Trade Barriers affecting Export of Sports Goods from Pakistan

Background of the problem / problem development

As my topic of research is “trade barriers in Export of Sports Goods in Pakistan”, the reason of research is to find out problems that are day by day effecting the manufacturing sector of Pakistan which include manufacturing of Sports Goods precisely, we will be focusing on what are the trade barriers and how they are effecting the industry of Sports Goods in Pakistan. As they say trade barriers are imposed to welfare an economy, but how are these barriers benefiting us, and what is actually happening to our industry due to these barriers.

As we know that sporting goods manufactured in Pakistan are the products of international brands like Adidas, Nike, Mikasa, Puma, Select, Erimma, Reebok, Slazenger and lot more, so trade barriers in this industry are restricting the exports. The major problem which lies over here is that our products compete in the international market and are relatively less expensive than others providing the best quality, then why are we facing problems in exports, why are our exports declining over the years, what are the major factors which are effecting our industry, we will notify these problems in our research and try to find the possible outcome.

Problem Definition

Well this research will define the trade barriers, there purpose of existence, we will take a look on why these trade barriers are imposed, and mainly we will go in further details of the impacts these trade barriers on different economies, we will take a look that either these trade barriers are helping some economies by saving their rights and existence.

In other words the main key area we will be focusing on would be the impact of trade barriers for Pakistan especially the impact of these restrictions on the manufacturing of Sports Goods, this study will also reveal us that in past years when there were no trade barriers, Pakistan’s exports were higher and the industry was enjoying Profits, but after the imposition of trade barriers and import quotas and declining rates of subsidies, this has effected this industry at very large scale, government is not giving any type of relief or assistance in order to boost this industry.

And in the mean time these trade barriers have shown a great impact in the declining sales of the sporting Goods industry. Due to the trade barriers there have been taken some quality measures but the major question arises that has these “trade barriers affected the manufacturing of Sports Goods in a positive way” or “trade barriers have restricted the trade of Sporting Goods from Pakistan”.

Managerial and Academic concerns

Industrialists and investors have great concerns for any type of regulation or policy made by the government, as the business is about manufacturing of sports goods, so by the end of the day every business is concerned about profits, if trade barriers will be imposed then there will be some restrictions to import or export, and due to some hurdles or problems business cannot make profits and if the business is not making profits then the investor and specifically the industrialist will be concerned, he will look forward to amend these barriers and find a way to gain more profits, so the research on trade barriers in sports sector will brief them about the problems and their effects and some good measures also.

Research Objectives

To find the current trade barriers affecting the exports of manufactured sports goods.

To find the relationship of government policies with international trade regulation objectives.

One of the major research objective would be that we will take in account that how these trade barriers have affected the manufacturing industries over the last decade, as has it helped in improving quality standards or it has set up some other barriers in providing quality standards.

To focus on WTO agreements which are regulating trade of under developed and developing countries.

To find the effect of ISO certifications on quality standards.

To analyze the aspects of trade and see how exports regulate foreign exchange in the country.

To find how change in interest rates affect the industry.

Related Definitions

Key Word

Definition

Trade Barriers

A trade barrier is a general term that describes any government policy or regulation that restricts international trade. The barriers can take many forms that may include many restrictions in international trade within multiple countries that import and export any items of trade:

Manufacturing

Manufacturing is the use of machines, tools and labour to make things for use or sale. The term may refer to a range of human activity, from handicraft to high tech and is most commonly applied to industrial production.

Sports Goods

Sports goods are sports equipments which is in general term referred for any object used for sport or exercise.

WTO

The World Trade Organization (WTO) is an international organization designed by its founders to supervise and liberalize international capital trade.

Government Policies

A policy is typically described as a deliberate plan of action to guide decisions and achieve rational outcomes. However, the term may also be used to denote what is actually done, even though it is unplanned. The term may also apply to government, private sector organizations and groups, and individuals.

Exchange Rates

In finance, the exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other.

Interest Rates

An interest rate is the price a borrower pays for the use of money they borrow from another burrower,

Growth

Growth refers to an increase in some quantity over time.

Chapter 2 Literature Review

Literature Review (10 Articles)

I have gathered this literature review from studying various articles highlighting what is actually going on or actually happening in the manufacturing industry, this literature review revealed various aspects and points which I never knew about, basically through studying different articles on potential in manufacturing of sports goods in Pakistan, and these articles clearly define how impact has been made on sports goods industry, its progress, and problems underlying in this sector. And this literature review of mine on sports sectors potential and barriers will give you knowledge about the current situation.

If we talk about Sports industry, it means we are talking about the Small and Medium sized Enterprises, and in the economic development of the country it cannot be underestimated. In 2007, a national SME policy 2007 was developed to turn SME into an effective tool for economic growth and development. In order to ensure the transparent implementation of SME policy, a Policy & Project Implementation, Monitoring & Evaluation Unit (PPMIU) is being established in SMEDA. ‘Federal Bureau of Statistics’ on manufacturing industries stated, “during 2008-09, SMEDA continued working on a series of demonstration projects in major SME clusters, to enhance the productivity and competitiveness of SME sector”(Federal Bureau of Statistics in section number 3.6, page number 51).

Government policies regarding the export and import of different products have been changing over the years. The articles being exported from Pakistan are track suits, footballs (including soccer balls, volley balls, rugby balls), boxing, cycling, motto sports uniforms, gloves, shorts, T shirts, wind breakers, Judo/karate kits, casual wears, stockings, etc. All of these goods needs some sort of raw materials to manufacture, and this raw material includes artificial leather, latex, bladder, chemicals, PV sheets, Rexene, and lot more, so if all of these items would be imported in the country duty free, then the industrial output will carry high quality products, as there is a cost associated to it in which artificial leather has a 50% of import duty, same is the case with chemicals which are used in different processes also has different import duties, but some items like the bladder, latex, scoder are free of import duty, means they are duty free items, and items like these helps manufacturers to even import in bulk and use them according to the needs, whereas items which include import duties are more cost efficient so manufacturer lays his hand tight in accruing this cost very common, as in the past years government has increased the import duties of almost all items, which is discouraging imports of raw materials also, if the government of Pakistan take corrective actions and try to find a solution on how to resolve the lack of availability of raw materials in order to save the industry. There are some import Quotas set by the government of Pakistan, but these quotas are not applied in the sports sector as government has not set any sort of quotas for imports related to raw materials used for sports goods.(“Custom income tax and Custom Duties”, a Book, yearly publication, section of import duties, page no. 57-99) .

If we still continue with the government policies which are effecting the manufacturing of sports goods, then we come across one more component that is rebates, rebates are a form of subsidies which are given to exporters on a given percentage of export or a fraction of their total exports, in Pakistan in Zia’s regime, subsidy given to exporters on export of different products was about 35%, just to encourage exports and bring foreign exchange into the country, and gradually it went on declining, in Nawaz Sharif’s 1st regime, this subsidy on export was declined to 15%, and in 2000-01 this was around 5.85%, and nowadays it has declined to almost 0, namely exists, now government of Pakistan is giving 0.45% subsidy on total amount of exports, which means if an exporter is exporting worth of 10 million Rs, he is getting a subsidy of 45,000 Rs, which is almost nothing, which in some terms is discouraging exports. (“Custom Rebates, a Book, yearly published, section of rebates for encouragement, pg 101-110) and (“Notification of Rebates and Exemptions, published by Ministry of Commerce”)

As every business needs funds and investments to increase its operations and increase the size of its business, funds are also required for day to day expenditures which occur in processing, so the Government of Pakistan has allowed all the exporters to take loan on showing their total yearly exports, government gives a fraction according to the feasibility report and yearly exports, which comes around to 60 to 70 percent, which means an exporter can take a loan of 60 to 70 percent of its total yearly exports, which can be paid back by easy instalments or annually and bi annually or even monthly payments, this type of loan which is specifically given to exporters is named as Part – ii loan in Banking terms, and as every loan has an interest rate attached to it, in this scenario interest rate is relatively lower to about 7.5% currently, this interest rate has also been fluctuating over the years, in 2000 it was about 3% and in 2005 it increased to 9.5% and then government made some adjustments to it due to decline in exports, and made it 7.5% in 2006, from then onwards till 2010 it is still 7.5%. (“Custom Rebates, a Book, yearly published, section of loan agreements, pg 23-26).

Exchange Rate, which measures the foreign-exchange rate, for-ex rate or FX rate between two currencies, specifies how much one currency is worth in terms of the other. Exchange rate also effects the exports of a country, as Rupee has devalued over the years and due to this the value of dollar has increased, so for 1 dollar you will have to pay more, as around 85 rupees, in 2000 the value of rupee in terms of 1 dollar was about 51.5 rupees and now it has jumped to 85 rupees fluctuating over the years.

If value of rupee will decrease then the exporter will not get much benefit, as inflation rate is also rising in Pakistan so at the end of the day exporter has to pay more in rupees to equivalent to 1 dollar. Exchange rates which have been fluctuating over the years have also created problems for exporters.

Pakistan’s major exports are to U.S.A and Europe, so in international trade, WTO (world trade organization) sets parameters for different countries to regulate trade, it set boundaries and barriers in order to safeguard one country’s interests, as stated, “Import liberalization is expected to increase competition between imports and domestic production and contribute to more efficient resource allocation and the development of a more efficient export sector”, (World Trade Organization WTO, Trade Policy Reviews with Government of Pakistan, February 1995). It also states that, “Pakistan’s economy has grown steadily over the past decades and, despite the constraint of a relatively weak infrastructure; the country has taken substantial steps to open its economy to the outside world”, according to WTO Pakistan’s largest trading partner in both exports and imports is the European Union, with a share of close to 30 percent, followed by the United States, Japan and Hong Kong. The share’s of North America and Asia in exports has increased in recent years, while those of eastern’ Europe, the republics of the former Soviet Union and the Middle East have declined. In the last few years, the shares of imports from Asia and the Middle East have increased, while those of North America have fallen (World Trade Organization WTO, Trade Policy Reviews with Government of Pakistan, February 1995).

According to the article WTO has also restricted Pakistani manufacturing industries from using child labour, the sports goods industry in Pakistan is not very much technological, although they are still working on the unique method of manufacturing the ball, which is sewed by the labour force, and in international market the handmade ball has its demand, and in order to meet that demand in last decade and even before that Sialkot started hiring child labour due to shortage of labour force, on average an unskilled worker can sew to about 2 – 3 balls in a day and the wage rate is also according to the ball sewed, so when Pakistan became a member of WTO in 1995, after inspections WTO set up a barrier for Pakistani sports goods in order to stop the use of child labour, WTO’s motive was to eliminate child labour, and this is also an important point in the ISO certifications that companies which are registered with ISO certification are also restricted to use child labour, if they don’t do so, their certification can be cancelled.

(“http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=PK”)

Pakistan conducts most of its trade with the United States and the European Union and furthermore, according to sources, 50% of its exports are to these two locations. However, due to terrorism threats on and from Pakistan, foreign governments have discouraged its citizens to visit Pakistan. Several big companies who have had interest in procurement of textile (Pakistan’s largest export product) have taken their business to neighboring countries such as: India, Hong Kong, and Singapore. Pakistani business men have been denied a visa or scrutinized greatly before they have been granted access to travel abroad and this has had a huge effect on their exports. “The foreign buyers have exploited the situation to procure goods at lowest values. Pakistani knitwear is better in quality than its competitors but fetch the lowest rates due to the denial of direct contact with outside businessmen” (Pu.edu). Exports are said to have gone down from $19.22 billion to $6.1 billion dollars amidst the reduction of imports. The trade balance/deficit is -4.5(billion $) and one of the reasons for this is because of the public global image that has been portrayed of Pakistan. Similarly, this situation has had a significant impact on the export industries of Pakistan, and regarding my project, it has affected the exports of sports goods as well. http://internationalbusiness.wikia.com/wiki/Impact_of_Terrorism_on_the_Pakistan_Economy

The terrorist attacks that were carried out on USA on 11th September, 2001, had significant and far-reaching effects on the global economy. The shock was a bit too hard for an already weak economy to absorb. Since then Pakistan’s participation in the international campaign has caused uncertainty in the country, as it has been facing major challenges, like domestic political and economic instability and increased law and order concerns amongst other reasons. One element which was significant was adverse effects in the confidence of consumers and business as the consumer confidence was declining and business sentiment was depressed. Since the start of the anti-terror campaign, an overall sense of uncertainty has prevailed in the country, which has contributed to capital flight and slowed down economic activities making foreign investors jittery.” The economy was slowing down substantially, with major engines of growth simultaneously showing signs of weakness; the growth rate is expected to be only 3.5 per cent in 2010. In such an economy the export sector is bound to suffer highly which naturally includes the sports goods exports as well. http://internationalbusiness.wikia.com/wiki/Impact_of_Terrorism_on_the_Pakistan_Economy

About a fifth of Pakistan is underwater after heavy monsoon rains burst the banks of some of its rivers. The floods have killed more than 1,600 people, affected about 17m people and caused widespread agricultural devastation.Local economists have predicted a collapse in economic growth from the current 4 per cent to near zero, as well as rising inflation and a near doubling of public spending from the government’s target. This will result in the banks securing themselves by increasing their interest rates on loans. This definitely will affect the exporters of the country as well because their cost of production will go high and thus making for them difficult to export. http://www.ft.com/cms/s/0/5b786f7a-b731-11df-839a-00144feabdc0,s01=1.html#ixzz17ojKvEIp

Chapter 3: METHODOLOGY AND CHOICE OF ANALYTICAL TECHNIQUE

Research Type

My research will be based on secondary data, in which we will collect the data which is already available and then analyse it.

The data which we will be using will comprise of both qualitative and quantitative data, but our major research is base on quantitative data.

By using quantitative data we will conduct a statistical analysis and then conclude.

The analysis will give us brief growth of manufacturing sector of sports goods and the variables will identify the affect on growth.

Data type & Reference Period

As already mentioned our research type will be secondary, so the data we will collect will also comprise of secondary data.

Data will be theoretical and statistical, but major source will be statistical data.

The reference period will be from 2000-2010.

Research Hypothesis

To check the relationship between Export of Sports Goods and Rebates

Null Hypothesis H0 = there is an insignificant relationship between Export of Sports

Goods and Rebates

Alternative Hypothesis H1 = there is a significant relationship between Export of Sports

Goods and Rebates

To describe the relationship b/w Export of Sports Goods and % change in Exchange rate.

Null Hypothesis H0 = there is not a statistically significant relationship between Export

of Sports Goods and Percentage change in Exchange rate

Alternative Hypothesis H1 = there is a statistically significant relationship between Export

of Sports Goods and Percentage change in Exchange rate

To check the relationship between Export of Sports Goods and Interest Rates

Null Hypothesis H0 = there is an insignificant relationship between Export of Sports

Goods and Interest Rates

Alternative Hypothesis H1 = there is a significant relationship between Export of Sports

Goods and Interest Rates

To describe the relationship between Export of Sports Goods and Import Duties

Null Hypothesis H0 = there is an insignificant relationship between Export of Sports

Goods and Import Duties

Alternative Hypothesis H1 = there is a significant relationship between Export of Sports

Goods and Import Duties

3.4 Theoretical Framework & Variables under Consideration

Short and Medium Enterprise loans

Inflation Rate

Export Quotas

Import Quotas

Import licenses

WTO agreements

(World Trade Organization)

Import duty

Interest Rates

Percentage change in Exchange rate

Rebates

Export of Sports Goods

(Dependent Variable)

3.4.1 Variable reference list

Government Policies

Subsidies

http://www.paccs.gov.pk/DesktopDefault.aspx?tabindex=0&tabid=15,

http://www.finance.gov.pk/admin/images/subsidies/iprsp_2.pdf,

Article: Section 4, Suggestions for augmenting Pakistan’s Export Trade,

Book: “Custom Rebates, a Book, yearly published, section of rebates for encouragement, pg 101-110.

Book: “Notification of Rebates and Exemptions”, yearly published, by the Ministry of Commerce.

Import Duties

Article: TRADE POLICY 2009-10 SPEECH Publish Date: 7/27/2009 4:20:00 PM Source: Ministry of Commerce,

Book: “Custom income tax and Custom Duties”, a Book, yearly publication, section of import duties, page no. 57-99.

Book: “Pakistan Custom Tariff”, yearly publications.

Short and Medium Enterprise loans

http://www.smeda.org.pk (Small & Medium Enterprise Development Authority Ministry of Industries, Production and Special Initiatives Government of Pakistan)

Article: Diagnostic study on Sports Goods cluster, Sialkot, By: Fouzan Muhammad, Assistant Manager, SMEDA RBC Sialkot

Federal Bureau of Statistics in section number 3.6, page number 51.

Trade Regulation

Article: TRADE POLICY 2009-10 SPEECH Publish Date: 7/27/2009 4:20:00 PM Source: Ministry of Commerce,

Article: Is Pakistan’s Manufacturing Sector Competitive, Author: Iffat Ara [Senior Economist at Social Policy and Development Centre (SPDC)], Paper presented at the PSDE Conference, January 2005,

Interest Rates

Book: “Custom Rebates, a Book, yearly published, section of loan agreements, pg 23-26.

http://www.sbp.org.pk/Epd/1995/c24.htm,

http://www.brecorder.com/index.php?id=954368&currPageNo=1&query=&search=&term=&supDate=,

Exchange Rates

http://www.opfblog.com/7786/historical-chart-of-pakistan-rupee-exchange-rate-vs-us-dollar/

Article: Exchange Arrangements and Exchange Restrictions, By State Bank of Pakistan, 2007

WTO Agreements

http://www.wto.org/english/tratop_E/tpr_e/tp1_e.htm,

http://www.wto.org/english/thewto_e/countries_e/pakistan_e.htm,

http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=PK,

3.4.2 Theoretical Justification of variables under consideration

According to my literature review and vast research on the Export of Sports Goods, and what factors affect its growth and which type of trade barriers are taken under consideration which affect its Exports are mainly the subsidies given by the government as a relief for exporters and it also encourages exports, in Zia’s Regime this subsidy was 37% on your total exports which means that if you are exporting $100 worth of goods yearly, you will get $37 from government as a subsidy, and this $100 worth includes only your selling price, other profit margins are separate, so purpose of briefing this point was that, 2 decades before the sports goods sector experienced high profits and high growth in Exports and made a great impact on the international market by providing quality products. So at that time subsidies i.e. rebates helped a lot in encouraging Exports and enjoying profits that is why I have taken this as one variable which is affecting the growth in Export of Sports Goods.

Now talking about the interest rates, normally interest which is applied on regular loan falls from 9% to 15%, but for exporters loan is relatively less it is basically known as export financing loan but in banking terms it is also known as part ii loan, it is a type of incentive to exporters, but a decade before this interest rate was around 2.5% to 3%, and in a decade it rose up to 7% reaching 9% in 2005, which is again not acting in the benefit of exporters and acting as a barrier in variance to recent incentives given by previous governments, so government should take this point under consideration and look for a solution at bring it back to 3% in order to give surplus money for exporters to encourage exports.

Another variable which i took under the trade barriers is the exchange rates of foreign currencies, as in exports customer pays in foreign exchange, so if the value of our currency will depreciate the customer will have to pay less in dollars, as the cost incurred would be higher.

Another variable was the import tariffs set by our government, which is restricting the purchase of raw materials which are used in manufacturing of Sports goods, if there are less import duties, the cost of raw material would be lower, hence benefiting the exporter, encouraging in other sense as the cost of raw materials would be lower so there are more chances of higher profits, but the government of Pakistan has restricted imported items by applying import duties to it, so any one who will import that product will have to pay more.

WTO agreements is also one strong variable affecting and most of its policies are acting as a trade barrier to Exports, Pakistan became a member of WTO (world trade organization) in January 1995, and then onwards in order to be its member Pakistan has to cope with the policies set by WTO, like the ISO certifications defines different quality measures for an industry, in the same way WTO agreements also defines different quality and quantity measures to safeguard a country’s domestic economy, in past years WTO passed a rule on child labour, discouraging the use of child labour, and countries which would fail to restrict its industries from the use of child labour force will not be counted as a member of WTO, WTO has also helped a lot in regulating trade with different countries of the world allowing Pakistan to enter into their market.

3.5 Time series Analysis:

3.5.1 Data sources

The data has been collected from different sources like internet, and some other related books for proper in detail information about the particular field.

It was also gathered from Business recorder, and other financial news papers.

Different articles by different authors were also kept under consideration which in the end helped in finding the impact of SME and different policies in SME.

Exchange rates were gathered from website, dollars price last updated on May 09 was taken.

Trade Policy of Pakistan regulated in different years.

3.5.2 Data reliability and internal consistency

Data is reliable because it has been collected from government authorities and government official websites.

Another point for data reliability is that this data is also applied in practical.

3.5.3 Missing data

The quantitative data for WTO agreements with Pakistan over the last ten years was missing.

Data on usage of Child labour was also unavailable.

Some other variables could also have been taken under consideration but were not taken due to lack of data just like Terrorism, as the growth of manufacturing of sports industry has also been affected greatly by recent terrorist activities going over Pakistan in recent years after 9/11.

3.6 Data Analysis tools and techniques

Stat Graphics

Regression

Hypothesis

WDI

Chapter 4: ESTIMATION, ANALYSIS & CONCLUSION

Results of statistical techniques

Regression Models

Four different regressions were run to check the effect of independent variables to dependent variables.

Export of Sports Goods VS Rebates

Regression Analysis – Linear model: Y = a + b*X

—————————————————————————–

Dependent variable: Export of Sports Goods

Independent variable: Rebates

—————————————————————————–

Standard T

Parameter Estimate Error Statistic P-Value

—————————————————————————–

Intercept 1.57444 0.0635035 24.7929 0.0000

Slope 0.319448 0.0208556 15.3171 0.0000

—————————————————————————–

Analysis of Variance

————————————————————————————————

Source Sum of Squares Df Mean Square F-Ratio P-Value

————————————————————————————————

Model 4.34098 1 4.34098 234.61 0.0000

Residual 0.148021 8 0.0185026

————————————————————————————————

Total (Corr.) 4.489 9

Correlation Coefficient = 0.983375

R-squared = 96.7026 percent

Standard Error of Est. = 0.136024

Data Analysis

In the analysis section, single regression is done in order to understand the affect of independent variables to the dependent variable. Important results are given below and the graphs are attached in the appendix.

General Form: Y (dependent variable) = f (x) where x is the independent variable

General Form: Export of Sports Goods = f (Rebates)

Where as

Notational Form: Y = βŏ + β1 * x1

The output shows the results of fitting a linear model to describe the relationship between Export of Sports Goods and Rebates. The equation of the fitted model is

Export of Sports Goods = 1.57444 + 0.319448*Rebates

Since the P-value in the ANOVA table is less than 0.01, there is a statistically significant relationship between Export of Sports Goods and Rebates at the 99% confidence level.

The R-Squared statistic indicates that the model as fitted explains 96.7026% of the variability in Export of Sports Goods. The correlation coefficient equals 0.983375, indicating a relatively strong relationship between the variables. The standard error of the estimate shows the standard deviation of the residuals to be 0.136024.0

Export of Sports Goods VS percentage change in exchange rate

Regression Analysis – Linear model: Y = a + b*X

—————————————————————————–

Dependent variable: Export of Sports Goods

Independent variable: Percentage change in Exc