Time to exploit the competitive advantages

Jan 10 - 16, 2005

With the commencement of much talked about WTO regime, it is necessary to have a quick overview of the key principles and with their implications for Pakistan's textile sector. Pakistan's textile sector currently faces some stiff challenges. The country is entangled with European Union to antidumping duty on bed-wear, resistance to Pakistan's entry to the GSP Plus scheme and tough competition from countries like India and Bangladesh. Despite all this, analysts are optimistic of the performance of Pakistan's textile sector in post textile quota regime. Availability of good quality cotton, cheap and efficient manpower and recent investment by the sector in BMR, are key competitive advantages. Companies that have engaged in forward integration, are export focused and have invested in technology should be the ones to reap the real rewards. The major textile units (both in the composite and spinning sectors) are expected to perform well and show robust growth over the years.

It must be remembers that in the post textile quota regime the developed countries will try to restrict inflow of low cost products from the developing countries. While the quantitative restrictions may not be there, the new threats would be compliance to social and environmental issue.

The Asian Development Bank has identified five key Pakistani industries where, potentially, increasing pressure for implementation of social and environmental standards by the foreign buyers could have adverse impact on export business. These are textiles, leather, sports goods, surgical instruments and carpets, which have been identified after detailed consultation with the stakeholders and review of the available literature by an ADB team that prepared a report on "Social and Environmental Issues" in September 2004.

While textile and leather industries are amongst Pakistan's most polluting industries, the ADB study observed that cloth production in textiles and leather tanning are extremely polluting. The ADB also proposed to enforce an environmental regulation as these industries are major source of industrial waste water that is polluting rivers and lakes. Only a small fraction of total industrial waste water is treated, which is adversely impacting the human health and environment. It refers to Pakistan Human Rights Commission report in 1998 which quantified loss to Pakistan economy by the environmental degradation at $1.65 billion. This loss is in addition to the impact of environmental degradation on health and lives.

Cloth production, the ADB study points out require the use of a large number of detergents, dyes, acids, sodas, salts and enzymes which lead to a large amount of wastewater. In leather tanning, a large amount of chemicals such as sodium chloride, ammonium sulphate, pigments and dyes are used. If not treated, waste-water from both cloth manufacturing and leather tanning has serious consequences for environment and human health.

Textile exports from Pakistan were around $8 billion in fiscal year. Cotton fabric was the single largest component of textile that earned $1.71 billion or 16.7 per cent of the total textiles export earnings. Textiles constitute 46 per cent of Pakistan's total manufacturing activities employing 38 per cent of the total industrial labour and its value addition contributes 9 per cent to the GDP. Textile exports share in Pakistan's total export has risen from 76.2% in 2001 to 76.7% in 2002, to 77.3% in 2003 and finally to 78.9% in 2004.

Carpets, surgical instruments and sport goods have been subjected to severe scrutiny because of involvement of child labour for last several years and their share in Pakistan's total export has gradually been falling. The share of carpet exports have come down from 16% in 2001 to 10.2% in 2004. That of sports goods has come down from 15% in 2001 to 14.4% in 2004 and surgical goods from 6.9% to 5.7%.

The ADB study has also identified the markets, which absorb Pakistani products. It found that EU absorbs 27.5% of Pakistan's exports, US 23.5% and other developed countries like Canada, Japan, Turkey, Korea and Australia import 9% of goods. It means that 60% of Pakistan's exports are marketed in 21 countries. Equally important are Asian markets Hong Kong, China, and Middle Eastern countries UAE and Saudi Arabia. Although, buyers in these countries may demand compliance with some environmental and social standards, they will, on the whole, may be less exacting that those to be met in the OECD markets.

Hosiery manufacturers are still apprehending that Pakistan's knitwear exports worth millions of dollars are at stake. They say despite having discussed their problems with the Federal Commerce Minister Humayun Akhtar, nothing has been done to get ride of them. The hosiery manufacturers bluntly attribute the present crisis to the 'inapt handling' of the quota issue by Ministry of Commerce and the sluggish attitude of Export Promotion Bureau (EPB).

According to industry sources, buyers were canceling export orders of knitted shirts (Cat-338) from the US because Pakistan was unable to meet delivery schedules due to textile quota problems. They said even air shipments, despite pledges made by the EPB, were not certain to board in time as no firm information was available to the exporters who thus find themselves totally helpless and stranded. They also alleged that the EPB opted to confront with the private sector instead of redressing the grievances of the foreign exchange earners for the country.

In November 2004, the office-bearers of the Pakistan Hosiery Manufacturers Association (PHMA), North Zone, had held a meeting in this context with Humayun Akhtar and Vice Chairman EPB, whereby it was noticed that 1.6 million dozens of Cat-338 quota was on books of exporters, against which only 700,000 dozens could be exported as per the record with the US Customs Authorities. Before this, the PHMA members were heard raising a hue and cry over the discrepancy in EPB record books and that of the US Customs Authorities.

According to a former PHMA chairman, the November meeting between all the stakeholders and the officials had noted that 500,000 dozens quota was wrongly auctioned in 2003 by the Ministry, although Pakistan never had an entitlement to this tune. He viewed that instead of getting the scattered things arranged in a professional way, EPB's steps aggravated the problems further.

The polyester staple fibre (PSF) industry has been making a substantial contribution in boosting textile exports from Pakistan. However, the industry is likely to remain under pressure due to demand and supply gap. The industry margins are also under pressure due to rising PTA and MEG prices in the international market. Primary margins of the industry are dependent on international prices of PTA and MEG. Their prices are continuously on the rise, owing to soaring international oil prices and mammoth demand emanating from China.

The PSF producers have reduced per kg prices from Rs 95/per kg to Rs 90/per kg (exclusive of GST) for the month of January, which would be a further blow to the industry, as it is already reeling from depressed primary margins. The vague estimates of a bumper cotton crop of 14-15 million bales are pouring in, as textile mill owners are increasing their consumption of cotton lint at reasonably low prices, thus surrogating PSF because of its ever high prices, which peaked at Rs95/per kg in December 2004.

The prices of cotton on the other hand are as low as Rs1, 800 to Rs1,900/maund. The PSF sales remained depressed in the last quarter, owing to a sudden decline of bed linen exports in that period. The recent sharp decline of exports in bed-linen categories has also been attributed to the US embargo on account of over performance and high anti-dumping barrier of 13.1 per cent in European Union. Nevertheless, the PSF producers may get some respite from February onwards, as most of the textile players are in the process of de-stocking their PSF inventories and may start fresh buying from the said month. Moreover, international prices of MEG have started declining.

Despite looming squeezed margins, producers are increasing the installed capacities from the present base of 609,000 tons per annum to nearly 862,000 tons per annum. The new capacity is expected to come online in 2008. The consumption of PSF is increasing in the country with an annual growth of 8 to 9 percent, which is expected to surpass local supply due to rapid expansion in textile spinning capacity (around 1 million spindles are expected to come online during 2005).

Ibrahim Fibres is doubling their installed base to 438,000 tons by 2007, whereas ICI is also contemplating to enhance its base up to 125,000 tons. The current biggest player, Dewan Salman, may also undertake debottlenecking in its existing base of 240,000 tons to meet the local and export demand.

It is no secret that maintaining cordial diplomatic relation plays a very vital role in boosting bilateral trade. The US and the European Union are Pakistan's major buyers of textiles and clothing. The US was reluctant to grant additional market access to Pakistan, despite terming the country it major partner in the war against terrorism. The EU enhanced quota but also imposed anti-dumping duties.

A business advocacy and awareness programme was jointly organised by Young Entrepreneurs Organization, Fakhar Law International and Market Access Promotion in Lahore, recently. The participants debated on business advocacy on trade issues and the need to change the industry mindset towards management and marketing. Though, the initiative has come very late, it is never too late to mend.

The post textile quota regime offers enormous opportunities but also poses some serious threats. However, keeping in view the investment being made in the sector and changing mindset, the threat is not as serious as being perceived by those who have thrived only due to protective regime of the Government of Pakistan. Get ready to face the challenge with courage by exploiting the strengths and overcoming the weaknesses.

A snapshot of key WTO principles is as under:

•Most Favored Nation (MFN): The Most-Favored Nation (MFN) obligation prevents WTO members from discriminating between foreign goods or treating products from one WTO member country different than those from another country. However, a major exception to this rule is regional preferential arrangements.

•National Treatment: According to this principle, imported and locally produced goods should be treated equally after the foreign good has entered the domestic market.

•Tariff Protection and Binding: Member countries are required to reduce existing tariffs and bind the reduced tariffs against further increases. Complete ban or quantitative restrictions (quotas) are prohibited. An important exception permits countries that face serious balance of payment crises to restrict imports in order to safeguard their financial position.