Strengthening Cooperation in Trade & Industrial Areas: Leveraging CPEC to Double Textile Exports
China-Pakistan Economic Corridor (CPEC) can assist in alleviating Pakistan’s economic crises vide export-led growth, infrastructure development, energy priority projects, development at Gwadar port and various other projects under the Public Sector Development Programme (PSDP). Pakistan’s comparative advantage mainly lies in textiles, the single largest contributor to the country’s exports (60%), manufacturing sector employment (40%) and banking credit (40%). Under CPEC, the government has proposed industrial cooperation and import substitution with China in various sectors including textile, reaping mutual economic benefits. This means that the potential-rich sector capable of putting the country on a path of export-led growth, import substitutions and development can benefit from improvements in quality, value addition, competitiveness and efficiency through CPEC, allowing the industry to reach its full capital and potential. But an important question is whether governments, businesses and investors on either side are aware of the magnitude of economic gains likely to accrue such textile-led export promotion and are willing to capitalize this opportunity to the fullest. This article is aimed at bringing to highlight some such opportunities.
To begin with, let there be no doubt about the significance of the textile industry to Pakistan’s economy, and the competitiveness of Pakistan’s textile products as highlighted in Figure 1.
Pakistan can produce goods at a lower cost compared to western countries and hence is a good location for outsourcing production. A complete textile value chain exists in the country unlike many others that possess only the primary base or the finished base. Many international brands such as H&M, Levis, Target, Nike, Adidas, Puma etc. continue to operate in Pakistan and work with local textile mills. Given the positive demand outlook in the domestic as well as international markets, Pakistan has significant opportunity to earn profitability and foreign exchange through textile exports at each stage of the value chain, as illustrated in Figure 2.
Employment and GDP gains
As per a recent World Bank report, CPEC can add an extra 14% to Pakistan’s GDP in 10 years. Additionally, China is relocating its basic and labor-intensive manufacturing, and approx. 85 million jobs are set to relocate. Given the above statistics, it is safe to assume a fair contribution of the textiles industry in both employment and GDP gains. Pakistan can capitalize these opportunities by becoming an ideal destination for Chinese FDI and Global Value Chains (GVCs), and collaborating in joint development of raw material extraction, processing bases and international marketing efforts. Domestically, the demand for branded textile products and apparel (woven and knitted) is already on the rise with increases in urban population, implying growth in affordability and changing lifestyle. Currently, 40% of Pakistan’s population lives in urban areas and overall GDP per capital, Purchasing Power Parity (PPP) adjusted, has grown by 8.47% between 2014 and 2019. The middle class of Pakistan is also expected to expand by over 6% beyond 2018. The resulting increase in purchasing power of consumers will boost the textiles and apparel consumption market. Internationally, with Pakistan’s strategic position and a view to becoming a trade hub at the crossroads of Asia, CPEC will lead to enhanced and cheaper exports to neighbouring countries.
Opportunities for Collaboration
So, what are some of the real opportunities for collaboration that can result in some of the afore-mentioned benefits? Firstly, it is important to remember that China is not only the biggest textile producer country in the world, but also by far the largest exporter. As many leading companies that market textiles are in collaboration with the cotton and textile industry of Pakistan, huge economic profits can be reaped in this sector through Commercial Joint Ventures and technology sharing in improving quality of seeds and high yield. Secondly, a perennial challenge for the textile industry in Pakistan has been the non-availability of sustained and affordable energy for local mills (see Figure 3). However, with the establishment of special industrial zones under CPEC as well as power generation projects that make up to 70% of overall CPEC initiatives, the industry can aim to operate at full capacity. Some prospective areas for commercial joint ventures with Chinese firms include: yarn (dyed and plain), grieg/bleached/dyed fabric, knitted fabrics, denim fabric, home, textiles/made ups/ towels, industrial uniforms, sportswear, baby wear, foundation garments and woven apparel.
What makes Pakistan’s Textile Sector Attractive?
The benefits of investing in and collaborating with Pakistan’s textile sector are equally attractive for investors and businesses, if not more. The industry has much to offer (also see Figure 4), including: (i) a complete textile value chain (ii) factories that are equipped and run as per global quality standards and are compliant with international certification under ISO, labor, environment etc. (iii) preferential market access i.e. unilateral market access to Pakistan on 20 tariff lines under Indonesia - Pakistan preferential trade agreement (iv) regionally competitive energy rates with a young, energetic and affordable labor force (v) a large and rapidly growing domestic market and, needless to mention, (vi) the CPEC investment route laden with opportunities in roads, ports and infrastructure. Additionally, there are tax exemptions and nominal tax rates on Export Oriented Units (EOU). Pakistan also enjoys EU’s GSP+ status till year 2022 on its exports to EU countries.
Pakistan’s overall investment policy is also friendly, offering/allowing: (i) FDI in all sectors (ii) equal treatment to local and foreign investors (iii) 100% foreign equity (iv) no requirement of government sanction (v) remittance of royalty, technical & franchise fee, capital, profits, dividends (vi) Special Economic Zones – aiming at increased trade, increased investments, job creation and effective administration (vii) duty free imports of machinery, equipment and raw material, and (viii) domestic market available on same conditions as for imports from other countries.
Prospects for Pakistan
There are further new developments for Pakistan to capitalize on – the export of finished goods is on the rise, while exports of raw material, including cotton and yarn are trending downwards – that can work positively for Pakistan’s economy. Currently textile industry has surplus capacity for intermediate products which can be converted to value-added items for higher value exports. The ongoing pandemic has a silver lining for Pakistan, since China is closed on account of the same, world has diverted their purchasing orders to Pakistan. Moreover, among other factors, including rising labour costs in China, are likely to reduce the Chinese share of the world garments market. This will create an opportunity for other textile and garment exporters, including Pakistan, to expand their share of the market. As per World Bank Report, 10% rise in Chinese prices on exports will increase approx. 25% Pakistan’s exports to US, 1% increase in apparel output will increase 0.4% in employment and 1% increase in expected wage will eventually increase in 16% likelihood of women joining the labor force. These are huge opportunities not only for Pakistan but for foreign investors looking to outsource their operations as well as to establish new profitable businesses in a sector with a perennially increasing demand.
Another development in pipeline is the establishment of 1,000 garment plants – the industry has committed to setup plants for the generation of annual exports of nearly $20 billion and providing jobs to 700,000 people under direct and indirect employment. Investment for each plant consisting of 500 stitching machines will cost nearly $7.0 million each. These will be modular scaled units catering to the needs of both, smaller and bigger units, and welcoming investors globally. As China is moving up the value chain and encouraging investors to setup natural resource base abroad, this initiative of setting up 1,000 plants could make Pakistan an investment heaven in the world of textiles. Chinese firms can invest in single or multiple units (clusters) taking full advantage of the natural synergies between China and Pakistan.
The All Pakistan Textile Mills Association (APTMA) has already identified an investment plan with lucrative projects involving installation of new machinery, as highlighted in Figure 5. The need of the hour is that governments and investors on either side begin to realize the huge potential that Pakistan’s textile industry offers, and initiate collaborations in the sector that are mutually beneficial to both countries
Figure 5: Investment Plan for Pakistan’s Textiles