The Asian Wall Street Journal

Globalization has been good to Pakistan. Over the past 20 years, real income has averaged an impressive 5% yearly increase. This progress hasn't just enriched the lucky few; Pakistan has become increasingly middle class. It is, of course, still a poor country. But thanks to rapid industrialization, the trajectory has been upward for many years.

Like most developing nations, textiles offered Pakistan the easiest path for large-scale employment. High-quality local cotton, a motivated workforce and low labor costs made the sector boom. But now, terrorism has had a devastating impact.

Much of Pakistan's problem is internal. Its leadership must resolve serious security problems that raise the risk of doing business. But the U.S. also has a vital interest in Pakistan's economic success; a failed state with nuclear technology is anyone's definition of a nightmare. Washington can contribute to Pakistan's success by ensuring a level playing field for its textile exports. Unfortunately, the omens aren't good.

Trade in textiles is currently governed by the onerous Multifiber Agreement. This international arrangement permits major importers like the U.S. and the EU to use discriminatory country-by-country quotas in combination with their already restrictive import tariffs. But the Multifiber Agreement is in its last years, and the end of quotas promises a substantial increase in the volume of Pakistan's trade with the U.S. Despite U.S. tariffs of 15% to 25%, the low cost and high quality of Pakistan's goods would allow its firms to compete.

Much of Pakistan's output is high-quality apparel, which involves more labor than yarn or unfinished cloth. Today, almost 20% of the country's national income comes from manufacturing, and nearly half of its industrial labor force works in the textile sector. Textiles make up 65% of Pakistan's export revenues, and the U.S. alone takes a quarter of those exports.

Before the Sept. 11 attacks, Pakistan's export prospects seemed bright. Today, its textile sector can best be described as under siege. The problem stems from a serious deterioration in domestic security. Last March, the U.S. State Department issued a travel warning for Americans to avoid unnecessary travel to Pakistan. The advisory was prompted by a series of terrorist attacks, including the brutal murder of Wall Street Journal reporter Daniel Pearl. The advisory is standard procedure designed to protect Americans, but its unintended side effects are seriously undermining Pakistan's export prospects.

Much of the country's output of high-end apparel is contracted to major brands like Tommy Hilfiger and Calvin Klein. These firms inspect all local suppliers and won't sign agreements with subcontractors they haven't certified. Now the travel warning has effectively ended this inspection process. Since new Pakistani firms cannot receive approval, job creation comes to a grinding halt.

Pakistani firms also have lost a substantial chunk of their existing business. Distributors have a strong incentive to switch to firms in nations that pose no impediment to the inspection process since those firms can more easily expand output to meet new demand or changing tastes. And the future is equally dim: If Pakistani firms fail to maintain links with international distributors, they will lose any prospect of benefiting from the end of the Multifiber Agreement quotas.

Pakistan cannot expect the U.S. to lift the advisory until it identifies and eliminates the organizations that use violence to promote their political agendas. This will require significant internal reform that only Pakistan can accomplish.

However, an American commitment to a more open global textile market would certainly give Pakistan much-needed help. Instead, the administration of U.S. President George W. Bush continues to think regionally instead of globally. As a first step toward free trade in the Western Hemisphere, it proposes lifting all tariffs on textiles and apparel from Latin American and Caribbean nations within five years.

This will do serious damage to Asian textile exporters like Pakistan, Indonesia and the Philippines. And as they are shoved out of the U.S. market, Pakistani firms will be left with whatever scraps of the world market they can secure. The likely result is that they will be forced down the industrial ladder; and deindustrialization in a poor nation is not a force for stability.

A tariff cut that discriminates between Latin America and Asia has more to do with politics than with global efficiency. American consumers will see few benefits. The overall U.S. tariff wall will remain as high as ever, so prices won't decline much, if at all. On the other hand, the profit margin of Latin and Caribbean producers will soar. A discriminatory tariff cut is like disguised foreign aid. American tariff revenues flow out of Washington into the pockets of firms in favored nations.

If U.S. policy undermines the prospects for economic growth, then forget about meaningful political reform taking root in Pakistan. The government of Gen. Pervez Musharraf is hardly a model of democratic accountability. Nonetheless, Pakistan has some of the deepest democratic roots within the Islamic world. In the most recent elections Islamist parties made startling gains, especially in the rougher northwest regions. But it's instructive to see where these parties thus far have failed to make headway.

Pakistan's textile industry is concentrated in three cities: Karachi in the south, and Lahore and Faisalabad in the north. For the time being, these areas seem immune to radical Islam. These cities are the most globalized in Pakistan, owing to their intimate connection to world markets. Economic integration gives people a wider window on the world. That connection itself is a force for moderate political change and a restraint on economically costly extremism.

Sensible U.S. policy should reinforce the benefits of Pakistan's integration with the world economy. Deepening America's commercial relationships with nations like Pakistan would create a more vibrant local constituency of business interests while encouraging the development of a strong, relatively well-off working class.

To that end, the U.S. should be working to reduce its overall barriers to textile imports. Cutting its import tariffs in half would reduce prices to U.S. consumers and enlarge the market for Peru and Pakistan alike. Instead, the U.S. seems intent on embracing discriminatory policies that favor one region of the world at the expense of others. That risks creating problems whose costs would far exceed the income from tariffs.

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Mr. Feldman is a professor of economics at the College of William & Mary in Virginia.