Pre-requisites for a competitive textile sector
A comprehensive document by the World Bank Group, titled Modernizing Trade in Pakistan: A Policy Roadmap, presents some valuable research on the textile industry in Pakistan in terms of its untapped potential, the impediments it has faced, and some of the ways forward. The gist of this research is summarized below.
Despite Pakistan’s current position as a top-five producers of cotton worldwide, and the competitive advantage this can give to the economy, its textiles and apparel industry possess a low share of the global apparel, synthetic fibers, and fine cotton markets. There are key areas to be addressed in taking the textile sector forward.
Pakistan’s textiles and apparel sectors directly employ roughly 2.5 million people, while another 2 million plus are employed in the informal sector. Textiles and apparel accounted for 60 percent of Pakistan’s exports in 2019 and an average of 55 percent of Pakistan’s exports over the past decade.
The industry must reconsider its prime focus on cotton-based production. Pakistan has historically relied upon low-quality domestic cotton for its textile products, thus neglecting synthetic fabrics and high-quality cotton, from which high-value-added apparel is made. This is mostly due to difficulty in importing high-quality cotton and synthetic fibers at world prices. Pakistan has primarily been producing short staple fiber raw cotton with a very high trash content (9 percent as opposed to a global average of 3 to 4 percent) and a very high moisture content.
The country’s domestic supply of cotton is being fully utilized, with some 84% of our apparel exports coming from cotton. However, it is important to note that cotton apparel accounts for only 46% of apparel exports globally. Increasingly in demand for high-performance apparel such as athletic wear, synthetic fiber requires more technological sophistication than producing apparel from traditional fibers. In acknowledgement of this key trend, the majority of global markets have shifted their focus towards synthetic fibers, thus keeping up with global demand. Pakistan can improve its competitiveness by upgrading its technology, readjusting its position in the apparel value chain and redesigning import duty suspension and refund programs for exporters.
High-value-added products are based on high-quality cotton and synthetic fibers. Apparel made from synthetic fibers, in particular, has higher unit values compared to cotton. Synthetic fibers contribute to more than 50 percent of India’s exports and more than 40 percent of the exports of both Vietnam and China. Although Bangladesh has the lowest reliance on synthetic fibers among its competitors, at only 18 percent, that share is one and a half times of Pakistan’s share.
In Pakistan, synthetic fiber products are mainly being imported as inputs into the domestic market. High fashion, high price, high value-added yarns, cloths, and apparel require long staple, clean dry raw cotton. Pakistan’s poor-quality raw cotton results in defects and low-quality fabrics that are usually not printed or dyed, and that cannot be used in higher quality apparel. Yet, the majority of Pakistan’s textiles and apparel manufacturers still rely on the extensive use of domestically sourced cotton and material inputs.
There have been certain advantages of heavily using local cotton, most notably in the production of globally competitive denim products, particularly trousers. Leading brands such as Levi’s have incorporated Pakistani firms into their supply chains. In addition, the country’s primarily low labor costs and competitiveness in the market for trousers provide a considerable edge to the industry.
However, the myopic focus on cotton has led to the neglect of the synthetic fibers market, and the country lags behind the regional, primarily textile-based economies of Vietnam, Bangladesh, and Cambodia.
Pakistan has a low level of FDI, which offers certain advantages. The largest exporters are vertically integrated, focusing on one product, and thus allowing for specialization and economies of scale. Pakistan’s potential for further moving into design and brand development is higher than Southeast Asian competitors’ such as Vietnam’s and Cambodia’s. This potential is a significant opportunity because markets outside the US and the EU do not have established sourcing relationships with East and Southeast Asian firms.
Yet the country’s policy environment at present has served to squeeze exporters’ profit margins and responsiveness, thus reducing their competitiveness in the global market. The industry has been held back by gaps in the supply chain that are exacerbated by a complicated tariff regime. Apparel producers are limited by costly, unstable and insufficient access to energy. Across the entire chain, institutions fail to engage meaningfully with one another. These challenges have prevented Pakistan from matching the export growth of countries such as Vietnam, Bangladesh, and Cambodia, and have negatively impacted the confidence of foreign investors in the country.
Pakistan’s Market Penetration Index, which measures the extent to which a country’s exports reach proven markets, is low, with a value of 14.68 in 2017. By comparison, India had a Market Penetration Index of 27.8 in 2017. The results allude to barriers to trade, as well as a lack of dynamism.
In Pakistan’s textiles sector, high tariffs are exacerbated by ineffective import duty suspension and refund schemes. Pakistan’s duty and tax remission for export (DTRE) programme has not been as effective as expected. It can take two to four months to import synthetic fibres, leading to delays and uncertainties in production that are not acceptable to global buyers. This begs the question as to why all inputs to textiles are not zero-rated.
The China Pakistan Economic Corridor (CPEC) project could improve Pakistan’s infrastructure, especially in areas that have textile and apparel production. Improved roads and electric utilities are potential benefits from the engagement, and Chinese officials are reportedly interested in investing in Pakistani yarn and cloth production.
Pakistan could improve its position in the textiles and apparel GVC by taking the following actions:
1. Investing in product and process improvements to upgrade in existing market segments.
2. Increasing backward linkages to foreign suppliers in regional and global value chains to diversify exports.
3. Supporting programs that allow more firms to move into design and branding. This would facilitate higher value-added functions in the value chain;
4. Supporting programs that increase the share of women workers in the textiles and apparel sector, thus contributing to social improvements.
Improved access to higher-quality inputs must be ensured through tariff reductions on textiles and an improved DTRE program. Others in the region are leading in this respect: Sri Lanka has eliminated all import tariffs on textiles to improve competitiveness in the apparel industry, while Bangladesh’s Special Bonded Warehouse Scheme (SBWS) provides rapid, duty-free access to all imported inputs for all exporters in all sectors of the Bangladesh economy. The scheme has some 4,500 licensed users, and textiles and apparel manufacturers in Bangladesh attribute their success largely to the SBWS arrangement.
The cross-cutting reforms required to improve overall competitiveness include taking advantage of the high-value-added apparel, providing local apparel exporters with access to higher-quality inputs — including synthetic fibres — at world prices, and sustainable import duty suspension/removal, and effective refund programs/exemptions on Sales Tax for textiles and other apparel inputs.