Oct 11 - 17, 2010

Last month, the European leaders agreed at a summit in Brussels to grant limited trade concessions to Pakistan to help it overcome the impact of devastating floods. Under the deal, the country will receive an immediate and time-limited reduction in duties on key exports to the 27-nation European Union, taking into account industrial sensitivities in the EU, notably on textiles. The deal would result in a trade waiver, worth at least 230 million euros ($292 million), for the strife-torn and flood-stricken country, similar to the one Islamabad received after the Sept 11, 2001 attacks on the United States in recognition of its role as a frontline ally in the battle against Islamist militants.

European leaders struck a deal in principle last month to ditch or reduce tariffs on Pakistani export products. European leaders scrambled at the summit in Brussels to break an impasse on giving Pakistan trade-linked aid, as Britain and Germany pushed the European leaders to offer Pakistan trade deal to help the country battle flood devastation and fears of rising extremism.

"The European Council underlines its firm commitment to grant exclusively to Pakistan increased market access to the EU through the immediate and time-limited reduction of duties on key imports," a statement by the 27 EU leaders reportedly said. "The European Commission is invited to explore options with WTO partners and present finalised proposals in October, taking into account industrial sensitivities in the EU."

The deal, however, faces a welter of obstacles, including concerns that it would be challenged at the World Trade Organisation (WTO) and fears in the European textile industry. Critics say that unilateral EU moves will go against the interest of some European states including France and Italy with textile industries that compete with Pakistani imports such as linen, garments, and ethanol, as these states are reluctant to give too much ground at a time of economic stress.

Pakistan's textile exports to the EU are almost 70 per cent of the total exports to the EU. The country's textile industry, which accounts for two-thirds of the country's exports, is currently struggling to revive growth. Analysts believe that preferential access to EU markets, via a waiver from the WTO would help revive the local textile industry.

The EU has already committed more than 191 million pounds in emergency aid and flood relief to Pakistan, with the UK the biggest single EU national contributor at around 64 million pounds.

The British Prime Minister David Cameron is pressing the European Union to agree a new regime of trade concession to Pakistan to alleviate the damage done by flooding in the South Asian nation, according to a report recently published in 'The Guardian'. Over the summer, Cameron reached out to President Asif Ali Zardari by saying he would fight hard to give Islamabad preferential access to the EU. The concessions to Pakistan could entail reducing tariffs on its exports or the EU suspending the tariffs unilaterally, but, apart from opposition within the EU, this could also run into problems with the World Trade Organisation.

The Guardian's report said the British push for trade privileges for Islamabad will be resisted by the EU countries with big textile industries that fear having their markets flooded with cheap goods from the region. At least four countries, including Portugal, Italy, and France, are reluctant to give trade privileges.

The country has repeatedly sought relaxation in the Generalised System of Preferences (GSP) plus criteria from EU to increase exports so that it could cope with the huge loss incurred due to the devastating floods and ongoing war against terrorism. Under the existing GSP Plus criteria, the country's exports are 1.5 per cent to the EU and it wants the criteria that allow two per cent of exports to the EU.

Analysts believe that in case the country's demand of seeking relaxation in the GSP Plus criteria or special window for trade from the EU get materialised, the country's exports would further surge by over one billion dollar, which may be negligible for the EU countries, but means a lot for the cash-strapped country.

Pakistan's trade deficit widened by 16.2 per cent in August as imports increased. The trade gap widened to $1.24 billion in the second month of the fiscal year, from $1.07 billion a year ago, according to the Federal Bureau of Statistics. Islamabad is seeking to boost exports to sustain growth in a country where the World Bank estimates a quarter of the population lives on less than a dollar a day.

European Union, the Pakistan's major trading partner, is reportedly considering preferential treatment to the Pakistani goods by ditching tariff barriers on 13 types of textile product, in an effort to kick start an economic fight back in the flood-hit country.

A list of product areas qualifying for exemptions, which are aimed at providing some 25 million Euros of annual benefits to the country, has reportedly been drawn up by EU leaders.

EU leaders will have three options to ease Pakistani goods into Europe-offering duty-free access on some goods, deciding a unilateral waiver with WTO agreement, or lowering Most Favored Nation tariff on some products. The country is also expected to benefit from a review under way of the EU's GSP+ - a trade support mechanism - due to be completed in January.

The country's textile exports to the EU are almost 70 per cent of the total exports to the EU. During the fiscal year 2008-09, the country's exports to the EU countries stood at $4.8 billion, out of which textile product exports were of three billion dollar. Pakistan's textile industry, which accounts for two-thirds of the country's exports, is currently struggling to revive growth. The country hopes to revive the textile industry with preferential access to EU markets, via a waiver from the World Trade Organisation.

The trade-linked aid from European Union is under criticism of textile producers in EU causing consternation within the industry. Euratex, a European association of textile producers, has strongly opposed the idea of giving Pakistan a preferential treatment.

Some European leaders deem it in the vital strategic interest of the EU to help Pakistan in the long-term with trade. Britain and Germany, which both have thousands of troops fighting Islamist insurgents in Afghanistan, reportedly backed trade concessions, but southern European states with textile industries that compete with Pakistan's blocked them.

Local exporters say increase in their share of the European markets is hampered by duty-free access given to textile exports from Bangladesh and Sri Lanka. The rising cost of doing business is constantly going up in the country. The exports of apparel from Pakistan in the last ten years had increased from $1.5 billion to only $3.5 billion, whereas in Bangladesh the exports increased from $1.5 billion to $12.5 billion, which showed that Pakistan's exports were much below as compared to other competitors in the region.