billion is around US$150 million only. The region – including India, China,Bangladesh and Viet Nam – is well known for footwear manufacturing, so the major buyerscannot ignore Pakistan. However, the conditions for growth in export require a combination ofproduct development and close cooperation with buyers in order to secure some flexibilityfrom their side.Trade issues in generalThe Government, through the Trade Development Authority of Pakistan (TDAP), providesmarketing and promotional support to the sector by subsidising exporters’ participation in tradefairs and trade delegations. For the fiscal year 2006-07, the Government announced 6% of itsbudget to be spent on research and development (R&D) activities.However, the implementation of government policies is so slow that they lose their impact.Moreover, the Government’s repayment process of duty drawback and various taxes, such assales tax and import duty, is very long and cumbersome. Delays in the repayment of dutydrawback unnecessarily block exporters’ cash flows.The footwear industry in India is growing rapidly. Some key raw materials can be importedfrom India at competitive prices, but the Government of Pakistan has restricted imports ofmaterials from India. The Pakistan Footwear Manufacturers’ Association (PFMA) has severaltimes voiced its concern to the Government to liberalise import conditions, but no attention hasbeen paid to their advice. Generally, the industry feels there is a lack of long-term policy andvision from the Government for the footwear sector of Pakistan.At company level, the most important strength is entrepreneurial commitment; there is a verystrong desire to succeed in all kinds of circumstances. However, most companies and exportersare small and medium-sized enterprises (SMEs). The standard and process of productdevelopment is not very effective or efficient. Among exporters, there is a tendency to copyeach other’s designs and, because of the overlapping product lines of most of the companies,International Trade Centre 1

the interest of buyers has dropped tremendously. Foresight to train and develop humanresources is also lacking because of limited financial resources.RecommendationsIt is proposed that a Footwear Training Institute is established. It should have all relevantfacilities, like R&D, material testing, product testing and human resource development.Relevant parties and cost estimates are mentioned in section 6.2.5 – If we had a million.Duty drawback rate is lower than the import duties paid. The rate must increase immediatelyto 8%.It is highly desirable to exclude footwear raw materials from the negative list of imports fromIndia. It would help in improving competitiveness, speeding up the process of productdevelopment and also increasing product variety.Implications of WTO AgreementsThe implications of the WTO Agreements have been looked at from three angles:• WTO Agreements and their relevance to the sector• Information flows on the WTO issues• Trade conditions for the sector, including threats and opportunities.WTO Agreements relevant to the footwear sectorThe agreement of direct relevance to the footwear sector is GATT 1994. Other agreementshaving high relevance intensity are TRIPs, Technical Barriers to Trade (TBT), Rules of Originand the Agreement on Customs Valuation.Information flows on WTO issuesExporters are not well informed about the WTO Agreements and their implications for theirsector. Very little information on WTO issues – and on where to get information – is offered tothe industry. A multi-organisational initiative is necessary to enhance the quality and easyaccessibility of information – the so-called downward flow of information.The Government of Pakistan regularly provides information on trade statistics to the WTO.However, these statistics are short on coverage, research design, and lack response from theindustry. Companies are generally reluctant to share information about themselves.Information among entrepreneurs on how to reach government authorities or trade bodies isnot even. A more formalised upward flow of information is recommended.WTO Agreements’ implications for trade conditionsExports• Better market access for Pakistan in the industrial countries’ markets.• Reduction in prices and improvement in the quality of inputs.2 International Trade Centre

• Opportunities to intensify penetration in the US, Germany, UK, France, Italian andTurkish markets.• Great potential for increasing exports, but the supply side problems to be tackled.• Pakistan must learn to produce what is liked and required abroad – and at competitiveprices.• Pakistan needs to do intensive research into the needs of foreign markets, includingfashion trends and designs.Imports• Substantial opening of Pakistan’s market, albeit at relatively higher duty.• No serious threat at present (tariff rate at 25% is quite high) but problem is caused bymalpractice of under-invoicing and misdeclaration, as well as smuggling.• Import growth is increasing – a potential threat.International Trade Centre 3

4 International Trade Centre

1 Background and objectives1.1 EC TRTA Programme for PakistanThe International Trade Centre (ITC) is implementing, on behalf of the European Union (EU),a Trade-related Technical Assistance (TRTA) programme in Pakistan. The overall objective ofthe programme is to assist Pakistan to foster its integration into the world economy and,ultimately, to contribute to poverty alleviation through the achievement of trade-relatedconditions for sustained and stable economic growth.More specifically, the programme aims to enhance awareness among government officials, thebusiness sector and civil society about the implications of the World Trade Organization(WTO) Agreements on the economy of the country, and to assist Pakistan in building thenecessary capacity to address issues resulting from its participation in the WTO.1.2 Five sector studiesWithin this framework, the programme has undertaken five studies on sectors selected by theMinistry of Commerce in Pakistan: automotive parts, footwear, furniture, pharmaceuticals andsports goods.The studies have been undertaken by national consultants working in collaboration with therespective business associations, national and international experts and ITC.The studies identify export opportunities and threats in each sector and examine theimplications of the WTO Agreements on these sectors. Specifically they include:• An overview of the sector and its relevance to Pakistan, including production processes,pricing and turnover performance, regulatory environment and export performance.• A summary of other studies, reports, policy papers, strategies, etc developed in recentyears for the sector.• An overview of the sector’s trading performance for key products, including the sector’sglobal trade position, national sector data, imports and exports over the last 5 years, andthe global position of key Pakistani companies.• Identification of the WTO Agreements relevant to the sector and analysis of theirimplications for the sector globally and in Pakistan, both currently and in the future. Thisincludes analysis of changed or new market threats or opportunities arising out of theemerging multilateral trading environment.• An assessment of the availability and accessibility of relevant information on WTO,including the information flows between the Government and the business community.• Identification of the key obstacles or shortcomings for improving the sector’s exportperformance and provision of proposals for improvement or rectification.• An assessment of the current export support services provided by the Government andsuggestions on how these could improve the export performance in the relevant sector.International Trade Centre 5

• Recommendations aimed at individual companies, business associations and relevantgovernment authorities – including some hands-on suggestions in the form of scenarioswith proposed partners and estimates of costs.6 International Trade Centre

2 Footwear sector in Pakistan2.1 The sector in general2.1.1 IntroductionPakistan's position in the global market is very small. Out of the total of around US$58 billion(US$70 billion at FOB) footwear business, Pakistan’s share is around US$150 million only.China is the largest footwear manufacturer and it is presumed that it has a machine capacity toserve at least 80% to 85% of the world footwear needs.Viet Nam’s footwear manufacturing sector is growing rapidly. About a decade ago and evenearlier, when the shift was taking place from Europe, it was viewed that Pakistan could emergeas one of important footwear manufacturing countries. This thinking was supported by the factthat Pakistan has a strong leather base and leather tanning industry. As new investments infootwear were meagre and the existing manufacturing did not grow at successful pace, globalbuyers eventually lost interest. Despite the fact that Pakistan has a big leather tanning industry,most of the tanners have gone into leather garments manufacturing rather than footwearmanufacturing, presumably because investment in leather garments is less capital-intensive andthe technical expertise required not of a vast nature. On the other hand, footwearmanufacturing needs more capital, skills, infrastructure, and the manufacturing process is farmore complicated and intricate as compared to garments manufacturing. Even at those times,few investments, which were made in the footwear sector by various companies, did not turnout to be very successful.Due to the complex nature of business, there were no success stories to follow. Footwear traderemains difficult in Pakistan. This is predominantly because the industry does not haveinternational standard vendors for supplying various components. In addition, it lacks tooling,which is essential and important for quality product development and footwear manufacturing.These components and tooling are in the form of lasts, moulds, soles top of encountermaterials, decorative trims and various other grinderies and chemical products which are usedin footwear manufacturing.Mould manufacturers are practically non-existent. This supporting industry is very important inimproving cost-effectiveness of local manufacturers and in introducing turnaround time fortaking good product to the global market/customer.National sector dataThe national footwear consumption is around 230 million pairs per year corresponding to 1.5pairs per person. This consumption includes low priced sandals and slippers, Poly VinylChloride (P.V.C)-injected footwear and shoes made by village cobblers. Today most of theshoes don’t have leather soles -- they have synthetic soles or non-leather soles. The soles aremade up of plastic based material, e.g. PVC, which is a widely used thermoplastic polymer.International Trade Centre 7

Production capacitySince the data available is not very reliable and most small manufacturers are unregistered, it isalso hard to assess the exact production capacity.In recent times, footwear requirement has also been met by the increasing surge of importedChinese footwear. It is assumed that imported footwear constitutes about 10% of the domesticrequirement.The most reliable source of information/data would be the Federal Bureau of Statistics (FBS),Islamabad.It is unfortunate that no reliable research study on the footwear sector in Pakistan has beenconducted in the past and no credible reports are available.Total employmentThe footwear sector is highly labour-intensive. Even within the mechanised sector, eachmachine needs an operator and a lot of work is still done manually. Several steps in shoemanufacturing still need to be performed manually, e.g. marking operations, lacing, foldingoperations, tread burning operations, etc. In cottage industry, where there is no existence ofmachines, artisans with the help of small shoe making tools perform all the steps involved inshoe manufacture.ProductsThe domestic industry makes all types of shoes except winter boots. Pakistan has a largefootwear sector, which mostly belongs to the cottage/unorganised sector. The local shops aredependant on the unorganised sector for their products.The style of these products is very good. The suspect raw materials used are purchased locallyas well as imported (As the material does not stand any specifications, it is called suspectmaterial). Most of these unorganised manufacturers are so small that their access to suspectraw materials is also limited. As the size of manufacturers and their requirement is small, largemanufacturers do not entertain them. Therefore, off-the-shelf, B-quality material is available inthe local market. Price conscious consumers nonetheless go for B-quality material.It is envisaged that 20% of the footwear sector is organised. Organised sector means capitalintensivefactories or mechanised manufacturing process. However, craftmanufacturers/cobblers do a large percentage of footwear manufacturing in Pakistan.Presently, the use of machinery is on the increase because of the closedown in Europe, whichhas made a lot of equipment available at very cheap prices. Secondly, machinery from china isalso available at very cheap prices. Lots of small entrepreneurs/artisans do not hesitate to useequipment in their manufacturing process.Pakistan exports mainly men’s shoes; both casual and city types made from leather uppers.Men’s sandals, chapals and slippers are sent to Arabian and Middle Eastern countries. Cheapmoccasins are also exported to these regions.8 International Trade Centre

Image of PakistanThe image of Pakistan can be viewed in two perspectives, i.e. the image of the footwearindustry and the image of Pakistan as a country.Image of footwear industryBecause of the small size of the industry, very few investors show interest. The product rangeoffered by the industry to the international market is very limited. Most of the companies havethe same or overlapping product range. Very few players regularly attend internationalfootwear exhibitions.Image of PakistanThe perspective of Pakistan as a whole is not very positive, e.g. law and order situation,occasional incidents of terrorism, protests against the West and other factors portray a verynegative image. The Indian media also highlights all these issues. The foreign missions of theEuropean Union put Pakistan on a negative travel list. Insurance companies are also hesitant tooffer travel insurance for Pakistan. A general perception is that as the living styles of Pakistanisdo not match with the Europeans, a ‘public hostile’ environment is created when a foreignervisits Pakistan. Mostly the perception is wrong. Business visitors are pleasantly surprised at theexisting reality, which is quite the contrary being positive. Efforts are lacking to overcome thisperception both at industry and country level.Production/manufacturing processFirstly, raw materials are purchased. Major raw materials include leather and linings, sole orsoling materials, grinderies, chemicals and components, buckles, threads, ribbons, packagingmaterial, etc. Then these raw materials are sent to the cutting department, where leather is cutinto components according to the shoe pattern. Components are prepared through the processof splitting, skiving, marking and numbering. In the end, quality check is done on thecomponents before sending them to the stitching department. In the stitching department, theworkflow or sequence of operations is arranged according to the upper design. The sequencesof operations involved in the stitching department are stitching, folding, pasting, eyeleting andother operations necessary for completing the upper. At the end of the sewing conveyor, threadcutting, cleaning and quality check take place.To prepare the stitched upper for lasting, various operations are conducted to make the shoeaccording to the customer’s requirements. Moccasins are hand-stitched. Other types of shoesare prepared through back part moulding, toe puff attaching and upper mulling.To make the sole and insole, firstly all the prepared components are assembled on the lastingtrack to complete the shoe. The shoe then goes through the lasting operation, which is a seriesof operations performed to convert the upper into a finished shoe. When the shoe is ready,finishing, cleaning and polishing is done. In the end, it is packed, quality of the shoe is checkedand the shoe is delivered to the finished warehouse.The process flow chart is given below in Figure 2.1. A list of definitions of operations is givenin Annex A.International Trade Centre 9

Figure 2.1 Footwear manufacturing process flow chartCuttingPattern making Upper cutting Splitting Skiving Tappering Stamping Upper markingStitchingDifferent Reforming andstitching Thread clipping Hand stitching back formingoperationsAssemblyHeating forShoe lasting Heel lasting Roughing Cementing of Cementing of reactivating Joining ofupper (first) soles cement after soles withdryingupperStitching of sole Placing inner Re-lasting Heat setting Chilling Cleaning and Spraywith upper socks was polishing applicationBrushing Final operations QC inspection Packingfinishinglike lacing

Table 2.1 Activity flow for manufacturing of export goodsNo. Activity Information Input required Source Timeinvolved1. Productdevelopment2. Presentation tocustomers andif positivereaction,customer salesmanasks forsamples3. • Receipt oforders• Salesconfirmation• Samples forlab testsandinspectioncompanies4. Planning ofraw materialand newtooling onreceipt oforders5. Issuance ofpurchaseorders andcontracts6. Receipt of rawmaterials7. Subject to OKreceipt of labtests, start ofproduction• Designdevelopmentprovided bycustomer• Windows inEurope andobtain samplesto copy• Trademagazines andtrade fair• Competitors• Requested bycustomersobtained byexhibiting intrade fair• Individual visitsand meetings• Email/photographs• On order• Emails, faxesand couriers• Customer ordersheets• Customermanuals• Letter of CreditTest of rawmaterials bycustomersuggested labs,mostly in HongKong and India forECO friendlymaterialsPattern making, newtooling, e.g., lasts,soles, moulds,leathers andaccessories• Trade fair inItaly, Portugal,Spain, HongKong, China,India, etc.• Soles factories• Mould factories• TanneriesSend by courierslike DHL, UPS,TNT, FederalExpress8-10weeks% ofcost3.52 weeks 1.25Customer Customer *Min. 6weeksrequiredPerforma Invoice tocustomer foropening L/C forimportLocal vendor andoverseas suppliersfor importedmaterials.SGS, CTC mostlyin Hong Kong orIndia2 weeksLeadtime 8weeks1.252 weeks 1.252-3weeksfor oneshipmentInternational Trade Centre 11

No. Activity Information Input required Source Timeinvolved8. Inspection offinished/packed order9. Alldevelopmentactivity (1 – 8)FactoryVisual inspectionby independentinspectioncompaniesFinal product test ofmaterials andproductsTime involved fromnew developmentto ex-factory’% ofcost1 day 1.2528weeksTotal7.25* = Minimum 6 weeks are required to deliver the order for each size. Two weeks are required to deliversalesmen sample and sending sample for lab test or order confirmation samples if tooling is available.Source: PFMAFigure 2.2 Share of production costs for leather shoe with rubber/TPR soleOverheads10%R&D5%Return10%Leather40%Wages /salaries11%Othermaterials10%Packaging3%Sole11%Source: PFMATrade structureTrade or distribution channels may be described as the "paths of goods - and title to thesegoods - followed from manufacturer to consumer". As goods move from manufacturer toconsumer, they may have to pass through various intermediaries. The characteristics of thefootwear trade channels are discussed below.Trade channelsA wide range of market factors affects the structural characteristics of the footwear tradechannels. The demand for footwear is growing and it is highly unpredictable and changingrapidly due to fashion-related and seasonal fluctuations. Furthermore, the range of products isvery diversified (by gender, age, lifestyle, usage etc., each with different sizes and colours)12 International Trade Centre

which implies that the intermediaries need to have great flexibility to constantly adapt theirrange of offer.Figure 2.3 Trade and distribution channels for footwear in the EUConsumersIndependentfootwearretailersFootwearmultiplesChains ofstorescompanyownedChain ofdepartmentstoresSuper/hypermarketsMail ordercompaniesE - tailorsImporters /wholesalersAgentsBuying groupsImportingmanufacturersFootwear manufacturersThe above figure shows the basic relationships between the manufacturers, importingmanufacturers, importers/wholesalers, agents and retailers, whether or not organised intobuying or selling groups. Depending on its position in the market, the functions of aparticular distribution organisation will be linked with up- or downstream organisations withthe same kind of specialisation. It is also possible for a given organisation to take over (someof) the functions of the latter, in order to improve competitiveness (vertical integration). Forinstance, manufacturers, agents and retailer organisations, like departmental stores, may alsofunction as importers/wholesalers. Each of these groups has a different approach tobusiness and to the market, with its own specific interpretation of the marketing mix.It is essential for the potential exporter to know into which product/market combination hisproducts fit (or "which kind of business he is in") as well as be familiar with the marketing anddistribution characteristics of these product/market combinations. These may differsignificantly from combination to combination.International Trade Centre 13

Table 2.2 Price trade structureRaw materials 70%Production price. including labour,administrative and overhead costs12%Selling costs 8%Returns/margins 5.5%Duty drawbacks Time involved inrealization of duty drawbacksResearch and development refundsSales tax refundsSource: PFMA4.5% Duty drawback refunds realized with6–8 weeks6% This is a new refund so far not effected15% Sales tax refunds are not realized forabout 7 monthsAt times costs/selling prices by part-time exporters are over invoiced to claim higher dutydrawback and sales tax refunds.Intermediaries in the footwear marketDifferent sales intermediaries have their place between producers in export countries andconsumers in European Union countries, for instance.Importers/wholesalersThe role of importers/wholesalers is gaining importance as the traditionally strong Europeanfootwear industry is losing ground to other, mainly Asian, countries, due to the highproduction cost.Most importers/wholesalers cater to the independent footwear retailers as well as to thedepartment stores, mail-order companies, selling and buying organisations and, to a lesserdegree, to footwear multiples. The wholesaler purchases from manufacturers in and outside theEU and holds stock at their own risk. The mark-up of wholesalers is approximately 20-30%.The fact that many independent retailers as well as purchasing combinations and multiplestores are becoming more cautious about pre-ordering, preferring to sell from stock, isreinforcing the position of the wholesaler. On the other hand, large retail companies areincreasingly purchasing abroad, thereby bypassing the intermediaries.The choice of whether to sell directly to a wholesaler or through an agent depends on the typeof supplier organisation concerned and its product/market combinations. All the factorsrelating to pricing, collection forming, sampling, fashion trends, delivery times, deliveryfrequency, product quality, exclusiveness, labels, packaging and promotion may play a role inthis respect. Mainly products like slippers, roped soles footwear and items with textile uppersare traded through the wholesale channel, but also leather and sports footwear.Importing manufacturersManufacturing companies in importing countries play a vital role in the distribution system.Most footwear manufacturers wholesale their own goods to retailers and some even14 International Trade Centre

function as retailers as well. Manufacturers with their own stores are, e.g. C and J Clark Ltdin the UK, Groupe Eram in France and Bata in the Czech Republic. C and J Clark Ltd is one ofthe largest footwear producers, selling its footwear through its 550 Clarks, K Shoes and RavelFascias stores. Groupe Eram is France's leading footwear producer and second retailer.According to Euromonitor, Eram has nine factories in the Maine et Loire region, as wellas one factory in Spain and one in Portugal. The Czech company Bata, a world leaderwhen it comes to producing footwear, is also an important retailer, operating through its ownstores. Like many EU producers, these producers have moved production (or part of it) abroadto remain competitive.Footwear producers generally sell their products (mainly brands) themselves and therefore theyhave a direct relationship with the distribution network. According to the importance of thedistributor and the size of the company, it is the sales manager (or the managing director) orthe sales representative of a region empowered by the manufacturer, who ensures businessdealings between production and distribution.An increasing number of manufacturers of branded clothing have added footwear to theirrange: for instance, Tommy Hilfiger, Ralph Lauren, Marco Polo, Esprit, Mexx, Hugo Boss,Jackpot, Cottonfield, and More and More.Importing retailersThe bigger retail organisations (multiples with more than 20 outlets, department and varietystores, buying organisations, mail-order houses) do their own importing.Buying groupsThe role of buying groups is very important in the footwear market. Buying groups areindividual dealers/wholesalers/retailers that join and cooperate as a single buying andmarketing force. Membership of such a group by an individual company offers the opportunityto source around 50-90% of its footwear requirements, depending on the buying group, at aconsiderable discount. By becoming a member of such an organisation, the individual retaileraims to reduce his costs. The original function of the buying groups is, therefore, to reducecosts by centralising buying and logistics. However, participating in a buying group caninvolve a restriction of choice, if the group aims at maximising the volume of orders placedwith producers.One of the biggest buying groups in the world is ANWR, a merger of Ariston and Nord WestRing. ANWR combines the purchasing for 2,000 members, which have more than 4,200outlets and a combined turnover of € 2.4 billion. The buying groups are particularly strong inthe German and Dutch footwear markets.AgentsSelling agentA selling agent is an intermediary who brings into contact a manufacturer and a buyer, covers ageographical territory and takes commission from the manufacturer. He/she is a wholesalerrepresentative of the manufacturer.International Trade Centre 15

WholesalerIs an importer/stockist who imports, completes all the import and custom formalities in his/herimporting country and sells to various retailers, retail organisations, independent retailer or aretail chain in his own country. A wholesaler may be a contact through the sales agent or canalso be a direct customer of the factoryBuying agentA buying agent is like a buying house and is usually based in the country or in the region of theexporter. He/she represents the buyer’s interest and takes commission from the buyer forrepresenting the buyer. The function of a buying agent is to introduce the buyer to variousfactories for a kind of product and get the best product at the best price for the buyer. In mostof the cases, the buying agent administers the shipment and gives all the logistic informationabout shipments to the buyer.Sales agentThe sales agent is an independent intermediary between the (foreign) producer and the retaileror retail organisation, receiving a commission from the former. The agent (or salesrepresentative) covers a limited geographical area. The level of commission depends on anumber of factors, including the turnover rate of the product concerned, but it averages anestimated 6-10% of turnover. Most agents represent more than one producer, althoughcompetition is avoided. More and more agents are starting to sell from stock, to meet theirclients' short-term demands. Stock is often held on a consignment basis. If the agent builds uphis own stock, he is in fact functioning as a wholesaler. The role of agents as described above,they are often used as selling agents. They operate mainly in the segments of high price/qualityand in the middle/high price, classical and branded fashion footwear. Another type of agent isthe so-called buying agent located in the supplying country, settles business on the instructionsof his principals, mainly retail organisations and works on a commission basis too.Contacts with sales intermediaries can be made in several ways, such as consulting traderepresentatives' associations, chambers of commerce, fashion centres, trade publications, tradedirectories, etc.2.1.2 Availability, quality and price of raw materialsIn the last two to three years, the price of leather has gone up and there is a persistent shortageas well. During the October 2005 earthquake, the footwear sector suffered a loss of livestockand cattle, which was not reported, but the following season experienced a further raw materialshortage and pressure on prices. Likewise, in the case of finished shoe production, the costs ofinputs for all raw materials are going up, e.g. electricity, wages, local tariffs and federalgovernment’s taxes, while the quality available is of medium grade. However, our qualitystandards meet international specifications, but the feel of finished product lacks far behind. Asthere exists an upward pressure on raw material, the end consumer is always pressurising forprice discounts. Therefore, profitability is under a constant pressure.Furthermore, it must be noted that petrochemical prices have increased very steeply in the lastfew years, i.e. all chemicals and soling material have also become very expensive.16 International Trade Centre

Generally, leather of certain types is available but footwear manufacturing remains highlyimport-based. All the soling material/soles, chemicals and other important raw materials usedin footwear manufacturing have to be predominantly imported.2.1.3 Other production inputsLocal and imported technologyFor shoe manufacturing, a lot of machinery is involved at all stages of the production process.In the cutting stage, mostly imported machinery is used. In the stitching stage, cut componentsare stitched to make uppers. Local machines are used but most companies use imported ones.For the lasting process, at times local machinery is used. The lasting procedure of assemblingupper and sole is the most expensive area for using machines. For bottom component making,local machinery is used.Cutting and stitching account for 20% of the technology cost, lasting 45-60% and sole making,moulds and bottom component making 20-35% of the cost.Very basic technology, i.e. only 5-7%, is available locally in satisfactory quality. Theremaining technology has to be imported. Quality-wise this technology is excellent.Table 2.3 Technology costs and sourceProcess Cost of machinery Origin of machineryCutting 10% lowStitching 10% lowLasting 60% highSole andbottomcomponentmakingSource: PFMA20% medium to highMost footwear manufacturing technology isimport-based. Italian manufacturers are thelargest suppliers. Due to an upsurge inChinese footwear manufacturing, one can nowsource shoes from the far East, e.g. China,Taiwan, Korea, etc. With a lot of closedowns inEurope, goods bargains are available forsecond hand machines. Some basicfabricated machines are available which attimes can be adapted.Packaging materialGood quality packaging material is available locally at a reasonable price. Part of packagingmaterial is labelling which is very important, i.e. bar codes, pricing, customer’s brands,security chip label (imported), etc. Mostly, the client sends these things or asks the factory tocontact its recommended supplier to get the labels made.Labour force and salariesSkilled labour is not available locally. There are no training institutes to train the talentedworkforce. On average, monthly salary in the organised footwear sector is approximatelyUS$100. However, the minimum wage fixed by the Government is PKR 4,000/month(ca. US$70). The US$100 paid to the employer includes benefits like EOBI and SocialSecurity. Most companies also additionally pay provident fund or gratuity, and sometimesInternational Trade Centre 17

oth. The employees also enjoy 14 days casual leave and 10 days sick leave. If an employeedoes not avail of the entitled leave, he or she is also rewarded by receiving a payment for theuntaken leave.Skilled workers in the footwear sector can earn as much as US$200 or more per month duringpeak production periods.The footwear sector is a good paymaster and an equal opportunity employer. Women haveproved to be useful workers in stitching departments and earn the same wages as their malecolleagues. At times, their professionalism and efficiency levels are even better.2.1.4 Growth in the sectorFootwear exports have shown constant average growth of 25% annually in the last five years.As the footwear industry is very small and has a high degree of dependence on imported rawmaterials, this exceptionally good growth can give the wrong impression and needs to beviewed with caution. Part-time and dubious exporters often over-invoice to claim unjustifiedrefunds from the Government. Of the total footwear exports from Pakistan, only 40% aredestined to Europe and a large percentage is directed towards the Gulf States. The possibilityof preparing over-invoiced documents for export to Gulf States is quite huge.However, the growth prospects still seem positive. The footwear industry has a good name inEurope. Pakistan’s products in the lower to middle range are well received. The country isrecognised for its leather. With recent anti-dumping on China and Viet Nam and with theannouncement in 2006 of 6% R&D, the Trade Policy provides a good platform for thefootwear sector.2.2 Reasons for fluctuations in exports and imports2.2.1 Reasons for fluctuations in exportsExports in the last five years showed an increase. As most of the big shoe manufacturersstarted importing shoes from China and Far East countries, small exporters started to move out.Before 9/11 in New York in 2001, the import duty was 4.5%. After that, the import duty wasreduced to 0% for three years due to the Anti-Narcotics Act. While India at that time waspaying 4.5% import duty, Pakistan had an edge over India. Exports are only in documents andfalse invoicing is done very frequently, to claim duty drawback and sales tax.After three years, the European Union did not accept Pakistan’s request to keep the duty rate at0%. Unfortunately, the 4.5% duty was imposed again on Pakistani footwear manufacturers.Bangladesh and Sri Lanka now have preferential status, i.e. 0% duty on imports. TheBangladeshi market is growing very fast. Many big European companies have entered theBangladeshi and Sri Lankan markets as buyers and their goods have a better image thanPakistan’s.In Europe anti-dumping was imposed on Chinese and Vietnamese products in March-April2006 from 11% to 17% on leather/synthetic footwear. China was the largest supplier to theEuropean Union, and 17% was a huge duty.18 International Trade Centre

Another big opportunity lies for Pakistan, as some importers now want to shift part of theirbuying to other countries. Nevertheless, there are many hurdles that need to be addressed.PFMA is asking the Government to give 8.5% R&D of the FOB value to the footwear industryso that exports can grow from around US$150 million to US$500 million in the next fiveyears. The contribution is currently 6%.The following steps should be taken to improve footwear exports:• The R&D amount to be made available to exporters for better product development.• Establish material testing labs, which have affiliation with known internationallaboratories.• Establish a footwear institute that can provide direction, technical support and otherassistance to the factories.• Create a conducive environment to encourage investment in manufacturing of footwearlasts, moulds and soles.• Sponsor international training of technicians in footwear factories.2.2.2 Reasons for fluctuations in importsIn the last five years, imports have increased. Reasons for this increase are as follows:• From China, large quantities of synthetic shoes were imported in the last three to fouryears. These shoes are stylish and cheap. FOB prices are low. They are under-invoicedand misdeclared, although the import duty is 25%. This has drastically hurt localmanufacturing.• Big retailers like Bata and Servis started importing massively.• Smuggling is a common practice.2.3 Pricing structure of footwear industry2.3.1 Pricing structureTable 2.4 Average unit value in US$ (FOB Pakistan), 2000-2005Unit 2000–01 2001–02 2002–03 2003-04 2004-05Total footwear 5.55 5.92 6.46 7.19 7.36Leather footwear 6.79 7.53 8.76 8.89 9.64Canvas footwear 1.57 1.64 1.99 2.26 2.32Other footwear 3.49 4.32 3.12 3.78 5.01Source: PFMABefore 9/11 the conversion rate was PKR 64/US$1. Immediately after 9/11, it dropped to PKR58/US$1.International Trade Centre 19

Duty drawback rates at 9/11 in 2001 were at 11%. These rates were slashed to 6% in mid-2006; the duty drawbacks today are at 4.5% (leather).2.3.2 Rules and regulations affecting the sectorMaterial testingThe rules and regulations regarding the exports of footwear are increasingly getting difficult. Alot of stress is laid on the requirements of material testing. Almost all European customerswant that materials should be free from prohibitive and adhesive substances. They haveidentified some adhesive substances, which Pakistani exporters have to take into account.Before production, companies have to send raw materials to the designated laboratories,identified by the international client, e.g. in China and Hong Kong. These laboratories are alsopresent in EU countries.Product testingAfter the order gets complete, the finished product has to pass through certain tests, which areagain specified by the client, e.g. with SGS, BV and Qualitests. The companies doing theproduct tests are international as well as local. These are third-party inspection companiesappointed by the customer. Their job is to come to exporter’s factories, conduct visualinspections and check the quality of packed products. Product quality should be according tothe sample given by the client. The product should have neat and clean branding andpackaging, and labelling should also be as per the customer’s requirements. Shoes must bepacked in cartons with assortment according to the client’s need.Lab testingThe laboratory testing of the products is done against internationally specified standards.Performance of the shoe is checked, i.e. whether it is showing wrinkles or not,thickness/elasticity of leather is fine, etc. These tests take place through designatedlaboratories, as specified by the client.On receipt of lab reportsThe customer’s logistic department allows the producer to give shipment to a designatedfreight forwarder, based on the laboratory report from the inspection company.A small importer would not make the exporter go through such extensive tests. However, hewould require a certificate from the manufacturer to export.Social auditsAccording to social and moral ethics, at local and international level, industrialproduction/management consultants inspect and check whether companies pay wagesaccording to the labour laws. They also determine whether labourers are working according tothe number of hours specified in the labour law, e.g. an industrial worker cannot work morethan 45 hours in a week. If he/she is working more than 45 hours, the company must pay himor her overtime, i.e. 75% of the pay. They cannot work on Sundays. Amongst other aspects20 International Trade Centre

inspected by the consultants, it is also seen whether the factory has a trade union, do theemployees have freedom of speech, what is the cleanliness level in the factory, is the factorywell lit, does the factory have large corridors, what is the standard of family quarters, areworkers getting standard food, etc.Technical auditsThe consultants ensure whether companies have enough machines, appropriate work force,breakdowns, health and safety conditions, frequency of use of inflammable substances, etc.Some clients are very specific as to how, for example, a broken needle gets disposed off, toensure it was not just chucked away particularly during shoe processing. After inspection, theconsultants give the company a score ranging from 1-10 (10 being the highest score). Everycompany has its own pre-defined ideal score. If the company is given a low score, then theconsultant suggests recommendations to the company to improve the score by adopting certainmethods in a specific period. If the company meets all the suggestions, the consultants referbuyers to contact that company. Small customers normally do not go for technical audits.Rules and regulations related to importsImport against indemnity. There are certain raw materials available in India, but for politicalreasons, Pakistan cannot import from India. European and Chinese raw materials are mostlyused. The Footwear Association feels that companies should get permission to import rawmaterials from India as well.Shoes should not be made from the skin of endangered species. Sometimes the buyer or thebuyer’s country requires certification for each shipment. For imported machinery, somecompanies also do inspection by a third party before shipment comes to Pakistan.2.3.3 Non-tariff barriersQuality and standard for footwearThere is no European Union standard for footwear other than for safety footwear. Most of theimporters (manufacturers, wholesalers, retail organisations, etc.) work with minimumrequirements. Despite EU harmonisation, individual markets have different requirementsregarding quality, materials, sizes, colours, etc. In this respect, they have formulated andstipulated minimum quality requirements, relating to both materials and make. A great numberof tests can be used to test if the applied materials (leather, textiles, etc.) meet the standardsrequired by the customers. Ground properties common to any leathers concern mechanicalstrength-tests, like tensile strength and, more importantly, tear strength. Methods of testing(excluding footwear for professional use) are mainly based on European norms (EN) ornational standards, and otherwise on ISO standards.Many countries have their own system of test methods as specified/used by their respectivestandardisation organisations: DIN in Germany, NEN in the Netherlands, BS in the UKand AFNOR in France. The CEN (European Committee for Standardisation) and ISO(International Organisation for Standardisation) are drawing up business-to-businessstandards, enabling footwear manufacturers to pursue a "total quality" policy if they so wish.CEN/TC 309 is preparing to standardise test methods, terminology and performanceInternational Trade Centre 21

equirements for the components of footwear; test methods and terminology for the wholeshoe; and the environmental aspects of footwear. These standards concern the end use offootwear. ISO/TC 216 is working on extending the CEN/TC 309 Standardisation worldwide.Its work excludes footwear for professional use (already covered by ISO/TC 94) and the sizingsystem designation and marking for boots and shoes (dealt with by ISO/TC 137).In the children's footwear sector, the European industry works with support from medicaland scientific circles on the development of consumer information to identify goodqualitychildren's shoes, in order to avoid health problems.Trade-related environmental, social, health and safety issuesThe following paragraphs concerning environmental, social, health and safety issues arederived from Access Guide, CBI's on-line database on non-tariff trade barriers atwww.cbi.nl/accessguide.Product legislationNow the most important environmental and health issue in the footwear trade is productlegislation. EU product legislation on environmental and consumer health and safety issues iscompulsory, therefore of the utmost importance. For example, legal requirements ondangerous substances such as certain Azo dyes splitting off carcinogenic amines. In theAccess Guide, an analysis of all necessary EU requirements, applicable in all EUcountries, includes Azo dyes in footwear, nickel, cadmium, PCB/PCT and asbestos. Inaddition, legislative requirements in Germany (Azo dyes, formaldehyde, PCP, chromium,disperse dyes, dioxins and furans) and The Netherlands (azo dyes, formaldehyde intextiles with skin contact, PCP) are outlined when they are additional to the EU legislation.These two countries are highlighted because they are relatively pro-active in their legislation.However, one thing important to mention here is that this does not imply there is noadditional relevant legislation in other EU countries.Most of the EU legislation mentioned is directly applicable to foreign firms supplying productsto a European country, for instance through their own foreign sales outlet. However, productsare often put on the market indirectly, through importers. In most cases, this makes theimporter responsible for the product. Importers might therefore encourage or even forceforeign suppliers to meet certain standards, for example through legally binding guarantees.All the above-mentioned product legislation applies to Pakistan manufacturing.Social requirements (labels, codes and management systems)Besides the legal requirements imposed by their own governments, exporters might beconfronted with social requirements that are requested by EU buyers. More and morecompanies have laid down minimum standards in the so-called codes of conduct, or use labelsand management systems to guarantee fair labour conditions. These social requirements aregaining importance in European markets and are becoming a precondition for internationaltrade.In the Access Guide, the most important requirements, including an indication of the marketimpacts, can also be found by typing in the keyword search such as international social22 International Trade Centre

66standards for textile and garments; ILO Conventions; SA8000 (International socialmanagement system).Occupational health and safety (OHS)Standards and methods have been developed because of the growing concern in Europe aboutthe local social conditions in which products are manufactured. OHS or labourconditions are an important issue when looking at the social standards that are more and morerequired for EU markets, especially in leather, occupational health and safety. Moreinformation can be found in the Access Guide.Environmental and consumer health and safety requirements (ESP, labels, codesand management systems)The environmental impact of leather, rubber and textile production is considerable.Environmental criteria are (among others) fire retardants, pigments and heavy metals in thevarious materials used to manufacture footwear. Several measures can be taken to reduce thisenvironmental impact. Environmentally sound production (ESP) measures in the productionprocess are not legally compulsory, as is EU product legislation, but you might be confrontedwith these requirements if they are requested by EU buyers. The environmental effects ofleather can be limited by specifying criteria for chromium emissions to water, emission oforganic solvents (e.g. with water-based finishes) and emission of wastewater (via a biologicalwater treatment plant). This also applies to the criteria with regard to the emission of organicsolvents, bleaching with chlorine-containing agents, treatment of the wastewater for textile andplastic leg and lining materials used. Environmental criteria can also be specified forplastic sole materials and rubber. There are many instruments, which are used like labels,hallmarks, management systems and codes of conduct. The number of ecolabels in thefootwear sector is limited and some of them have only a small market impact. Detailedinformation on these requirements can be found in the Access Guide.Packaging, size marking and labellingPackagingCare must be given to the packaging of products if one intends to export to the EU countries.It is obvious that packaging must be travel-resistant. As required, products should also beprotected against the elements, changes of temperature, rough handling and theft. Besides thesebasic issues, some importers may have specific demands concerning packaging, likeinformation concerning the order printed on the boxes (order number, box number, namedepartment or contact person etc.).For environmental reasons packaging made from materials like PVC is less popular withconsumers and in some cases is or will be forbidden by governments. Exporters in developingcountries should be prepared to discuss this issue with potential clients and should anticipatethe cost of special packaging in their selling price, if required.The European Directive on Packaging and Packaging Waste (94/62/EC) establishesoverall legislation for the treatment of packaging waste, which consists of quantitativeobjectives to be achieved by each of the EU member states. The member states haveresponsibility for translating the directive into national legislation.International Trade Centre 23

It is becoming increasingly difficult and expensive to dispose off waste in Europe. In principle,the importer is held responsible for disposal of the packaging waste for all goods from outsidethe European Union. It is therefore crucial, when planning exports to the EU, to take thepackaging of your products (both sales packaging and transport packaging) into consideration.To fulfil the requirements of the target market, good communication with the importer aboutpackaging is necessary. Leather shoes are packed in individual boxes per pair and 12 to 18pairs in a carton, but cheaper plastic and textile shoes may be packed in plastic bags or in bulk.Here too, importers will most likely specify their packaging requirements.Size markingThe International Organization for Standardization (ISO) published in 1994 standardsconcerning the Mondopoint shoe sizing system, covering length and width grading and themethod of marking. However, the market has not adopted this size system. Two different sizesystems for footwear are used in the European Union in general, sometimes in combination:the English size system and the (mainly) French or (continental) European sizing system. Ingeneral, single unit sizes are demanded for textile and plastic shoes, whereas, leather andsynthetic leather must also be made in half sizes. The normal size range for women’s shoes is36 to 41 and for men's shoes 40 to 45. Width sizes are given in capitals A to K, of which A issmaller than K and G represents the standard width size. Differing widths are rarely offered,except by more expensive European brands and by manufacturers of children's shoes.Importers purchase a minimum of 12 to 18 pairs of shoes per model. The size assortment foran order of 12 pairs (the so-called Pirmazenser size range) is given in Table 2.5.Table 2.5 Overview of the Pirmazenser size rangeNumber of pairsLadies’ sizes 36 36.5 37 37.5 38 38.5 39 39.5 40 40.5 41Men’s sizes 40 40.5 41 41.5 42 42.5 43 43.5 44 44.5 45Ladies full sizes 1 2 3 3 2Ladies half sizes 1 1 1 2 2 2 1 1 1Men’s full sizes 1 2 3 3 2Men’s half sizes 1 1 2 2 2 1 1 1The footwear sector operates with three dominating size markings in USA, Europe and theUK. For example: USA men ‘8’ is UK ‘7’ and European ‘41’.LabellingThe aim of labelling is to foster trade, inform consumers and highlight the visibility. Theobligatory labelling, as described in the EU shoe labelling directive 94/11/EC, concernsinformation about the parts of footwear, namely upper, lining and insole sock as well as theouter sole of the footwear article. The information must be conveyed by means of agreedpictograms or textual information, as defined and illustrated in the directive, and must relate tothe material which constitutes at least 80% of the surface area of the upper, the lining andinsole sock, and at least 80% of the volume of the outer sole. However, if no single materialaccounts for at least 80%, information must be given concerning the two principal materials inthe composition of the product. The manufacturer or his authorised agent in the EuropeanUnion has to use at least the language or languages of the EU member state of consumption.24 International Trade Centre

Exporters should be aware that labelling should involve affixing the required information to atleast one article of footwear in each pair, either by printing, sticking, embossing or attaching alabel. Moreover, labelling must be sufficiently large, visible and understandable so that thecustomer is not misguided.Currently, eco-labels are applied to footwear to a limited degree. The increasing market shareof self-service outlets, like grocers' supermarkets and variety stores, has enforced the inclusionof information on packaging or product.2.4 The YATRA studyThe objective of the YATRA study was to see how Chinese footwear exports into Pakistanaffect the local industry and how the Chinese footwear industry would influence the Pakistanimarket.The study was done by a Japanese consultant, with the long-term objective to see the influenceof Chinese imports on the Japanese market and what further steps needed to be taken. Pakistanwas given as a case study. At the time the YATRA study was conducted, the influence ofChinese footwear imports was increasing and had adverse effects on small cottagemanufacturers serving the local market in Japan.The adverse effect was high because the Chinese shoes were of bad quality in terms ofdurability and comfort. The end-consumer eventually was not happy.Pakistan produces around 240 million pairs of footwear per year. Around 20 million pairs areexported and a similar or slightly higher number is imported but of a somewhat lower quality.Consumption in Pakistan is approximately 1.5 pair per person per year.2.5 An overview of the footwear trade2.5.1 Product classificationThe HS classification system for traded goods was introduced in 1988, and has since thenbecome an internationally accepted method of classification wherever products are traded. TheHS classification is harmonised in relation to the classifications of the United Nations and theEuropean communities. Goods are classified according to simple objective criteria andapplications. The HS, a revision of the CCCN (Customs Cooperation Council Nomenclature),1974 classification system, includes a six-digit sub-heading that was introduced for moreprecise tagging of products. Many countries that have adopted HS have added one or moredigits to further classify products of particular national interest (8-digit or 10-didgit level).Pakistan started reporting its exports categorised according to the HS classification in 2002 upto the 8-digit level.The footwear sector is classified under chapter 64 that can be broken down into the categories6401 to 6406 at the 4-digit level. The table below highlights the product classification relevantto Pakistan’s footwear export sector.International Trade Centre 25

Table 2.6 Product classifications relevant to Pakistan’s footwear export sectorHS codeProduct category6401 Waterproof footwear6402 Uppers of rubber/plastic (sports footwear e.g. ski boots)6403 Leather uppers640312 Ski-boots, cross-country ski footwear and snowboard boots, with outer soles ofrubber, plastics, leather or composition leather and uppers of leather640319 Sports footwear, with outer soles of rubber, plastics, leather or compositionleather and uppers of leather (excl. ski boots and cross-country ski footwear, andskating boots with ice or roller skates attached)640320 Footwear with outer soles of leather, and uppers which consist of leather strapsacross the instep and around the big toe640330 Footwear with leather uppers, made on a base or platform of wood, with neitheran inner sole nor a protective metal toe-cap640340 Footwear, incorporating a protective metal toe-cap, with outer soles of rubber,plastics, leather or composition leather and uppers of leather (excl. sportsfootwear and orthopaedic footwear)640351 Footwear with outer soles and uppers of leather, covering the ankle (excl.incorporating a protective metal toe-cap, sports footwear, orthopaedic footwearand toy footwear)640359 Footwear with outer soles and uppers of leather (excl. covering the ankle,incorporating a protective metal toe-cap, made on a base or platform of wood,without in-soles, with uppers which consist of leather straps across the instepand around the big toe, sports footwear, orthopaedic footwear, and toy footwear)640391 Footwear with outer soles of rubber, plastics or composition leather, with uppersof leather, covering the ankle (excl. incorporating a protective metal toe-cap,sports footwear, orthopaedic footwear and toy footwear)640399 Footwear with outer soles of rubber, plastics or composition leather, with uppersof leather (excl. covering the ankle, incorporating a protective metal toe-cap,made on a base or platform of wood, without in-soles, sports footwear,orthopaedic footwear and toy footwear)6404 Uppers of textile materials6405 Not elsewhere specified including uppers of composition leather640510 Footwear with uppers of leather or composition leather (excl. with outer soles ofrubber, plastics, leather or composition leather and uppers of leather,orthopaedic footwear and toy footwear)640520 Footwear with uppers of textile materials (excl. with outer soles of rubber,plastics, leather or composition leather, orthopaedic footwear and toy footwear)640590 Footwear with outer soles of rubber or plastics (with uppers other than rubber,plastics, leather or textile materials);Footwear with outer soles of rubber or plastics (with uppers other than rubber,plastics, leather or textile materials);Footwear with outer soles of leather or composition leather (with uppers otherthan leather or textile materials);Footwear with outer soles of wood, cork, paperboard, fur-skin, felt, straw, loofah,etc. (with uppers other than leather, composition leather or textile materials)6406 Parts of footwear640610 Uppers and parts thereof (excl. stiffeners and general parts made of asbestos)26 International Trade Centre

HS codeProduct category640620 Outer soles and heels, of rubber or plastics640691 Parts of footwear, of wood640699 Parts of footwear (excl. outer soles and heels of rubber or plastics, uppers andparts thereof, and general parts made of wood or asbestos)2.5.2 Pakistan’s footwear exportsPakistan footwear exports amounted to US$155 million in 2005, up 47% from the previousyear. As a percentage of Pakistan’s total exports (1%), the sector is still relatively small, butdefinitely not insignificant. Footwear with uppers of leather or composition leather dominatesthe export sector, making up over 75% of the sector’s exports. The uppers of compositionleather are significant (43% of the sector’s exports). Pakistan is globally a big player in thecomposition leather category -- ranks as the third largest exporter representing 11% of worldexports in value terms. These shoes are primarily exported to the Middle East. Less than 10%of exports of this category of shoes are exported to the UK. There is room for much moreexpansion on this market, which is the world’s largest and growing at a rate of 12% per annum.Boots with uppers of leather and soles of rubber or plastic are also an important export productfor the sector, making up 18% of the sector’s exports. Again these are primarily destined forthe Middle East -- UAE, Saudi Arabia and Yemen. The world’s major market for this product,the United States, is entirely untapped by Pakistan. Over a third of what the US buys in thiscategory of shoe consists of uppers of pigskin, clearly not a segment for Pakistan; neverthelessthe remaining two-thirds are worth further investigation.Other products exported include leather slippers (279 tons), leather uppers and leather solesbelow ankle (173 tons), leather uppers with metal toe-cap (240 tons), and leather uppers withnon-leather soles below the ankle (387 tons). The United Kingdom and various Middle Easterncountries are key destinations.Table 2.7 Pakistan’s total footwear exports and imports, 2001-2005 (US$ million)2001 2002 2003 2004 2005Exports 45.3 71. 3 90.1 105.4 154.5Imports 3.7 6.6 16.6 19.7 23.7Source: Calculations from COMTRADETable 2.8 Pakistan’s major export destinations by shoe category, 2005HS codeProduct categoryValueUS$’000Quantity(Tons)% changeover prev.yearMain destination64 Total footwear 155,490 - 48% Saudi, UAE,Yemen640110 Waterproof footwear 57 6 -34% UAE640212 Ski-boots, snow-boardboots, all rubber/plastic29 2 -77% South AfricaInternational Trade Centre 27

HS codeProduct categoryValueUS$’000Quantity(Tons)% changeover prev.yearMain destination640219 Sports footwear, solesand uppers ofrubber/plastic640220 Footwear of rubber orplastics, upper strapsassembled to sole byplugs149 13 548% UAE, UK, Kuwait297 47 -44% UAE, Switzerland640291 Rubber/plastic boots 22 2 10% UK640299 Footwear, outersoles/uppers of rubber orplastics, nes640312 Ski-boots, snow-boardboots, uppers of leather640319 Sports footwear, outersole of rubber/plastic/leather and upper ofleather3,068 331 251% Afghanistan, UK,UAE94 4 96% France, UAE226 12 -39% Germany, UK,UAE640320 Leather slippers 5,408 279 110% UK, France, UAE640330 Footwear, wooden, outersoles of rubber/plastic/leather and uppers ofleather640340 Footwear, outer sole ofrubber/plastics/leather,uppers of leather, metaltoe-cap17 1 -91% -3,576 240 -32% Yemen, Italy, UK640351 Boots with leather upperand leather sole622 18 20,633%Saudi, Korea,South Africa640359 Footwear, outer soles anduppers of leather, nes640391 Boots with rubber/plasticsoles and leather uppers640399 Footwear, outer soles ofrubber/plastics uppers ofleather, nes640411 Sports footwear, outersoles of rubber/plasticsand uppers of textilematerials640419 Non-sports, outer soles ofrubber/plastics and uppersof textile materials640420 Footwear with outer solesof leather and uppers oftextile materials640510 Footwear with uppers ofleather or compositionleather, nes6,180 173 8% UK, Afghanistan,Germany28,016 1,229 -6% Italy, UAE,Germany8,695 387 11% Germany,Belgium, UAE1,116 67 -59% Saudi, UK,Yemen1,316 129 25% UAE,Afghanistan, UK1,935 68 36% France, UAE, UK67,644 3,894 93% Saudi, Yemen,UAE28 International Trade Centre

HS codeProduct categoryValueUS$’000Quantity(Tons)% changeover prev.yearMain destination640520 Footwear with uppers oftextile materials, nes556 49 -26% UAE,Afghanistan,Sudan640590 Footwear, nes 20,885 1,730 106% Afghanistan, UK,UAE640610 Uppers and parts thereof,other than stiffeners640620 Outer soles and heels, ofrubber or plastics1,502 152 287% Afghanistan,Nepal, USA1,428 447 535% Afghanistan,UAE, Sri Lanka640691 Parts of footwear of wood 84 20 22% Saudi ArabiaSource: ITC’s Trade MapBesides the Middle East, Europe is also an important destination. 37% of Pakistan’s totalfootwear exports are destined for Europe in 2005. The key European markets are UK,Germany and France. Exports to Europe are mainly in uppers of leather with non-leather solesform, of which the majority are above the ankle. In comparison with neighbouring competitors,Bangladesh and India, Europe has a smaller share of Pakistan’s exports.Table 2.9 Footwear exports – Pakistan, India and Bangladesh, 2005Export destination Pakistan Bangladesh IndiaWorld US$155m US$118m US$1.05bEurope US$58m US$83m US$805mSource: ITC’s Trade MapExports in value terms as reported in the trade statistics over the years must be treated withsome care. Export values have been somewhat inflated due to the buyback sales tax returns onraw materials. A discrepancy with mirror statistics, i.e. import figures of Pakistan’s tradingpartners, also confirms this. The policies on these tax returns have changed in 2005 and figurescan be deemed more accurate in the next FY06 data.2.5.3 Pakistan’s footwear importsFootwear imports have also increased significantly since 2001, from US$3.7 million toUS$23.7 million in 2005, flooding in from China and to a lesser extent from Thailand. In 2005,80% of Pakistan’s footwear imports came from China. For the time being the flood of Chineseimports does not need to be considered an immediate threat as they are not in the samecategory as Pakistan’s exports. The main imported shoe categories are textile upper footwear,sports footwear, rubber/plastic slippers and rubber upper footwear.International Trade Centre 29

Table 2.10 Pakistan’s major import origins by shoe category, 2005HS codeProduct categoryValueUS$’000Quantity(Tons)Main destination64 Total footwear 23,674 - China, Thailand, UAE640110 Waterproof footwear, metaltoe-cap69 10 China640199 Waterproof footwear, nes 231 55 China640212 Ski-boots, snow-board boots,all rubber/plastic640219 Sports footwear, outer solesand uppers of rubber orplastics, nes69 4 China3,863 428 China, Thailand, UAE640220 Plastic/rubber slippers 1,351 297 China, Thailand, UAE640299 Footwear, outer soles/uppersof rubber or plastics, nes640319 Sports footwear, outer sole ofrubber/plastic/leather andupper of leather1,328 173 China, Thailand4,934 285 China, Saudi, Malaysia640320 Leather slippers 53 4 China640340 Footwear, outer sole ofrubber/plastics/leather, uppersof leather, metal toe-cap640351 Boots with leather upper andleather sole640359 Footwear, outer soles anduppers of leather, nes640399 Footwear, outer soles ofrubber/plastics uppers ofleather, nes640411 Sports footwear, outer soles ofrubber/plastics and uppers oftextile materials640419 Non-sports, outer soles ofrubber/plastics and uppers oftextile materials640351 Boots with leather upper andleather sole640359 Footwear, outer soles anduppers of leather, nes640399 Footwear, outer soles ofrubber/plastics uppers ofleather, nes640411 Sports footwear, outer soles ofrubber/plastics and uppers oftextile materials640419 Non-sports, outer soles ofrubber/plastics and uppers oftextile materials110 8 China, USA, Italy26 1 China64 3 China1,241 69 China, Viet Nam,Thailand652 59 China, Thailand, VietNam2,245 267 China, Thailand, UK26 1 China64 3 China1,241 69 China, Viet Nam,Thailand652 59 China, Thailand, VietNam2,245 267 China, Thailand, UK30 International Trade Centre

HS codeProduct category640420 Footwear with outer soles ofleather and uppers of textilematerials640510 Footwear with uppers ofleather or composition leather,nes640520 Footwear with uppers of textilematerials, nesValueUS$’000Quantity(Tons)Main destination1,264 111 China, UAE, Thailand495 47 China, Thailand, UAE350 48 China, Thailand, UAE640590 Footwear, nes 3,176 531 China, Thailand, UAE640610 Uppers and parts thereof,other than stiffeners640420 Footwear with outer soles ofleather and uppers of textilematerials640510 Footwear with uppers ofleather or composition leather,nes640520 Footwear with uppers of textilematerials, nes434 212 China, UAE, Hong Kong1,264 111 China, UAE, Thailand495 47 China, Thailand, UAE350 48 China, Thailand, UAE640590 Footwear, nes 3,176 531 China, Thailand, UAE640610 Uppers and parts thereof,other than stiffeners640620 Outer soles and heels, ofrubber or plastics434 212 China, UAE, Hong Kong1,460 870 UAE, China, Portugal640691 Parts of footwear of wood 36 20 UAE640699 Parts of footwear nes 193 86 China, Ger.. IndonesiaSource: ITC’s Trade Map2.5.4 World overviewWorld producers/exportersThe major producers globally are China, India, Brazil, Italy and Spain. A shift has taken placeaway from the traditional European suppliers first to Taiwan and South Korea and now on toChina, India, Indonesia, Thailand and Viet Nam. These Asian suppliers have taken oversignificant proportions of the world’s production purely as a result of lower labour costs.China is now a massive producer and in terms of export dominates all other producers,exporting US$19 billion worth in 2005 and expected to increase it in the coming years with thecountry’s accession to WTO and with the removal of certain quotas. Italy, Hong Kong (aneffective gateway to China) and Viet Nam follow with a US$9 billion, US$6 billion and US$2billion worth of shoe exports. China’s share of world total footwear exports is 28%.Competition is largely by means of cutthroat pricing, so much so that China has frequentlybeen accused of dumping. Italy and Spain are concentrated more in the high quality and trend-International Trade Centre 31

setting design niches. China’s major thrust is in the sports footwear both with uppers of textilesand leather.China poses more of a threat to Pakistan’s domestic footwear sector than to Pakistan’s exportfootwear sector, as sports footwear from China replaces other types of traditional footwear.China is less competitive in most of the footwear categories that Pakistan’s exports are in. Thisis to say it has less of an all-flattening effect as it does with sports shoes. Nevertheless, Chinais a major exporter of 640340 (leather upper with metal toe cap), 640391 (uppers of leathercovering the ankle) and 640510 (uppers of composition leather), which are important shoecategories for Pakistan, but for the time being, luckily for Pakistan, China gets its major sharefrom very large orders which tend to be concentrated in the United States.Looking in more detail at world exports for categories relevant to Pakistan:640320 – Leather slippersThis is not the world’s major traded shoe category. Global exports in 2005 are estimated to bearound US$258m. In both value and quantity, the world’s major supplier is India followed byChina and Romania. India’s major markets are the UK and Germany supplying the bottom-endquality. China is focused more on the Central Asian, USA and Japanese markets, on a midrange segment. The more expensive slippers are supplied by Romania and Italy.India is Pakistan’s key competitor for leather slippers, especially in the Middle Easternmarkets, supplying larger quantities at lower cost.640340 – Leather uppers with metal toe capThis is an important category globally; total world exports in 2005 were estimated to be wortha billion dollars showing significant growth in supply over 2001-05. The major suppliers inthis market are Italy and China, the former supplying primarily to its fellow European Unioncountries at high-end prices and the latter mainly to the US at bottom-end prices.Looking at the markets that Pakistan covers, other countries that supply at the similar pricerange include China, India, Tunisia, Bulgaria, Romania and Turkey.640359 – Leather uppers, leather solesItaly remains the world’s leader for this shoe category, holding almost 60% share of the valueof world exports. Italy’s strong position on these markets is mainly in value terms – as marketspay most for Italian shoes – at least 50% more than the prices of Portuguese shoes and 100+%more than the prices of Indian and Chinese shoes. Italian shoes are known for their trendsetting and luxury brands on the high- end of the market. Italy’s major market is the US, whilstSpain and Portugal supply more to the European Union. Having said this, Italy is also themajor shareholder in most European markets as well as Japan. Other major exporters includeFrance, Brazil and Hong Kong, not necessarily representing China (only 25% of Hong Kong’simports of this product category come from China).640391 – Uppers of leather covering the ankle, non-leather solesItaly, Viet Nam and China are the major players in this market. Global exports of this categorywere estimated at US$5.2bn in 2005. Again, Italy’s exports are geared towards the major EUmarkets – Germany, France and the UK, whilst the lion’s share of China’s 74.4 million pairs of32 International Trade Centre

this category was exported to the United States and the Russian Federation. Viet Nam’sexports of these boots were destined for the United States and Europe.Viet Nam and Brazil respectively managed to wrestle themselves 5% and 4% share in theUnited States market in 2004 versus the 74% Chinese share.Pakistan has lifted its prices for this shoe category in the Middle East (US$21,000/ton) to aprice range that is no longer in line with India (US$7,000/ton) in the lowest bracket, but nowcompeting with Turkey and China.640510 – Composition leather uppersRomania and China are the dominating forces in this market, exporting over 5,000 tons and4,300 tons respectively in 2005. China exports mainly to the United States, Japan and theRussian Federation, whilst Romania supplies soles to the European Union and Switzerland.Pakistan was the third largest supplier in the world of this product, exporting 11% of totalworld exports, up from 7% in the previous year. Pakistan is by far the leading supplier in theMiddle East of this shoe category, facing a little competition.World imports – major marketsTable 2.11 World imports by shoe category, 2005HS codeProduct categoryValue 2005(US$ m)Growth p.a.2001-0564 Total footwear 73,161 9%640320 Leather slippers 137 20%640340 Leather uppers with metal toe cap 1,326 15%640359 Leather uppers, leather soles 3,640 7%640391 Uppers of leather covering theankle, non-leather soles6,962 11%640510 Composition leather uppers 423 8%Source: Calculations from COMTRADE64 – Footwear sectorLooking at the footwear sector as a whole, global imports added up to some US$73.2bn in2005. The US is the world’s major buyer with a 26% share of world imports. European Unioncountries account for 44%, with the major concentration in Germany, the UK, Italy andFrance. Italy and, to a lesser extent, France are also major exporters.Furthermore, Japan (5%), Canada (2%), China and Hong Kong (8%), Switzerland (1%),Australia (1%) and Korea (1%) are important markets at the global scale.Looking in more detail at the important export products for Pakistan:International Trade Centre 33

640320 – Leather slippersLeather slippers represent only a small segment of the world’s shoe industry, total worldimports are estimated at around US$137m and showing a growth trend of 20% per year invalue, with the United Kingdom buying just under a third. The demand for leather slippers isstrong in the Middle East – especially in the UAE and Oman. The most rapid growth rates areoccurring in Europe – the United Kingdom (37% per year), France (37%) and Italy (35%).Across markets, a willingness to pay more for slippers is evident as growth rates in valueexceed growth in quantities. A wide range in value per pair exists – from US$7.2/pair CIF(cost, insurance and freight) in Saudi Arabia to US$40 per pair CIF in Switzerland (AWE --Average Weight Equivalent of 600g leather slipper weight).Pakistan is a small supplier to the UK at a very low price range. It has a stronger foothold inthe Middle East. Pakistan has only just started taking part in the fast growing Italian market, afact worth investigating for further expansion.640340 – Leather uppers with metal toe capThe world market in 2005 for this type of shoe is estimated at around US$1.33bn, with theUnited States as the key market buying over 20%, followed by a series of European countriesand Canada. China has a very strong foothold in the US market, supplying 95%. The worldimport market for this type of shoe has been showing growth rates of 15% per year (the 2001-05 trend), the highest growth can be witnessed in Taiwan (11.9%), Spain (49%) and Poland(45%).None of these major buyers report buying this shoe category from Pakistan.640359 – Leather uppers, leather solesThe world import market for the all-leather shoe is estimated to be worth US$3.64bn TheUnited States buys just under US$1bn worth of this shoe type, by far the largest market,followed by France, the UK, Germany, Italy and Japan. Despite competition on many otherfronts, Italy remains the world’s leader in all-leather shoes supplying over half of all the worldmarkets in value terms.Amongst the top five markets, Italy has been showing the highest growth rates – on average23% annually over 2001- 05, reflecting a boost in its subcontracting for export business.Pakistan is also a supplier to these top markets, of significance only in the UK and Italianmarkets, supplying 1% of both countries’ imports in 2005.640391 – Uppers of leather covering the ankle, non-leather solesThe world import market for this leather upper boot is estimated to be worth US$6.96bn. TheUnited States (34%), Germany, the UK, France and Italy are the world’s major buyers of thisshoe category. Basketball is an American game and this is clear from the basketball shoecomponent of this category – 17% of US imports as compared to 1% in Japan. In both Europeand the US, the most important component (30%) is the ladies’ low ankle boot. Italy, China,Brazil and Viet Nam are the important suppliers of women’s low ankle boots to the majormarkets.34 International Trade Centre

Pakistan is also a supplier to the European top countries in the form mainly of women’s ankleboots, supplying comparatively very little (less than 1%; ranking 40 th supplier). Nevertheless, ithas its foot in the door of top markets.640510 – Composition leather uppersA comparatively small market exists for this product category, the global import market isestimated at around US$423m. The market is showing significant growth, averaging 8% peryear between 2001- 05. The United Kingdom, the United States and France are key buyers.Singapore and Ukraine also play smaller part. Though still very small, Libya stands out as arapidly growing new market.Whilst composition leather shoes are one of Pakistan’s most important footwear exports,Pakistan does not appear in the list of suppliers to the world’s key markets.Market access conditions in major marketsTariffs and quotas in major marketsThe lowest tariffs applied to the imports of footwear from Pakistan occur in Europe wherePakistan benefits from the preferential tariff for GSP countries and the Middle East – the UAE,Saudi Arabia and Oman, which all have the same flat rate of 5% for footwear products. For theproduct categories highlighted as of importance to Pakistan in the previous chapter, the EUGSP rate is 4.5% in most cases with some exceptions. Category 640510 – composition leatheruppers is 0%. In the 640391 category – uppers of leather covering the ankle – there are two EUtariff lines specifying women’s shoes with insoles of a length of more than 24cm at 1.5%.These categories are produced in Pakistan but not in large numbers. Though the GSP providesfor a beneficial rate for Pakistani footwear exporters, it does mean extra paperwork.The tariffs imposed by Japan on imports of footwear products from Pakistan are comparativelyvery high, with the majority of tariff lines at a 27-30% rate. Japan only offers a GSP rate in the640510 and 640590 categories, and only for specific lines – 0% tariff for 640510300 and640590200. It should be noted that many of the Japanese footwear tariff lines are subject totariff quotas. For numerous tariff lines, the below quota rate is in fact zero. The above quotarate is very high – as much as US$40/pair.In a similar fashion to Japan, the US has not included footwear in its GSP regime, at least notfor the products being looked at for this overview. The usage of disposable footwear variesfrom one country to the other. For example, in Pakistan, footwear made up of leather upper andPVC is worn casually. Whereas in Australia this footwear is imported from Pakistan, India andChina. It is worn only once and then thrown because it is available at very cheap prices, i.e.US$4–5. Having said that, the US tariffs are significantly less than Japan’s, ranging from 0 to12.5%, averaging 7% for the product categories relevant to Pakistan.For specific lines in the 640340 (metal toecap leather upper), 640391(uppers of leathercovering the ankle) and 640510 (uppers of composition leather), Japan also applies a tariffquota at a very prohibitive rate of US$40/pair, equivalent to well over 100% of the shoevalues.South Korea applies a flat MFN rate of 13% and Yemen, which is still in the process of WTOaccession, applies a flat general rate of 10%.International Trade Centre 35

Table 2.12 United States tariffs applied to imports from PakistanHS codesProduct category64032000 Footwear w/outer soles leather and uppersconsistiong of leather straps across theinstep and around the big toe64034030 Footwear w/outer soles ofrubber/plastics/leather/comp. leather anduppers of leather, w/protective metal toecap,welt64034060 Footwear w/outer soles ofrubber/plastics/leather/comp. leather anduppers of leather, w/protective metal toecap,n/welt64035915 Turn or turned footwear w/outer soles anduppers of leather, not covering the ankle64035930 Footwear w/outer soles and uppers ofleather, not covering the ankle, welt, nesoi64035960 Footwear w/outer soles and uppers ofleather, not cov. ankle, n/welt, for men,youths and boys64035990 Footwear w/outer soles and uppers ofleather, not cov. ankle, n/welt, for personsother than men, youths and boys64039130 Footwear w/outer soles ofrubber/plastics/composition leather anduppers of leather, covering the ankle, welt64039160 Footwear w/outer soles ofrubber/plastics/composition leather anduppers of leather, covering the ankle,n/welt, for men, youths and boys64039190 Footwear w/outer soles ofrubber/plastics/comp. leather and uppersof leather, cov. ankle, n/welt, for personsother than men/youths/boys64039920 Footwear w/outer soles ofrubber/plastics/comp. leather and uppersof leather, n/cov. ankle, made on a basewood64039940 Footwear w/outer soles ofrubber/plastics/comp. leather and uppersof leather, n/cov. ankle, welt, nesoi64039960 Footwear w/outer soles ofrubber/plastics/comp. leather and uppersof leather, n/cov. ankle, n/welt, for men,youths and boys, nesoi64039975 Footwear w/outer soles ofrubber/plastics/comp. leather and uppersof leather, n/cov. ankle, forwomen/child./infants, val.n/o $2.50/prTrade regimeappliedApplied tariffsMFN 0.00%MFN 5.00%MFN 8.50%MFN 2.50%MFN 5.00%MFN 8.50%MFN 10.00%MFN 5.00%MFN 8.50%MFN 10.00%MFN 8.00%MFN 5.00%MFN 8.50%MFN 7.00%36 International Trade Centre

HS codesProduct category64039990 Footwear w/outer soles ofrubber/plastics/comp. leather and uppersof leather, n/cov. ankle, forwomen/child./infants, val. over $2.50/pair64051000 Footwear, nesoi, w/outer soles of otherthan rubber/plastics/leather/comp. leatherand uppers of leather/composition leather,nesoi64059020 Disposable footwear, nesoi, designed forone-time use64059020 Disposable footwear, nesoi, designed forone-time use64059090 Footwear, nesoi, w/outer soles and uppersother than of rubber/plastics/leather/comp.leather/textile materialsTrade regimeappliedApplied tariffsMFN 10.00%MFN 10.00%MFN 3.80%Preferentialtariff for GSPcountries0.00%MFN 12.50%Source: www.macmap.org.Table 2.13 European Union tariffs applied to imports from PakistanHS code Product category Trade regimeapplied640320 Footwear, outer sole/upper ofleather, strap across theinstep/around big toe640340 Footwear, outer sole of rubber/plastic/leather, uppers of leatherw/met toe-cap640359 Footwear, outer soles and uppersof leather, nes640391 Footwear, outer soles ofrubber/plastic uppers of leathercovering ankle nes640399 Footwear, outer soles ofrubber/plastics uppers of leather,nes640510 Footwear with uppers of leather orcomposition leather, nesPreferential tarifffor GSP countriesPreferential tarifffor GSP countriesPreferential tarifffor GSP countriesPreferential tarifffor GSP countriesPreferential tarifffor GSP countriesPreferential tarifffor GSP countries640590 Footwear, nes Preferential tarifffor GSP countriesNo. oflinesAppliedtariffs1 4.50%1 4.50%8 4.13%16 4.13%17 4.15%1 0.00%2 5.95%Source: www.macmap.org.International Trade Centre 37

Table 2.14 Japan tariffs applied to imports from PakistanHS code Product category Trade regimeappliedNo. of linesAppliedtariffs640320 Leather slippers MFN 2 11%640340 Leather uppers with metal toe cap MFN 2 61%640359 Leather uppers, leather soles MFN 2 6%640391 Uppers of leather covering theankle, non-leather soles640399 Outer soles of rubber/ plasticsuppers of leather, nesMFN 2 29%MFN 3 26%640510 Composition leather uppers MFN 3 26%640510 Composition leather uppers GSP 1 0%640590 Footwear, nes MFN 1 30%640590 Footwear, nes GSP 1 0%Source: Based on calculations on from tariffs and tariffs quotas. For a more in-depth picture, readersare recommended to visit www.macmap.org.Table 2.15 South Korea tariffs applied to imports from PakistanHS code Product category Trade regimeappliedNo. of linesAppliedtariffs640320 Leather slippers MFN 1 13%640340 Leather uppers with metal toe cap MFN 1 13%640359 Leather uppers, leather soles MFN 2 13%640391 Uppers of leather covering theankle, non-leather soles640399 Outer soles of rubber/ plasticsuppers of leather, nesMFN 5 13%MFN 5 13%640510 Composition leather uppers MFN 1 13%640590 Footwear, nes MFN 1 13%Source: www.macmap.org.Table 2.16 UAE/Saudi/Oman tariffs applied to imports from PakistanHS code Product category Trade regimeappliedNo. of linesAppliedtariffs640320 Leather slippers MFN 1 5%640340 Leather uppers with metal toe cap MFN 1 5%640359 Leather uppers, leather soles MFN 3 5%640391 Uppers of leather covering theankle, non-leather solesMFN 3 5%38 International Trade Centre

HS code Product category Trade regimeapplied640399 Outer soles of rubber/ plasticsuppers of leather, nesNo. of linesAppliedtariffsMFN 3 5%640510 Composition leather uppers MFN 1 5%640590 Footwear, nes MFN 1 5%Source: www.macmap.org.Table 2.17 Yemen tariffs applied to imports from PakistanHS code Product category Trade regimeappliedNo. of linesAppliedtariffs640320 Leather slippers General tariff 1 10%640340 Leather uppers with metal toe cap General tariff 1 10%640359 Leather uppers, leather soles General tariff 1 10%640391 Uppers of leather covering theankle, non-leather soles640399 Outer soles of rubber/ plasticsuppers of leather, nesGeneral tariff 1 10%General tariff 1 10%640510 Composition leather uppers General tariff 1 10%640590 Footwear, nes General tariff 1 10%Source: www.macmap.org.Raw material imports and duty structureApart from leather that is acquired from local tanneries, the sector is highly dependent onimports of raw materials. In addition to leather, the industry uses a series of plastic resins,rubber in various forms, synthetic leather, various footwear parts and machinery.Unfortunately, it is not possible to distinguish the materials from those imported for otherindustries when looking at national trade statistics. This does not apply of course to the importsof footwear parts. Footwear parts imported include uppers and parts thereof, 212 tons worth(2005) was imported mainly from China and the UAE, and outer soles of rubber or plastic (870tons worth in 2005) originating mainly from the UAE, China and Portugal. Import duty ratesfor these parts are high – 20% and 25% respectively. Import duties on raw materials as pergeneral practice should be refunded at the time of exports in the form of daily drawbacks. TheInput Output Coefficient Organisation (IOCO) based in Karachi administers the cost ofimported raw material in the product and gives advice on duty drawback rates to thegovernment or CBR. Unfortunately, in the case of footwear, IOCO has worked import dutieson concessionary rates covered under special Statutory Regulatory Orders (SROs). However,most of the manufacturers do not import as per concessionary SROs and pay normal importduties rather than concessionary rates. Therefore, duty drawback rates are much lower than thedesired level. The Footwear Association is struggling hard with IOCO to correct or increasethe duty drawback rates in line with duty paid on imported materials.International Trade Centre 39

Much of the rubber is sourced from fellow SAPTA countries, the footwear industry can benefitfrom a marginally lower than 5% duty rate, and 3.3% through a bilateral agreement with SriLanka.Import duties for raw material imports for this sector range from 5-25% ad valorem, machineryat the lower end and footwear parts, grindery, composition leather at the upper end. It is likelythat the 25% duty for composition leather and grindery will come down in a few years' time asa result of WTO agreements, but for the time being this level of tariff may inhibit furthergrowth of the sector.Table 2.18 Imports of footwear parts and import tariffs applied, 2005HS code Product description Imports640610 Uppers and parts thereof,other than stiffeners640620 Outer soles and heels, ofrubber or plasticsValueUS$’000TonsUS$/TonCIFImporttariffTotal 434 212 2 20%China 280 134 2.1 -UAE 80 36 2.2 -Hong Kong 58 32 1.8 -Italy 11 9 1.2 -Total 1460 870 1.7 25%UAE 541 328 1.6 -China 312 231 1.4 -Portugal 171 65 2.6 -Thailand 140 80 1.8 -Others 296 166 -640691 Parts of footwear of wood Total 36 20 1.8 25%640699 Parts of footwear nes Total 193 86 2.2 25%Notes:1. Value = FOB value + freight2. Import duty (custom duty) 10% (supposed) on above value+ sales tax 15% on above value+ income tax 6% an above value3. On some components, sales tax is refundable. It takes 7 to 8 months after exports to claim salestax return. 6% income tax is adjustable during annual tax return.Source: www.trademap.org and www.macmap.org.2.5.2 Examples of trade data – three case storiesA significant part of the trade data in this report is taken from three websites owned andoperated by the International Trade Centre, ITC, www.intracen.org. These website are TradeMap, Market Access Map and Product Map.ITC’s Trade Map at www.trademap.org provides import and export data for over 200countries and territories for over 5,000 product categories in a fully interactive environment.The above insights were straightforwardly acquired from the data the website provides.40 International Trade Centre

ITC’s Market access Map at www.macmap.org provides information on tariffs and marketaccess measures for 178 importing countries and 200+ exporting countries on an easy to useweb platform.ITC’s Footwear product Map at www.p-maps.org/footwear provides extensive marketintelligence in the form of directly downloadable market studies, a gateway to marketinformation on the Internet and numerous online company directories.These websites have a wide range of users: enterprises, associations, government authorities,financial institutions, statistical bureaus, researchers, academia, press etc.Interested users in Pakistan can request passwords to access these online sources from TDAP,SMEDA, ITC’s Islamabad office, LCCI, KCCI or FPCCI.Below are the case stories relevant to the footwear sector in Pakistan. They are based on datataken from the three websites - purely as examples of the waste amount of data available.Case story I: Insight into trade in leather slippersThe United Kingdom is the world’s largest importer of leather slippers, importing some US$39million worth in 2005, down from US$46 million in the previous year but significantly upfrom US$14 million in 2001. Pakistan is a small player on this market, supplying a mere 23tons (equivalent to 38,333 pairs using a conversion of 600g per pair).Many of the suppliers to the UK market are EU countries, headed by Italy supplying 34% ofUK’s imports in value terms, though India – having gained significant market share recently by2005 had captured 5% of the United Kingdom import market. Like Pakistan, India faces atariff of 4.5% under the GSP regime. Other countries like Bangladesh that have an LDC status,can access the European Union free of duty.On average the UK imports leather slippers at CIF value of US$39,000 per ton (equiv.US$23/pair). By destination this does range enormously. Higher value and presumably highquality slippers are imported from Italy at an average CIF value of US$71,000 per ton (equiv.US$43/pair), while the CIF value of slippers imported from Pakistan is a mere US$3,174 perton (equiv. US$1.90/pair). While the Italian figure seems unrealistically high, the difference invalue compared to slippers from Pakistan cannot be ignored.Italy is itself a significant leather slipper market, buying 352 tons (equiv. 588,000 pairs) in2005 worth US$5.7m. It is not immediately obvious to determine what portion of the Italianimports are sold to Italian consumers and what portion gets value addition and is exported onto a third destination. What is clear though is that Italy adds significant value – importing at anaverage CIF value of US$16,300 per ton (equiv. US$9.80/pair) and exporting at an averageFOB value of US$66,300 per ton (US$40/pair). Like the UK, the Italian leather slippers marketis looking very healthy; Italy imported 35% more leather slippers every year over the period2001-2005. 40% is supplied by India while Germany and Romania supply 27% and 17%,respectively. Pakistan has just managed to poke the point of its foot in the door of this marketsupplying 12 tons (equiv. 20,000 pairs). How does a Pakistani leather slipper differ from theIndian leather slipper? Are the quality standards of the UK and Italian markets beyond thereach of the Pakistan slipper exporters?International Trade Centre 41

One needs to keep in mind, of course, that India is a massively larger supplier; the world’slargest in fact – exporting 12,900 tons (equiv. 21.5 million pairs) in 2005, up 50% from theprevious year. The world’s second largest supplier is China, exporting mainly to Central Asia,the United States, Japan and Russia and operating in a higher price echelon compared to India.Romania is the world’s third largest supplier and supplies solely to EU countries takingadvantage of its bilateral agreement that provides duty-free access.Markets are not exclusively one quality of shoe or the other. Japan for example buys high-endleather slippers from France (US$54,000 per ton CIF – equiv. US$32/pair) but also buyssignificant quantities of low-end from Bangladesh (US$11,500 per ton CIF – equiv.US$7/pair). It is interesting to note that Japan buys 40% of its leather slippers from Bangladeshand not from Pakistan or India. This can be explained by the fact that Bangladesh benefits fromthe 30% import duty advantage as an LDC.Australia is an extremely dynamic market showing a sudden large intake of low-priced slippersfrom India (equiv. US$8/pair CIF) and China (equiv. US$7/pair CIF) since 2003. At theserock-bottom prices, Pakistan may not be able to compete.Looking closer to home at Middle Eastern markets – Oman and the United Arab Emirates arethe other obvious choices for expansion.Pakistan exported just over 279 tons in 2005; a two-fifth was destined for the UK, France, andGermany. This is a significant change from 2004 when the United Arab Emirates was the mainmarket.Non-tariff barrier information covering items such as social requirements, health and safetystandards, environmental standards, packaging size marking and labelling requirements, areprovided in detail in some of the market surveys that can be downloaded directly from ITC’sFootwear Product Map.Note: Data needs to be treated with some care, as some countries seem to be declaring exportsat significantly higher values than their trading partners e.g. Italy and Russia.Case story II: Trade potential in the footwear sector between Pakistanand TurkeyOnce trade links between two countries in a certain sector have been established, there may beno harm in taking a cross-sectional look at further trade potential. Whilst Turkey is asignificant exporter of footwear, its imports exceed exports. Turkey imports double the valueof Pakistan’s footwear exports and is showing import growth rates that are significantly morerapid than world imports. Turkey currently only imports a mere US$171,000 worth directlyfrom Pakistan. The figure would most likely increase if the indirect passage via the UAE istaken into account. Nevertheless, Pakistan could potentially export a lot more footwear toTurkey. The countries have similar tastes and styles, are within close proximity to each otherand there are matches between the footwear categories exported by Pakistan with the ones thatTurkey imports.42 International Trade Centre

Table 2.19 Pakistan-Turkey footwear trade, 2005HS codeProduct descriptionPakistan’s exportsTurkey’s imports from worldTo World To Turkey Annual growthUS$’000 US$’000 US$’000 2001-05640320 Leather slippers 5,408 31 149 34%640340 Uppers of leather withmetal toe cap640359 Uppers and soles ofleather640391 Uppers of leather, nonleathersoles, coveringankle640399 Uppers of leather, nonleathersoles, nes640510 Uppers of compositionleather3,576 0 2,299 40%6,180 0 15,208 13%27,879 137 33,142 83%8,695 0 109,979 58%67,644 0 526 -11%640590 Footwear, nes 20,885 0 1,974 32%Source: www.trademap.org.Pakistan’s current footwear exports to Turkey are in two shoe categories – boots with uppers ofleather and non-leather soles, and leather slippers. As highlighted in the table, there is a vastscope for Pakistani expansion onto the Turkish market in four categories especially: 640340,640359, 640291 and 640399.In terms of market access, Turkey’s tariffs for footwear products are quite favourable,especially taking into consideration the GSP preference that Turkey applies to imports fromPakistan. Turkey’s GSP tariff is 4.5% for almost every category, with the exception of 0% forcategory 640510 and 0-12% for category 640590.The numbers clearly invite further investigation. Perhaps a first next step would be to identifysome prospective buyers to talk to. The LeatherNet Directory at www.leathernet.com, ITC’swww.leatherline.org and Turkish Business Guide at www.turkindex.com are useful foridentifying companies. You may also wish to identify a trade fair where more investigativeinquiries could be carried out. ShoeInfonet at www.shoeinfonet.com has a calendar of footwearevents. The International Footwear Industry Trade Fair in Istanbul listed in Shoe Infonet’scalendar may be just the fair to attend.Case story III: The Swiss footwear marketKnown for its global brand Bally, Switzerland is definitely a producer and exporter offootwear, but imports far exceed exports. In 2005, Switzerland imported close to US$870million worth of footwear to meet its exceptionally high consumption of over 5 pairs per capita(EU countries consume 1.8 pairs per capita). 1It is not a surprise that Italy is Switzerland’s major supplier bordering Switzerland from thesouth and being the top footwear producer globally. 34% of Switzerland’s footwear imports1EU report on competitiveness of the footwear sector. Informal footwear market overview in Switzerland.International Trade Centre 43

were of Italian origin in 2005. This proportion is a lot higher if we look at the shoe categorythat Italy is most competitive in – leather upper and sole, here Italy has captured 74% of theSwiss import market. The flow of shoes into Switzerland is not only heading northwards, thenorthern neighbour also has a large 20% slice of the Swiss import market. Other importantsuppliers to Switzerland include China and Viet Nam, which are the major source of sportsfootwear for Switzerland.Two-thirds of the shoes that Switzerland imports have leather uppers. Amongst these there arethree types of shoe that stand out: (a) the normal shoe with leather sole and leather upper, (b)leather upper with rubber or plastic soles covering the ankle, (c) an interesting category forfurther research – HS 640399 code – uppers of leather with rubber/plastic soles not elsewherespecified. Import values for this category are very high US$345m – almost half of Swissfootwear imports. The description of the category is insufficient to immediately understandwhat type of imported shoes has been classified here. A guess would be that these are used bythe military or for farming. Without further research, it is very difficult to pinpoint, butdefinitely intriguing. The sheer size of imports in this category merits further investigation.The other third of Swiss footwear imports consists mainly of sport and casual shoes withplastic, rubber or textile uppers. There appears to be no market for shoes with compositionleather uppers. This is not surprising considering the high-income levels and the Swisspreference for high quality. Since mountain sports play an important role in Switzerland, pasttimes ski and hiking boot imports are important. Whilst ski and snowboard boots are clearlyclassified by the HS code, mountain boots are not. Mountain boots are becoming more andmore of lighter synthetic textile fabrics, replacing the old fashioned heavy leather boot, sothese are likely to be classified more in the 6404 (textile upper) group.Most categories are showing stable market trends. There are, however, a few exceptions inwhich notable growth is occurring. Although market size is not yet very large, Swiss importsof leather slippers are growing at 14% per year in value over the last five years. India isgaining market share very rapidly by offering leather slippers at much lower prices than Italyand Germany. Another category that is showing growth is shoes with leather uppers and ametal toe-cap (HS -640340) growing at 18% per year over 2000-05.Looking at the market access conditions for footwear exports to Switzerland, the market iscompletely open for developing country suppliers through the Swiss GSP zero tariff rate for allfootwear imports. Developing countries are not in any particular advantage versusSwitzerland’s main suppliers in the EU since these countries benefit from a bilateral agreementbetween Switzerland and the EU through which footwear imports are also at zero tariffs.Table 2.20 Pakistan’s exports of footwear, 2000-2005 (US$ million)Export category 2000-01 2001-02 2002-03 2003-04 2004–05Total footwear 43 57 86 89 138Leather footwear 35 49 74 78 108Canvas footwear 41 34 50 40 70Other footwear 36 42 80 70 23Source: PFMA44 International Trade Centre

2.5.3 SWOT analysis of Pakistani footwear companiesThe following strengths, weaknesses, opportunities and threats have been short-listed based oninterviews conducted of exporters and on the consultants’ own views and observations.StrengthsMajor strengths identified are:• Good image and tradition of Pakistan as a leather country.• Pakistan is still a low wage country like Bangladesh.Other strengths are:• Labour is easily available.• Support from TDAP/EPB for marketing, i.e. exhibitions, trade fairs, etc.• The infrastructure of the footwear industry in Pakistan is better than other countries likeIndia and Bangladesh etc.WeaknessesMajor weaknesses identified are:• Non-existent footwear component and support industry, which makes productdevelopment lengthy, time-consuming and costly. Consequently, producers have to relyon imported components. Production lead times thereby tend to be longer.• Industry size is generally small to attract buyers of large volume.Other weaknesses are:• Potential new buyers reluctant to pay first time.• Costs of production like utilities and taxation are much higher than in neighbouringcompetitive countries.• Poor infrastructure in terms of shipping services.• Lack of product development and R&D facilities at country level.• No research is done in terms of product development or in finding new buyers/markets.Companies follow local successful companies, approach their customers, copy theirproducts, cut prices and eventually deplete their product.OpportunitiesMajor opportunities identified are:• Due to anti-dumping duty imposed on Chinese imports into EU, which ranges from 9%– 17%, an opportunity has been created for countries like Pakistan, India and BangladeshInternational Trade Centre 45

since the Chinese footwear exports have become more expensive. How successful itwould be, is yet to be seen.• The EU has imposed anti-dumping duty on the import of Chinese shoes. This decisionwas finalised in October 2006, which created a great opportunity for Pakistani shoemanufacturers. In order to remain competitive, the European importers will certainlylook for alternative sources of supply. Therefore, Pakistan shoe manufacturers have thelikelihood of attracting buyers. This opportunity has been well recognised even atgovernment level, and for strengthening the footwear industry, the government hasapproved 6% for research and development.• Long-term view – other countries’ economies are growing but growth in Pakistan’seconomy is relatively slow. Despite a lot of scope, some companies in faster developingeconomies will shift their production towards making other products like computers,cars, etc., while Pakistan’s economy, which is not growing, can focus on making shoesand be successful in this sector.Other opportunities are:• Potential to grow in exports. A lot of room is available.• Footwear manufacturing is a labour-intensive industry. Pakistan’s industry has a big poolof labour, which can be trained as semi or fully skilled footwear workers. If footwearmanufacturing is expanded, it has the potential to absorb a lot of workforce.Threats• Uncertain political conditions, i.e. regular public demonstration against the West, acts ofterrorism, uncertain and continuously changing conditions across the borders, nonexistenceof a long-term business policy at government level and the negative image ofPakistan.• Internal inefficiency at company level.Other threats are listed below• Various decisions by government, such as unpredictable sanctions, prove very unhealthyfor the sector.• Faster growing economy in the footwear producing world, e.g. Bangladesh, India, etc.• Political unrest in Pakistan.• Exporters being faced with imported products and import duties decreasing.2.5.4 Footwear association and its roleThe Pakistan Footwear Manufacturers’ Association (PFMA) (www.pakfootwear.pk) is a tradeassociation representing Pakistani footwear manufacturers, importers of raw materials andcomponents and traders. It has 55 industry members and 37 trade members.The Ministry of Commerce and the government of Pakistan duly approve the association. It isincorporated under the Company Ordinance of 1984. It is a member of the Federation of46 International Trade Centre

Pakistan Chamber of Commerce and Industry (FPCCI). The association has been formed toprotect and safeguard the interests of footwear manufacturers and traders by applications,deputations, delegations, petitions and memoranda to the government of Pakistan or theprovincial governments. The association was established to assist the members byinvestigating their problems and finding ways to improve their current situation.The main objectives for the association are:• To provide a meeting place for exchange of views by all interested companies.• To provide a channel of communication with similar and allied associations or societiesin other countries.• To arrange suitable demonstrations and take part in domestic and foreign exhibitions anddelegations.• To investigate problems particular to this industry and trade with a view to causeimprovements and progress.• To spread knowledge regarding the latest information pertaining to this industry andtrade.• To protect, safeguard and further the interests of the footwear manufacturers and tradeby applications, deputations, delegations, petitions and memoranda to the government ofPakistan or to the local and provincial governments and any other government or publicbody, local or supreme; to endeavour to bring about suitable changes and alterations inthe legislation or rules in the interest of this industry and trade.• To obtain and disseminate industrial and other necessary information to the members.• To provide means of co-operation and technical and social intercourse between partiesand persons engaged or interested in the industry.• To promote goodwill between members and settle amicably any differences arisingbetween the members or between any members and outsiders.• To establish and maintain library or libraries and information bureau/s, institutes,colleges or other institutions for technical education or a fashion design centre etc.Collect models, designs patterns and other things of interest in connection with thefootwear manufacturing industry and provide facilities to its members in the use ofgazettes, trade directories and other informative publications.• To subscribe to or become and continue to remain a member of the Federation ofPakistan Chambers of Commerce and Industry and procure from and communicate withany incorporated organisation of commerce and industry such information as may belikely to forward the objects of the association.• To frame rules and regulations in the interest of consumers regarding the standard of thefootwear products and take necessary steps to educate the public.• To assist members in manufacturing, marketing, import and export of footwear andallied commodities. Maintain contact with foreign trade, commerce and industrymissions and cooperative advertising bodies. Collect information and explore facilitiesand possibilities for manufacturing and import and export, and assist members thereof.International Trade Centre 47

• To endeavour with other recognised organisations and/or registered bodies to form aNational Arbitration Association of Pakistan and to seek affiliation or liaison withsimilar bodies abroad.• To endeavour with other recognised chambers and associations acting through theFederation of Pakistan Chambers of Commerce and Industry to form a NationalCommittee of International Chambers of Commerce.• To make representations to the government, central or provisional and other authoritiesor bodies as and when deemed necessary, and to secure an organised action, direct orindirect, for the fulfilment of any or all of the objects mentioned herein.• To undertake manufacturing, trading or import and export business activities, approvedby the association on a non-profit making basis to facilitate the industrial and tradingactivities of individual members.• To convey to the government the problems facing the industry.• To suggest corrective policy matters for the growth of the footwear industry.• To coordinate with TDAP/EPB on participating in footwear exhibitions around theworld.• To recommend to TDAP/EPB trade delegations to different markets.• To pursue at different government levels removal of irritants affecting the businessoperation of its members.• To send recommendations to the Government, Ministry of Commerce, Central Board ofRevenue and Finance Ministry regarding import tariffs• To give feedback to the government about various decisions taken by them.• To appraise the government about any issues taken up by the governments of theimporting countries and their implications on Pakistani exports.• To arrange a footwear exhibition within Pakistan and attract foreign buyers, as well asmachinery and raw material suppliers. The objective of this exhibition is also to educatethe members and other footwear manufacturers about the technology and materialsavailable worldwide, thus contributing to the transformation of unorganised sector into amechanised sector.• To protect and promote the interest of the footwear manufacturing and all those deals inany category of footwear manufacturing industry and trade.2.5.5 Anti-dumpingPakistan is not taking any anti-dumping measures against the Chinese imports of footwear inPakistan. The Pakistan Footwear Manufacturers Association moved an application a few yearsback for protective measures against Chinese footwear imports to Pakistan, but no headwayhas been made in this direction. In fact, the import of Chinese footwear is on the rise. Some ofthe major retailers are patronising these imports. The government of Pakistan is also workingon signing FTA with China so the likelihood of any anti-dumping is removed.48 International Trade Centre

3 Implications of the WTO Agreements3.1 Background3.1.1 Multilateral discipline of trade rulesInternational trade for nearly six decades has been subject to the discipline of multilaterallyagreed rules “by which countries are required to abide in their trade relations with oneanother” 2 . The institution responsible for overseeing this rules-based system is the WorldTrade Organization (WTO, www.wto.org) established in January 1995. The WTO is thesuccessor to the General Agreement on Tariffs and Trade (GATT), which had been performinga similar role since January 1948.Box 3.1 Multilateral discipline of trade rules – The WTO system• International trade is subject to the discipline of multilaterally agreed rules by whichcountries are required to comply with in their trade relations with one another.• The World Trade Organization (WTO) oversees this multilateral system. ItsAgreements aim to help international trade flow smoothly, freely, fairly andpredictably.• Under the WTO trade regime there are both opportunities and challenges forPakistan.• It is for business community supported by the Government to convert tariff reductionsand liberalization commitments into opportunities for trade.• Likewise concerted action needs to be taken by both the public and private sectors toadequately meet challenges.Source: WTO Cell, Planning & Development Department, Government of the PunjabThis chapter is divided into four main sections:• General background• Information on the WTO issues• Implications of the WTO Agreements• Trade conditions as a result of the WTO Agreements.3.1.2 Purview of the WTOThe WTO’s purview encompasses three agreements, relating to trade in: (1) Goods; (2)Services; and (3) Trade-Related Intellectual Property Rights. In addition, there are twelveassociate agreements relevant for trade in goods.2ITC; Business Guide to the World Trading System (1999), p.3International Trade Centre 49

3.1.3 Functional scopeThe functional scope of the WTO is depicted in the diagram below.Figure 3.1 Functional scope of the WTOWTOTrade in goods Trade in services Intellectual property rightsGeneral Agreement onTariffs and Trade(GATT 1994)General Agreement onTrade in Services(GATS)Trade Related Aspects ofIntellectual PropertyRights (TRIPS)These Agreements seek to establish a trading system that is: non-discriminatory, freer, predictable,more competitive and arguably more beneficial to developing countriesAssociate Agreements on:• Agriculture• Application of Sanitary &Phytosanitary Measures(SPS)• Product standards (TBT)• Trade-related investmentmeasures (TRIMs)• Anti-dumping• 3.0.5 Customs valuation• Pre- shipment inspection• Rules of origin• Import licensing• Subsidies• Countervailing measures• Measures for safeguards• Business and professionalservices• Communication• Distribution services• Educational services• Environmental services• Construction and related• Engineering services• Financial services• Health services tourism andtravel-related services• Recreational, cultural andsporting related services• Transport services• Other services• Patents• Copyrights• Trademarks• Industrial designs• Geographical Indications• Undisclosed information3.1.4 Dispute resolutionFor disputes arising under GATT 94, GATS and TRIPs there is a common dispute resolutionmechanism embodied in the WTO’s Disputes Settlement Understanding, (DSU).50 International Trade Centre

3.1.5 Focus on trade in goodsIn this report focus is on trade in goods. Hence, further reference will not be made to theGATS while the TRIPs will be referred to wherever it is relevant.3.1.6 Obligation of conformityEach member country of the WTO is obliged to ensure the conformity of its laws, regulationsand administrative procedures with the agreements of the Organization (Article XVI (4) of theMarrakech Agreement Establishing the WTO).3.1.7 Opportunities and challenges under the WTO regimeOverviewThe central objective of the WTO is to help international trade flow smoothly, freely, fairlyand predictably. The WTO’s rules with their trade liberalization orientation, have indeed led toa rapid expansion of the world trade.In ranking the many achievements of the GATT-WTO system, among the most significant isthe deep reduction in developed-country tariffs from high double-digit figures in 1947 to lowsingle-digit numbers today 3 . There have been also significant reductions in other barriers totrade.Under this liberal international trade regime there are both opportunities and challenges forPakistan. No doubt Pakistan faces many challenges. At the same time, the multilateral tradedispensation has created many opportunities. If a proper strategy is adopted and theGovernment plays a supportive and facilitative role, it can lead to a significant increase ininternational trade and substantially contribute to the economic growth. Hopefully ongoingtrade negotiations would add to these opportunities. However, “the WTO is about providingopportunities – it does not provide guarantees nor does it provide all the conditions forparticipation in the global economy”. 4 In short, Pakistan has to put its act together, forrealizing the potential that has become available due to the trade liberalization. Action is to betaken by government agencies, trade bodies and, above all, by entrepreneurs themselves. As ithas been aptly observed “the business community has the primary responsibility for convertingtariff reductions and liberalization commitments into opportunities for trade by adopting5appropriate export promotion and development strategies”.Current status of efforts to liberalize tradeCurrently (mid 2007), the ninth (and the first under the WTO) Multilateral Round ofNegotiations (MTN) called the Doha Development Agenda (DDA) is in progress 6 (more3456See Patrick F. J. Macrory, Arthur E. Appleton and Michael G. Plummer, The World Trade Organization:Legal, Economic and Political Analysis, Volume-I (2005) p.109.See WTO “The Future of the WTO” (2004), p.16.See Supra note 1 at 23.See Hong Kong Ministerial Declaration, WT/Min (05), 22 December 2005, and for updates on the latestdevelopments and pending issues visit Hwww.wto.orgH.International Trade Centre 51

correctly in a state of suspended animation). Earlier rounds have given great impetus to thegrowth of international trade by slashing tariffs mostly in industrial countries as well aselimination of non-tariff barriers such as quantitative restrictions. Following the UruguayRound (the most important MTN held so far), average tariff rates in developed countries onmanufactures stand at an average of 3 % on imports down from the 5.5 % pre-Uruguay Roundaverage, a 45 % reduction. Tariffs; however, on goods of export interest to developingcountries still remain relatively high, 7 e.g. on clothing and footwear. DDA has been launchedto improve the situation of developing countries in the multilateral trading system throughfocusing on issues of principal concern to them. The progress of negotiation has been so farvery slow and deadlines for reaching agreement have been repeatedly missed. Meetings to takeforward the DDA process held in 2006 and 2007 turned out to be inconclusive and negotiationshave been suspended. One comment from an influential periodical graphically describes thesituation as the Doha Round lying “comatose after five years of fruitless negotiations”. 8Negotiations under the DDA on the Non-Agriculture Market Access (NAMA) cover the sectorunder study. Modalities are yet to be finalized on a Swiss formula, i.e. envisaging rate ofreduction for a higher tariff to be greater than that for a lower one. (For further details see:www.wto.org.)3.2 Information on WTO issuesInformation flows, both upwards and downwards, regarding the WTO are depicted in Figure3.2 below.The present arrangements leave a lot to be desired in terms of their content, sources,destination, user friendliness and nature of information i.e. optional or compulsory. There aremarkedly divergent perceptions among entrepreneurs about the nature and frequency of suchflows. Despite contrary claims made by individual entrepreneurs, one cannot help reaching theconclusion that flows are erratic in both directions.78See I. Haque, Doha Development Agenda: Recapturing the momentum of multilateralism anddeveloping countries, American University International Law Review, Volume 17 Member 5 Footnote36. Also See Bernard Hoekman, Strengthening the Global Trade Architecture for Development: ThePost Doha Agenda, Nov. 2001, at 2.The Economist, November 4, 2006, p.40.52 International Trade Centre

Figure 3.2 Upward and downward information flow on the WTOWTO, GenevaWTO Mission of Pakistan, GenevaMinistry of Commerce/TDAPMinistry of IndustryChambers of Commerce and PakistanFootwear Manufacturers AssociationEntrepreneursSource: WTO Cell, Planning & Development Department, Government of the Punjab.3.2.1 Information flow - upwards, i.e. from companies via governmentto the WTOGovernment driven flows – upwardsThere is no problem in respect of information transmitted by the Government of Pakistan to theWTO as an obligation of the membership of the organization. Regularly, the Ministry ofCommerce sends necessary information about notifications to the WTO as agreed in theInternational Trade Centre 53

Ministerial Decision on Notification Procedure. 9 Some of the items that are notifiable are:Tariffs, Generalized System of Preferences (GSP), provisions, Custom valuation, Rules oforigin, Safeguard actions, details regarding exports subsidies and concessionary exportfinancing.Trade statisticsAs regards trade statistics, the Government of Pakistan is obliged to furnish data for theintegrated database of the WTO. These figures are based on data of the custom stations andare reliable. However, there has been a lag in furnishing these statistics. The problem is beingsorted out.Another compulsory upward information flow is generated from the Census of ManufacturingIndustries (CMI) – conducted every five years. 10 Results of CMI suffer from problems ofcoverage, research design and lack of adequate response from the industry. Further, these atbest are historical data.Information through consultative meetingsThe Government of Pakistan gets itself informed about problems faced by industry andsuggestions made by the private sector, in meetings preceding the formulation of each year’strade policy. Apart from the Federations of Pakistan Chambers of Commerce and Industries(FPCCI), the regional Chambers of Commerce and sectoral associations, which are registeredwith the Government, are invited. However, as regards associations, some selection is made toensure that representation is adequate in terms of both sectors and regions.Information flow – upwards: Exporters’ opinionSemi voluntary and sporadicIn the footwear industry, it was found that companies were very hesitant to share informatione.g. pairs sold or exported, the organizational hierarchy, client’s details etc. One reason is thepredominance of cottage industry segment, which lacks capacity to organize and transmitinformation. As a matter of fact in a recent seminar a consultant commented on the hesitationof companies in sharing confidential information about their company i.e., sales records,client’s details, profitability etc.Statistics regarding imports and exports are transmitted by the Government to the WTOdatabase on the basis of information provided by the Customs authorities.Information about the concerned government agencies/departmentsA majority of exporters generally had an idea that complaints/suggestions about the WTO canbe made to Ministries of Commerce & Industries or TDAP. They were also aware of websitesof the concerned government organizations.910WTO: Decision on Notification Procedures, Ministerial Decisions and Declaration adopted by the TradeNegotiations Committee on December 15, 1993.The census is undertaken under the Industrial Statistics Act, 1942 for industrial units employing 10 andabove workers registered or qualifying for registration. Information is treated confidential.54 International Trade Centre

On the other hand, some entrepreneurs thought that there was no organization to which theycan make complaints nor they were aware of any procedure for making their voices heard bythe relevant government authorities. In short, information among entrepreneurs about reachingout to the government authorities or trade bodies is not even. More enlightened entrepreneursare aware of what to do while others remain ignorant of avenues of articulation available tothem.3.2.2 Information flow - downwards, i.e. from the WTO viagovernment to companiesComplaints about the lack of information about the WTOIn January 2005 several management consultants, bankers, and government bodies, i.e. TDAP,SMEDA, and Chambers of Commerce, organized seminars on the WTO to create awarenesswithin the business community. According to industry sources after these events, no seminarswere organized. As a result, companies have no access to up-to-date information related to theWTO.Knowledge about implications of the WTO AgreementsPeople earlier thought that the WTO would bring no change. However, entrepreneurs nowhave a general idea of the effects of the WTO agreement on the footwear sector but they do nothave any professional information about this subject.To improve the current situation, the local consultant recommended that the Ministry ofCommerce should become more proactive. TDAP should circulate newsletters, makeinformation available on websites, conduct seminars, visit trade associations and invitecompanies for open dialogue. SMEDA should also come forward by organizing tailor madeseminars and other promotional activities. The Ministry of Industry should also take part insuch activities. In short a multi-organizational initiative has been found to be very necessary toenhance the quality and easy accessibility of information.Existing information flow – downwardsWith respect to downward flow, the website of Ministry of Commerce(www.commerce.gov.pk) and other ministries, TDAP (www.tdap.gov.pk) and the WTO Cellof the Government of the Punjab (www.wtopunjab.gov.pk) have been playing a useful role.However, here again it was found that various notifications issued by the WTO Secretariat andwhich are regularly sent to the Ministry of Commerce are not put on the website. The pleataken in this regard was that this information was available from the WTO website. PakistanFootwear Manufacturers Association’s website (www.pakfootwear.org) has no information onthe WTO or markets. However, it is felt that the Government of Pakistan and its export/tradedevelopment organizations must play a more proactive role. The WTO, in collaboration withITC and the European Commission (EC/EU), has established WTO reference centres in theMinistry of Commerce, TDAP, and the Lahore Chamber of Commerce & Industry (LCCI).WTO references centres have also been established by the FPCCI, selected Chambers ofCommerce & Industries and the Planning & Development Department of the Government ofthe Punjab.International Trade Centre 55

Demand for proactive supportive role of the governmentPakistan’s shoe industry, according to entrepreneurs, has been adversely affected by the lowcost imports of shoes from China. However, the anti-dumping complaints lodged by two mainlocal shoes manufacturers was not entertained as their combined shoes production was lessthan 20% of total shoe production in the country.The footwear entrepreneurs were of the firm view that the Government should create greaterawareness about the WTO issues by, regularly organizing focused seminars, workshops anddiscussions, circulating newsletters, magazines and creating websites. TDAP, Chamber ofCommerce & Industry and the Pakistan Footwear Manufacturers Association should also comeforward in creating awareness. The Government should compile a mailing list and regularlycirculate updates on the WTO agreements to exporters/manufacturers.RecommendationsThe situation as to information flows is not satisfactory. A proactive role is required on the partof Ministry of Commerce and the Trade Development Authority of Pakistan. The TDAPorganization should provide leadership and collaborate efforts with other relevant agencies,e.g. Chambers of Commerce, SMEDA and Provincial Government’s WTO Cells and tradeassociations. Funds are not an insurmountable problem because the Ministry of Commerceand TDAP have ample resources in the form of the Export Development Fund (EDF). The realchallenge is to organize a system that is user friendly and available in virtual real time.Technical assistance from the ITC to set up/improve such an information system should bevery much welcome. TDAP should intensify its activities for capacity building, specifically forthe better use of opportunities and coping with challenges emanating from the WTO system.Among other things, the following measures are recommended:• The present system of generalized information in the WTO should be changed to onedisseminating focused information regularly on concrete issues.• A comprehensive plan for dissemination of sector-specific information may be preparedby TDAP in consultation with stakeholders.• A helpline, professionally manned, should be established in TDAP. Sector specificexperts should be available to callers.• Special meetings/workshops/seminars for educating entrepreneurs about the WTO issuesshould be organized by the TDAP preferably in partnership with concerned tradeassociations at least four times a year at different places.(Action: Ministry of Commerce, TDAP and ITC)3.3 Implications of the WTO Trade Agreements3.3.1 The WTO Agreements relevant for the global and Pakistanifootwear sectorThe WTO Agreements in terms of degree of their relevance for the footwear sector can bedivided into three categories: high intensity relevance, low intensity relevance and contingent56 International Trade Centre

elevance. Agreements possessing contingent relevance refer to those that come into effect incertain situations only.The degree of relevance of these agreements for the footwear sector is the same in Pakistan andelsewhere, i.e. in other WTO member countries as well.The agreement of direct relevance to the footwear sector is GATT 1994. Other agreementshaving high relevance are TRIPs, Technical Barriers to Trade (TBT), Rules of Origin, and theCustoms Valuation.The agreements of lesser relevance are: Application of Sanitary and Phytosanitary Measures(SPS), Pre-Shipment Inspection, Import Licensing Procedures and Trade Related InvestmentMeasures.In the category of contingent relevance are agreements on Anti-Dumping, Subsidies,Countervailing, Safeguards and the DSU.The WTO Agreements not only influence the volume of trade but also affect the operationalspace of a policy-maker and market access of an individual exporter.A diagrammatic representation of the degree of relevance of the WTO Agreements for thefootwear sector is given below in Figure 3.3.International Trade Centre 57

Figure 3.3 Relevance intensity of the WTO Agreements 11TRIPSRules ofOrigin*CustomValuationTBTSPSGATT1994DSU**FootwearAntidumpingPreshipmentinspectionImportlicensingprocedureAgreementon SCM***TRIMSHigh intensity relevanceLow intensity relevanceContingent relevance* Acquires high intensity relevance in the context of Regional Trading Arrangements and whereany scheme of preferential tariffs has been adopted.** Dispute Settlement Understanding*** Subsidies & Countervailing Measures11Texts of Agreements are available on the WTO’s website – Hwww.wto.orgH.58 International Trade Centre

3.3.2 Relevance of specific WTO Agreements for the footwear sectorGeneral Agreement on Tariffs and Trade 1994The structure of GATT 1994 that lays down the framework within which the internationaltrade of goods takes place rests upon five pillars that constitute the core of the legal obligationsof the member countries.The Most-Favoured-Nation (MFN) obligation (Article-l)Every member of the WTO is required to treat imports from all other members “on an equal,non-discriminatory basis vis-à-vis all other members imports”. Thus if a country grants aspecial favour to another country (e.g. lower custom’s duty rates) the same treatment has to beextended to all other WTO member countries.Implications for the footwear sectorImportsPakistan or any other WTO member country while importing footwear has to extend the sametreatment to the same products of all the member countries. They are not allowed to give adifferential treatment to any trading partner who is member of the WTO. This obligation leadsto non-discriminatory trade and provides level playing field to every member of the WTO.ExportsFor Pakistani exports non-discriminatory market access to other markets is legally assured.This does not; however, indicate the rate of tariff that is leviable on footwear items. Marketaccess will be virtually blocked if tariff rates are excessively high. Likewise, exports will beadversely affected if importing countries are using non-tariff barriers.Exception to the principleSome exceptions are permitted from this principle such as:• Preferential tariff rates given to countries that are members of a free trade area/regionaltrading arrangements under Article XXIV of the GATT.• Preferential tariff rate arrangements among developing countries permitted under theEnabling Clause 12 (see Box 3.2.)• Special access to markets of industrial countries at lower tariff rates granted todeveloping countries, e.g. Generalized System of Preferences (GSP) 13 .• Member countries are allowed to introduce trade restrictions in case of balance ofpayment difficulties.1213WTO, Guide to the Uruguay Round Agreements (1999), p.40.The GSP was proposed at UNCTAD II in 1968. It entered into force in 1971 and gives developingcountries a margin of preference in the tariff rates their goods face in the markets of developedcountries. In this way GSP increases their competitiveness.International Trade Centre 59

However, all these exceptions are allowed under strict conditionalities.Box 3.2 Regional Trade Agreements (RTAs)Governments often take action to liberalize trade on a regional level through formation offree trade areas or preferential trade areas. Under these arrangements, goods can entereach other’s country market either without payment of any tariff or on some preferentialterms and conditions. RTA, which includes bilateral free trade agreements betweencountries that are not in the same region, have become so widespread that all but one WTOmember are now parties to one or more of them. It is estimated that more than half of worldtrade is now conducted under RTAs. Some 197 such agreements in force have beennotified to the GATT/WTO.Many experts regard these arrangements as building blocks for a freer non-discriminatorymultilateral trading system. However, many other experts perceive these arrangements tobe obstacles to the growth of a multilateral system. Regional arrangements are allowed (asexception to the Most Favoured Nation principle) under Article XXIV of the GATT 94 as wellas under the Enabling Clause (trade arrangements between developing countries).Pakistan is a signatory to an Agreement on South Asian Free Trade Area (SAFTA) that is atransformation of the SAARC Preferential Trading Arrangement (SAPTA, operational albeithalf-heartedly since 1995) into a Free Trade Area among the SAARC members(Bangladesh, Bhutan, India, Nepal, Maldives, Pakistan and Sri Lanka).SAFTA’s framework agreement envisages reduction of tariffs to 0-5% level and removingquantitative barriers to trade (a) within 10 years by its LDCs members—Nepal, Bhutan andMaldives and (b) between 7 – 8 years in case of India, Pakistan, Bangladesh and Sri Lanka.In addition to the above, a FTA has been signed with Sri Lanka. Early harvest agreementshave been signed with China and Malaysia. Besides this a FTA agreement has been signedwith China in November 2006. Negotiations are ongoing for signing FTA with Bangladesh,Turkey and Kenya. Discussions are also ongoing with Indonesia, Laos, Singapore andThailand for exploring the possibility of entering into FTAs.Source: WTO Cell, Planning & Development Department, Government of the PunjabNational treatment obligation (Article III)Once foreign goods have entered a country’s market, these and locally produced goods are tobe treated equally (as if foreign goods have acquired importing country’s nationality).This article embodies the same principle of non-discrimination as set out in the MFNcommitment. It also establishes the principle that no tax will be imposed on imports in excessof the amount of the indirect taxes levied on the like domestic products.Reduction and bindings of national tariffs (Articles II, XI)In order to make trade predictable, the WTO member countries are generally binding theircommitments (Article XI), i.e. ceilings are imposed on tariff rates that can be charged by acountry. 14 . Under the WTO system tariffs (i.e. custom duties) are the only form of thepermissible measure for trade protection (Article II & Article XI). The bound tariffs cannot beincreased above the bound rates unless compensation is paid to the other adversely affectedWTO member.14Pakistan has bound more than 99% of tariff lines.60 International Trade Centre

In case of developing countries, imports often take place on lower than the bound rates theseare called applied rates which can be increased up to bound levels without consultation withanyone.Reduction of tariffs is an important aspect of trade liberalization. As a matter of fact rates oftariffs have been constantly coming down since the GATT became operational in 1948.Industrial countries’ tariffs in most of the traded items have fallen down to less than 4%. Sucha significant reduction in tariff barriers has been very helpful for increasing trade. However, asstated above, on many items of interest to developing countries, tariff rates remain relativelyhigh e.g. textiles and clothing.Elimination of quantitative restrictions (Article XI)Member countries are required to eliminate quantitative restrictions on imports and exports.However, there are a number of exceptions to this rule. For example export restrictions can beapplied on export of goods to prevent or relieve critical shortages, Article XI-2 (a).Relevance to the footwear sectorExportsPakistani exports of footwear do not, by and large, face significant non-tariff barriers inindustrial countries’ market. They mainly face tariff barriers, which have also substantiallycome down. In other words, for the footwear sector of Pakistan “market access” is not aproblem as such. This indicates a great scope for increasing export in this item providedPakistan has the right products at the right prices.ImportsThe combined effect of Articles-II and XI is that foreign footwear goods enjoy reasonableaccess to Pakistan’s market though tariffs are relatively high (25%).Imports should prove a tonic effect for Pakistan’s domestic industry. This infusion ofcompetition is expected to have a positive effect on footwear manufacturing units.Pakistan’s exports have in fact better opportunities in markets of industrial countries onaccount of their comparatively lower tariffs.Transparency of Government regulations affecting trade (Article X)Members are obliged to publish relevant laws, regulations, administrative rulings of generalapplication including those pertaining to the classification of the valuation of the products etc.The governments are also required to disclose their policies and practices publicly within thecountry as well as by notifying the WTO. With a view to ensuring that members adhere to theirobligation, their trade policies are examined through a surveillance mechanism called the“Trade Policy Review Mechanism”. This examination of the trade policy and results ofexamination becoming a part of public domain also contribute to greater transparency.International Trade Centre 61

Relevance for the footwear sectorTransparency in government regulations, in Pakistan and abroad, helps in smoother flow oftrade. It is “in essence due process guarantees and a partial shield against arbitrary governmentaction”.Trade Related Aspects of Intellectual Property Rights (TRIPS)Many countries entered into international agreements (non WTO) to protect creative ideas andnew knowledge by giving the creators of these knowledge based assets (called the intellectualproperty rights) the following:• The right to prevent others from “using their inventions, designs or other creations”, 15and• The ability to negotiate payment for their intellectual property (IP) rights.However, protection given to IPRs (by several international agreements) was found to beinadequate. This was particularly true as to the level of protection, implementation andenforcement. It was, therefore, agreed to develop new internationally agreed rules. The resultwas the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)negotiated in the Uruguay Round of MTN, which sought to reduce distortions andimpediments to international trade through promoting effective and adequate protection ofintellectual property rights.The Agreement spells out the way that basic principles of trading order and other intellectualproperty agreements should be applied. The “MFN” and national treatment requirement haveconstituted key elements of the architecture of the agreement on the TRIPs. This Agreementhas also required Members to comply with pre-existing agreements governing IPRs. It wasexplicitly provided that nothing in the TRIPs Agreement shall derogate from existingobligations as spelled out in the Paris Convention, the Berne Convention, the RomeConvention and the Treaty in respect of Integrated Circuits.The TRIPs Agreement markedly narrowed the gaps in the manner these rights wererecognized, protected and enforced among trading nations. It also provides for settlement ofdisputes through the WTO dispute settlement system. Pakistan, in compliance with the TRIPSAgreement, has enacted new legislation (IPO law) as well as effected amendments in theexisting laws relating to patents, copyrights and trademarks.Relevance for the footwear sectorTRIPs Agreement is directly relevant for the footwear sector. In the current businessenvironment, the primary source of competitive advantage for all businesses, including thosein the fashion industry, is innovation and original creative expressions. Business managersneed to identify such valuable intangible assets in a timely manner, determine their businessrelevance, and agree on those to be protected and leveraged through the intellectual property(IP) system. As the sector becomes more sophisticated its relevance will increase further.15This Agreement fixed minimum levels of protection that each member of the WTO is required to provideto the intellectual property of other members.62 International Trade Centre

Protection of designs and trademarksFootwear designs can now be protected by registration under the Registered DesignsOrdinance, 2000. Likewise, well-established companies are advised to get their trademarksprotected.The quality of protection has significantly improved. By the same token, the footwear industryin Pakistan cannot copy some one else’s designs or trademarks. In case a violation occurs inrespect of IPR of Pakistani rights holders, they would be well advised to take advantage ofprotection provided by the TRIPS Agreement.(Action: Footwear Industry/Exporters)Agreement on Technical Barriers to Trade (TBT)Every WTO Member while allowing imports has the right to adopt standards considered by itto be appropriate for human, animal or plant life or health or for the protection of theenvironment or for prevention of deceptive practices. TBT seeks to assure that regulations,standards, testing and certification procedures do not create unnecessary hurdles to trade.However, with a view to preventing excessive diversity, TBT encourages member countries touse international standards where these are appropriate but it does not oblige them to changetheir levels of protection in the process.TBT contains a code of good practice for the preparation, adoption and application ofstandards. It lays down that procedures used to determine whether a product conforms to thenational standards have to be fair and equitable. It does not approve of any methods thatwould give domestically produced products an unfair advantage. It also encourages countriesto accord recognition to each other’s testing procedures. To help the stakeholders to knowabout the latest standards in the prospective markets, all the WTO members are required toestablish a national enquiry point.The TBT gives decisive advantage to industrial countries as they have superior technologiesand do follow more rigorous and higher standards. On the contrary, Pakistan being adeveloping country has yet to progress to those relatively sophisticated standards. Inparticular, there are not enough laboratories. This puts Pakistan at a disadvantage.Relevance for the footwear sectorIn most of the developed countries governments and businessmen respond to the civil society’spreference for ecologically friendly production and consumption systems and consequentialenforcement of high environmental standards. Leather industry in this respect is getting a lot ofattention because tanneries are contributing significantly to pollution. Indirectly leather productslike footwear in view of this are subjected to rigid scrutinyThere is also the possibility that protectionist interests in importing countries may insist onlaying down unrealistic standards that might have the effect of obstructing trade. In such cases,Pakistani exporters may be well advised to plead that the arbitrary standards have been creatingunnecessary hurdles to trade and constitute a violation of the TBT Agreement.There are various government institutions through which awareness regarding environmentalstandards and regulations can be/should be disseminated regularly to the export sector. TheseInternational Trade Centre 63

include the Ministry of Commerce, Ministry of Industries and Ministry of Environment, TradeDevelopment Authority of Pakistan and provincial department of environment protection. Thelack of such information can lead to loss of markets. The Ministry of Commerce may alsoconsider including a trade and environment section in the cell that deals with the WTO anddraw on the relevant expertise from the other ministries.(Action: Ministries of Commerce, Industry & Environment, TDAP)Agreement on the Application of Sanitary and PhytosanitaryMeasures (SPS)Member countries of the WTO are allowed under Article XX of the GATT 94 to regulate tradewith a view to protecting human, animal or plant life or health. Under the Agreement onSanitary and Phytosanitary Measures (SPS), the WTO has disciplined the exercise of discretionby member countries by disallowing them to discriminate or misuse this authority serving as aform of disguised protectionism.Members of the WTO are allowed to establish their own standards but it is stipulated that therelevant regulations must be based on science and applied only to the extent necessary toprotect human, animal or plant life or health. They are not allowed to arbitrarily orunjustifiably discriminate between countries, where identical or similar conditions prevail.Member countries are encouraged to use international standards, guidelines andrecommendations if these are available.In order to make the process fair from the perspective of exporters, standards different fromthose already prescribed, can be applied. Similarly, different methods of inspecting productscan be adopted. In order to make this happen exporters demonstrate that the measures whichexporting countries have applied are at the same level of “health protection” as adopted byimporting countries. Once that is done, an importing country is expected to accept theexporting country’s standards and methods. This agreement also lays down that governmentsmust provide advance notice of new or changed SPS regulations. They are also required to seta national enquiry point to provide up-to-date information.Relevance for the footwear sectorApparently, the agreement on SPS should not be relevant for the footwear sector. However,protectionist’s interests can assume any garb and come up with objections as to the importedfootwear on the ground of it being harmful to human, animal or plant health. In particular,such a stand can be taken somewhat easily in respect of the components of footwear and readyto-assembleparts. It may be argued, for example, that tanneries or polish on the footwear areemitting certain substance that is harmful to the human, animal and plant life. In such asituation, it would be open for Pakistani exporters to press into service provisions in theagreement against untenable standards.(Action: Entrepreneur/Association and GOP)64 International Trade Centre

Customs Valuation under the GATT – Implementation of Article VII ofthe GATTThe provision regarding customs valuation under the GATT seek to establish a fair anduniform system for the valuation of goods that provides protection to international traders fromfixation of arbitrary values by customs authorities of importing countries. The agreement laysdown that the customs value of the imported goods in the case of unrelated parties will be the“transaction value”. This really means the price actually payable for the goods when sold forexports. Additional considerations apply where the importer and exporter are related entities.Some costs such as freight, packaging, commissions, etc, may be added for the purpose ofworking out customs value. The agreement however excludes items that are regardedirrelevant for fixing custom value e.g. the price of goods on domestic market of the exportingcountry. If the custom authorities of a country have doubts about the declared value, they maydetermine the value by sequentially adopting one of the five options: (a) the value of identicalgoods, (b) the value of similar goods, (c) the imported price of identical or similar goods lessapplicable deductions for costs, (d) computed value and (e) if none of these methods work,reasonable means may be used for determining value.Relevance for the footwear sectorSerious problems can arise if custom authorities of a country choose to fix arbitrary values. Ifvalues fixed are excessive, trade liberalization policy can be effectively neglected. In casevalues are on the low side the tariff protection given to domestic manufactures will cease to beeffective. If footwear importers and domestic producers in any country find this misuse ofcustom processes then they can agitate the matter with the relevant revenue authority (Customsand Central Board of Revenue).Rules of OriginThe WTO agreement on Rules of Origin contains a work-programme seeking to bring about inthe long terms harmonization of these rules. The issue of “Rules of Origin” does not arise incases where import and export take place on MFN basis. It is relevant in cases where a countryis to benefit from the lower tariff available through GSP or under regional trading arrangement.Such concessional arrangements rightly require scrutiny of imported goods to ensure that theyare coming from the eligible sources.Relevance for the footwear sectorWhere footwear exports are destined for a country either granting GSP or for a member of aregional arrangement of which Pakistan is a member, rules of origin acquire specialimportance. Exporters will be advised in these cases to obtain complete documentation,certifying the Pakistani origin of the concerned articles. Importers should, likewise, insist ongetting proper documentation from the importing country. The Trade Development Authorityof Pakistan issues certificates of origin. Exporters are advised to approach the local office ofthe bureau.(Action: Entrepreneur/Association and GOP)International Trade Centre 65

Agreement on Trade-Related Investment Measures (TRIMs)At times, local content requirements and performance requirements have been, inter alia,employed by host countries as an instrument to promote development objectives, such asindustrialization, import-substitution and export growth. Such requirements can affectinternational trade. For example, a requirement of local content in a product may prevent orlimit the use of imported inputs. Any investment related measure of this type has been nowprohibited as a trade distorting measure. (This agreement, as such, is not relevant for thefootwear sector.)Anti-dumping – Agreement on Implementation of Article VI of GATT1994Article VI of the GATT 94 finds the practice of sale of products of a foreign country at lessthan the normal value of the products in the exporting country (called dumping) objectionableif: (a) the price level causes or threatens material injury to an established industry in theimporting country or (b) the price level materially retards the establishment of a domesticindustry. Article VI (2) of the Agreement permits a country to offset or prevent dumping bylevying on the concerned product anti-dumping duty not greater in amount than the margin ofdumping. The margin of the dumping is the price difference determined in accordance withthe Article VI (1).Under the anti-dumping agreement, a country is allowed to act in a way that would normallyinfringe the GATT principles of binding a tariff on MFN basis because anti-dumping actionmeans “charging extra import duty” on a particular product from a particular exportingcountry. Detailed procedures have been laid down on how anti-dumping cases are to beinitiated, how their investigations are to be conducted and conditions for ensuring that allinterested parties get an opportunity to present evidence.Normally, anti-dumping measures expire five years after the date of imposition, unless aninvestigation shows that ending the measures would lead to injury. Anti-dumpinginvestigations are required to end immediately in cases where it is determined that the marginof dumping is insignificantly small (defined as less than 2% of the export price of the product).Likewise, proceedings must end if the volume of dumped imports is negligible. The agreementlays down that the member countries must inform the WTO about all preliminary and finalanti-dumping actions promptly as well as report on investigations twice a year.Relevance for the footwear sectorThe agreement on anti-dumping is important both for importers and exporters of footwear. Ifan actionable dumping takes place in the Pakistani market, one can have recourse to theNational Tariff Commission (www.ntc.gov.pk) for seeking relief. If necessary the Governmentof Pakistan also can, on the basis of Anti-dumping Agreement, agitate the matter in the DisputeSettlement Mechanism of the WTO. The Ministry of Commerce, Government of Pakistan isthe concerned agency.(Action: Entrepreneurs and Ministry of Commerce)In case export of footwear from Pakistan faces anti-dumping proceeding in an importingcountry or in the dispute settlement system of the WTO the Government of Pakistan has toargue (and present evidence) that dumping has not taken place or the margin of dumping is66 International Trade Centre

insignificantly small. However, given the extremely small quantum of footwear exports fromPakistan, there is little likelihood of anti-dumping action against Pakistan in the near future.Action is to be taken at the instance of the industry by the Ministry of Commerce.(Action: Entrepreneur/Association and Ministry of Commerce)Agreement on Subsidies and Countervailing MeasuresThis agreement disciplines use of subsidies and also regulates the actions that can be taken bythe countries to counter effects of subsidies. A country can have recourse to the WTO’sdispute settlement mechanism and seek the withdrawal of the subsidy or the removal of itsadverse effects. Another alternative is to launch its own investigation and charge extra duty(known as “countervailing duty”) on the goods in question to nullify effects of subsidy givenby our trading partners. The agreement defines a subsidy and also introduces a concept of aspecific subsidy i.e. a subsidy available only to an enterprise/group of enterprises. Thediscipline applies only to specific domestic or exports subsidies.The agreement deals with the following two types of subsidies:Prohibited subsidiesRequiring recipients of subsidies to achieve certain exports targets or to use domestic goodsinstead of imported goods in their manufacture. Such subsidies (trade distorting) can bechallenged in the WTO’s dispute settlement mechanism. In case, it is found that the prohibitedsubsidies have been given, the respondent country will be ordered to withdraw it immediately.In case the respondent fails to comply, the complaining country can levy countervailing dutyon such subsidized products after following the prescribed procedure.Actionable subsidiesThis category is less objectionable than “prohibited subsides”. Here a complaining country hasto demonstrate that the subsidy has an adverse effect on its interests. The agreement definesthree types of damage that can be caused by this class of subsidies: (i) Domestic industry of theimporting country is being hurt, (ii) Rival exporters from another country may be hurt whenthe two compete in third markets, (iii) Domestic subsidies in one country can hurt exporterstrying to compete in the subsidizing countries’ domestic market.ExceptionSubsidies given by LDCs/developing countries with GNPs of less than US$1,000 per capitaper year are exempted from subsidy regime.Relevance for the footwear sectorIn case prohibited and actionable subsidies are given to promote export of footwear, affectedinterests in Pakistan can request the National Tariff Commission to impose countervailingduties. On the other hand, if allegations about subsidies (trade distorting) on the part ofPakistan are made by an importing country, this agreement provides the exporter withwherewithal to show that countervailing duty should not be imposed. Should the matter requirereference to the WTO, the Ministry of Commerce would have to be approached.(Action: Footwear Industry and GOP)International Trade Centre 67

Agreement on safeguardsThis agreement disciplines initiation of emergency safeguards measures by laying downrequirements for safeguard investigations. These have to be transparent as well as obligeMember countries to follow established rules and practices. The criteria for serious injurycaused or threatened to be caused have been also laid down. The agreement also sets timelimit on all safeguard actions (4 years) and addresses “grey area” measures by providing thatthe members must not seek/take or maintain any voluntary export restraints, orderly marketingarrangements or any other similar measures. An import “surge” that triggers action under thisagreement is defined to be a real increase in imports i.e. an absolute increase or an increase inthe import share of a shrinking market (even if the import quantity has not increased).Relevance for the footwear sectorThis agreement can be used wherever any importing country finds that there has been a surgein imports, causing injury to the domestic industry. Affected parties are well advised toapproach the Government of Pakistan for remedial steps in such a case.By the same token, the exporting country can always show that action under safeguardsprovisions is not transparent or does not meet the criteria of serious injury or threat of seriousinjury. 16(Action: Footwear industry and GOP)Box 3.3 WTO Agreements in a nutshell• General Agreement on Tariffs and Trade (GATT 94) regulates the international tradein goods and rests on five pillars: Most-Favoured-Nation (MFN) Obligation, NationalTreatment Obligation, Elimination of Quantitative Restrictions, Transparency ofGovernment Regulations Affecting Trade and Tariff Bindings.• Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) seeksto reduce impediments to international trade through promoting adequate protectionof intellectual property rights. TRIPS Agreement is especially relevant for thepharmaceutical industry.• Agreement on Technical Barriers to Trade (TBT) contains a code of good practice forthe preparation, adoption and application of standards.• Agreement on Sanitary and Phytosanitary Measures (SPS) disciplines exercise ofdiscretion when a country wishes to disallow import of any item on the ground that itwould be hazardous to life or health of human being or disallowing import to protecthuman, animals or plants.• Customs Valuation under GATT – Implementation of Article VII. This agreementseeks to establish a fair and uniform system for the valuation of goods that providesprotection to international traders from fixation of arbitrary values by customsauthorities of importing countries.16In 1995, the government of Argentina increased tariffs on certain textile, apparel and footwear imports tolevels substantially above their WTO bound rates, which for footwear was 35 %. Subsequently, a WTOdispute settlement panel found the duty increase on textile to be illegal, but the Government of Argentinawas able to avoid such a determination on footwear by reimposing the higher duties under the WTO-legalsafeguard rules. This action stymied the efforts of several US exporters of branded athletic footwear toincrease exports to Argentina.68 International Trade Centre

• Agreement on Rules of Origin seeks to clarify and harmonize rules of origin inmember countries and in particular requires members to ensure that such rules donot create distorting or disruptive effects on trade. The rules of origin are of specialrelevance in cases where a country is to benefit from the lower tariff available throughGSP or under a regional trading arrangement.• Agreement on Trade-Related Investment Measures (TRIMs) seeks to prohibitinvestment related measures that are trade distorting e.g. local content requirementsand performance requirements. It is of special relevance for automotive parts sector.• Agreement on Implementation of Article VI of the GATT 1994 (Anti-dumping)regulates the practice of dumping i.e. the sale of products of a foreign country at lessthan the normal value of the products in the exporting country if the price level causesor threatens to cause material injury to an established industry in the importingcountry.• Agreement on Subsidies and Countervailing Measures disciplines the use ofsubsidies and also regulates the actions that can be taken by the countries to counterthe effects of subsidies.• Agreement on Safeguards disciplines initiation of emergency safeguards measuresby laying down requirements for safeguard investigations.3.4 Trade conditions of Pakistan’s footwear sectorMarket access for Pakistan has improved and also for its trading partners. As a result of theWTO agreements, market access for the Pakistani footwear in industrial countries’ market hasimproved as tariffs have come down. Further, there is now protection available to Pakistanagainst any discriminatory treatment in our trading partners’ markets. Further, Article XI of theGATT 1994 has eliminated quantitative restrictions.Box 3.4 Import and export profileExports• 2005: US$154 million• Rank as exporter in world trade: 35• Major export destinations: Saudi Arabia, United Arab Emirates Yemen, Afghanistanand United Kingdom.Imports• 2005: US$24 million• Rank as importer in world trade: 91• Applied tariffs: 25%• Major import sources: China, Thailand, United Arab Emirates, Saudi Arabia, andHong Kong.Source: ITC calculations based on COMTRADE statisticsPakistan has also opened its market substantially, among others, in respect of footwear (albeiton 25% of duty, higher as compared to that of industrial countries). Since 1998, Pakistan’simport regime has been significantly liberalized through reduction in tariffs, rationalization,International Trade Centre 69

and removal of import quotas, import surcharges and regulatory duties. The unweighted(i.e. simple) average statutory tariff has come down from 47.1% in 1997-98 to 14.4% in2006-07. The process in fact started in 1988 after the agreement on Structural AdjustmentProgramme was concluded with the International Monetary Fund (IMF). In the case ofPakistan unilateral liberalization has been the principal avenue of liberalization of trade.Pakistan has been complying with all its commitments under the WTO. The net actualliberalization on the part of Pakistan has been much more than multilaterally required inPakistan’s WTO agreements. Some experts are of the view that we should not have unilaterallyreduced tariffs to such a steep extent.Competition has led to reduction in prices: Pakistani footwear makers have now entered an eraof increasing competition, as opening up of trade impacts both exports and imports. Newtougher requirements for producing domestic footwear according to stricter standards and moreelaborate designs are being progressively adopted.The WTO regime is not static but is dynamically evolving. The way negotiations on DDAproceed and the ultimate agreement reached will hopefully influence the landscape ofinternational trade.3.4.1 Other countries’ access to Pakistan (threats)Rapid growth of importsExports of footwear from Pakistan are around six times of its imports: ca. US$154 millioncompared with US$24 million – with both figures increasing. The MFN duty applied byPakistan to the imports of different footwear products is 25%. 17 This is relatively high ascompared to a large number of other countries. Despite this a rapid growth of imports underthe WTO liberalized import regime has taken place. Market share of main footwear exportingcountries in Pakistan’s economy is increasing with a rapid pace. For example the exportgrowth of China in the footwear sector to Pakistan is 104% for the period 2001-05. Otherdeveloping countries, like Thailand, Viet Nam and Indonesia, are also exporting more andmore to Pakistan. The reason for the increase in imports from these countries is that Pakistanibuyers find the footwear produced by them attractive on account of the quality and price.The following table shows this import growth, including the share in Pakistan’s imports andvalue of footwear products by top 10 supplying countries to Pakistan.Table 3.1: Top 10 footwear exporters to Pakistan, 2004ExportersImported value 2004(US$ million)Share in Pakistan’simports (%)Export to Pakistangrowth 2001-05 (%)China 18.6 79 104Thailand 1.6 7 37United Arab Emirates 0.94 4 36Saudi Arabia 0.59 2 n.a.Hong Kong/China 0.23 1 6517Source: ITC calculations based on COMTRADE statistics70 International Trade Centre

ExportersImported value 2004(US$ million)Share in Pakistan’simports (%)Export to Pakistangrowth 2001-05 (%)Viet Nam 0.20 1 -23Portugal 0.18 1 647Malaysia 0.17 1 55Indonesia 0.16 1 3United States 0.14 1 178United Kingdom 0.12 1 -9Source: ITC calculations based on COMTRADE statisticsDoes liberalization of trade pose a threat to the footwear industry of Pakistan? Not really.Pakistan’s tariff rates are relatively high. Further, Pakistan’s bound rates are much higher thanthe applied tariff rate. The real problem is menace of under-invoicing and mis-declaration aswell as smuggling. These in particular pose a real threat to smaller manufacturers. Some ofthese manufacturers have reportedly closed down their production facilities. In order to protectthemselves from unfair competition the affected industries can approach the National TariffCommission (NTC), which provides an institutional mechanism for trade remedial actions.However, it has been reported that the affected parties did not find access to the NTC easy.More importantly the NTC can only help against the regular imports. If competition is withthe under invoiced or smuggled goods any increase in duty (anti-dumping or countervailing)will not prove effective. Pakistan’s tariff rates are likely to come down further after an accordon NAMA (Non-Agricultural Market Agreement) under the DDA. This may create someproblem for domestic manufacturers.One cannot hope for a closed economy in a globalized world: In the liberalized world of todayone can not expect a closed economy and should not be upset about flow of imports. However,the rate of growth in imports should be a matter of concern. If imports show an exponentialincrease it would not certainly be good news for the domestic footwear industry.3.4.2 Pakistan’s access to other new markets (opportunities)Improved market accessExports of footwear decreased by 17% between 1995-96 and 2000-01. This cannot beattributed to the liberalized WTO regime - it was coincidental. In all probability it was a supplyside problem. From 2000-01 to 2004-05 there was a 224% increase in exports. Though itcannot be claimed that the WTO is the only factor underlying this growth, it can be assumedthat the better market access opportunities provided by the liberal trade regime (from 1995onwards) made an important contribution to better export performance.In this connection a study of tariffs in our trading partner countries’ would be instructive. Atable setting out tariff rates in the various export destinations for Pakistan’s footwear productsand exported value in 2005 is given below. Countries in the table are arranged according totheir share of Pakistan’s footwear exports.International Trade Centre 71

Table 3.2: Top 10 buyers of Pakistani footwear, 200518 Exported valueImporters Applied tariff(US$ million)Share of Pakistan’sexports (%)European Union 6.62% 56.4 37Saudi Arabia 5% 22.8 15United Arab Emirates 5% 22.6 15Yemen 10% 20.7 13Afghanistan n.a. 19.4 13United States 12.5% 2.2 1Oman 5% 1.4 1Kuwait 5% 1.2 1Sri Lanka 18.8% 1.0 1Sudan 35.7% 0.98 1Source: ITC calculations based on COMTRADE statistics.Market access is not a problem for Pakistan in respect of footwear. The main problem faced byPakistani exporters is on the supply side. Pakistan’s share in the total world export of footwear,in spite of its resources and easy availability of raw materials, is only 0.2%. That is very lowcompared to other developing countries like China (28%), India (1.5%), Indonesia (2.1%) andViet Nam (7.2%). Pakistan’s ranking in world exports is 37.R&D support of 6% was given to footwear in the 2006-07 Trade Policy. To realize exportpotential, among other things, it would be certainly helpful if some improvements in thefootwear industry’s processes and products were made. Accordingly, it was decided to providethis sector with a subsidy of 6% of FOB value of its exports for R&D. This should stimulateR&D and help the industry to improve its competitive edge.3.4.3. Third parties’/countries’ access to other markets (threats/competition)Competition/potentialPakistani footwear exports represent a very nominal share in world exports, but there is greatpotential for improvement. With the enforcement of the WTO regime, Pakistan has beenenjoying better market access in this sector. It should fully use this opportunity and takemaximum benefit from its cheap production factors, e.g. lower wages and cheaper rawmaterials. As the raw materials and footwear parts are required for a good finished product,this industry should be further facilitated. Better mechanisms should be adopted to ensure dutyfree imports of components used in the finished products for export.A welcome decision was taken by the Government in the Trade Policy 2006-07 to hire aninternational consultant to advise on measures to help in attracting foreign direct investment(FDI) to Pakistan’s footwear sector and to transform the local industry to become a major18For more detailed tariff information per shoe category see overview of trade section 2.5.72 International Trade Centre

player in the world market. It has been further decided that Footwear Development Centreswill be setup by the PFMA at Lahore and Karachi with financial assistance from the ExportDevelopment Fund (EDF).The production and cost effectiveness of Pakistan’s shoe industry will be further increased ifthe Government allows imports of shoe components from India. Pakistani shoe producers havebeen importing almost 50-60% shoe manufacturing components from Europe and USA. Theyhave been paying very high prices for these, whereas the same quality items are available fromIndia at much lower rates. Though some of the parts are included in the positive list ofimportable items from India, others remain non-importable. Currently Pakistani entrepreneursget Indian products irregularly by importing these via Dubai, which makes them almost 20%more expensive than the direct route and also takes much more time 19 . If all the items could beimported from India, preferably via the land route, it would have a positive impact on thequality and price of the products.Need for greater compliancePakistani exporters will have to become more careful about compliance with other countries’standards, especially in view of the strong consumer lobbies demanding high environmentalstandards in developed countries. In order to access and increase exports in developedcountries, Pakistani exporters should consider adopting a system of eco labelling. Cases havebeen reported where products from Pakistan were banned, e.g. in 1990 when Germanyimposed a ban on leather treated with pentachlorophenol (a carcinogenic chemicalpreservative). Subsequently, several European countries have imposed a ban based on the useof azo dyes. Information of this type is not shared evenly in the industry. There is need on thepart of PFMA and TDAP to widely update the footwear industry about the environmentalcompliance requirements.(Action: TDAP and PFMA)Opportunities and competitionMany opportunities have become available after the conclusion of the WTO Agreements andconsequential trade liberalization. Needless to say, Pakistan is not alone in the field andcompetition is intense. Two factors have been taken into consideration while identifyingopportunity offering markets: (i) the size of the market, and (ii) the degree of presence ofPakistani products. The size of the market has been given greater weight because Pakistanshould aim to substantially increase exports, which would be possible only in bigger markets.Six markets have been identified as being very promising for export growth.United States of America (USA)USA is the top import market for footwear in the world with 26% import share. Despite USA’simport potential and low tariff rates, Pakistan’s share to the US is only 2% of its total footwearexports, with growth of 2% per annum. Its share in the USA’s imports is negligible and it doesnot even figure in the list of the 10 largest buyers of Pakistani footwear. China accounts for69% market share in the USA market with rapid rate of growth of their exports.19The Nation, Lahore, Wednesday, 29 June 2005.International Trade Centre 73

GermanyGermany is the fifth export destination of Pakistan and the second largest importer of footwearin the world. But Pakistan stands way below other exporters when it comes to sale to Germany.Italy, Viet Nam, China, Portugal, Austria, The Netherlands and Romania are top playershaving more than 56% of the German market.United Kingdom (UK)The UK is also a big import market, where Pakistan’s import share is nominal. The UK isPakistan’s fourth major export destination yet its market share with Pakistan is insignificant.However, Pakistan’s 16% export growth in 2003-04 was encouraging.FranceFrance is the fifth largest importer of footwear in the world and sixth export destination ofPakistan. Pakistan’s share in its imports is a low 0.11%; in addition, negative export growthwas recorded in 2003-04. Italy, China, Viet Nam, Spain and Portugal are the top exportershaving more than 65% of the market.ItalyVery recently the European Commission (EC) implemented anti-dumping taxes on footwearoriginating from Viet Nam and China. After the imposition of the tax many Vietnamesefootwear producers turned to markets outside the EU, thus providing a good chance forPakistan to increase its presence in this market which is the sixth largest in the world. Pakistaniindustry should, inter alia, appoint Italian consultants and follow their design pattern forpenetrating more effectively into the Italian market.TurkeyTurkey import shoes worth US$303 million per year. Despite its relative proximity andfriendly relations with Pakistan, the export figures are still very small. The potential of thismarket for Pakistani products needs to be actively investigated.Box 3.5 At a glance: Impact of the WTO Agreements on Pakistan’s footwear sectorExports• Better market access for Pakistan in the industrial countries’ markets.• Reduction in prices and improvement in the quality of inputs.• Opportunity to intensify penetration in the US, Germany, UK, France, Italian andTurkish markets.• Great potential for increasing exports but Pakistan has to tackle supply sideproblems.• Pakistan must learn to produce what is liked and required abroad and at competitiveprices.• Pakistan needs to do intensive research into the needs of foreign markets, includingfashion trends and designs.74 International Trade Centre

Imports• Substantial opening of Pakistan’s market albeit on relatively higher duty.• No serious threat at present (tariff rate at 25% is quite high) but problem is caused bymalpractice of under-invoicing and misdeclaration as well as smuggling.• Trend of import growth increasing – potential threat.International Trade Centre 75

4 Obstacles and shortcomings to export4.1 Obstacles and shortcomings – exporters’ opinionsThe obstacles and shortcomings mentioned below are based on interviews conducted withfootwear manufacturers/exporters in Pakistan and the national consultant’s observations.4.1.1 Major obstacles and shortcomingsGovernment policies• Inconsistent and non-focused government policies and rapid changes in them are alsoviewed as a bottleneck for any long-term planning. Examples are set out below.• Duty drawback for export is nominal - Duty drawback rates have been reduced from11% to 1.8% without the consent of the footwear industry. It was a gradual decreasefrom 11-6-4.8-1.8%. As exports are made for future period, exporters quote pricekeeping in view the current rates. However, sudden and uninformed changes in the dutydrawback rate decrease or increase the price.• In the trade policy of 2004-05, the commerce minister deliberately announced that theywould hire two international consultants to give advisory services to the government.However, it has been 18 months, but no such consultant has been hired.• The government does not even understand the economics, e.g. for export marketingcompanies pre-sell for about 6-8 months. On the other hand, when the government ismaking policies it increases utility prices, taxes and wages of workers.• Unnecessary taxation suffocating the cash flows of exporting companies, e.g. sales tax.• The Government should introduce completely free exhibitions at shoe fairs worldwide,e.g. GDS - Germany, WSA Shoe Fair - USA, Expo Riva - Italy, etc. which are heldtwice in a year.• Simplification of procedures. The Government has consented to the footwear industry’srequest for reducing duty tariff on few raw materials to 10%, but the process for gettingconcessional rate under SRO 555(1)/98 dated June 12, 1998 is a lengthy andcumbersome process. It involves CBR/IOCO survey, which takes a long time andcomplies with certain conditions that are very difficult to fulfil. In reality, thegovernment allows free import and free export. But exporters have to sign an indemnitybond saying their imports are to be used for exports and not to deduct duty on imports.These are temporary in nature but the exporters have no option. A draft/cheque of theduty is also attached with the indemnity bond. When it is confirmed that export is made,exporters can take their cheque and that indemnity bond gets cancelled out. But most ofthe companies don’t have well established export departments to fulfil all theseformalities.76 International Trade Centre

Role of export promotion bodies• Need to enhance the role of TDAP and make it more active. Presently, it plays a dormantrole with a limited focus on promotion.• Pakistani stands at industrial exhibitions are deplorable. TDAP should do a better job.The displays are poorly managed. They should be well decorated and should beattractive to buyers. Rather than portraying a positive image, a negative image isportrayed. TDAP can decide to participate in selective exhibitions, but they shouldparticipate with full preparation and display good stands. Some countries also holdfashion shows at their stands. However, this creates a non-serious environment.Designs• Lack of innovative designs. Footwear buyers throughout the world have becomechoosier about designs and quality. The overall trend is towards buying moreinnovative designs and smaller quantities. In order to survive in the internationalmarket, companies must keep themselves abreast of the latest designs in the worldmarket and assess their capabilities in order to update their processes and machineryaccordingly.• The Government should invite highly qualified technicians from abroad and arrangeseminars/workshops to create awareness among the industry people about latesttechnology, fashion, trends, etc.• Only a liberal policy of import for machinery and local taxes on production willencourage producing new designs easily. It is vital for competition in the internationalmarket.Environment• The environment is highly volatile, making it insecure for local and especially foreigninvestment. Law and order issues scare export customers: buyers are hesitant to visitPakistan due to apprehension about personal security. The image of Pakistan is that of ahigh-risk country to travel. For example, in 2005 a company was invited to participate inEXPO, but that day turned out to be the worst day. Due to security reasons, entry intoEXPO was extremely difficult.Vendor industry• Vendor industry is miserably lacking in Pakistan. The footwear industry has neither bigsuppliers nor a wide variety of accessories, like buckles, ornaments, thread, etc. Thus, allthese materials are imported, which tends to be very expensive and very timeconsuming.Latest designs need latest materials, so sourcing of new materials has to bedone vigorously. The local suppliers are not capable of providing a wide range ofmaterial. This is also a major reason why companies cannot control the quality ofmaterials.• As component industry is almost non-existent in Pakistan and as it requires heavyinvestment, the import duties on the import of shoe chemicals, shoe lasts and old andreconditioned shoe machinery should be reduced to 5%. To support the footwear orcomponent industry, the Government should give a five years’ tax holiday.International Trade Centre 77

Training institute/ human resources• Lack of training institutes, research work and quality control laboratories in the footwearindustry. The Government should work with a positive mind by encouraging existingplayers by providing them with adequate facilities to establish training institutes.• Very few training institutes for footwear designing are using modern technology. Mostlabour learns the process of shoe making on the job.• Footwear development centre – lacks technical and supervisory staff that are essential tomeet the challenges of the international market. There is a dire need for a fashion anddesign development institute equipped with latest CAD/CAM system.• Scholarships for higher studies abroad. The Government should grant scholarships topromising persons engaged in the footwear industry for courses in footwear design thatare not being offered in Pakistan. These trained personnel will not only be an asset to theindustry, but will also form nucleus for training the students in the FootwearDevelopment Centre, when operational.• The European Union should send three to four experts/technical people who can identifyfour or five factors and work on various aspects of workers’ training. In this way, thequality of shoes produced will improve.• The creation and upgrading of R&D and research laboratories is highly required. ThePakistan Council for Scientific and Industrial Research (PCSIR) standards has longbecome obsolete.4.1.2 Other obstacles and shortcomings• Poor retail structure.• Low per capita consumption and highly inconsistent consumption pattern.• Shoes rank low in priority in overall apparel expenditure in Pakistan.• Cultural limitations, i.e. in lifestyle in terms of dress code, eating/drinking habits offoreign importers.• Reduce input cost, i.e. electricity, oil, gas, etc. This is a major factor that increases theshoe cost. The cost of manufacturing in Pakistan is higher than in other countries,especially in Far East. As a result; companies cannot offer competitive prices to theimporters leading to low profit margin for producer.• Declining living standards.• Finger dexterity: prejudice against employment of women. Buyers may point out whyexporters have not hired women or Christians or their proportion is less. This problemcan also arise during a social audit.• Shortage of leather in Pakistan. Besides the shortage of leather, its prices are increasingeveryday. Despite having abundant leather, the tanners do not finish each type of leather.They do not cater to special requirements as it is small in quantity and a special type offinishing is required. The Government should reduce duties on raw hides to fulfil therequirement for leather.78 International Trade Centre

• Chinese footwear captured the shoe market by offering cheaper and quality products.• Huge influx of cheap footwear from Far East. Shoes originating in some of the countriesare highly subsidised and some importers continue under-invoicing their value.• SMEs cannot make use of latest technology, which is needed for quality products. Dueto limited resources, product development is not of export standards. For good productdevelopment, the procedure is very time-consuming, as components are not availablelocally and companies have to rely on imported components. As a result, companies outtimethemselves. Export is a time sensitive activity. Exporters have to meet certaindeadlines for delivery of orders or samples. Moreover, the small size of the footwearindustry makes larger importers hesitant to start business, as they are not aware of theexport market and how to start their business.• Major competitor is India. India gets raw materials and components at very cheap prices.The export subsidies are much higher than those provided to Pakistani footwearmanufacturers. Duty drawbacks are lesser compared to India so they offer their productsat competitive prices.• The Government must provide 12% R&D to the footwear industry, as R&D is verycrucial but its costs are very high.• Long lead times.• Open the gate on Indian investment for raw material and expertise.• Removal of all inland taxes on shoe industry also can help a lot in promoting shoeexports.• The Government should incur travelling cost for world-renowned customers for visitingtheir annual fair. Like Thailand gave training to Toyota management about how to investin their country.• The Government should provide loans to the footwear industry at very low rates. Thecurrent interest rates are very high.• Participation in international exhibitions/extensive marketing. There should be activeparticipation in international fairs and exhibitions abroad where export opportunities aretremendous. Presently, companies are participating in only two international exhibitions(GDS in Germany in March and September) every year. In addition, an internationalfootwear exhibition is also held every year in Lahore. The Government must invest inforeign trade missions abroad and ensure that they employ commercial counsellors whohave trade-specific knowledge and experience. These counsellors must have sufficientfunds to promote trade. At foreign exhibitions, the Government and TDAP must play amore aggressive role.• Footwear delegations should visit foreign countries in order to explore exportpossibilities. For all above activities, companies need a subsidy of at least 75% of theirexpenses from the Government (out of EMDF). Otherwise, companies cannot manageparticipation or organise exhibitions within their own resources, which are very meagre.• The Government must undertake a study to understand the global footwear industry’srequirements and what the Pakistani footwear industry is doing about it.International Trade Centre 79

• The European Union should give funds to donors or associations to set up machinery andbuild up training institutes. It should also give funds to send technicians to train abroad.• Credit extension to the market in terms of produce.• The whole of Europe is ready to buy more shoes. Customers want competitive prices andtimely delivery. However, due to the above obstacles, Pakistan’s industry staggersbehind in exports. But it is still not too late. The Government can take the initiative andact now.4.2 Obstacles and shortcomings – importers’ opinionsImporters who were interviewed mentioned the following obstacles and shortcomings.4.2.1 Obstacles• Product development takes considerable time.• Quality issues: Quality of the shipment does not match with the samples.• Delays in deliveries, not complying with contracts, etc.• Buyers are not comfortable to visit Pakistan.• Communication issues: Exporters are very slow in responding to buyers’ queries.4.2.2 Shortcomings• Exporters cannot go into good development programmes, due to limited resources. Theyare small and medium scale so they do not have resources to do what they want, e.g. ifan exporter wants to build a quality-testing lab in his factory, it becomes very difficultfor him.• Invest into HR development programmes.• Improve product development.• Forecasting and proper planning for exports.• Proper cost management.80 International Trade Centre

5 Export services in Pakistan5.1 Export service providers5.1.1 Trade Development Authority of Pakistan - TDAPIn late 2006 the Trade Development Authority of Pakistan (TDAP) (www.tdap.gov.pk)succeeded the Export Promotion Bureau (EPB) as the primary agency engaged in thepromotion and boosting of export. Since EPB's inception in 1963 as an attached department ofthe Ministry of Commerce, it has facilitated exporters in overcoming difficulties faced by themon the supply and demand side of exports.On the demand side, TDAP helps exporters to participate in exhibitions abroad and sendsdelegations to export markets with a view to exploring new markets and developing thetraditional markets. On the supply side, TDAP has established over 32 training institutes andprojects in various export sectors to train necessary manpower that can manage the export tradeand industry professionally, meeting the requirements of the export markets. Exportpromotional activities are carried out in co-ordination with trade bodies at home and Pakistan'strade missions abroad.TDAP has its head office in Karachi, the main industrial and commercial centre and a majorexport outlet of the country. TDAP has a staff of around 800 of which close to 600 arepermanent.Services provided by TDAP are as follows:• Export facilitation committee• Resolving problems in exports• Simplification of procedures• Export procedures handbook• Establishing buyer-seller contacts• Fax on demand and the website• Interface with chambers/trade associations• Settlements of trade disputesRegulatory services include the following:• Formulation of proposals for the trade policy• Implementation of the trade policy• Textile quota management• Registration of importers/exporters• Registration of export contracts• Determination of minimum export prices• Issuance of GSP certificatesFunctions of TDAP are listed below.International Trade Centre 81

Marketing• Market research• Fairs and exhibitions - local and international• Trade delegations• Overseas and local publicity• Participation in trade-related events• Expo Centre - holding of exhibitions• Facilitation through trade officers abroad• Seminars/conferences/workshopsCommunication• Publication of trade inquiries/opportunities• Library• Export intelligence bulletin• Counselling• Year Book - statisticsHuman resource development• Training institutes• Seminars on ISO 9000 and 14000• TQM• Social sector concerns• Environmental concerns5.1.2 Small and Medium Enterprise Development Authority - SMEDAThe premier institution of the government of Pakistan under the Ministry of Industries,Production and Special initiative, SMEDA (www.smeda.org.pk) was established in October1998 to take on the challenge of developing small and medium enterprises (SMEs). With afuturistic approach and professional management structure it has its focus on providing anenabling environment and business development services to small and medium enterprises.SMEDA is not only an SME policy-advisory body for the government of Pakistan, but alsofacilitates other stakeholders in addressing their SME development agendas.SMEDA has its head office in Lahore and regional offices in Lahore, Karachi, Peshawar andQuetta.SMEDA offers the following services:• Assistance in raising finance• Financial advice• Project identification• Business plan development• Technical advice• Marketing advice (branding, labelling, packaging, distribution, promotion, etc)• Company incorporation, export registration and regulatory advice• Sales tax, custom duty, excise duty, etc• Training and development82 International Trade Centre

• Information services (library, databases, project briefs, pre-feasibilities)• Business matchmaking5.1.3 Federation of Pakistan Chambers of Commerce & Industry -FPCCIMr. G Allana originally formed the Federation of Pakistan Chambers of Commerce & Industry(FPCCI) (www.fpcci.com.pk) in 1949 but its membership then was confined to a limitednumber of bodies. The FPCCI is the supreme trade and industrial body in the country. Itenfolds all chambers and national associations representing specific trades and/or industries.Indeed, it is compulsory for all chambers and associations of commerce and industry tobecome members of the federation.Being federal in its constitution, the federation takes up only such issues and matters asconcern the country's trade and industry as a whole; in other words, the interests of allchambers and associations together, e.g. economic planning, investment schedules, tax policy,money and credit transport and communication, export promotion, organisation of generaltrade missions to foreign countries, receiving general trade missions form abroad etc. Mattersconcerning specific trades and/or industries (e.g. cotton or steel) or individual firms andcompanies are left to associations and local and regional chambers.The head office of FPCCI is based in its own building, Federation House, in Karachi. FPCCIhas zonal offices in Lahore and Peshawar, which mainly deal with the provincial governments.FPCCI has a branch office in Islamabad to liaise with the federal government.FPCCI offers the following services.Trade promotionFPCCI acts as a forward post of Pakistan's private sector abroad. In the first place, it maintainsconstant liaison with the diplomatic and commercial missions abroad and takes special care todevelop, promote and strengthen cooperation and contacts with its counterpart bodies abroadthrough exchange of delegations, literature, directory(ies), business information, etcCooperation agreementsFPCCI has signed cooperation agreements with a number of foreign counterpart chambers ofcommerce including those of Japan, South Korea, France, Netherlands, Germany, Turkey,Bangladesh, Hungary, Romania, Malaysia, Philippines, Singapore, Oman, Australia, BruneiDarussalam, Indonesia and Syria. These agreements envisage a regular exchange of data andinformation on trade and investment opportunities, visits of trade and investment delegationsand participation in trade fairs and exhibitions.With the signing of cooperation agreements, joint business councils/economic cooperationcommittees have been set up in FPCCI and its counterpart chambers, which keep constantliaison with each other throughout the year. They have obligation to meet alternately once ayear to dispose of agreed agenda, which pre-dominantly relates to the promotion of two-waytrade, narrowing down trade gaps, identification of new commodities for mutual exchange, etc.Investment affairs, transfer of technology and training of personnel are the other areasnormally deliberated on.International Trade Centre 83

Bilateral trade committeesA large number of bilateral trade and industry committees have been set up with severalcountries of the world for the promotion of trade, joint ventures and economic ties. Thesecommittees invite trade missions, trade officials and diplomats of the countries concerned forexchange of views and review of difficulties in the fields of trade, joint venture, investment,etc.Standing committeesFPCCI has constituted a number of standing committees, which deliberate intensively ondifferent problems and issues being confronted by the trade and industry in the country;prepare suitable pragmatic recommendations for their resolution and submit the same to thegovernment for consideration. These standing committees have been established on theimportant subjects of banking, taxation, exports, imports, industry, investment, agriculture,planning and economic affairs, privatisation, research and development, ports and shipping,environment, health, transport, labour, tourism and many others.ExhibitionsFPCCI also undertakes the responsibility to organise, in consultation with Export PromotionBureau, Pakistan's participation in international trade fairs and holds single country exhibitionsof Pakistani goods and services in selected countries. At home, it also organises internationaltrade fairs (such as PITF-84) and national industrial exhibitions and fairs of specialised singlecommodities.Export trophy awardsTo encourage the export of Pakistan's goods and technical/ consultative services, FPCCIinstituted export trophy awards in 1976-77. The awards are given every year to those whoexcel in promoting the export of goods and services both in quantum, value and to newdirections. In addition, the federation has instituted a 'Businessman of The Year’ award, whichis conferred on a businessman/industrialist who, in the judgment of FPCCI, has made anoutstanding contribution to the growth of national economy. A 'President of Pakistan' trophy isalso conferred on a business house has made the overall best and highest performance inexports. FPCCI has also instituted a ‘Best Lady Exporter’ gold medal, which is conferred on alady who, in the judgment of FPCCI, has made the best export performance during the year.ArbitrationFPCCI has set up arbitration machinery under Section 12 of the Trade OrganisationsOrdinance, 1961, to arbitrate in matters of disputes arising between member bodies of FPCCIand its members.Pakistan Shippers’ Council (PSC)The Pakistan Shippers’ Council, having the status of a Standing Committee of FPCCI, worksfor the protection and furtherance of the interests of exporters and importers in Pakistan inrelation to the transportation of goods by sea, land and air, and undertakes studies on problems84 International Trade Centre

affecting shippers in Pakistan. PSC is affiliated to the Association of Shippers’ Councils ofBangladesh, India, Pakistan and Sri Lanka (ASCOBIPS), as a member.Pakistan International Freight Forwarders’ Council (PIFFC)PIFFC is another specialised agency of FPCCI functioning to safeguard the interests of freightforwarders who facilitate the transportation of import and export cargo of Pakistan. PIFFC isaffiliated with the International Federation of Freight Forwarders Association (FIATA).Trade delegationsFPCCI sponsors general and specialised trade delegations to various destinations in the worldto promote export of goods and services and to locate most competitive sources of imports tosave foreign exchange. Public sector industries and business houses’ representatives are alsoassociated with such missions. Similarly, buyers and sellers missions from abroad are invitedby FPCCI besides investment and joint venture delegations.Pakistan's trade missions abroadBriefing of Pakistan's trade officials abroad and an exchange of information, country profileswith them is the hallmark of FPCCI on this front. Since economic considerations haveovertaken political considerations in the present world environment, even ambassadors/highcommissioners and commercial counsellors of Pakistan posted abroad visit FPCCI forindividual or collective briefing on economic and trade ties/issues before taking up assignmentand during the course of assignment.International symposia/seminars/workshopsHolding of international seminars/workshops/symposia in cooperation with internationalagencies in the fields of trade, industry, joint venture, training of manpower, etc is a regularfeature of FPCCI. The programmes familiarise participants from business and industry with thelatest market trends, the state of competitiveness, trade regulations, customs procedure, dutystructure, port facilities, containerisation system, incentives offered by competitors, etc.5.2 Export services as they actually are – expressed viewsExport services being provided by various export promoting bodies are as follows.5.2.1 TDAPTDAP is playing a pivotal role in boosting exports of Pakistan. Following are some of theservices that TDAP is providing to footwear exporters.• A 50% subsidy is provided for participation in international trade fairs. In 2007, TDAPwill provide a 50% subsidy for participating in the trade fair at Las Vegas organised byWestern Shoe Association (WAS). Similarly, the same subsidy will be provided to theparticipants of the trade fair at Riva Jarda, Italy.International Trade Centre 85

• Sponsors trade delegates to destinations suggested by the footwear association.Delegates get a 50% subsidy on economy tickets and US$100 per day.• Single country participation: When the prime minister makes an official tour to anycountry, industry and trade representatives also accompany him. He may suggest holdingan exhibition of all the products that are manufactured and exported by Pakistan. Thisexhibition involves all the products for instance.• TDAP also sponsors footwear exhibitions in Pakistan called JUFT.• Invites various international companies by giving those free tickets and hotel stay to visitexhibitions and engage themselves in business-to-business meetings.• Partly freight subsidy is also provided on the exports of non-traditional products to nontraditionalcountries. Although footwear exports do not come under this category,footwear exporters try to bring it under non-traditional items to benefit from the subsidy.TDAP is trying its best to provide everything that they offer. However, there is still a lot to bedone and there definitely exists room for improvement. The subsidy is provided to exportersonly for participation in trade fairs. It should be provided to other exporters from Pakistan aswell. The effectiveness of the services can be improved further.5.2.2 SMEDASMEDA prepared a ‘sector brief’ report providing an overview of the footwear sector, globaltrade of the product and Pakistan’s status. A 10-year manufacturing plan was also provided.The plan was sent for recommendations to the Government but was not brought into practice.Currently, SMEDA focuses more on providing consultancy and making feasibilities andbusiness plans for SMEs. SMEDA is not playing an active role as far as footwearmanufacturing and exports are concerned.5.2.3 FPCCI and LCCIFPCCI provides representation to the private sector. It supports Pakistani delegates toparticipate in international exhibitions and trade fairs in consultation with TDAP. Tradeofficers and commercial counsellors abroad provide information about the economy andmarket of importing countries to the exporters. Trade counsellors abroad give informationabout the country’s economy and market. Trade promotion and marketing facility is minimal.FPCCI and the Lahore Chamber of Commerce & Industry (LCCI) are not actively participatingin boosting footwear exports. Their role is nominal.5.3 Export services as they should be – expressed viewsAt international exhibitions, importance should be given to setting up good export stands.TDAP should take this responsibility and pay attention to the decor, appearance andpresentation of the stand. A professional image should be portrayed. For this purpose, TDAPshould hire the services of professional stand builders, developers and designers.• Trade delegations are not well managed by trade counsellors abroad. TDAP should guidethem by highlighting the importance of attending those trade fairs. The preparation work86 International Trade Centre

for export delegations is not finalised until the last moment. Some major exporters missthe opportunity to participate in trade fairs because the process takes a very long time.• Footwear policy is not devised. It is recommended that a footwear policy be made byTDAP in consultation with the PFMA. For the fiscal year 2006-07, the total export targetof Pakistan is US$18 billion, while the global footwear business is around US$70billion. Pakistan’s footwear exports are a mere US$155 million. This suggests animmense global opportunity and market that Pakistan can successfully tap, provided ithas a long-term footwear policy that adopts measures to facilitate footwear productionand exports.• Contribution of the Export Development Fund to the footwear sector is 25% of footwearexports, i.e. US$35 million.5.4 Export services in other countries – some examples5.4.1 IndiaConsidering the potential of the footwear sector, the Indian Government, in consultation withthe Indian Leather Council, identified footwear as a growth area. The Indian Governmentestablished the Footwear Design and Development Institute (FDDI) that provides technical,managerial, human resource and marketing services and assistance to footwear manufacturersand exporters. The testing centre of FDDI provides a wide range of laboratory testing expertiseand services internationally. However, Pakistan also recognises the importance of this sectorbut no practical steps have been taken to grab the opportunity.5.4.2 PortugalThe Foreign Trade Development Authority (FTDA) sponsors the footwear sector, which is thelargest foreign exchange earner for Portugal. FTDA encourages investment in supportindustries like soles, moulds and last making.5.4.3 ChinaChina’s footwear sector is well developed. The Government provides export subsidies tofootwear manufacturers. China encourages investment for footwear manufacturing as well asfor manufacturing of raw materials. In addition, the ability of the exporters to respond quicklyto international orders at proper time makes China the world’s largest supplier of footwear.International Trade Centre 87

6 Conclusion and recommendations6.1 Conclusions and recommendations• Inconsistent and non-focused government policies serve as a hurdle in long-termplanning. The policy made by government lacks a long-term vision. The Government,with the help of international consultants and the PFMA, should develop a footwearvision.• Duty drawback for export is nominal. The duty drawback rate has been reduced from11% to 1.8% without the consent of the footwear industry. It was a gradual decreasefrom 11-6-4.8-1.8%. However, uninformed changes in the duty drawback rate put theindustry into a loss as duty drawbacks are included in costing. Exporters take these ratesinto consideration when quoting prices.• Pakistan’s immigration authorities have the policy of granting visas to business visitorson arrival. However, documentation is so stringent and cumbersome that this facility ishardly availed. It is proposed that all business visitors should be issued hassle-freevisas at the immigration counter at airports. Immigration staff should have clearinstructions about this.• The Government does not understand the economics of trade, e.g. export marketingcompanies pre-sell about 6-8 months ahead. On the other hand, when the Government ismaking policies, it increases utility prices, taxes and wages of workers without anynotices, increasing cost inputs.• The Government should introduce completely free exhibitions at shoe fairsworldwide, e.g. GDS - Germany, WSA Shoe Fair - USA, Expo Riva - Italy, etc. whichare held twice a year. At the moment, TDAP only subsidises the cost of stand. Otherexpenses include stand decoration and entertainment of customers at the Pakistanpavilion plus advertisement costs at the exhibition grounds/sites.• Simplification of procedures. The Government has a policy to allow the import ofcertain materials under SRO 555(1)98 with no or concessionary import duties. However,once again the procedure to import under this SRO is quite complicated and many smallto medium-sized manufacturers/exporters are unable to benefit from this scheme. It isrecommended that the procedure/documentation should be simplified so that businesscan easily benefit from such schemes/incentives.• Export promoting bodies, especially TDAP, should play an active role inrepresenting footwear exporters at international level. Pakistani stands at industrialexhibitions are deplorable. The displays are poorly managed. They should be welldecorated and should be attractive to buyers.• The Government should adopt a liberal policy for the import of footwearmachinery and raw material. Importing raw material from India would be cheap andhelp exporters offer their products at a competitive price in the international market. TheGovernment should allow the import of raw material from India by excluding footwearrelatedraw material from the negative list.88 International Trade Centre

• Creation and upgrading of research and testing laboratories is highly required. ThePakistan Council for Scientific and Industrial Research’s (PCSIR) standards have longbecome obsolete.• The environment is highly volatile making it insecure for local and especiallyforeign investment. Buyers are hesitant to visit Pakistan due to apprehension about theirpersonal security. The image of Pakistan is that of a high-risk country for travel.• The vendor industry is lacking in Pakistan. The footwear industry neither has bigsuppliers nor a wide variety of lasts, moulds, soles and other accessories. Thus, all thesematerials are imported which tends to be very expensive and time-consuming. Localsuppliers are not capable of providing a wide range of material. It is proposed that theGovernment should encourage investment in the above areas. Investment will attractforeign companies and local investors alike.• Footwear buyers throughout the world have become choosier about designs andquality. In order to survive in the international market, companies must keep themselvesabreast of the latest designs in the world and assess their capabilities in order to updatetheir processes and machinery accordingly.• There is a lack of technical and supervisory staff, which is essential to meet thechallenges of the international market. There is a dire need for a fashion and designdevelopment institute equipped with the latest CAD/CAM system.• The Government should grant scholarships to promising persons engaged in thefootwear industry for such courses in footwear design that are not being offered inPakistan. The European Union should send three or four experts/technical people whocan identify four or five factors and work on various aspects of workers’ training. In thisway, the quality of the shoes produced will improve.• Most European customers require social, technical and safety audits of factories thatthey work with. Exporters must ensure that their workplaces qualify with theserequirements/audits and to be mindful of all the above aspects in employment andworking conditions.• SMEs cannot make use of the latest technology, which is needed for qualityproducts. Due to limited resources, product development is not of export standard.Moreover, the small size of the export-oriented footwear industry makes larger importershesitant to start business, as they are not aware of the volume they would be able tosource from Pakistan. It is recommended that two or three companies jointly offer tolarge buyers, providing economies of scale. Furthermore, the perception of Pakistan as apotential large footwear producer should be promoted.• Long lead times. For good product development, the procedure is very time-consumingas components are not available locally and companies have to rely on importedcomponents. As a result, companies out-time themselves in necessary sampling.Simplified import procedures and technical developments can help overcome thislimitation.International Trade Centre 89

6.2 The way forward – if we had a millionHere is a list of hands-on projects that could improve the conditions for production and trade inthe sector. It is a wish list based on meetings with parties who assisted in the preparation of thestudy. Most of the project proposals are related to some of the conclusions and suggestions inthe study.All costs are early-stage estimates inserted to ease discussion of follow-up from the study. Theproject proposals are independent of each other (unless otherwise indicated) and are listed inno order of priority.The study does not speculate on possible funding for the implementation of the projectsproposed. Funding could be from the Government of Pakistan, a trade promotion organisation,the sector associations and their members, an external donor or in some cases from selfgeneratedfunds (selling services).6.2.1 If we had US$200,000Information cell on WTO and other export related issuesBackgroundThere is a need for a WTO-related information system, which is userfriendlyand available in virtual real time. The weakest link in the chain hasbeen the PFMA. The association should be able to (1) receive, assimilateand analyse information (downwards from WTO via the government andthe association to the producers and exporters), and (2) help producers andexporters give information (upwards) to the federal government andeventually to WTO.The PFMA information cell would also deal with other export-related issues– details to be decided.CostsEstablishment costUnit cost (US$)Total (US$)Consultancy charges for establishingthe Information center (one time) 2,500 2,500Rent of premise 1,000/m 36,000Furniture/fixture 4,000 4,000Computer/equipment 6,000 6,000Operational cost (3 years)Total establishment cost 48,500Professional (salary) 1,500/m * 36 54,000Secretary 250/m * 36 9,000Telecom 500/m * 36 18,000Other utilities 600/m * 36 21,600Travel 750/m * 36 27,00090 International Trade Centre

Printing, etc. 500/m * 36 18,000Misc. 100/m * 36 3,600Total operational cost 151,200Grand total 199,700Reserve 3006.2.2 If we had US$250,000Export marketing assistance programmeRationaleDetailedproposalMost members of PFMA are small and medium-sized exporters. They donot have enough resources to participate and market their products atindividual level in various international footwear exhibitions.To establish a Pakistani pavilion at two large international footwearexhibitions for a period of two to three years. The members of the PFMAshould be able to continuously take part and display shoes at those identifiedexhibitions. Their regular presence in trade fairs will help them to meetexisting clients and potential new buyers.Following are two recommended exhibitions that are arranged bi-annually:• REVA GARDA• WSACostCostbreakdownSimilarprojectsPartiesUS$250,000 for a period of two years. Assuming 15 exporters would attendfour exhibitions for a period of two years.Costs per year (US$125,000):• Space allocation, stand building and decoration: (70%): US$87,500• Marketing and promotional activities at the exhibition site: (15%):US$18,750• Air travel and stay (15%): US$18,750.This kind of market development and export marketing assistance isprovided for footwear producers in some countries.PFMA6.2.3 If we had US$350,000A CAD/CAM system within the premises of PFMARationaleA CAD/CAM system will facilitate all members of the association to gettheir design needs promptly fulfilled.International Trade Centre 91

Most of the members do not have an efficient design department and lackresponse to various product development requirements by customers.Therefore, they lose the opportunities that exist in the market.CostUS$350,000.The cost breakdown would be:• Upfront cost (85%): US$297,500• Training cost (Training to be provided as to how to operatemachines/equipment) (2%): US$7,000• Running costs (13%): US$45,500.Note: Running/operating costs mentioned above is for a period of one year.For future, it would generate revenue from various activities, e.g. productdesigning, development, etcPartiesPFMA6.2.4 If we had US$500,000Overseas training of personnel from the footwear industryRationaleDetailedproposalCostMany possibilities exist in Europe for training within the footwear industry.Courses are available in production, design and development. Courses arealso available for technical managers in footwear manufacturing. Most ofthe producers in Pakistan are either unaware of the options or shy awayfrom such human resource development programmes to avoid expenses.• PFMA to shortlist 10 companies from the industry. Two people fromeach company would be selected for overseas training.• Short-term, i.e. 3 to 6 months, diploma courses available inproduction, design and development are recommended to start theprocess.• Italy and England are the countries recommended for these trainingcourses.US$500,000Note: 70 % of the above cost would be incurred on tuition fees and theremaining 30% would be spent on board and lodging for theparticipants/trainees.PartiesPFMA92 International Trade Centre

6.2.5 If we had US$1 millionFootwear Training Institute (FTI)RationaleDetailedproposalCostEstablishment of a Footwear Training Institute (FTI) is highlyrecommended. The objective of FTI is twofold:• Enabling the footwear industry to capitalise on the exportopportunities that exist today. Footwear Design Centre (FDC) as partof FTI to start part operations and be able to generate some funds.• Organise technical collaborations for FDC with some internationalfootwear institutes.A FTI equipped with all the facilities for the development of footweardesigns, research, laboratory testing, new sample development, technicaltraining for skill development, etc. Key elements should be:• A two-year designer course with CAD/CAM facility.• Consultancy services for footwear manufacturers, in-house trainingand customised courses.• A testing laboratory with accreditation from an internationallaboratory so that all customers worldwide should be able to acceptthe test results of FDC.• An R&D Centre, which should include technical books and manualson footwear and a database of the global footwear industry, canbenefit from this source.• Services like- Product development- Mould making- Last making- Promotion of footwear exports• Promotion of vendor industry investments in joint ventures.Total cost: US$1,000,000:• Part 1: US$100,000 for stitching courses. School of Fashion Designwould use funds to purchase sewing and cutting machines (50%operational costs).• Part 2: US$650,000 to purchase lasting equipment to assemble shoes.(100% operational cost).• Part 3: US$250,000 for laboratory equipment and testing materials.(70% upfront cost).Note: Operating/running cost would be borne by the Pakistan School ofFashion Design. The association/industry would be responsible forabsorbing all the people who will come out of the institute.International Trade Centre 93

SimilarprojectsFDDI: Footwear Design and Development Institute (India).Parties • TDAP, PFMA and Pakistan School of Fashion Design (PSFD) shouldclub their resources to facilitate and expedite the establishment ofFootwear Institute.• PSFD should manage and run the institute whilst PFMA would beacting as an advisory body. This institute would be having the supportof TDAP. Furthermore, the Government would provide land.94 International Trade Centre

AnnexesAnnex A – Operations involved in the manufacturing processCuttingProcessPattern makingUpper cuttingSplittingSkivingTaperingStampingUpper markingDescriptionDesigner makes pattern during sampling according to the design of theshoe.Cutting is done of the leather in different parts as per design. Thecutting process is carried out on clicking/cutting presses with the help ofcutting dies, which are engineered as per pattern designs.Being a natural material, leather does not have uniform thickness withinthe same skin. Different parts/areas of the skin have differentcharacter/thickness. For example, leather from the shoulder area isdifferent from the belly area. In order to maintain uniform thickness incut components the leather is split.The edges of the components are skived in areas where stitching isrequired. The objective is once again to have uniform thickness.It is a process done in order to achieve uniformity and craftsmanshipwhen two main components like the plug and vamp are hand-stitched. Itis mostly done for moccasin construction. Other construction may notfollow tapering.A stamping machine is used for size number, brand and pairing.Marking is done for components’ joining.StitchingIn the stitching department, workflow and sequence of operations is organised according to theupper design. Following operations are performed in stitching:• Fitting/joining of cut components.• Stitching of the same.• During the stitching process certain components are required to be folded and thenstitched.• Some uppers require eyeleting.• Various processes in stitching can be zigzag, such as decorative stitching and thestitching to join two parts and various components.• Once the upper is ready it needs finishing which involves cleaning, removing of glue,which might have been used while pasting of various components.• Cutting of excessive threads.International Trade Centre 95

• The upper now needs to be given shape according to the human foot. The processis called performing which is done for the fore and heel parts.Stitching workflowThe stitching department is engaged in different types of stitching and relevant operations aftercutting of components received from gutting section. Generally, stitching section performsfollowing stitching operations:• Zigzagging the back of quarters in order to stitch two parts together.• Stitching the outer counter with quarters for strengthening the back part of shoe.• Joining of lining with quarters• Cementing of stiffener and pasting with quarters for reinforcement of shoe (to maintainthe shape).• Trimming collar lining for shaping sharp edges of collar.• Fitting foam in the collar and cementing, pasting collar lining with quarter.• Cementing for folding facing edges.• Cementing/pasting eyelet stays for making it stiff.• Folding edges of facing for better look and moulding (railing).• Edge stitching of facing and stitching foam inside quarter.• Punching holes for such design, which are with eyelets.• Eyeleting according to design requirement, folding lining and foam quarter.• Cementing for folding tongue• Folding tongue edges.• Cementing / pasting lining with tongue.• Edge stitching of tongue for better look.• Joining tongue with vamp.• Stitching and locking of quarters and vamps.• Cementing and pasting socks decoration piece with socks.• Stitching decoration piece with socks.• Cutting extra threads from upper.• Burning small thread edges for better finishing of stitched upper.• Cleaning cement and spots from upper.• In case of Boat Shoes, performing operation is done for maintaining exact and bettershape of the shoe.96 International Trade Centre

AssemblyShoe lastingHeel lastingRoughingProcessCementing of upperCementing of soleHeating for reactivatingcement after dryingSoles attachingHeat setting/chillingFinishingQC inspectionDescriptionLasts are used as per requirement for shoe style. Lasts givepermanent shape to shoes.Heel is shaped with the help of heel lasting machine.Finished leather is a smooth surface and will not achieve goodadhesion between upper and sole. Therefore, to achieve goodadhesion, the upper is roughed.Dismecol cement and other adhesives are applied for attaching withsole.Cement is used at the sole after roughing of sole for attaching it withupper.The roughed and cemented sole and upper are given time to dry onthe track before assembling/placing the two together. The driedcement/glue is reactivated with heat in order to achieve bondingbetween upper and sole.Once the upper and sole are placed together these are pressed withmachine, which applies pressure uniformly distributed so that the soleis completely bonded to the upper.The shoes are then passed through a heating chamber and thereaftera chiller. The instant hot and cold process helps leather to achievegood and long lasting shape according to the last.Shoes are then cleaned, polished and finished to give them a niceand crisp look.Quality is inspected and, if approved, final packing is completed.International Trade Centre 97

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Annex B – Members of PFMA as per early September 2007Industry membersM/s A & E Enterprises M/s Falk Shoes International M/s Raja Industries (Pvt.) LtdM/s AES / AET M/s Fircos Shoes (Pvt.) Ltd M/s Sartaj Shoe FactoryM/s Al-Hassan Enterprises M/s Firhaj Footwear (Pvt.) Ltd M/s Service Industries LtdM/s Al-Huda Trading Co. M/s FM Shoes Industries M/s Shafi (Pvt.) LtdM/s Ahsan Elahi & Co. M/s Footlib Ltd M/s Shakhiz Industries (Pvt.) LtdM/s Akhtar Enterprises M/s Franco Industries M/s Sigma Shoes (Pvt.) LtdM/s Army Welfare Shoe Project M/s Geo International M/s Simba EnterprisesM/s Ayesha Export Linkers M/s Ghazi Industries M/s Starlet Products (Pvt.) LtdM/s Bama Footwear M/s Khokar Enterprises M/s Sohail Qamar EnterprisesM/s Bata Pakistan Ltd M/s “K Shoes” (Pvt.) M/s Sumayyah EnterprisesM/s BAS Enterprises M/s Laurel Co (Pvt.) Ltd M/s Supreme ExportsM/s BISMA Enterprises M/s Lyra (Pvt.) Ltd M/s Taba EnterprisesM/s Bravo SportsM/s Brothers Associates (Pvt.) LtdM/s Darvesh ExportersM/s Elegant (Pvt.) LtdM/s Ramzan Tanneries &Footwear Industry (Pvt.) LtdM/s Mansha Khan LeatherMerchantM/s Mehr Dastgir Leather &Footwear Industry (Pvt.) LtdM/s Mehran Traders & FootwearIndustry (Pvt.) LtdM/s Talon Sports (Pvt.) LtdM/s Topfitt Shoes IndustriesM/s Trust Shoes InternationalM/s U.E. (Pvt.) LtdM/s EPCT (Pvt.) Ltd M/s Prime Naalain (Pvt.) Ltd M/s Zak Impex (Pvt.) LtdM/s ExpertiseM/s R Shoes Industries LtdTrade membersM/s A & A International M/s Haroon Shoes Company M/s Paramount Trading CompanyM/s Al-Noor TradersM/s Ideal Rubber & EngineeringIndustriesM/s Prowess Footwear MarketingM/s ATS Synthetic (Pvt.) Ltd M/s Idrees Brothers M/s Quadri BrothersM/s B&T Laminates (Pvt.) Ltd M/s Imran Trasers M/s Rana-Rani ExportsM/s Bond Street M/s Insaf Chemical Store M/s Shoeline International (Pvt.)LtdM/s Boots M/s Intra Chimie M/s Siltex (Pvt.) LtdM/s Borjan (Pvt.) Ltd M/s Krayons M/s Stylo ShoesM/s Chic Leather M/s Long View (Pvt.) Ltd M/s Super Cromption IndustriesM/s Crescent Art Fabrics (Pvt.)LtdM/s Matchlock Trading Co. (Pvt.)LtdM/s Tauheed Leather IndustryM/s Fazeel Enterprises M/s Modila Industries M/s Urban SoleInternational Trade Centre 99

M/s Five Star Marketing LtdM/s Footwear ConsultancyServicesM/s Global EnterprisesM/s Mohsin MubasherCorporationM/s New Akbar Slatch & Co.M/s Noble Shoes IndustriesM/s Zeen’s InternationalSource: PFMA’s website, www.pakfootwear.pk.100 International Trade Centre