In this bustling commercial hub near the Kashmiri border, fortunes seem to rise and fall with the Nike swoosh. Some 80 percent of the world's soccer balls are produced here by Nike and other top sports brands – making Sialkot, a city of 3 million, a model of prosperity in a country where poverty and extremism freely intermingle.

But there is a controversy behind this pot of gold. In November, Nike severed its contract with Saga Sports, its chief supplier, saying Saga's poor management exposes Nike to the threat of child labor and other labor violations.

The incident, observers say, highlights the moral dilemma of first-world corporations using third-world labor. And since it is Pakistan, the outcome may be more pressing than elsewhere in the world.

Many say a surge of unemployment and falling profits in Sialkot, a rare oasis, is the last thing a Pakistan struggling with militant Islam and poverty needs.

A soul-searching debate is now coursing through the country: Child labor is universally condemned, but is it fair for multinationals to cut and run when incidents arise of children working? Or do corporations have an obligation to work to fix these problems themselves?

For Nike's part, the Beaverton, Oregon-based firm stated in a November press release that it will continue working with contract factories in China and Thailand to supply hand-stitched balls. Nike's contracts with Saga will expire in March.

About Saga's 5,000 stitchers, it added: "[I]n this case, the company exhausted all options and was left with no alternative but to cease orders, despite the potential impact to workers and the near-term effect on Nike's soccer ball business."

Gloomy-looking executives at Saga Sports, 70 percent of whose work is for Nike, say they're confident they can keep the company on board. The US Embassy recently told the Sialkot Chamber of Commerce that Nike will continue its other textile operations with existing contractors in Pakistan, according to unofficial statements from American officials.

By severing its contract with Saga, Nike is likely to score moral points with its customers in the West. But it's also likely, observers agree, to sink Saga, a corporate giant that makes about 6 million of Pakistan's annual production of 40-million soccer balls.

Saga estimates that as many as 20,000 families could be affected, since 70 percent of the local market relies on them for work.

"Definitely, Saga did wrong. But does the wrong they did warrant Nike leaving?" asks Nasir Dogar, chief executive of the Independent Monitoring Association for Child Labor (IMAC), which oversees compliance at Sialkot's 3,000 soccer-ball stitching centers.

Sialkot's hand-stitched ball industry, about a century old, is big business: Saga Sports alone accounted for $33 million of the industry's $210 million total. For Sialkot's 45,000 stitchers, who earn less than $100 a month on average, soccer balls are a way of life.

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