EXPLORING PRODUCT TRADE MARGINS & POTENTIAL IN TEXTILE AND

CLOTHING SECTOR FOR PAKISTAN

PIDE2017-FMPHILEAF21

THESIS SUPERVISER

Prof. Dr. ABDUL JALIL

BY: AWAIS KHAN

MPhil Economics & Finance

Department of Business Studies

Pakistan Institute of Development Economics

Islamabad Pakistan

(2020)

i
 Acknowledgments

I am heartily thankful to my supervisor, Prof. Dr Abdul Jalil, for his kind supervision,

guidance and support. His wide knowledge and fantastic way of guiding have been great

importance for me. His broad analysis and precise assessment enhanced the quality of this

thesis. His encouragement, supervision and support from start to finish enabled me to think

like an economist.

I would like to thank all my friends and family for their invaluable support. Especially my dear

friend Rao Nasir have inspired, encouraged and supported my graduate studies.

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Table of Contents
Acknowledgments ...................................................................................................................... ii

List of Figure ........................................................................................................................... vii

List of Acronyms .................................................................................................................... viii

Abstract .................................................................................................................................... ix

Chapter 1 ....................................................................................................................................1

Introduction: ...............................................................................................................................1

1.1 Introduction to Topic: ...................................................................................................1

1.2 Statement Problem: .......................................................................................................5

1.3 Research Question: .......................................................................................................6

1.4 Objective of Study: .......................................................................................................6

1.5 Organization of the Study: ............................................................................................6

Chapter 2 ....................................................................................................................................8

Textile Sector of Pakistan:...........................................................................................................8

2.1 Introduction: .................................................................................................................8

2.2 Evolution of Textile Industry in Pakistan: ....................................................................8

2.3 Bleak Period for Textile and Clothing Sector: ...............................................................9

2.4 Era of High Tariff Abolishment: ................................................................................. 10

2.5 Current Position of Textile Sector: .............................................................................. 10

2.6 Share of Textile Sector of Pakistan in Trade: ............................................................... 12

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 Table 2.1: Textile Sector of Pakistan ..................................................................................... 12

Table 2.2: textile and clothing to total export of Pakistan ....................................................... 14

2.7 History of Trade Restrictions in case of Textile and Clothing: ..................................... 15

2.8 Overall Performance in Different Regimes: ................................................................. 16

Chapter 3 .................................................................................................................................. 17

Literature Review:..................................................................................................................... 17

3.1 Trade Margins:............................................................................................................ 17

Table 3.1: Diversification ...................................................................................................... 23

3.2 Literature on Gravity Framework: ............................................................................... 35

3.3 COMPARISON OF TRADE MODEL; GRAVITY VS CGE .......................................... 38

3.4 Issues in Previous studies and Way to overcome: ........................................................ 40

Chapter 4 .................................................................................................................................. 43

Econometric Methodology and Data: ........................................................................................ 43

4.1 Gravity Framework: .................................................................................................... 43

4.2 Theoretical Background: ............................................................................................. 45

4.3 Estimation Methodology: ............................................................................................ 49

4.4 The Estimating Equation ............................................................................................. 52

4.5 The Dataset: ................................................................................................................ 54

Chapter 5 .................................................................................................................................. 58

Results and Discussions ............................................................................................................ 58

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 Table 5.1Tobit Results for Textile and Clothing sectors ..................................................... 58

Chapter 6 .................................................................................................................................. 64

Conclusions & Recommendations ............................................................................................. 64

References ................................................................................................................................ 67

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 List of Tables

Table 2.1: Textile Sector of Pakistan ......................................................................................... 12

Table 2.2: Textile and clothing to total export of Pakistan ......................................................... 14

Table 3.1: Diversification .......................................................................................................... 23

Table 5.1Tobit Results for Textile and Clothing sectors ............................................................ 58

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 List of Figure

Figure 1: Review framework and layers. (Source: Kepaptsoglou, 2010) ................................ 45

vii
List of Acronyms

ACU Asian Clearing Union

ADB Asian Development Bank

ASEAN Association of Southeast Asian Nations

ATC Agreement on textile and clothing

BTA Bilateral trade Agreement

CGE Computable general Equilibrium

ECO Economic Cooperation Organization

EIA Economic Integration Agreement

EU European Union

FTA Free Trade Agreement

GATT General Agreement on Tariff and Trade

GTAP Global Trade Analysis Project

MFA Multifibre Agreement

NAFTA North American Free trade Agreement

PBS Pakistan Bureau of Statistics

PTA Preferential Trade Agreement

SAARC South Asian Association for Regional Cooperation

SAPTA SAARC Preferential Trading Agreement

SPS Sanitary and Phytosanitary

WTO World Trade Organization

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 Abstract

This study is an empirical examination of the impact of abandoning the Agreement on Textiles

and Clothing (ATC) on product-intensive and extensive margins of Pakistan’s exports in textile

and clothing to its major destination markets - the EU and the USA. Additionally, study also

analyses the impact on Pakistan’s textile and clothing exports of abolishment of quota on China

which was imposed in EU and USA. Study also computed margins of trade preference with both

these changes. ATC is important as post ATC saw a sudden increase in regulations and trade

restrictions for the textile and clothing sector. Post-ATC further complicated export potential of

textile and clothing items for Pakistan as it has to face preferential arrangements between its

trading partners and competitors and barriers like safeguard measures. Utilizing data from 2000-

2018 and applying Tobit regression model, the results advocate that growth in extensive margins

resulting from lower barriers is consistent with predictions of the heterogeneous firms model.

Results indicate that reduction in trade costs could bring trade to those sectors which were either

hardly traded or not traded at all.

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Chapter 1

Introduction:

1.1 Introduction to Topic:

Developing countries like Pakistan are mostly agrarian mostly producing labor intensive

products and is more exposed to risk of unemployment in case of trade barriers. Textile sector is

one of the major contributing industries in the economy of Pakistan. Major chunk (almost 10%)

of Pakistan’s total GDP hinges around textile sector. Moreover, this sector also supports the

labor force of Pakistan as nearly 30 percent of 65 million within Pakistan are associated to this

sector.

Textile and clothing sector has relentlessly been under protective measured in the world

market. Generally nations trading under such restrictive circumstances show less growth as

compared to countries with fewer restrictions. There is need to quantify the impact of those

restrictions on quantity of exports, which needs to be addressed in order to enhance the speed of

growth.

The reduction in the trade restrictions have differentiated impact on exports, The first

impact is the increase in the volume of already traded commodities (intensive margins) and also

growth of traded commodities or destination markets (extensive margins). The intensive margin

of trade refers to the growth of exports in goods that are already being exported. We can refer to

these as "old products". The extensive margin is defined as the growth of exports in new

categories as “new products1 ( Pierola et al., 2008).

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 Trade margins are very important to be analyzed from the policy makers’ point of view

because by knowing the sensitivity of trade margins to the reduction in trade barriers can help the

exporting nation where to focus on and subsidize those products to increase the bulk of exports.

If a nation’s exports increase more in intensive margins than extensive margins by lowering the

trade restrictions; then nation should focus to increase the quantity of already traded products or

vice versa. The product line or margins can be prioritizing using this analysis of segregated

impact of trade margins. In addition predictions can be generated to analyze the trade policies.

History shows that textile and clothing has been protected sector irrespective of the size

and level of economic development of a nation. This sector has persistently been in jurisdiction

of protectionist restrictions like tariffs, quota, subsidies and safeguard measures in the form

voluntary export restraints on cotton textiles exports of Asian countries by USA in 1950’s.

Later in 1974, the Multi fibre Arrangements restricted developing countries’ textiles and

clothing exports to Western Europe and North America adversely affecting the growth and

employment in under developing countries. In the 1990’s the MFA was assimilated into the ATC

(New Agreement on Textiles and Clothing), to remove the MFA quota barriers in four phases in

ten years (1995-2005). Since 2005, the textile and clothing sectors have been subjected to the

ATC rules..

Many researches have been conducted in order to check the effect of imposition or

removal of trade barriers on the trade pattern among nations of the worlds. In case of textile and

clothing sector the studies predicted that the removal of quotas under MFA would benefit the

South Asian economies and the export performance will enhance after the completion of the four

phases of ATC.

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 Actual performance of textile export sector reveals that the removal of trade barriers

barely influenced the export of textile and clothing for Pakistan. In an early analysis of ATC

impact by Mahmood and Khan, 2000 reported increased exports in textile and clothing for

Pakistan due to elimination of quotas and gradual lowering of tarrif barriers by developed

countries. Exports of Pakistan may have enlarged in the absolute terms but its segment to total

world export of textile has declined. So it means that ATC period benefitted the other nations but

not Pakistan. The textile and clothing sector of Pakistan failed to reap benefits of abolition of

quotas as predicted. (Kalim et al., 2013).

In the period of 1988-1993 when the restrictions of MFA were intact, the share of

Pakistan was almost above 2.5 percent in the total world exports. But from 1995 to 2005 the

share of Pakistani textile declined below 1.5 percent on average (Ministry of textile, 2019). From

2005 to 2019 Pakistan has been very consistent in this share and showed no improvement in the

share to total exports. It was 1.65 percent in the fiscal year 2019.

So this issue should be addressed in the current time when Pakistan is going through

severe crisis in the balance of payment account. Despite growth in charges of textile products,

export demand for South Asian textile products improved in European Union and United States

America. A high quality yarn has been trademark of Pakistan’s export instead of using it for the

production of supreme quality products like apparel and fabric.

Selvanatahan & Hossain et al., (2015) analyzed the post MFA position from 2005 to

2013, showing that some growing countries like Bangladesh and Vietnam have accomplished to

last their progression in textile and clothing sector while some other countries like Philippines

and Mexico have practiced a decrease in exports of textile and clothing. This was because of the

presence of major exporters like India and China.

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Many empirical researches have been conducted analyzing the ex-ante and ex-post impacts of

MFA abolition on the export performance of developing countries. An ex-ante study by Gelb,

(2005) asserted that Pakistan, India, Bangladesh and Vietnam would gain in some markets as the

major importers of textiles and clothing would reduce the risk of importing only from one nation.

He argued that most developing countries’ exports would suffer in the post MFA era due to

Chinese influx of goods. Mahmood and Ahmad, 2019 investigated that costs of inventory and

markup adjustments, which indicates the firm-specific uncertainties negatively affect the firm’s

intensive export margins by reducing the quatity of already traded commodities.

These papers have investigated the impacts of post ATC only on the intensive margin of

trade (the volume of already traded varieties old product lines). Very less literature has studied

the impacts on the extensive margin of trade (export of new products). A preliminary study by

(Khandelwal et al., 2010) has attempted to reveal the impact of misallocation of quota licenses

along the extensive margin on aggregate total factor productivity for China. Yasmin and Wahab,

2017, asserted change in both product extensive and intensive trade margins due to reduction in

trade costs in case of South Asian exporters. For the most part, literature has focused on impacts

of ATC expiration on total export value of textiles and clothing, without extracting the details of

the total exports, i.e. whether exports grew at the intensive or extensive margins or which of

these margins mattered more pre and post ATC.

The work done in the sector of textile and clothing is limited in case of Pakistan

especially in trade margins; where product intensive margins have been studied but no study

analyzed the extensive margins. There exists a gap exclusively for specific textile and clothing

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sector; there is need to investigate the trade potential and product trade margins both product

extensive and intensive trade margins at the same time.

1.2 Statement Problem:

Pakistan being an agricultural nation is one of the prime producers of cotton, producing

textile commodities which are very much labor intensive and a greater part of labor force is

associated with this sector. Textile and apparel sector has been playing a vital role in the export

performance, which is very much vulnerable to the risk of trade barriers; ultimately the risk of

huge unemployment and lower income.

There is need to analyze the factors which have huge impact on the exports of textile for

Pakistan. The trade restrictions imposed by the importer countries have adverse impact on the

product lines. WTO and GATT are trying to minimize those trade restrictions by the destination

countries to promote the growth in developing economies. In Textile sector Multi fibre

agreement MFA, 1974 damaged the exports of textile and clothing of entire South Asian region.

So, in 1994 WTO signed the agreement on textile and clothing ATC with the purpose to remove

those trade barriers in five phases. The expected behavior was that reduction in the trade

restrictions would benefit the South Asian countries.

Research is needed on exclusive textile sector with the product lines that with the

removal of such trade barriers have variable impact to show whether Pakistani exports of textiles

and clothing sector, and more importantly export potential, exports at which of the two margins,

were hurt by quotas imposed under the MFA regime. Such a practice is very much necessary

from the policy makers’ perspective that when the resources and time is limited then there is

need of a most suitable policy to get useful outcomes.

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 Its best time to inspect the impact of removal of MFA, the period of ATC and post ATC,

alongside China quotas and the trade preferences margins on the extensive and intensive export

margins of textiles and clothing product lines (product intensive and extensive margins). Such an

exercise that incorporates trade margins into practical research at best aids in improving insights

into the development process.

1.3 Research Question:

➢ What is the influence of reduction in trade barriers on intensive and extensive trade

margins?

➢ What is the impact of removal of quotas on Chinese exports on the intensive and

extensive trade margins for Pakistan?

1.4 Objective of Study:

From the discussion above, the following are the key goals of this research

➢ To separate total increase in trade of textiles and clothing at the two trade margins

extensive and intensive due to reduction in trade costs in ATC and post ATC period.

➢ To study the outcome of elimination of quotas under MFA alongside China quotas on

the product extensive and intensive export margins.

1.5 Organization of the Study:

After this first introductory chapter, this study is organized in the following way. Chapter

two present the Textile sector of Pakistan with its evolution and current position. Chapter three

consists of the empirical literature review on the trade margins, potential and background of

Gravity Model. Chapter four concentrates on the methodology, i.e. Gravity model, Variables, the

equation, econometric techniques and the sample data that are used in estimation along with the

6
theoretical framework. Chapter five focus on the analysis of the estimated empirical results of

the model. Lastly, the summary of the main findings, limitations, policy recommendation and the

conclusion of the study is given in chapter six.

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Chapter 2

Textile Sector of Pakistan:

2.1 Introduction:

Economy of Pakistan is relentlessly dependent on its textile industry. It is one of the

largest manufacturing industries that consume a large chunk of raw products and in return

extends support to an ever increasing population by providing jobs at amateur and professional

level. In this regard, the clothing has created maximum jobs opportunities, especially for the

female labors (Textile policy 2014-19).

Pakistan inherited a weak industrial setup at the time independence; however, with the

passage of time the sector has witnessed massive growth and has emerged as one of the major

stakeholders in Pakistan's economy. Despite its massive success, Pakistan's textile industry still

lags far behind the international standards and has huge potential for the expansion in the

domestic manufacturing of textile goods.

2.2 Evolution of Textile Industry in Pakistan:

An in-depth analysis of considerable work done by researchers and Government of

Pakistan will be discussed in this section. As per the studies, a huge disparity has been witnessed

between Pakistan's export in clothing sector and textile commodities. As a result, Pakistan has

been labeled as a failed market to utilize primary goods to produce more value added products.

At the inception of Pakistan, Government of Pakistan encouraged various industrialists to

contribute in the neonate industrial sector by entailing an import substitution policy. At the

8
beginning only few vertically integrated units chipped in. Those units took the burden of all

major works ranging from spinning to weaving.

However, with the passage of time, the sector witnessed a massive change as advanced

fragmentation or stand-alone (mostly spinning) units were installed. It is generally assumed that

various factors contributed in it, such as tendency of the owners to have small mills owing to the

continuous labor unrest, division of assets among family members and shunning away tax

regulations.

2.3 Bleak Period for Textile and Clothing Sector:

Contrary to the 1960's, Pakistan textile sector witnessed bleak period in 1970's, as

nationalization awaits private sector. Though, the textile sector has managed to evade extensive

nationalization policies, yet massive heavy import duties tarnished the flourishing sector. The

new tax regime stymied the process of import of technological advanced machineries. To meet

the need of local market, a state of the art Textile Machinery Company was set up at Korangi,

Karachi. Likewise, to meet the demand of ring-spinning frames/machines a Spinning Machinery

Company was set up at Kot-Lakhpat, Lahore.

Furthermore, a nationalized company, Pakistan Engineering Company Ltd, at Lahore was

already manufacturing and marketing looms. Instantaneously, licenses were issued for more

value addition of products (for example if an industry owner had a spinning mill, so the policy

encouragement was to bring this industry into weaving) by the government but the policy failed

to yield results as that policy was seen from the perspective that it could stimulate growth of the

apparel industry, government priorities changed once again (ADB, 2010).

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2.4 Era of High Tariff Abolishment:

In 1980, the US gave confidence and allocated quotas for Pakistan in certain product

categories. Likewise, the growing demand of textile products across the globe boosted

Government of Pakistan to shift focus on Export led growth. To enhance trade, high tariffs on the

import of different industrial equipment were abolished. These policies shifts yielded positive

results as Pakistan marked an upward slope in her exports.

Despite the positive output, Pakistan failed to capitalize the boost as major chunk of her

export products included low quality clothing materials and lacked any innovation in terms of

design and quality. Thus, a down gradient trend was witnessed after the quota regime was

dropped in 2005. (ADB, 2010). The constant policy changes have been the dominant factors in

the poor performance of Pakistan in textile sector. Moreover, the investors were encouraged by

policies of international market regimes to priorities the spinners and weavers sector over the

garment industries.

2.5 Current Position of Textile Sector:

At present, textile industry of Pakistan has been divided into two major frameworks:

large sized planned sector and extremely uneven cottage industries. The ordered sector consists

of integrated Textile Mills or large number of spinning units and a very small number of shuttles

less looms units. Whereas, the downstream industries like weaving, garments, towels and hosiery

lie in unorganized sectors.

This sector is prone with massive exports boost. Some units have showed a massive

economic progression. As per available data until June 2017, Pakistan textile industry comprised

of 517 textile units i-e 40 composite units and 477 spinning units. There are 28,500 shuttles less

looms and 375,000 conventional looms.

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 Export demand and cotton production has pushed the Spinning Sector. Furthermore,

growth was witnessed in weaving and processing sector. Air-Jet weaving units have been

established either as an independent units or combined with spinning units. Some of the apparel

units are in progression of regressive integration while on the other hand; spinning units are in

the route of developing weaving and making up facilities to complete this chain.

Though, both Textile and Clothing sectors are accompanying each other and horizontally

and vertically combined either under same management or business tie ups. Pakistan textile

sector has been the backbone of its industrial growth. Pakistan ranks at 8th place in export of

textile in Asia. 8.5 percent of Pakistan's total GDP depends on this sector.

Furthermore, 15 million job opportunities, approximately 30 percent of the Pakistani

labor force of about 49 million has been associated with this particular sector. In addition to that,

the annual growth rate of world's textile sector is 2.5 percent with a total volume of US$18

trillion. To the dismay, Pakistan is at meager 1% only.

The expansion of the industrial production sector has been given the uppermost priority

since Pakistan is establishing with foremost burden on Agro Based sectors. It is high time for

Pakistan to re-determine her direction to maximize her capacity and in turn enhance her

economy. It will not only stabilize the dwindling economy bit will also help Pakistan improve

her industrial sector.

Pakistan heavily depends on its textile industry. The sector has provided effervescent

support to Pakistan's economy since 1947 by creating jobs and enhancing Pakistan financial

position. The prospect is bright for this sector and Pakistan ought to consider this as reality

because there is no alternative available for Pakistan currently.

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 Textile sector had been the major asset of Pakistan in global market during the previous

four decades. In post quota era, a stable position has been maintained by showing growth during

2005 to 2007, but it failed to sustain her position in 2008 with as massive declined to US $11.1

billion due to financial calamity globally in 2008. A special attention in terms of Policymaking

and policy implementation is needed in this sector. Government adopted certain policies to

mitigate like markup rate for Export Refinance Scheme of State Bank of Pakistan is being

reduced from 9.4% to 7.5% from 1st of July 2014. And textiles sector enjoyed duty free import

of machinery under Textiles Policy 2009-14.

The Textile Industry of Pakistan has supported Pakistan export earnings up to a great

extent. In this regard, extensive variety of item viz Cotton fibre, yarn and cloth, yarn other than

cotton yarn, tents, bed-wears, towels, carpets and variety of garments have been the leading

products of Pakistan export sector.

However, there is still a room for improvement as the sector is very vibrant can yield

much better results for Pakistan. Therefore, to keep the track Pakistan needs to encourage

investments in this sector. Large industrial units should be provided with well-situated tax

regimes to import latest technology. Similarly, labor training, innovation in the products and

research and development is also need of the hour.

2.6 Share of Textile Sector of Pakistan in Trade:

Pakistan export performance for textile in previous decades is as follow:

Table 2.1: Textile Sector of Pakistan

Year Export of Pakistan World Exports Share of

in US Million in US Million Pakistan
in %
FY1988 1941 52079 3.73

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 FY1989 2292 75465 3.04
FY1990 2136 85318 2.50
FY1991 2608 104393 2.50
FY1992 2854 153638 1.86
FY1993 2541 190013 1.34
FY1994 2456 259795 0.95
FY1995 5240 303893 1.72
FY1996 5494 313351 1.75
FY1997 5555 354554 1.57
FY1998 5523 342660 1.61
FY1999 4973 335504 1.48
FY2000 5550 391159 1.42
FY2001 5756 380578 1.51
FY2002 5778 399177 1.45
FY2003 7225 459573 1.57
FY2004 8039 514783 1.56
FY2005 8555 541947 1.58
FY2006 10219 595435 1.72
FY2007 10788 659695 1.64
FY2008 10572 689599 1.53
FY2009 9514 590458 1.61
FY2010 10221 680540 1.50
FY2011 13788 801171 1.72
FY2012 12336 780821 1.58
FY2013 13048 841430 1.55
FY2014 13720 845328 1.62
FY2015 13454 809381 1.66
FY2016 12756 754641 1.69
FY2017 13148 729382 1.80
FY2018 13377 774350 1.73
FY2019 13579 820680 1.65

In the period of 1988-1993 when the restrictions of MFA were intact, the share of

Pakistan was almost above 2.5% in the total world exports. But from 1995-2005 the share of

Pakistani textile declined below 1.5% on average (PBS, 2020, Ministry of textile, 2019).

From 2005 to 2019 Pakistan has been very consistent in this share and showed no

improvement in the share to total exports. From the figures in above table there have been a rise
13
in the dollar worth of world exports of textile and clothing but the share of Pakistan as compared

to world trade has consistently been low. In the following table the percentage stake of textile

and clothing to total export of Pakistan is given:

Table 2.2: textile and clothing to total export of Pakistan

Years Exports of Total Exports of % share T&C

T&C Pakistan in exports
Pakistan in US Million Pakistan in
US
Million
FY1988 1941 4455 43.56
FY1989 2292 4661 49.16
FY1990 2136 4954 43.12
FY1991 2608 6131 42.54
FY1992 2854 6904 41.34
FY1993 2541 6813 37.29
FY1994 2456 6803 36.10
FY1995 5240 8137 64.39
FY1996 5494 8707 63.09
FY1997 5555 8320 66.76
FY1998 5523 8628 64.00
FY1999 4973 7779 63.93
FY2000 5550 8569 64.76
FY2001 5756 9202 62.54
FY2002 5778 9135 63.25
FY2003 7225 11160 64.73
FY2004 8039 12313 65.29
FY2005 8555 14391 59.44
FY2006 10219 16451 62.11
FY2007 10788 16976 63.54
FY2008 10572 19052 55.48
FY2009 9514 17688 53.78
FY2010 10221 19290 52.98
FY2011 13788 24810 55.57
FY2012 12336 23624 52.21
FY2013 13048 24460 53.34
FY2014 13720 25110 54.63
FY2015 13454 23667 56.84
FY2016 12756 20787 61.36
FY2017 13148 20422 64.38
FY2018 13377 23212 57.62

14
 FY2019 13579 22958 59.14
Table:2 Source: Pakistan Bureau of Statistics PBS-2020

From the table 2, it can be observed that the segment of textile sector in the absolute

exports of Pakistan has been very significant. There are prospects of growth within this sector

because of comparative advantage in the production. The total share textile has been fluctuating

during the last few decades. During the MFA regime, the share remained below 50% and even

40% sometimes. After the establishment of WTO and signing of ATC, the share of textile in the

total exports went above 60%. So a massive increase can be seen in the exports of textile as the

restrictions were reduced during the course of ATC.

But in post ATC period the share of textile is reduced that may be because of removal of

quota on Chinese exports of textile and clothing. In post 14 years of ATC, the export share of

textile has been fluctuating. So there is need to analyze the reasons behind such fluctuations and

patterns of trade in the context of textile and clothing.

2.7 History of Trade Restrictions in case of Textile and Clothing:

History shows that textile and clothing has been protected sector irrespective of the size

and level of economic development of a nation. This sector has persistently been in jurisdiction

of protectionist restrictions like tariffs, quota, subsidies and safeguard measures. In the late

1950s’ USA imposed voluntary export restraints on cotton textiles exports of Japan, Pakistan,

Hong Kong and India, which was not favorable for Asian countries.

In 1962, under the auspices of GATT; an agreement about restrictions on international

trade in cotton, textile and clothing was contracted to remove the restrictions of voluntary export

restraints. But later in 1974, this was swapped by the Multifibre Arrangments, which lasted for

two decades. This agreement restricted developing countries’ textiles and clothing exports to

Western Europe and North America via computable restrictions. This adversely affected the
15
developing states output, growth and employment. Such tariff barriers caused noteworthy drop in

the progression of textile and clothing sector for a longer duration of time.

In the mid 90’s, it was decided to abolish the quota restriction to regulate trade under

Uruguay round. The WTO was established and the MFA was assimilated into the ATC (New

Agreement on Textiles and Clothing). This agreement was supposed to remove the MFA quota

barriers in four phases in ten years (1995-2005). Since 2005, the textile and clothing sectors have

been subjected to the general directions of the GATT. All the restrictions of MFA were removed

in order to promote the textile sector in developing countries by increasing their exports.

2.8 Overall Performance in Different Regimes:

In the period of 1988-1993 when the restrictions of MFA were intact, the share of

Pakistan was almost above 2.5 percent in the total world exports. But from 1995 to 2005 the

share of Pakistani textile declined below 1.5 percent on average (Ministry of textile, 2019). From

2005 to 2019 Pakistan has been very consistent in this share and showed no improvement in the

share to total exports. It was 1.65 percent in the fiscal year 2019. So this issue should be

addressed in the current time when Pakistan is going through severe crisis in the balance of

payment account.

Despite growth in charges of textile products, export demand for South Asian textile

products improved in European Union and United States America. A value added yarn has been

trademark of Pakistan’s export instead of using it for the production of supreme quality products

like apparel and fabric. So Pakistan has huge advantage to produce large quantity of high quality

products to increase the exports. The key areas in this sector can be identifies to improve the

growth process, by finding which margins is of more important. Either we should produce new

variety or produce more quantity of already traded commodities.

16
Chapter 3

Literature Review:

This study is different from other studies because it is combining distinguished aspect of

trade margins to textile and clothing industry for Pakistan. Like this research is going to analyze

the impact of removal of trade barriers under ATC and few other variable on the product trade

margins in a single sector. No literature exists regarding this analysis. So in this chapter will

study the literature on product trade margins first, Then in second part we will took into the

studies about trade potential of Pakistan and in the final part the gravity modeling will be

reviewed from different studies. A few researches have been conducted on export performance

of textile sector of Pakistan but in different perspective. So in this section the relative literature

will be discussed.

3.1 Trade Margins:

Many developments in the theory and empirical trade literature stresses the role of

multiple factors like, reduction in trade barriers, exchange rate, energy, foreign policy and type

of product, etc. play vital role in the increase or decrease of exports margins for a nation. Some

researches mention the stake of firm advance of output differences to highlight two-pronged

trade shapes along the trade margins both intensive and extensive [(Melitz, (2003), Helpman &

Melitz (2008), Chaney, (2008), Bernard et al., (2009)]. Melitz’s, (2003) structure adds only the

firms which prominently are able to fetch through the export markets.

In addition, reducing the trade restrictions ultimately the trade cost expanding from

lowering tariffs or transportation costs, would thus reassure the firms which are presently

17
exporting and wish to increase their exports (the intensive margin) and also encourage new firms

into export market (the extensive margin).Lucio, (2010) believed that in order to analyze

comparative input of both these margins, it is imperative to study the cumulative, geographic,

firm or product level. These levels have been studied to analyze the Spanish trade during 1997-

2007. Consequently, it has been evaluated that intensive margins contribute vehemently in the

short run changes in exports; but, the trade margins both intensive and extensive are important to

improve the commodities traded.

Felbermayr & Kohler, (2004) believed that the trade in the world grows at two levels.

Where, as exchange association between the two countries already exists might be able to

increase through time. Similarly, trade may also boost up if a trading connection is neonate

between countries that have not traded with each other in the past. They provided a pragmatic

segmentation of post-World War Second, and progression in manufacturing world trade along

both of these margins by proposing a “corner solutions version” of the gravity model explaining

movements on both of the margins. A Tobit estimation of this model resolved the called distance

puzzle. It was found as more considerable evidences than recent studies that WTO membership

improved trade.

Lui, (2009) addressed the puzzle which was discussed by Rose, (2004) on futility of the

GATT/WTO in encouraging global trade; he investigated two core areas in the portion of

literature: sample selection bias and gravity model specification. According to him, when we

include zero trade flows in the investigation and applying a healthier econometric process, results

concluded that the GATT/WTO has been very fruitful in encouraging both the margins of trade.

The results declare that the effect at the extensive margin was more projecting during the first

five GATT rounds, while the effect at the intensive margin dominated after the World Trade

18
Organization was formed. The conclusion in his paper explained high importance for both

policymakers and the gravity approach that internments the institutional impact of being a

member of the GATT/WTO.

Kohoe & Ruhl, (2013) concluded that the extensive margins are of greater importance for

US_ China trade after China enters WTO; the reduction of barriers to trade significantly induced

the extensive margins for several commodities of zero trade. There is vast empirical literature

that has been generated analyzing the ex-ante and ex-post impacts of MFA abolition on the

textile exports of developing countries.

Amarsanaa & Kurokawa, (2012) observed even a larger growth in the extensive trade

margin in trade between China and Mongolia, showing growth highly correlates with entry of

China into the WTO. The extensive trade margins accounted for 40 percent of Mongolian

exports to China and 78 percent of Chinese exports to Mongolia.

McDaniel & Hillbery, (2002) in his study asserted that US' trade with a 78 percent

increase has been witnessed with NAFTA partner countries in reality since 1993. Mexico and

United States’ trade was up to 141 percent likened to the 43 percent increase in U.S. trade with

the other nations of the world.

The study compared U.S. trade growth with that of Canada and Mexico as well as the

growth in U.S trade with non-NAFTA partners. This could be done by applying a simple

analysis of trade growth offered by Hummels & Klennow, (2002). This application provides the

visions into the matter that if the United States is trading more of the alike goods with NAFTA

partners since 1993, or they are trading new goods. The results provide evidence that sizeable

component of U.S. trade growth could be explained by increasing the diversity of goods the U.S.

takes from Mexico.

19
 Above studies have been conducted in different regimes to evaluate the trade between

different nations of the world. Mostly this regional analysis exhibits the trade growth at two

margins and the effects of different regional trading blocks and even WTO/GATT. Most of the

studies showed a huge growth in exports at extensive margins than intensive margins due to

these trading units, McDaniel & Hillbery, (2002), Amarsanaa & Kurokawa, (2012), Kohoe &

Ruhl, (2013). Where Lui, (2009), Felbermayr & Kohler, (2004) concluded that both intensive

margins and extensive margins are of equal importance than in their studies. Lucio, (2010)

argumented that intensive margins grow vehemently in shortrun, where in longrun, they both

growth equally.

There is another factor that causes weak coefficients values of trade models is the

transparency index for institutes. Anderson et al., (2002) empirically investigated insecurity and

pattern of trade on 58 countries using maximum likely-hood technique and results concluded that

institutional problems are one of major constraints to trade and the results of gravity equation are

biased if we ignore indices of institutional quality.

By excluding institutional variables, there is inverse relationship between per capita

income and portion of income spent on traded commodities. By lowering the transaction cost for

protected exchange and which results in rise of trade volumes. Cross-country variations in the

effectiveness of institutions and resulting changes in the prices of imported commodities gives a

simple explanation for the point that high income and capital abundant nations trade

disproportionally with one another and a 10 percent rise in the transparency index results 5

percent increase in the import volumes.

Kim, (2019) presented a model integrating both the choice of trade partner and traded

quantity; predicting that regimes including democratic as well as of the some merged

20
authoritarian trade more in the extensive trade margin than the regimes of autocracies. He then

applied a two stage Bayesian estimator to measure the role of institutions at highly disaggregated

product level trade. His data comprised 131 countries over a half century.

Results concluded that political institutions matter for the extensive trade margins but not

for the intensive margins. The impacts of governmental institutions on the extensive trade

margins vary across products. So the institutional transparency index is also important in

determining the trade flows and trade at the both margins.

In the both above studies Anderson et al, 2002 and Kim, 2019 studied the impact of

institutional and different political regimes on the trade margins; both concluded that the

institutional and the political barriers likely influence the trade and especially the extensive

margins more than the intensive margins of trade.

Empirical findings by Baldwin & Nino, (2006) provided supportive but not conclusive

evidence for the extensive margins, by analyzing bilateral trade flowing among twenty states

(EU 15 plus Switzerland, Norway, Iceland, US, Canada and Japan). At that part of

disaggregation there exists an issue of zeros in the matrix of trade in the exports of nations. They

basically used the empirical model of Melitz, (2003) as reference and concluded euro makes the

European countries behave like a single nation from the point of view of an exporter. So the euro

encourages firms to export that were not traded previously.

The introduction of Euro on trade has been examined by Berthou, (2008) in his study.

The study has been limited to the effect of euro on trade, using trade data and business surveys

for firms situated in France over the period 1995-2003. The research aims to answer three basic

questions, at first, it targeted to study the influence of euro in relation to the export decision of

individual firms, and on the number of commodities exported and on the exports (at average

21
value) by commodities to destination market. Secondly, it targeted to examine the role of euro on

the new entrants or one with low market values. At third level, the role of productivity drive and

its effect and on the euro over heterogeneous firms. After through deliberation, it has been

observed that the euro zone market marks an upward influence on export both at extensive

margin and intensive margin. However, this impact is merely restricted to firm with population

less than twenty labor force.

At bilateral trade flows the examination of zeros shows much disaggregated product

category levels that have been done by Hummels and Klenow, (2005). They targeted a large

number of US trading partner by using a cross sectional examination of a fundamental matter

that to what extent larger economies are impacted by intensive goods margin and extensive

goods margin?

The study extracted that sixty percent of exports of the countries having large economies

are influenced by extensive margins; particularly, as the economy of exporting country grew,

exported a larger number of commodities to more markets. Though, they failed to point out the

association between trade liberalizations/reduction in trade barriers with the both product trade

margins.

In the above three studies Baldwin & Nini (2006), Berthou (2008), Hummels and Klenow

(2005), the impact of common currency among the trading nations was checked and the results

revealed that common currency has huge impact on enhancing exports especially more at the

extensive margins.

Pierola et al.,(2008) evaluated the patterns of diversification of exports in less developed

countries and predicted that intensive margin account has more important share for overall

growth of trade. At extensive margins, diversification in geographic aspect is much important

22
than diversification of product and reduction of trade costs have a positive effect on both

extensive and intensive trade margins. Amurgo & Pierola, (2008) provided a useful definition of

diversification as shown in the table below:

Table 3.1: Diversification

OLD GOODS (OG) NEW GOODS (NG)

OLD MARKETS (OM) OGOM NGOM

NEW MARKETS (NM) OGNM NGNM

Geographic Extensive Margins of Trade = OGNM + NGNM

Product Extensive Margins of Trade= NGOM + NGNM

Product Intensive Margins of Trade = OGOM

The product trade margins are further classified into three categories, first geographic

extensive, which means that the number of destination markets increase for the already traded

product and also the new product. Second product extensive margins include the increase in

number of varieties of goods to old and new destination markets. Third is product intensive

margin which studies the volume of already traded product to the old destination market.

The Hummels and Klenow’s trade margin decomposition methodology has been

incorporated by Begstrand, (2009) by using the work of Baier & Bergstrand, (2007) panel

methodology. This study tried to cover the partial impacts of Economic Integration Agreements

on trade flows (cumulative) using gravity equation to evaluate with a numerous country pairs. In

addition, they also tried to find the impact of all such agreements on the extensive and intensive

product trade margins.

The study was distinctive in a sense that it for the first time managed to build up

association between statistic and economic significance of EIA’s impact on both margins of

23
trade in the framework of a large number of country pairs. Secondly, it also inspected the

impacts of different types of EIA including one way PTA’s, the two way PTA’s, FTAs, and a

new variable for custom unions, common markets and economic unions on trade flows, intensive

margins, and extensive margins of trade.

Gravity equations have been used for analysis of intensive as well as extensive product

trade margins and it’s being influenced by agreements for economic integration using (panel data

set) with number of countries, product groups, pairs and EIA’s from 1962 to 2000 by Bergstrand,

(2014). Moreover, methodology recognized in [(Hummels & Klenow, 2005) and (Baier and

Bergstrand, 2007)].

The study assessed that a greater effect on aggregate trade has been observed as an

outcome of the first evidence of the degree of difference, of various types of EIA’s on these

intensive and extensive trade margins, with deeper integration agreements. He further entailed

the first indication of new differential timings of two of the margins, with intensive margin

effects taking place earlier than extensive margin effect for EIA’s, FTA’s, and one way PTA’s,

consistent with two recent researches. Finally, he also found comparative sizes of extensive

margin and intensive margin effects. These are consistent with application of a gravity equation

grounded upon the standard Melitz’ model.

Opposite to the two studies of Helpman and Egger, (2001) compared with Baier et al.,

(2006), methodology for evaluating the impact of different kinds of EIA’s on mutual trade

flows, no economic study has observed influence of different kinds of EIA’s on the product

intensive and extensive trade margins using a larger number of nations data. Helpman et al.,

(2008) and Egger (2001) have not differentiated majority of the kinds of EIAs in their analysis

regarding various margins.

24
 Begstrand, (2014) found that deeper EIA’s entails greater trade impact than FTA’s.

Secondly, it has larger impact than one and two way Preferential Trade Agreements. However,

we differentiate between different trade impact at the both intensive and extensive margins.

It resulted in using a panel of bilateral trade flows in the years from 1962 to 2000

covering 98 percent of world exports. Thirdly, Bernard, (2009) did empirical research to explore

the timings of trade marginal reaction to shock. Using cross sectional deviation to observe long

run features, the results revealed that variations in trade across country pairs when cross sectional

margins are used have been described largely by the extensive margins of trade. In addition, by

using firm level data as well as the results that is consistent with Hummels and Klennow. Using

time series deviation he found that a bigger part of trade disparity could be explicated by the

product intensive margins at short intervals of time.

In another study trade creation effects on agriculture and food sector has been studied by

using European Union’s PTAs among developing countries in the period 1990-2006 by

Scoppola, (2013) used gravity framework in a panel data setting and results deduced that

European Union PTA’s have an inseparable impression on the agricultural extensive margins,

while the food industry is much more sensitive to such arrangements. On the other hand, the

PTA’s have inverse consequence on the intensive trade margins.

Studies showed that preferential trade agreement had huge effect on trade performance

and suggested that preferential trade agreement has vehemently effected the intensive trade

margins, where the impact on the extensive trade margin vary across product sectors, both in

terms of the signs and the value of the estimated coefficients. [Cardamone, (2009); Cipollina &

Salvatici, (2010); Dadush & Nielson, (2007) and Matthee et al., (2015)] have tried to scrutinize

the influence of the Global Financial Crisis on South African exports at the both intensive and

25
extensive trade margins. The study concluded that intensive margin caused most of the

contraction in aggregate exports.

Shujiro, (2016) investigated the effects of the FTA between Japan and Mexico signed in

2005, on the exports of japan to Mexico. Author constructed a theoretical trade model of firms

(heterogeneous) based on the Melitz and Chaney framework of gravity, and derived a theoretical

relationship that the effects of tariff changes on intensive and extensive margins of trade between

the both countries.

The results showed tariff reduction triggered by FTA, increased intensive margins, while

no strong indication was found on the effect on extensive margins. This indicated that FTA

shortly exerted more favorable effect on existing exporters and products than on new export

marketplace firms or varieties.

Kim, (2018) suggested that the impact of Trade agreement between USA and Dominican

Republic. FTA allowed firms of the state to surge the changes of goods that they disseminate

abroad. Similarly, all the companies were capable to export more goods to USA market after the

year 2009.

The results of his study was; First, small producers that were capable to get benefit from

the growth on the extensive trade margins; and second, clearly supportive argument on product

diversity, the result of FTA depend upon the kind of goods produced by the firms, and

differentiated products incline to get by exporting more varieties while firms producing

homogenous goods are not.

There had been a number of studies mentioned above, conducted to assess the impact of

different trade agreements like EIA’s, FTA’s, PTA’s among nations across the world. Most of

the researches revealed that trade grew more at extensive margins due to these agreement. Some

26
reaches concluded opposite results that the intensive margins are more sensitive in case of EIA’s.

A few mentioned that both trade margins accelerated after signing of trade agreements.

Chaney, (2008) found opposite relation between elasticity of substitution and trade

margins to the prediction of Krugman, where he speculated that high elasticity of replacement

between goods amplifies the impact of trade barriers and trade flow, where Chaney took

heterogeneous firms where the level of productivity is optimal and the predictions of Krugman

reversed that the trade flow is reduced but not magnified. If goods are less substitutable,

consumer will buy foreign commodities at higher cost, trade barriers will have a little impression

on trade.

If value of elasticity of substitution is high, trade barrier will have a robust impact on

trade flow. So there will be high competition when elasticity of substitution is high and any cost

disadvantage will result huge loss in the market. And in case of trade margins, if elasticity of

substitution is high intensive margins will be more sensitive to the change in trade barriers,

where it makes extensive margin less sensitive less sensitive due to reduction of trade barriers

results entrance of new firms in the market of exports. When the value of elasticity of

substitution is high, firms with low productivity incur severe losses and only capture small share

of market and the impact of new firms is very small.

When value of elasticity of substitution is low, there is less competition and new entrants

capture larger share of market. So higher value elasticity of substitution increases sensitivity of

intensive trade margins to changes in trade barriers and reduces the sensitivity of extensive trade

margins. Also trade barriers have larger impact in the case of heterogeneous firm model.

This pattern is completely overturned in evaluation the intensive margin of trade. While

overall results did not observe any significant influence on the intensive trade margins.

27
Following (Chaney, 2008) the argument he expounded for his conclusion is the demand of

homogenous products is greatly elastic to trade barriers. On other hand, the demand for

distinguished products is a smaller amount delicate to trade barriers. It suggests that for these

kinds of merchandises and also founded little response at the intensive margin. Nonetheless, the

similar logic proposes that the new firms can enter into the export market in case of

differentiated products and therefore cause growth in the extensive trade margins.

The literature on trade facilitation or reduction in the trade barriers has focused mostly on

implications for trade volumes but the recent theoretical researches have highlighted that trade

costs such as transaction costs related to cross border trade dealings have impact on both the

traded volumes. Persson, (2010) tested that the reduction in restrictions or facilitation affects

only the extensive margins. This could be done by counting the eight digit products exported

from developing to European Union.

The research also used this as a dependent variable. Moreover, He also testified that the

extensive margins in various commodities are affected in the same way by transaction costs.

Results suggested that if the cost of exporting proxied by time needed to export a commodity

decrease by one percent, the number of differentiated export product rise by 0.7 percent and in

case of homogenous product, the rise is 0.4 percent.

Venessa et al., (2011) asserted that majority of the third world countries have

undiversified exports. The undiversified approach is directly proportional to the rapid growth.

The diversification is determined by the margins of trade. Thus, the actions in terms of

diversification has been influenced by the extensive margins, on contrary the intensive margin

influences the action in terms of export development. Thus, when government envisions

improving export (and employment) growth, they set to target intensive margin. They found that

28
trade liberalization or removal of trade barriers have expected concentration on the comparative

advantage sectors of country, and is directly associated with diversification in export at both the

margins.

Kehoe & Ruhl's, (2013) methodology has been used by Dalton, (2013) to educate the

influence of minimized restriction on trade of Japan with China afterwards China's inclusion into

the WTO in 2001 and to measure the margins. The study intends to find out the extensive

margins of trade. Consequently, it has been concluded that 22 % exports of China to Japan and

15% exports of Japan to China is result of reduction in trade barriers.

Likewise, in another study conducted by Rocha, (2013) tried to highlight trade margins

and its impact of restrictive product on product trade margins for a large panel of French firms.

For that reason, an updated database has been marginalized under the supervision of WTO to

enlist and focus on restrictive product standards only. The analysis was restricted to the sub-

group of Sanitary and Phyto Sanitary regulatory measures.

Moreover three variables were shortlisted to analyze the effects of product standards: that

are the; first the possibility to export and to leave the market for export. Secondly, the value

exported and third, the export prices. To specify, the study intended to examine if SPS measures

has an impact on the firms size, market shares and export orientation. As a result, it has been

observed that SPS measures adversely effects exports. Not only that, negative impact of SPS has

been witnessed on the intensive trade margins. Finally, the negative impacts of SPS measures on

the margins of trade are even reduced for large scale firms.

Klenow, (2019) compared to existing studies allowing searching systematic variation in

the intensive and extensive trade margins for years, origins, and destinations with fixed trading

costs. He found that at-least 40 percent of the disparity in exports occur along the intensive trade

29
margin. That is, when exports from a given nation to some destination nation are high, exports

per producer are responsible for, on average, at least 40 percent of the high exports. His findings

are strong enough to look at all destination markets or only the largest destinations, including all

firms that the intensive trade margins are more important.

Coughlin, (2015) conducted the study by applying the Heterogeneous Firm Trade Model

of Helpman & Melitz, (2008). Different firms of a state which export goods are used to measure

the extensive margin while the approximation of intensive margins by the average firm exports

of the state. The standard of negative binomial as well as its hurdle extension including various

others methods, are used to resolve non trading pairs.

Extensive margins are measured by the increase in the number of exporting firms where

the intensive margins are measured by the mean of exports of the firms of a nation. For Intensive

margin estimation a Heckman correction is examined. In the light of the theory it has been

evaluated that statistically significant and more consistent effects of changes in cost-related

variables on the extensive margin of trade only.

Mahmood et al.,2020, introduced risk behavior as another source of firm heterogeneity

which is systematically related to export decisions. The firms’ export decisions are affected by

uncertainty and the firm’s risk-taking behavior along with productivity and the firms’ size. The

results show that risk-taking firms have higher probability of exporting relative to risk-neutral

and risk-taking firms at 91 percent. The firm-specific uncertainties also

negatively affect the intensive margins of trade

A Belgian firm level data regarding destination and products of nations have been studied

by Bernard, (2014). He examined the significance of multiple product producing firms for a

small and open economy to study the role of multi product firms by using recent theoretical

30
framework. Along with that a panel characteristic of Belgian data has been introduced to observe

various adjustment of the intensive and extensive margins of trade in both the short run and long

run both for aggregate About 65 percent of all Belgian exporting firms account for 98 percent of

exports relate to the various firms producing different unique panel features of the Belgian data.

Analyzing different firms, it was deducted that the productivity of the firm is an associated

phenomena with worth of firm exports. More of the productive firms export in large quantity to

the majority of the countries having higher average product country export flows. Where half of

the variation in total firms exports is affected by the margins of trade.

Hejazi et al., (2017) analyzed the impact of tariff barriers on US imports of agricultural

food products on trade margins using multinomial logit model and showing significant but small

increase in intensive trade margins but the magnitude of impact on extensive trade margins was

twice as intensive margins. Where Imura, (2018), studied the impact monetary policy shocks on

export margins of Canada showing that lower interest rates and appreciation of currency increase

the value of exports. Overall extensive margins were found more sensitive to the monetary

shocks.

In his study Beverelli, (2014) examined the impact of reduction in trade barriers on

extensive trade margins. The study used OECD Trade Facilitation Indicators reflect closely the

Trade Facilitation Agreement. It was signed at the Bali WTO Ministerial Conference held in

December, 2013. The study analyzed that number of commodities being exported to various

destination markets is influenced by trade and found a positive effect of trade facilitation be

observed by extensive trade margins.

Another study tried to find out the relationship of tariff liberalization on South African

intensive and extensive margins of export with the European Union over the period of the

31
introduction of the South African Free Trade Agreement. The text predicted that traffic has a

positive impact at intensive margin, whereas it adversely impact at extensive margin. The

conclusion has been verified by Rauch classification. Rankin et al, (2015).

Intensive and extensive product trade margins for south Asian exporters in the markets of

USA and European Union has been analyzed in the period of ATC and post ATC using gravity

framework by Wahab and Jalil (2017). The study finalized that regression results suggested

expansion in extensive trade margins due to reduction in trade barriers with the model of

heterogeneous firms. And exports will grow both at intensive and extensive trade margins due to

decrease of costs in trade.

There are number of studies which had focused on the impact of trade liberalization or

trade facilitation on trade margins mentioned above. Some are totally focusing on textile sector

and some on the overall exports of nations. Variety of different results and conclusions can be

observed by reviewing all the above mentioned summaries. Even a study by Imura (2018)

investigated the monetary policy impact on trade margins that trade favoring monetary policy

has huge effect on the extensive margins of trade.

Venessa 2010; Beverelli, (2014); Coughlin, (2015) and Hejazi et al., (2017), also

favored that extensive margins of trade are much more sensitive to the reduction in trade barriers,

where intensive margins show les sensitivity as compared to extensive margins. Bernard (2014);

Wahab and Jalil (2017) concluded significant increase in both trade margins with trade

facilitation. Rankin et al, (2015); Cardamone, (2009); Cipollina & Salvatici, (2010); Dadush &

Nielson, (2007); Matthee et al., (2015), Klenow (2019), predicted that intensive margins of trade

are much important and vulnerable to the trade liberalization among countries or regions.

32
 Hossain & Alam, (2006) discussed the clothing industry as one of the most vital

industries in the world in terms of export earnings and employment. This was widely regulated

by quota imposition under the Multi Fibre Arrangements during 1974-2004. It was widely

forecasted that the MFA phased out in 2005 would be a source of decreasing in textile exports of

some under developing nations such as Bangladesh, Philippines and Vietnam.

This forecast was made on the basis that, after the ending of the MFA, these countries

may not be able to compete with major suppliers such as China and India. However, the post-

MFA performance (2005-2013) showed that some developing countries such as Bangladesh and

Vietnam have succeeded to continue their development while some others like the Philippines

and Mexico have experienced a decrease in their clothing exports.

Adhikari et al, (2007) analyzed the potential for number of exporters in South Asia and

other regions for 18-19 month period post-ATC and deduced that the abolition of restrictions did

not alter the export composition a lot, that dismantling of ATC has distinguished impacts on

trade margins, according to the degree of competitiveness, factor endowment and marketing

capacity. The elimination of quotas on Chinese exports in the field of textile and clothing in 2008

changed the whole scenario for less competitive nations. So there is need of more regional

cooperation, enhancing competitiveness and adoption of such policies and strategies to cope the

pressure.

Growth in the both intensive and extensive trade margins is very much compulsory in

case of Pakistani Textile sector. Results from the gravity equation have shown that Pakistan has

miserly failed to attract world market because it has failed to export products that catch world

demand. On the other hand, countries like Bangladesh and Turkey feed the world with that the

world demands. The later part of the study shows that Pakistan's poor performance in this sector

33
is the result of no diversification, inadequate export markets, shortage of skilled labor force, high

cost of production as well as a harsh atmosphere. (Nabi et al., 2013).

Another study Wahab & Akhter, (2011) assessed the post ATC threats to exports of

Pakistan in clothing and textile line, at sub-sectoral level and 551 filtered HS-6 digit line of

different countries like China, India, Pakistan, Bangladesh and Vietnam. Using Bilateral RCA’s

and export competitive indices results showed a nominal increase in exports of Pakistan for $ 9.6

billion to $ 10 billion, where the Pakistan’s share of world trade fell from 2.09% to 1.89%.

Where Pakistan’ loss to China and India is the highest. Ex-ant studies predicted that India and

China would gain from the removal of quotas but Bangladesh and Vietnam has been successful

too, to capture some of markets. Out of other countries growth rate of exports of Pakistan’ textile

sector has been lowest due to declining competitiveness and increased competition in the

destination markets.

In the age of globalization, it is pertinent to understand major indicators of growth and

export at micro level. A paper studied the competitiveness of Pakistan in the backdrop of rising

influence of globalization. It has been observed that Pakistan reverted past policies to adopt

protectionist path since the mids 2000. The study found that Pakistan's major flaw lies in the fact

that major chunk of Pakistan's export is controlled by only few exporters. This caused lack of

innovation and improvisation in the export sector. There is need to focus on trade diversification

(extensive margins) for Pakistan (Taglioni and Reis, 2013)

An ex-ante study by Gelb conducted in 2005. In the study he argued that Pakistan,

Bangladesh, India and Vietnam would gain in some markets as the major importers of textiles

and clothing would decrease the risk of importing goods only from one country. He argued that

34
most developing countries’ exports would suffer in the post-MFA era due to Chinese influx of

goods.

An ex-post study by Whalley, (2006) employed a multi-country CGE model and

concluded that Pakistan’s export growth was restrained in the post-ATC period because the

constructive effects of the removal of MFA restrictions being nullified by factors such as a

13.5% EU anti-dumping duty on bed-wear and the introduction of a 12.1% tariff on textiles

exports again.

These papers have investigated the impacts of post-ATC only on the intensive trade

margins. A less extensive literature has inspected the impacts on extensive margin of trade

(export of new products). A primary study by Khandelwal et al., (2010) have attempted to reveal

the impact of misallocation of quota licenses along the extensive margin on aggregate total factor

productivity for China.

For the most part, literature has focused on impacts of ATC expiration on total export

value of textiles and clothing, without extracting the details of the total exports, i.e. whether

exports grew at the intensive or extensive margins or which of these margins mattered more pre-

and post-ATC.

There are number of studies that have been discussed above about different nations,

sectors and variables. Many studies employed different models to check the impact of trade

agreements, WTO, exchange rate or any other factor on the exports in the form of trade margins.

3.2 Literature on Gravity Framework:

The use of Gravity model also debatable because of its plus and minuses. This model has

been very successful in determining the trade patterns and potential in many studies across the

world and especially in case of Pakistan, [Butt, (2008), Nabi et al, 2013, Kalim, (2014). Jalil and

35
Wahab, (2017), Kamal, (2019)]. The basic rationale for using this model for current study is to

deal with zeros in the trade flows which cause biasedness in the results. Also the Gravity

framework is now been given the theoretical base to provide more conceptual foundations.

The origin of gravity model can be traced back to the study of Physics. It has been

regarded as a major work done by Newton. It has its base in the study of gravity: defined as a

force of attraction between two bodies directly proportional to their masses and inversely

proportional to the square of distance between them. However, this model has been successfully

used by various economists such as Tinbergen (1962), Poyhonen (1963) and Linnemann (1966)

to find the interdependency of various nations in the backdrop of trade.

Thus, this model enhanced the ability to apply numerical data for better understanding of

trade oriented relationships. The empirical outcomes of the gravity equation have been quite

robust and very much best fitted to the data available. Consequently, best results can be extracted

from the application of this model. Moreover, this also enhanced the dependency of modern day

economist to purview trading relationship of various countries. Thus, this model has been

extended and new dimensions have added in the gravity model.

Although, this model yielded positive results, this model has certain loopholes. For

instance, the model has been criticized for its lack of theoretical orientations by Baldwin (1993),

Leamer (1994) , Bergstrand et al (2005) that the previous studies used the gravity model without

any theoretical foundations, no solid economic background is given yet and is only based on the

analogy of physics. Most of the studies determined the trade pattern and potential using this

gravity model after controlling many causal factors affecting the trade including the institutional

barriers, cost related to trade, transportation cost, cultural and topographical characteristics and

some other constraints.

36
 The gravity model has been utilized to study the underlying pattern of trade relation by

utilizing different factors in determining the trade relations. Considering these factors diverse

framework has been developed by different economist such as Anderson (1979), Feenstra et al.,

(2001), Eaton & Kortum, (2002), Anderson & van Wincoop, (2003). Different parameters such

as Ricardian, Heckscher-Ohlin, and Modern trade Theory were used by them.

A monopolistic competition model has been presented by While Helpman and Krugman,

(1985) with ever increasing returns and transportation costs. On the other hand, a traditional

model of study was opted by Anderson and van Wincoop, (2003) extended the previous gravity

model for more robust and conclusive results. Now, in order to regulate the increasing impact on

profits, there are certain prerequisite such as bilateral distance and dummy variables for common

language, common borders and any of the regional/bilateral agreements, in cross section and

panel data samples.

The study of gravity model has been applied at limited level to study Pakistan’s trading

percentage level. It has been primary studied in the context of its impact on SAPTA/SAFTA

Rahman, (2003). Similarly, Gravity framework is used by Betra, (2004) to inspect trade of India

with Pakistan. She asserted that the trade potential of these countries lies at a whooping US$ 6.5

billion. She finds that Pakistan has been unable to reap the outcome of her trade potential due to

certain political restrictions with India. Still the most studies only focused on the overall trade

level and totally ignored the subsectors or product level analysis in much of the cases.Hina,

(2019) evaluate the welfare impact of BTA’s and RTA’s on Pakistan using the Gravity frame

work. There are number of researches which used the Gravity equation like [Melitz (2003,

2008), Gul, (2014), Alam, (2013), Hummels & Klenow (2002, 2005), Bergstrand, (2014), Butt,

(2008), Bernard, (2014), Kohler, (2014), Scoppola, (2013), Jalil and Wahab (2017)]; due to its

37
robust results. It has been very popular among popular from long time but with its advantages,

there are also some issues with this modeling.

3.3 COMPARISON OF TRADE MODEL; GRAVITY VS CGE

The idea of trade modeling is the center of attention of many critics. Transek, (2001)

indicates that simulation models have a vibrant impact on the study of repeated sampling.

Whereas, econometric model are based on the notion of making predictions about different

economic phenomena.

Equally, simulation models also bring to the fore the casual organizational structure of

trade flow, Transek (2001), CGE model and GTAP only captures limited number of factors that

have impact on the trade flows which comprises of causal factors like consumption, demand

side, transportation, environment, energy and production etc. The model of Transek, (2001) used

the CGE simulation model for estimating the trade flows endogenously using transportation cost.

This model has widely been used by number of reserchers for modeling trade flows and

for examining the impact of FTA’s like Kouparitas, (2001) and Siriwardana, (2007).

Nonetheless, many critics criticized CGE models for been too much limited in terms of

parameters selections. In this regard, The World Bank Economic Prospects of 2005 has

vehemently rejected the CGE model.

Further, Hertel et al., (2007) has a mixed approach towards the study of CGE model and

concluded with comments on the weak econometric base of the simulation model. It has been

asserted that on one side that CGE model works on the low and weak econometric foundations,

on the other hand, their study appreciates the CGE model for its vitality at various levels.

Furthermore he commented that there is potential to get good results if we combine the CGE’s

and econometric models.

38
 Econometric methods for modeling trade have concentrated on the gravity modeling. The

idea of the gravity model is grounded on Newtonian physics; trade between two states is

influenced by their sizes and topographical distance between them (Porojan 2001, Head, 2003).

Despite having many loopholes, the Gravity model centers on explaining the swift flow of

trading items at various levels (Baldwin, 1994). The gravity model has described the excellent

robust results in presenting the trade flows in spite of having a poor reputation and lacking

theoretical background. For instance, Bergstrad (1985) stated that the model’s super level of

statistical explanation has been tarnished by its in ability to explain strong theoretical

foundations.

In another study, Filipinni and Molini, (2003) castigate the gravity model as something

that goes without theory. However, its ability to yield positive results within the ambit of facts

and figures has been appreciated by them. Indeed the justifications for the performance of

gravity model performance was given by Linnermann (1966) while in (1979) Anderson was the

first person to derive the theoretical foundations based on the economic theory. To minimize the

flaws in gravity model, upgraded versions have been offered by Krugman (1979), Helpman &

Krugman (1985), Bergstrad (1985, 1990).

To this fact, Baldwin, (1994) hinted that the gravity model has been widely hailed for the

foundational understanding it has. Filippini, (2003) has asserted in his study that there lie

variable relations between the idea of simulation and econometric approaches. Both these have

been thoroughly analyzed to deeply study various factors impacting trade flow. The layers of

gravity have been the center of attention of many economists like Tinbergen (1962) and

Linnemann, (1966) to study the underlying relation among various trading states. Likewise, this

39
model was also used by Bayomi & Eichengreen, (1997) to explore various pragmatic

understanding of the relationships between the relationships of trading partners.

Impact on the Trade flows have been analyzed under different regimes by using both the

CGE, GTAP and econometric approaches: however, the gravity mode has been the most popular

among them because of it robust results and limited assumptions on the use of parameters on the

independent side (Fillipini, 2003).

Consequently vast literature on the gravity model can be seen with their application

studying the trade flows during the last decades. Keeping in mind the sense of the model; the

economists like Timbergen (1962), Linemann (1966) applied the gravity model to find out the

trade relationship between the various nations. Hence the model has been used for the longer

period of time to find out the pattern of trade in several studies. The overall empirical results of

the gravity model have been encouraging and found best fit on the available data.

3.4 Issues in Previous studies and Way to overcome:

Following are the few major short comings in the different structures of gravity framework.

These studies fail to provide results as per the standards of econometric explanations.

The utilization of log-log models by various studies where either utilized or drop zero values of

the dependent variable has shown difficulties in either cases. On one side, the log of zero has

violated the elementary assumptions of Jensen’s inequality. Whereas, a biased and inconsistent

estimates can be extracted by dropping of zero values or using OLS estimator (Frankel, 1997).

Baier and Bergstrand, (2005) believed that various external factors/ingressions may leads

to the biased and inconsistent parameter estimates. Few studies have applied gravity model

analysis to test different trade oriented issues. However, this mode may distract and may result in

the underestimation of the influence of tariff on trade.

40
 Generally, it is more appropriate to use, as the gravity framework by default does not

incorporate the dynamic effects and industry tie-ups. Likewise, it fails to provide apt analysis of

tariff simulation especially when the variable for tariff measure heteroskedasticity problem.

Thus, this may cause underestimation of the impact of tariff on trade.

Heteroskedasticity has been labeled as a severe problem by Santos Silva & Tenreyro,

(2005). They asserted that it is problematic both in terms of traditional gravity equation

presented by Tinbergen, (1962), and in terms of recent gravity equations recommended by

Anderson & van Wincoop, (2003).

This research aims to address the above mentioned problem by utilizing linear-log form of

the gravity equation, Tobit regression Method and the modes adopted by several others such as

(Nino, 2009), (Santos Silva & Tenreyro, 2005), (Jalil & Wahab, 2017). Moreover, Tobit

estimator proposed by Santos-Silva and Tenreyro, (2006) is much more suitable to evaluate the

gravity equation because of its robustness in case of all kinds of data even censored or

uncensored. It will be very much helpful in expressing the trade margins. This study considers

minimizing the problem of zeros in trade data due to non reporting of the data or the trade might

not happened before or after that period of time, trade policy measurement errors and

heteroskedasticity issue. The current study will be using 1 $ value in the place of missing

observation or zero trade. So the consequences of using the logarithmic forms will be tackled

easily.

Vast literature exists on gravity applied to estimate the nexus among variables and gave

robust results but not huge work has been performed on the trade margins all over the world

especially in Pakistan. So there exists gap that much more work can be done in different export

41
sectors to find out the trade margins to enhance the growth in export values. Current study is

dealing with the textile and clothing sector for Pakistan.

Knowing the importance of this sector for Pakistan and its performance in the last few

decades, Adhikari et al, (2007); ( Akhter & Wahab (2011); Nabi (2013), Taglioni and Reis

(2013), in their papers mentioned number of problems faced by textile sector of Pakistan in trade

and also recommended number of solution in the production and even in the trade policy side.

The idea for this this study has been taken from the above researches to test the effectiveness of

trade agreements in different regimes on the trade margins of textile and clothing sector for

Pakistan. In order to segregate the impact of trade facilitation during and post ATC into two

different trade margins to give precise conclusion in this regard.

42
Chapter 4

Econometric Methodology and Data:

Current study is using the gravity framework to find the trade margins in the textile and

clothing sector. This chapter will provide the details of this modeling technique with its pros and

cons, its superiority over other trade models, its steps and reasons behind choosing this

framework.

4.1 Gravity Framework:

The concept of gravity framework has a daunting effect on the field of study. The idea

has been first introduced by Tinbergen, (1962) and Linnemann, (1966). In addition to that, this

model has been widely utilized for the explanation of trade flow at international level.

Furthermore, (Bergstrand 1985, Porojan 2001), highlighted in their study that this conception has

been widely approached to analyze significance of major traffic inflow at international level.

Likewise, Porojan, (2001) recommends that gravity model have been utilized in numerous

studies to understand the phenomena of trade flows at international level despite of lacking any

theoretical foundation.

The use of gravity model debatable because of its advantages and disadvantages in

different cases but still it is considered to be one of most potential model in determining the trade

flows. This model has been very successful in determining the trade patterns and potential in

many studies across the world like Melitz et al., (2002), Rose (2004), Chanay (2008), Lui (2009),

Hummels and Klenow (2005), Kim (2019), number of studies mentioned in the earlier chapter

used gravity framework to find trade margins and especially in case of Pakistan, Butt,

43
(2008),Nabi et al., (2013), Jalil and Wahab, (2017). The elementary rationale for using this

model for current study is to deal with zeros in the trade flows which cause biasedness in the

results. Also the Gravity framework is now been given the theoretical base to provide more

conceptual foundations.

Still many empirical studies reveal that there have been innovation and methodological

refinement took place in the gravity framework attempted to improve its base and assess the

trade flows. Similarly, a variant of gravity model has been utilized by Bergstrand, (2007) to

unearth the impact of Free Trade Agreements at various levels. Simply put, Free Trade

Agreements entails a system of agreements between different states to regulate and eliminate

different trade barriers- such as tariffs, quotas etc., with only one aim- to enhance trade between

states at every level. This agreement has been playing important role in trade amongst different

nations and organizations.

Explaining and predicting the impacts of FTA’s and has been a major application of the

gravity model according to Bergstrand et al, (2007). The importance of gravity model has been a

proven fact as it has been widely applied to study flow of trade. Consequently, this study aims to

understand different model pertinent to trade flows. The success of gravity estimation revealed

that the removal of tariffs, quota and other trade restriction between the trading partners

increased the trade flows. FTA’s have been widely used for enhancing the trade between nations

including NAFTA, ASEAN and Middle Eastern countries.

Many researchers showed interest in the application of gravity framework and its

implementation for presenting trade flows and particularly impacts of FTA and other reduction

of other trade barriers. In this regard the current research is going provide a systematic review of

previous work done in trade modeling by providing fruitful insights of the impacts of reduction

44
in the trade barriers on the product trade margins using the gravity model. Following is the frame

work shown for gravity specification presenting the steps that this model pursues. Like the first

stage is the setting of objective that what the study tends to find whether the nexus between

variable or any other relationship among variables? In this study the main objective is to find out

the trade margins in textile and clothing sector.

In the second step, the variable are selected to be included in the equation of gravity, like

GDP per capita, export values, distance etc. in the current study. The final step is choosing any

suitable technique to estimate the equation. As tobit technique is chosen for this research.

Figure 1: Review framework and layers. (Source: Kepaptsoglou, 2010)

4.2 Theoretical Background:

Traditional trade theories cannot investigate the diversification patterns since they simply

neglect all zero-valued trade flows. If zero trade flows are not randomly distributed, the results

arising from the use of these models are biased. The workhorse trade models maintain that as

economies develop or barriers to trade are reduced, more is exported, but there is disagreement

among the models about how the export growth transpires.

45
 For instance, trade models with Armington assumption feature an intensive margin only,

thereby underestimating the trade and welfare effects of trade openness and also making the

wrong prediction that larger economies’ exports are lower priced than smaller ones. Gravity

equation equipped with micro-foundation in Anderson & van Wincoop, (2003) assume

homogeneous goods within every country, and the absence of extensive margin indicates that

changes in trade costs only lead to greater export volumes of the same products.

Empirical trade model being used by Krugman features monopolistic competition and

incorporated that productivity level of firms differences cross countries and these differences

basically result a firm to become an exporter. Firms having any advantage in production and cost

will be able to export more quantity and varieties.

This latter finding has been reiterated and termed as a ‘basic fact’ in a study by Eaton &

Kortum (2002), in which they allow for stochastic differences in technologies across countries

and their results indicate that a country with a higher technological level, less input cost or less

trade impediments export a wider range of goods.

Melitz model constitutes enrichment over Helpman & Krugman (1985) trade replica. It

has two prominent novelties: marginal costs faced by different firms vary, and firms face an

overhead of entering a market. The Melitz model assumes that firms incurred a fixed cost in

producing a new variety. The Melitz model departs from Krugman’s model by incorporating

heterogeneity of firms in terms of productivity. The utility of Melitz model along with different

form exerted the flow of a zero trade flow can be related to variable and fixed trade costs. The

higher the trade cost, the more likely the observance of a zero.

Thus, the model is able to give details of zero trade flows and can be utilized to

understanding the two margins of trade. An important manifestation that stems from the

46
threshold productivity inclusion in the model is that improved productivity via lower costs of

exports result in increased average exports of each firm (product-intensive margin) as well as the

number of firms (product-extensive margin).

The model reinforces that firms that are more productive than others turn out to be

exporters, and more firms are drawn into exporting when trade costs and other barriers to trade

are reduced since average productivity of firms increase.

This research follows the Melitz framework. The bilateral send offs to abroad country are

based on two conditions; first the exporter country’s cut-off condition for exports to the

importing country and secondly the exporter country’s mass of total product varieties

Only those domestic firms that successfully cover the fixed costs of market entry by producing at

low marginal costs become exporters. The export cut-off condition that expresses the threshold

marginal cost for exporting units is given by:

𝑖−𝜎
𝑒𝑥𝑝
̅̅̅̅̅
𝑀𝐶𝑒𝑥𝑝 𝐶𝑑 𝐷𝑠
𝐹𝐶𝑖𝑚𝑝 = ( )
1 − 1/𝜎 𝜎

Equation 1
𝑒𝑥𝑝
𝐹𝑖𝑚𝑝 is fixed cost of entry in the destination market. ‘MC’ is firm-specific marginal cost. 𝑎̅𝑜𝑑 is

the threshold marginal cost of origin country’s product in destination market. 𝐶𝑑 is the mutual
𝑆 𝑑
trade costs. 𝐷𝑠 is the demand shifter in destination market, that is 𝑃1−𝜎 whereas 𝑆𝑑 is total outlay
𝑑

in destination market on all varieties, 𝑃𝑑 is the usual CES price index.

The domestic cut-off condition has been explained as the highest marginal cost for all

active firms in the country of origin. Firms faced with higher marginal cost than this entry cost

will not yield even for the domestic market. This cut off condition is as follows:

47
 𝑖𝑚𝑝
̅̅̅̅̅𝑒𝑥𝑝 𝑖−𝜎 𝐷𝑜
𝑀𝐶
𝐹𝐶𝑒𝑥𝑝 = ( )
1 − 1/𝜎 𝜎

Equation 2
𝑖𝑚𝑝 ̅̅̅̅̅𝑒𝑥𝑝 is the threshold marginal cost of origin
𝐹𝐶𝑒𝑥𝑝 is the cost of entry in the domestic market. 𝑀𝐶

country’s product in its own market. Assume no trade costs for domestic sales.

The value of bilateral exports for each firm is:

̅̅̅̅̅𝑖𝑚𝑝
𝑀𝐶
1 𝜎−1
𝐶𝑑1−𝜎 𝑫𝒔 {𝑌𝑥 ∫ 𝑀𝐶 1−𝜎 ̅̅̅̅̅
𝑑𝐺[𝑀𝐶|𝑀𝐶𝑒𝑥𝑝 ]} (1 − ) , 𝑀𝐶 ≤ 𝑀𝐶𝑖𝑚𝑝
𝑋𝑑 = 𝜎
0

{ 0, 𝑀𝐶 > 𝑀𝐶𝑖𝑚𝑝

Equation 3

Where,

𝑋𝑑 = Total bilateral exports from nation-exporter (origin) to nation-importer (destination)

𝐶𝑑 = Bilateral trade costs

𝑀𝐶 =Firm specific marginal cost

̅̅̅̅̅
𝑀𝐶𝑖𝑚𝑝 = Pair-specific threshold marginal cost for sales abroad

̅̅̅̅̅𝑒𝑥𝑝 = Threshold marginal cost for domestic sales

𝑀𝐶

𝑌𝑒𝑥𝑝 = Endowment of nation-exporter

𝑆𝑑
𝐷𝑠 = Demand-shifter for importer, namely where 𝑆𝑑 is total spending of importer on all
𝑃𝑑1−𝜎

selections, 𝑃𝑑 is CES price index

̅̅̅̅̅𝑒𝑥𝑝 ] = The conditional density functions, describing the distribution of marginal costs
𝐺[𝑀𝐶|𝑀𝐶

for exporter; it is conditional on 𝑀𝐶𝑒𝑥𝑝 since firms that do not produce in nation-o cannot export.

48
The above equation basically elaborates the relationship between the total value of exports from

exporter to the importer nation with the cost of trade, marginal cost of exporting and selling

domestically, endowment of the exporting country.

4.3 Estimation Methodology:

The OLS method is mostly utilized for the finding out coefficients of the gravity model

arrangement in its log-linear form. Many researchers observed modeling and methodological

flaws in the use of OLS for development of gravity model. Henderson et al, (2008) noticed that

the empirical conclusions are not in line with theoretical models. The model has been refined by

Anderson & van Wincoop, (2003). They provided theoretical base to gravity model for properly

accounting endogeneity of trade costs and considering institutional trade barriers.

Egger, (2001) by using a practical way of treating the interaction impacts in order to

remove the biasedness and inconsistency in the estimation. Like Baltagi, (2003) emphasized on

lacking interaction impact may result biasedness in the results and wrong conclusion from the

gravity model and he highlighted the need of controlling all the interaction impacts in both time

series and cross sectional data. Thus in this way the potential way is the bi causal fixed impact

model is much suitable for capturing the important components of both types of data.

Egger, (2002) concluded that the interest of analysis decides the selection either fixed or

random impacts, like the sample of the data, properties of data and the theoretical model that we

are going to use. Most of the studies conclude that the fixed impact model entails better

empirical results. Egger said that the bi-causal or random impact models need to incorporate the

cross sectional or time series dimensions. But this method is only useful when we are trying to

observe time invariant impacts. Otherwise the only way available is to use the fixed impact

models.

49
 According to Glick & Rose, (2002) after assessing the fixed and random impact models;

came to a conclusion that much more robust results can be drawn from using fixed impact

model. Where Egger & Pifaffermayr, (2003) emphasized on the need of using bi causal fixed

impacts Where Wilson, (2003) concluded that bi causal fixed impact model bring much more

robust result as compared to un changing factors like tariff. In (1999), Kalijaran introduced a

stochastic coefficient model; a model fitted in the same type used after almost a decade by

Tzouvelekas, (2007). Porojan, (2001) used the spatial econometrics to incorporate the spatial

impacts.

Where Egger, 2004 introduced a three stage modeling estimation technique to explain the

trade flows using the gravity equation. He estimated the fixed impacts, instrumental variable, and

random impacts in three steps. Peridy, (2005) incorporated the random impact model by

applying several relating estimation techniques like HTM and ABB. These estimates were very

much superior to the estimates of standard random impact estimator for the gravity model

specification. Carrere, (2006) proposed Taylor estimation for this purpose.

A broader study to analyze different modeling techniques has been done by Peridy,

(2005) such as OLS, fixed effects, random effects, HTM, GMM and ABB. He concluded the

study by suggesting that all model yield significant results with similar coefficients. In that

context, a non-parametric technique has been used by Henderson & Millimet, (2008) to estimate

gravity equations and significant results were reported.

Lehman et al., 2007 used the SUR model controlling for the cross nation impact while

Kepapsoulgu et al., 2009 implemented in same way for the bi-causal fixed impacts. Finally,

Baier & Bergstrad (2009) recommended in their study that to obtain promising results of

50
multilateral effects, it ought to be used with OLS. This suggestion was quite similar to the

findings of Anderson & van Wincoop (2003).

A harsh criticism of OLS has been reported by Santos Silva & Tenreyro 2006. They

entail that the log-liner conversion for estimation of gravity model parameters depends on quite

unrealistic assumptions of error in the equation and suggested the estimation of gravity in the

multiplicative form. Therefore, they recommended to attain more assertive results Poisson quasi

maximum likelihood (PQML) technique is of more value than OLS.

I will add to the existing literature such as [Melitz (2003), Chaney (2008), Butt (2008)

Jalil & Wahab (2017)], empirically by utilizing gravity framework, using the Tobit model. A

traditional means of solving with the presence of zero trade flows has been the Tobit model (or

censored normal regression model).

The Tobit model has been used by Rose (2004), Amurgo Pacheco and Pierola (2008), and

Andersen and Marcoiller (2002) and Baldwin and Di Nino (2006) to deal with nil trade flows. In

addition, under heteroscedasticity, the parameters of log-linearized models estimated by OLS

results biased assessments of the accurate elasticities( Liu (2009), Silva and Tenreyro (2006),

and Felbermayr et al (2010). Another methodology to avoid the biasedness of the OLS is

Maximum likelihood estimation, which frequently been used by many researchers Silva (2006),

Butt (2008).

Adding an arbitrary small positive value ($1) to the zero-valued observations is

equivalent to distorting the results as it is ad hoc, and may lead to inconsistent pooled OLS

estimates because these values do not reflect the underlying expected values. This leads to

measurement error which can lead to selection bias (Liu 2009). The coefficients obtained using

only constructive trade flows are assessed inconsistently. However, when the zero trade flow is a

51
genuine zero, it represents a choice, and Tobit model is more appropriate than models such as

sample selection which is employed for missing trade values or no response.

4.4 The Estimating Equation

Equation suggests a gravity-like estimation. The equation is not a linear one, so that it is

linearized by taking logs. The GDP of destination market can be used as a substitute for 𝑆𝑑 and

the GDP of the origin country as a proxy for 𝑌𝑒𝑥𝑝 . A reduction in trade cost, or market entry cost,

Fc, will lead to an increase in bilateral exports.

Reduction in these costs can lead to the items that were not traded earlier. Thus, export

grows at both the intensive and extensive limits as trade costs are brought down. When firms

find it unprofitable to export, the firm will not export at all. Zero-valued trade flows in the

dependent variable create a problem for a log-linear gravity equation form. When zeros are

converted into logarithms for estimation, they become undefined. To tackle this, the present

paper adds a small amount of 1$ to zero-valued trade flows.

Following the discussion above, and the theoretical framework presented, the following gravity

equation is estimated:

𝐥𝐨𝐠(𝐗 𝐞𝐱𝐩_𝐃 ) = 𝛂𝟎 + 𝛂𝟏 𝐥𝐨𝐠(𝐏𝐂_𝐠𝐝𝐩𝐞𝐱𝐩 ) + 𝛂𝟐 𝐥𝐨𝐠(𝐏𝐂_𝐠𝐝𝐩𝐢𝐦𝐩 ) + 𝛂𝟑 𝐥𝐨𝐠(𝐆𝐞𝐨_𝐝𝐢𝐬)

+ 𝛂𝟒 𝐥𝐨𝐠(𝐩𝐫𝐞_𝒑𝒐𝒔𝒕_𝐀𝐓𝐂𝐭 ) + 𝛂𝟓 𝐥𝐨𝐠(𝐐𝐮𝐨𝐭𝐚𝐂𝐡𝐢𝐧𝐚 𝐭 ) + 𝛂𝟔 (𝐭𝐩𝐦𝐫𝐞𝐠 ) + µ𝐭

Where, Xexp_D is the value of exports in dollars from exporter (Pakistan) to the destination

market, of the ith product line at the 6-digit level, in year t. PC_gdpexp is the GDP per capita of the

exporter in year t; PC_gdpimp is the GDP per capita of the importer state. Distance is a substitute

of transportation costs, so that generally an inverse impact on trade is expected.

52
QuotaChina t is a dummy variable is used to capture period during which safeguard measures

were placed on Chinese exports of textiles and clothing by the USA and the EU. Though both

destination markets introduced import quota on Chinese exports in 2005, however, Chinese

exports were also restricted during the ATC period. Therefore, to assess how quotas on Chinese

exports of textiles and clothing affected the other South-Asian exporters, we assign a value of 1

for the period 2001 to 2008, period of quotas on Chinese exports of textiles and clothing, and 0

otherwise.

Dummy variable Pre_post_ATCt = 1 for time period 2001-2005 and 0 otherwise. To

introduce preferences at the product level, we compute trade preference margin (tpm) which is

the difference between the tax payable under a given system of tariff preferences and the duty

that would be calculated in the absence of preferences. It is calculated for each product line at HS

6-digit line.

Formula: tpm = MFN tariff – preference tariff

tpmregtis a continuous variable and varies across countries, products and over time. Another

variable is a dummy presenting the period in which institutions worked rather freely and for the

growth of exports, mostly democratic ones will be presented by 1 and others zero.

This research will add to the existing literature such as Melitz (2003), Chaney (2008),

Butt (2008) and Jalil (2017) empirically by utilizing gravity framework, using the Tobit model.

A traditional means of solving with the presence of zero trade flows has been the Tobit model (or

censored normal regression model).

The Tobit model has been used by Rose (2004), Amurgo Pacheco and Pierola (2008), and

Andersen and Marcoiller, (2002) and Baldwin and DiNino, (2006) to deal with nil trade flows. In

addition, under heteroscedasticity, parameters of log-linearized models has been estimated by

53
OLS and results biased assessments of the accurate elasticities [Liu (2009), Silva & Tenreyro

(2006), and Felbermayr & Kohler (2010)]. Another methodology to avoid the biasedness of the

OLS is Maximum likelihood estimation, which frequently been used by many researchers Silva

(2006), Butt, (2008)

Adding an arbitrary small positive value ($1) to the zero-valued observations is

equivalent to distorting the results as it is ad hoc, and may lead to inconsistent pooled OLS

estimates because these values do not reflect the underlying expected values. This leads to

measurement error which can lead to selection bias (Liu 2009). The coefficients obtained using

only constructive trade flows are assessed inconsistently. However, when the zero trade flow is a

genuine zero, it represents a choice, and Tobit model is more appropriate than models such as

sample selection which is employed for missing trade values or no response.

4.5 The Dataset:

To pick up two-pronged changes in selling items abroad, behavior at the artifact level

and firm level using the Melitz trade theoretical framework, the ideal dataset should comprise the

product level, firm level two-sided trade figures. Due to non-availability of the product-level,

firm-level data, the full extensive margin cannot be captured by utilizing export data at

harmonized system six digit level.

There exist a range of goods within HS-6 digit level product lines. Therefore, if more

varieties were traded post-ATC within a 6-digit product category, such product extensive margin

cannot be identified. Thus, when a bilateral flow changes from zero to positive value, this may

mean that we do not know how many different varieties may have been traded. Thus, the impacts

on extensive product margin cannot be fully ascertained.

54
 The Harmonized System codes are standard up to six digits, the most detailed level that

can be compared internationally. The HS codes that are greater than 6-digit cannot be used to

make international comparisons as countries do not always use the same codes to define

products. Therefore, due to non-availability of such product-level, firm-level data, and since the

present study is a comparative analysis of three exporters of textiles and clothing to two

destinations, the paper resorts to using the most detailed trade data available, namely the HS 6-

digit level, obtainable from the UN COMTRADE database.

Figures for the dependent variable, the export value of textiles and clothing product lines,

are acquired at the HS 6-digit level from the UN COMTRADE databank. Data on independent

variables such as nominal GDP and population of the exporter and importer nations are obtained

from World Development Indicators (WDI) database. Bilateral distance data is obtained from the

CEPII bilateral distance database (www.cepii.fr). The preferential trade agreements are those that

are alerted to the WTO, and can be found at http://ptadb.wto.org/?lang=1. Trade preference

margin are computed from data obtained fromhttps://tao.wto.org/welcome.aspx?ReturnUrl=%2f.

The data base available in the UN COMTRADE statistics; there exist a problem of zeros

in the trade flows. It is also possible that the trade may have happened but that may have not

been reported. The presence of zeros in the data results in the underestimation of the coefficients

in the equation.

Kohler et al, 2005 replace those missing values of trade with the zeros while those zeros

were treated as missing by Helpman, (2008). For the current research, if the export of a product

is not reported within the time period; such product lines will be eliminated from the analysis. If

a product is trade few years and is not reported as traded for the rest of years in the research so

such commodity will be treated as missing and zero will be assigned for those missing years.

55
 The HS-2000 trade data is available for the time-period 2000 to 2018 for Pakistan to the

destination markets for both textiles and clothing are EU-15 and USA. Since 2003, EU

membership has grown from 15 countries to 28 countries. Nine of ten top export destinations for

Pakistan were core member states of EU, i.e. EU-15. The present analysis focuses only on EU-

15. The average share of Pakistan’s exports to EU-28 for the period 2012-14 accounted for 25.3

percent, while it was 23.8 percent for EU 15.

The number of member states of the EU has been increasing over time, but the current

study requires fixed number of member states since it concerns the scrutiny of product

diversification: extensive and intensive. If the number of member states is allowed to increase

with time, the results may overestimate the importance of margins over time for EU, by

considering only the last ATC phase, a lot of information related specifically to extensive margin

of trade may most probably not be lost since most of the commercially meaningful textiles and

clothing items were integrated in 2005. Most products integrated in the first three stages were

either not restricted in the first place or were subject to non-binding quotas with low utilization

rates. Therefore minimal integration took place in the first three phases of ATC.

Though the ATC regime was abolished from 1st January 2005, yet this study includes

2005 as the ATC period, for the same reasons stated in a study by Akhter & Wahab (2011).

Trade remedies such as safeguard measures were deployed by US and EU to deal with

immediate pressure that could cause huge adverse impacts by eliminating quotas. Also, the

booming world trade in 2005 may have contributed to exports growth, and distilling the impacts

of ATC removal from the impact of world trade is difficult (ILO, 2007). The study will employ a

relatively longer dataset of pre-post-ATC years (only 5 pre- and 13 post-ATC years) from 2001-

56
2018, and this is useful as it will provide an insight into the medium-term adjustment process of

textiles and clothing exports resulting from quota abolition.

There are 848 textiles and clothing products according to the product definition at the 6

digit lines according to the Harmonized System (HS) arrangement 2000. Pakistan exports 695

HS-6 digit textiles and clothing product lines to USA. In case of EU, Pakistan’s exports comprise

695 textiles and clothing lines. Thus for the same span of time for each exporter as in case of

USA.

57
Chapter 5

Results and Discussions

The results and their interpretations will be discussed in this chapter; showing the

marginal impacts that are obtained from estimation of the equation using Tobit technique. In

order to treat zeros in the trade values, by adding 1 dollar value replacing those zeros, using the

log form.

Table 5.1Tobit Results for Textile and Clothing sectors

Impact on Trade margins for Sector Textiles and Clothing

Dependent Variable: Log of Trade Margin
Intensive Margin Extensive Margin
log GDP of Exporter
(Pak): PC_gdpexp 0.1488*** 0.1796***
(0.0455) (0.0631)
log GDP of Importer:
PC_gdpimp 0.2362 0.2551
(0.1440) (0.1893)
Trade Preference Margin:
tpmreg 0.0191 0.0221
(0.0204) (0.0540)
Dummy of China Quota:
QuotaChina t 0.5128*** 0.6186***
(0.0801) (0.1918)
Cost of Transportation:
Geo_dis -0.4035*** -0.5320***
(0.0803) (0.1237)
Pre_post-ATC:
pre_𝑝𝑜𝑠𝑡_ATCt -0.2934*** -0.3675***
(0.0250) (0.1545)
Diagnostic
Likelihood Ratio 36.8583 31.9417
p-value 0.0006 0.0000
2
Pseudo R 0.4976 0.4309
Note: Standard Errors are in parentheses. *** represent 1 percent level of significance

58
 Above table is presenting the measured marginal impacts of all parameters on a

segregated level. The values of parameters in the table above for both the extensive and intensive

trade margins are given and showing significant results. The signs of the coefficients of all

independent variables are same for both margins and according to the economic theory.

The per capita GDP of the exporter country has the positive coefficient value as the

market of exporter nation is developed; the larger amount of export activity will incur and also

there will be diversification in the export variety. The results mention the greater degree of

increase in the extensive margin than that of intensive margins of trade. The growth process itself

involves modernization and discovery of new products for exports. As from the results we can

see that one unit increase in the per capita GDP of Pakistan will result 0.1488 units increase in

the exports of Pakistan at intensive margins or the volume of already traded textile and clothing

products. While the same one unit increases in per capita GDP will enhance exports at extensive

margins or variety of new products by 0.1796 units.

On other hand from the results it is also concluded that the rise in the per capita GDP of

the importing nations have greater impact on the exports of Pakistan. This argument supports the

macroeconomic theory that increase of the income level of a nation will basically increase the

imports of that nation. People indulge in the use of more imported commodities by hike in their

income. From the table it can be interpreted that one unit rise in the per capita GDP of the

importing nation will increase the exports at intensive margins by 0.2362 units. And at the same

time the impact on product extensive margins will be 0.2551. So here again the impact on

exports at extensive margins is greater than intensive margins.

59
 The results for the continuous variable (TPM) trade preference margins indicate

significant results for both margins of trade for clothing sector but in case of textile sector the

opposite happened. Results suggest that one unit increase rise in the preferential margins will

result 0.0191units rise in exports at intensive margins and 0.0221 units at extensive margins.

The size of coefficients for extensive margins are greater than for intensive margins show that

the results of reduction in the trade barriers such that when the fixed costs related to trade

diminishes, the greater rise in the exports is enlightened by extensive margin comparative to the

intensive margin. Hence our analysis is in the line with the theory that the outcome of reduction

in trade barriers like removal of quotas or fall in tariff will reduce the cost of exporting which

result enhancement in export performance and diversification. As a result the existing firms may

increase their exports or more firms enter in the export market.

Existence of large competition in the international market is also an obstacle in the way

of exports of developing economies like Pakistan. So the reason behind introducing this dummy

variable of quota on Chinese exports of textile and clothing is that restriction on the big giants of

this sector can promote the exports or textile for our small firms. After the membership of China

with WTO and the elimination of quota restriction on China in 2008, it was predicted to have

positive impact on Pakistani exports of T & C. Results show that positive value showing that the

textile exports of Pakistan are directly proportional to the imposition of trade restrictions on

Chinese textile products.

It is also noteworthy that the coefficient values for all the parameters are greater for the

extensive margins of trade than the intensive margins. The empirical results are very much

supportive for the Melitz model of international trade; which says that the reduction in the trade

barriers or trade costs increase of trade in intensive trade margins but also entails the greater

60
increase in the exports of products which were not previously traded. As from the table, results

conclude significant results that the imposition of quota has positive impact on the exports of

textile and clothing for Pakistan. The coefficient for the extensive margins is greater than

intensive margins of trade i-e 0.6186 for extensive margin and 0.5128 for the intensive margins.

With its benefits, removal of quotas brought opportunities for Pakistan but also brought our firms

to tougher competition with China, India and Bangladesh.

The greater is the geographical distance between the countries, the lesser will be the trade

flows. Here in this model the distance is used as a proxy of trade costs and is expected to have a

negative impact on the exports. Here the results of this study are in line with the foundations of

gravity model that far a nation is the lesser will be the trade. The coefficients sign reveal the

same negative sign for both trade margins of exports. The more a far the destination country is,

the less will be trade as according to Timbergen, (1962), Linemann, (1966). The coefficient

value for the extensive margin is again greater here than the intensive margin of trade. The

geographical further-ness of a nation is greater the one unit, there will be decrease in exports at

intensive margins by 0.4035 units. And fall in extensive margins will be 0.5320 units.

The dummy variable Pre-Post ATC capturing the period before the agreement on textile

and clothing from 2000 to 2005, have negative coefficient value after the estimation of Tobit

regression as according to expectation. Results suggest that the implementation of quota and

tariff barriers have reduced the exports of textile and clothing in the importing nations. In the

post ATC period there is significant increase in the exports of textile and clothing in both

extensive and intensive margins of trade. Increase in the restrictions from the destination market

reduces exports at intensive margins by 0.2934 units and lowers trade at extensive margins by

0.3675 units.

61
The magnitude of the values of coefficients for all the parameters on the right side of the

equation is greater for the textile and clothing sector. The magnitudes of the coefficients for the

intensive trade margins are lower than the extensive margins of trade for the sectors of textile

and clothing. Pakistan enjoyed the preferential schemes for textile and clothing sectors under

standard GSP like duty and quota free access to the markets. Other reductions in the trade

barriers and duty free entry into the markets basically overcome the transportation cost. These

results also explore the fact that the size of GDP of the importing nation has greater impact on

textile and comparative less on clothing; because clothing sector can find easy access to the

importing nations due to greater preferences.

The per capita GDP of Pakistan has a direct impact on the both trade margins of the both

subsectors of textile and clothing. The level of development and the growth in exports are

synchronized and go side by side. In 1990 the preferential agreements had previously shifted a

large share of exports of textile. This is also evidence that the removal of quotas resulted a main

effect on the exports of clothing sector but not as much on textile sector. Thus the restrictions on

the Chinese exports of textile and clothing in the major importing markets protected Pakistan

from a bigger and cheap competitor.

The greater portion of growth in the post ATC cannot be all credited to the quota

removal but it is also significant related to the quota imposition on Chinese products. Some

safeguard measures were accepted by China while its membership with WTO but these were

removed in 2008. While a greater portion of market was also captured by Vietnam in 2007 by

becoming member of WTO. The incurring of such events had adverse impact on the exports of

small competitors like Pakistan. Most studies after the ATC period predicted huge rise in the

exports of China, which is a great threat to the exports of small players like Pakistan, Bangladesh

62
and Vietnam. The previous statistics of WTO in 2014 (International Trade Statistics) found that

export share of Pakistan is decreased by a proportion of 1.1 percent in 2000 and 1.0 percent in

2013 despite of the removal of all quotas in in 2005 and Pakistan being the member of GSP

preferential scheme of European Union.

Therefore, Pakistan is going through serious problems and facing huge challenges in

maintaining the competitive quality after the ATC period. Exports of new product varieties or

extensive margins of trade of Pakistan respond better than the intensive margins or the products

already traded. The abolition of quotas can serve as a source of diversification in the exports. So

if Pakistani fears of loss in the export proportion in the post ATC period can look towards

diversification as a survival strategy.

Furthermore, the results also reveal that Pakistan have huge potential of exporting Textile

and Clothing products to large number of European union member nations like Spain, France,

Italy, Poland, Denmark, Germany, Belgium, Sweden, UK and USA. The actual exports of

Textile and clothing are very much less than the actual exports of Pakistan. Being Agro based

nation, The GDP and Exports of Pakistan are highly dependent on the textile sector but still there

is much more room for improvement and diversification of the products to enhance the quality

and quantity of exports in this sector. Textile and clothing sector can contribute much more for

the growth of our economy if we utilize our potential properly.

63
Chapter 6

Conclusions & Recommendations

From the point of view of a policy maker the findings of the current research are

significant. This study segregated the total trade at both extensive and intensive margins and

showing that the aggregate trade covers the heterogeneous effects of trade. The product line or

margins can be prioritizing using this analysis of segregated impact of trade margins. In addition

predictions can be generated to analyze the trade policies.

The framework designed in this study will also help policy makers in determining

effectiveness of their decisions in the past. The framework will be helpful in conducting

counterfactual simulation. These simulations become important in a situation where very few

resources are available to the policy makers and response time from the for the decision makers

is short and limited. In these scenarios, such simulations help in prioritizing the policy decisions

to harvest best policy impact. These simulations would also be helpful in determining whether

the policy makers need to adopt macroeconomic adjustments through demand side management

or reform supply side dynamics through export marketing strategy or subsidizing the production

meant for exports.

Results and conclusion drawn in this study are in line with the finding of concept

proposed by Melitz model of heterogeneous firms. Results originating as a response of extensive

margins to the shock in the trade barriers is consistent with the concept provided by

heterogeneous firm model which advocates that heterogeneous firms have to deal with fixed

initial costs for making exports. This finding is consistent with Kramaz et al., (2011), Bernard et

al., (2003) and Melitz (2003).

64
 Model in this study advocates that trade cost, variable in nature, has the potential to effect

bilateral trade mainly due to extensive trade margins. Model highlights that such variable costs

generally change the composition of exports for a country. In theoretical terms Bernard et al.,

(2011) highlights the decisions taken by firms on the basis of product and geographic led

margins for trade. We can also categorize this model as the general form of Melitz, (2003).

These models highlight that there is an active and negative relation between firms

revenues as well as profits and variables costs of trade. Generally low variable trade cost results

in high revenues as well as profits. In this scenario existing exporters respond by making efforts

to export additional varieties of products to the existing destination markets and the firms

catering domestic demand only start thinking of coming into export business. This finding

highlights that freer trade between nations generally enhance productivity of firms. Findings also

show that extensive margins are relatively a greater proponent of gravity equation.

This study also reveals that Pakistan’s exports have large room for diversifying it to

additional countries and products. This finding is consistent with the work of Klinger &

Leddermann, (2006) on developing and poor countries. This indicates that extensive margins are

more important for countries like Pakistan and these margins are the core determinants of gravity

model. It highlights that whenever trade costs are broad down, countries like Pakistan respond by

exporting incremental products. However in practice this is not that straightforward. Structural

changes and impediments play an important role in harvesting gains from trade liberalization.

Because a country have diversified strengths and weaknesses, gains from trade

liberalization cannot be same for all sectors. This study recommends that trade negotiators

should take into account the dynamics of this sector of the host country and market analysis of

65
the trading partner before making any trade agreement. This analysis will help policy makers to

focus on the areas with highest trade potential between the countries.

This indicates that policy-makers and marketing strategists fine-tune their exporting

policies and marketing strategies for different markets. The government should focus on both

trade margins but more on the extensive margins as compared to intensive margins due to its

sensitivity. The customs and fashions also keep on changing so the new varieties and value

addition is required in this sector to compete with the rest of the world.

In the recent month the government of Pakistan has taken bold steps to promote the

textile and clothing sector by promoting SME’s, easy financing and power provision etc.

especially in Faisalabad to make advancement in the potential sector. These steps will basically

contribute to the enhancement of extensive margins. But the intensive margins are also very

important to support the incumbent firms in the industry and their survival and growth. So it is

important for the policy makers to focus on the domestic issues to be resolved and identify the

major products having potential of increasing intensive margins and products necessarily to be

identified for extensive margins with the terms and condition and the type of trade liberalization

to be negotiated before any agreement.

66
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