TEXTILE SECTOR: KEY ISSUES AND DEVELOPMENTS
It is expected that there will be severe competition from neighboring countries like China as well as India
By DANIYAL AHMED
Nov 08 - 14, 2004
Performance of textile sector: There has been a growth in the export of textiles as well as its products by 10% which has helped the export target of $ 12.27 billion during the fiscal year 2003-04 against 11.16% billion export during the fiscal year 2002-03, where the export proceeds amounted to $ 8.3 billion or 68% of the countries total exports.
KEY ISSUES AND DEVELOPMENT
Quota Systems Phase Out: The negotiations in the World Trade Organization (WTO) has led to the elimination of the quota system from January 2005, reasons are based on the advantages that countries can gain from the economics of comparative and absolute advantages.
In the past, there have been various trade restrictions which have usually favored the developed countries. These restrictions range from the Long Term Agreement regarding International Trade in Cotton Textiles (LTA) which started in 1962, and was sponsored by the GATT, this was renegotiated several times. The LTA was replaced by the Multi-Fibre Agreement (MFA) in 1974, which also went through a process of renegotiations. The MFA enforced restrictions on trade of cotton, wool as well as man-made fibres.
The MFA was designed as a temporary measure, and is a system of quota arrangements. This agreement allows a broad range of countries which would otherwise not be competitive in this industry to produce garments and textiles. The MFA which expired in 1994 was followed by the agreement on Textiles and clothing (ATC) after the creation of the World Trade Organization in 1995, which is a transitory regime from the MFA to the free multilateral trading system. The integration was to take place over a period of 10 year period, after which the quota system is to be abolished.
Since Pakistan is cotton producing country with low labor costs and high productivity in contrast to other developed countries, there will be benefits for Pakistan. However it is expected that there will be severe competition from neighboring countries like China as well as India. To counter these issues the government has offered incentives in the federal budget 04-05 so that the Textile Industry can prepare itself through a Balancing, Restructuring, and Modernizing or BMR drive so that the country is able to compete with the other countries in the region
Incentives in the Federal Budget 04-05: After lobbying efforts from APTMA (All Pakistan Textile Mills Association), the government of Pakistan has finally realized that it must adapt policy issues in view of the recent changes in the global textile Industry.
For this reason, incentives are being offered in the Federal Budget 04-05 to enhance the Textile sector these include.
•Decreasing the custom duty on plant and machinery not manufactured locally to 5%.
•The removal of 15% GST on ginned cotton to reduce the cost of the spinning sector.
•The Power tariffs have been reduced for Industrial consumers by PRS 0.58/unit this will decrease the cost of production.
•Eliminating the general sales tax (GST) as well as withholding tax of 15 % and 6% respectively on duty paid value of plant machinery and equipment.
These incentives offered in the Federal Budget 2004-05 are encouraging to the BMR drive. This will boost exports so that Pakistan can prepare itself for the post quota world.
What does the Trade Policy Offer the Textile Industry: The trade policy 2004-05, has allowed for policy measures to accelerate exports as well as boost the country's economy. There has been an export target of 13.7 billion and imports have been projected at 16.7 billion, there is a trade gap of $ 3 billion due to the higher imports of machinery and raw materials.
The features of the trade policy which have an impact on textiles are
•Relocation of Industries
•Rehabilitation of Industrial estates
•Communication centers in Islamabad
•Special Package for Garments
•A supplier credit fund for promoting exports of Pakistani goods in Africa as well as Central Asian states
•Freight subsidy scheme extended till September 30 2005
•Removal of the ban on import of cotton waste, which will help in boosting towel exports.
THE BALANCING MODERNIZING RESTRUCTURING (BMR) DRIVE: The textile industry has spent 3 billion on BMR (Balancing, Restructuring, and Modernizing.). Textile machinery has also been imported in the amount of $ 1.6 billion in the last three and a half years.
There has been a large investment in spinning, weaving and processing, as compared to made-ups manufacturing.
TEXTILE CITIES BEING ESTABLISHED: The Textile Industry faces several problems such as the high cost of utilities, as well as water shortages and electric failures, these issues have contributed towards making Pakistani exports less competitive than other developing countries. To help address and solve most of the problems faced by our textile industry, plans have been made for the establishment of three textile cities in Karachi, Lahore and Faisalabad. The government has formed public limited companies or PTCL's (Pakistan Textiles Cities Limited). It is expected that the textile cities project would add 1.5 billion to Pakistan exports. The City in Karachi is going to be set up near Port Qasim.
The Textile City in Karachi will include a number of supporting and ancillary industrial units in the area which will include knitting, bleaching and dying units, adequate infrastructure facilities, as well as Banking, Insurance, Postal, Internet as well as Commerce.
The Punjab Industrial Estate Development and Management Company (PIEDMC) is preparing to set up the Sundar Textile City. This would have 250 textile units; expanding over 1,500 acres and create 300,000 jobs. The city and will become operational in January 2006.
THE ANTI-DUMPING DUTY ON PAKISTANI BED-LINEN: The European Union has imposed a 13.1% anti-dumping duty on Pakistani bed linen, which was implemented on March 18 2004. The EU has issued a detailed regulation which found that Pakistani companies were involved in dumping bed-linen which the report claims has been harmful to textile businesses in the EU. The anti-dumping duty is for five years which will have a negative effect on Pakistani home textile exports, and will decrease the advantages that Pakistan may have in the quota-free world after 2005.
The European Commission has initiated a partial review of the anti dumping measure on the import of bed linen.
GSP AND SOCIAL SCHEMES OFFERED BY DEVELOPED COUNTRIES: textile mills have focused extensively on BMR; whereas there has been little emphasis on factors such as human resource development. In examining this issue the generalized system of preference (GSP) scheme must be handled with utmost importance. The GSP can be best be described as a system of preferential treatment by developed countries, which reduce duties or duty free tariffs to eligible textile products imported from developing countries. These schemes are designed specifically to promote economic growth, human resource development as well as industrialization. The GSP scheme is being abolished in some developing countries, as they have signed Free Trade Agreement (FTA) signed with the EU and the United States. If Pakistan was to continue with GSP schemes than it would face an erosion of the advantages that the country has in raw materials i.e. cotton, however, if human resource development is not made a priority area in Pakistan than consumers in the western world will be vary of purchasing Pakistani products out of concerns for child labor as well as the condition of workers in the third world. One of the prime reasons that the negotiations in the WTO has decided to abolish the quota or preferential treatment is to reduce poverty in the world through the advantages to be gained from comparative advantages, however if human resource development which reduces poverty and improves the quality of life is sacrificed to export-oriented industrialization, than the result would be that Pakistani exports will not be appreciated in the west and the country will lose its market share in the developed world.
In recent news the European Union (EU) has announced a new scheme of Generalized System of Preferences (GSP) for the exports from Pakistan, which would ensure reduced import tariff. The new 10-year GSP scheme (2006-2015) would replace the existing one, which expires in December 2005. The new scheme would come into force from January 2006. Pakistan exports to the EU will be subject to 11% import duty with the expiry of the existing GSP scheme in December 2005, however, exporters associations had been asking the Government to seek extension in the scheme.
COTTON SUBSIDIES IN THE DEVELOPED WORLD: Subsidies disrupts trade, this is done by making production cheaper encouraging firms to produce more as well as to increase the market share of foreign markets. Thus the oversupply depresses the world price of cotton. Therefore producers in underdeveloped countries suffer because there are constrained by little financial support from their government.
The European Union gives over $100 billion worth of farm subsidies annually. Where as the United States government currently gives about 3 billion of annual subsidies to its cotton farmers.
In recent times the WTO ruled that these subsidies given by the European Union as well as the United States are illegal. This may have an effect on international trade, and can effect cotton prices. Pakistan may be able to benefit from the cotton subsidy ruling as this can be used as a negotiation tool with the EU in exchange for lowering the anti-dumping duty.
Cotton Analysis: The area under cotton crop is estimated to have increased by 3.2 million hectares in the 2004-05 seasons, which has an average yield of 610 kg per hector.
There is an expectation of larger arrivals of cotton as compared to last year due to a bumper crop of 12.0 million bales which is 20% more than last year. There has been an increase in the amount reported because the government has abolished the levy of 15% sales tax on lint cotton, which has discouraged the concealment of cotton bales.
There has been an improvement in the quality of cotton as there have been less rain and pest attacks this season.
The current price of cotton is Rs. 2059 per maund ex gin price for lint cotton grade 3. There have been inquiries for Pakistani cotton from other countries; these factors indicate a strong export of Pakistani cotton. However, spinners who had booked foreign cotton at high prices are in a difficult position because of the low domestic rates. On the international front, there were fluctuations in the NY cotton futures owing to damage to the cotton crop by storms as well as heavy rain fall in the United States as well as in China. There is a reported loss of about 500,000 bales of the US cotton crop size.
The recent rains in China have also caused damage to the cotton crop. This figure remains at 2.0 million bales, which places total crop damage in China to 20.90 million bales. This places China's crop size at 27.55 to 28.80 million bales.
In the Western and Central African countries the cotton crop is progressing as expected. There total production is about 4.97 million bales.
INCREASING OIL PRICES AFFECT PSF RAW MATERIAL COST: The Price of PSF is closely linked to the international oil price trends, as polyester production requires the input of the raw material PTA as well as MEG, which is derived from crude oil. There has been an increase in the use of blended yarn in international markets and for this has had an impact on the domestic demand for PSF. Currently oil prices are on the increase as there are supply worries due to the tension in the Middle East. The situation might change if the conditions in Iraq are improved, however the expectation is that the world is running out of fossil fuels and governments are pursuing alternative energy programs. For this reason crude oil is a precious commodity, an increase in demand with short supply will lead to increase in oil prices, thereby affecting the price of Polyester Staple Fiber (PSF).