By Noreen Akhtar | Amna Urooj

Introduction, In a transformative shift, Pakistan’s textile industry is setting new standards for sustainability as global markets, particularly Europe and the US, intensify their scrutiny of imports. Environmental, Social, and Governance (ESG) factors have become paramount, with consumers and regulators demanding adherence to higher standards across the entire value chain.

Sustainable strategies across the value chain

Pakistan’s textile exports to Europe and the US have surged, driven by a newfound commitment to ESG practices. These markets now prioritize sustainability, and failure to meet their stringent criteria could jeopardize Pakistan’s exports. To safeguard its position, Pakistan has proactively embraced global standards, positioning itself favorably for continued export growth, including the preservation of its Generalized System of Preferences (GSP) Plus status.

Europe has led the charge in adopting ESG regulations, mandating compliance. Businesses failing to adhere face substantial penalties, emphasizing the seriousness of ESG guidelines. Pakistan, however, has risen to the challenge, with companies swiftly aligning with regulations to ensure uninterrupted access to key markets.

Pakistan’s textile industry, a cornerstone of the economy, is undergoing a profound transformation in response to ESG demands. While challenges persist, such as the perceived cost of sustainability initiatives, industry leaders debunk such notions. Drawing inspiration from success stories like Bangladesh, Pakistan’s companies are proving that ESG compliance can enhance competitiveness rather than impede it.

Driving forces of sustainability

The Ministry of Commerce in Pakistan, in collaboration with international partners, spearheads initiatives to enhance sustainability in the textile industry. By focusing on labor rights, social standards, and environmental practices, these efforts aim to bolster economic resilience and competitiveness while addressing critical challenges in the sector.

On the other hand, initiatives led by industry pioneers like MG Apparel and other prominent textile companies such as Sarena Textiles, Crescent Bahümán Textiles, Crestex, Interloop, US Apparel and Textiles, Yunus Textile Mills and many others exemplify Pakistan’s steadfast commitment to sustainability.

While major textile companies are driving these sustainability initiatives forward, Micro, Small, and Medium Scale Enterprises (MSMEs) in the textile sector are also recognizing the urgent need to improve working conditions and enhance competitive potential. With increasing demand from international buyers for sustainably produced textiles, Pakistan’s textile industry is undergoing a significant modernization process where sustainable production is a key success factor. As Pakistan’s Textile Value Chain (TVC) is disaggregated and strict compliance applies to the entire textile value chain, MSMEs are stepping up their sustainability goals and adapting Environmental, Social, and Governance (ESG) practices to remain competitive and align with international standards.

External allies in the journey

External organizations, including WWF-Pakistan and TÜV Rheinland, have been instrumental in supporting Pakistan’s textile industry on its sustainability journey. Programmes like GIZ’s TextILES provide invaluable guidance on initiatives such as the EU Green Deal, aligning Pakistani businesses with international standards on chemicals management such as Zero Discharge of Hazardous Chemicals (ZDHC), and health and safety.

Environmental and social/ethical commitments

Industry’s dedication to international conventions is seen in its integrated approach of aligning development activities with Vision 2050. Companies demonstrate their long-term commitment to environmental sustainability and women’s empowerment by encompassing responsible sourcing, adopting renewable energy sources, water stewardship, energy conservation, enhancing carbon sinks and employee welfare. Companies have acquired crucial certifications, demonstrating unwavering commitment to environmental and social responsibility. Notable achievements include significant reductions in water consumption, energy savings, and emissions elimination, thus embracing green revolution in the supply chain.

Companies’ impactful community programmes as part of effective CSR policies have provided employment opportunities and access to education and healthcare. Steadfast investment in community engagement projects indicates the fact that social compliances are embraced effectively.

Transparency and governance measures

Supply chain visibility is crucial for ensuring transparency throughout the textile industry. This involves tracing the origin of raw materials, monitoring production processes, and tracking the distribution of finished products.

Pakistan’s textile industry has recognized supply chain traceability as a significant aspect of ensuring transparency and accountability throughout the supply chain. For the first time in Pakistan’s history, industry associations, government, individual firms, and international organizations are collaborating to unanimously develop national standards on supply chain traceability. These standards, under a legal regulatory framework, will be enforced through the National Compliance Centre (NCC). NCC will act as the lead agency designing, regulating, and implementing comprehensive supply chain traceability requirements for export-oriented firms.

Individual companies have made strides towards enhancing firm-level supply chain transparency in alignment with the global requirements. Prominent companies have adopted the most advanced traceability technologies such as LoopTrace and FibreTrace to consciously champion supply chain transparency in the global market. Companies’ ongoing investment in sustainable, clean and transparent supply chain validates their firm commitment to comply with the prerequisite to sustainability in the supply chain that is traceability.

Integrity, responsibility, and transparency are the major components of corporate governance. To ensure the incorporation of these components in all operations, textile firms in Pakistan are encouraging women’s participation in decision-making (top leadership). Regular record-keeping and audits are mandatory to avoid corruption, and performance indicators (KPIs) are devised to ensure ethical compliances and stakeholder-centric approaches.

Government-led initiatives and policies

The Government of Pakistan has implemented several initiatives to support the textile industry flourish sustainably through best ESG practices.

The Textile and Apparel Policy 2020-2025 is one notable step that aims to boost textile exports, enhance industry’s compliance to the global ethical and environmental requirements and promote nation-wide skill development and employment. The policy is committed to making Pakistan a global sustainable sourcing hub, as it encourages the transition to energy efficiency, circular economy and investment in sustainable technologies.

Ministry of Commerce, in thorough consultation with the industry stakeholders, has established the first-ever National Compliance Centre (NCC) that aims to enhance transparency and accountability by monitoring and enforcing compliance with relevant regulations, particularly concerning worker rights, safety, and environmental sustainability.

These along with other significant initiatives on skill development and TVET (Technical and Vocational Education and Training) programmes indicate government’s robust commitment to promoting social sustainability, environmental stewardship, circularity and good governance in Pakistan’s textile industry.

Addressing challenges and seizing opportunities

Despite several exceptional initiatives, challenges persist in the textile industry. Supply chains need to be more transparent regards to regular data disclosures on labor practices, environmental impact and working conditions. Transparency efforts in this area must include the implementation of codes of conduct, factory inspections, and worker empowerment programs.

More efforts are required to comply with environmental protocols concerning water conservation, greenhouse gas emissions, and chemical pollution. Transparency initiatives such as the use of eco-friendly materials, energy-efficient practices, and environmental reporting must be included in this area.

By embracing sustainability, Pakistan’s textile industry can not only address environmental and social challenges but also unlock new opportunities for growth, innovation, and competitiveness in the global market. These opportunities include access to new markets by meeting consumer requirements, increased profitability by manufacturing sustainable high value-added products, cost savings by improving resource (water and energy) efficiency, less risk of non-compliance penalties and reputational damage, enhanced competitiveness by producing innovative products, improved reputation and supply chain resilience.

Consumer trends and market dynamics

Pakistan’s textile industry is witnessing a resurgence fueled by reforms, attracting attention as a cost-effective labour source amidst shifting global dynamics. As consumer trends favour smaller order volumes, Pakistan’s advantage in fulfilling such orders efficiently has become evident, while sustainability imperatives and ESG compliance underscore the need for industry players to adapt. Initiatives promoting gender inclusion and labor wellbeing further enhance the industry’s appeal, positioning it for sustainable growth and competitiveness in international markets.

Industry collaboration

Pakistan’s textile industry continues to forge ahead on its ESG journey through active participation in international trade and textile events/exhibitions such as Heimtextil 2024. Spearheaded by the Trade Development Authority of Pakistan (TDAP), the industry emphasizes sustainable production and innovation, as showcased by esteemed entities like Sadaqat Limited and Lucky Textile Mills.

The introduction of ‘Econogy’ underscores the industry’s focus on integrating economy and ecology for long-term success. Similarly, Pakistan’s participation in the 31st Dakar International Trade Fair 2023, supported by the Pakistan Embassy in Senegal and TDAP (trade development authority of Pakistan), showcases a diverse range of products while fostering business connections and promoting Pakistani goods.

This collective effort reflects Pakistan’s manufacturing prowess and export potential in the global market, reinforcing its position as a key player in the textile industry.

Conclusion

As global markets increasingly prioritize sustainability, Pakistan’s textile industry is adapting to remain competitive. Initiatives aimed at improving ESG compliance, along with support from governmental and non-governmental organizations, are essential for driving sustainable practices across the value chain.

By embracing sustainability as a strategic imperative, Pakistan’s textile industry is securing its position in international markets but also contributing to long-term environmental and social welfare.

By Shahid Sattar | Muhammad Mubasal

The global textiles and apparel trade is witnessing a significant transformation, shifting emphatically towards man-made fibers (MMF), which now constitute approximately 63% of global textiles and apparel trade, earning them the title “fiber of the future”.

However, Pakistan’s textile sector stands at a crucial crossroads, predominantly tethered to cotton-based exports that account for almost 67% of its total textile and apparel exports while MMF based exports account for a mere 12%, thus sidelining itself from the burgeoning MMF market. This reliance on cotton not only highlights a missed opportunity in an evolving industry but also underscores the necessity for Pakistan to diversify and enhance its textile exports towards MMF to overcome economic challenges and enhance its competitiveness in the global textiles landscape.

Despite being among the top 25 textile and apparel exporters, Pakistan has one of the least diversified export baskets. To gauge the idea, around 1% of the product space accounts for around 65% of the exports consisting of denim and non-denim fabrics and apparel, knitwear, socks, home textiles and towels.

Moreover, Pakistan’s textile and apparel exports are highly concentrated in cotton-based products whose share in global trade has shrunk from 40% to 33% between 2007 to 2021while MMF-based textiles and apparels’ share grew from 30% to 35% during the same period. Since 2007, Bangladesh, India, China, and Vietnam have experienced an increase in the share of MMF-based exports, however, Pakistan has not seen an increase in their exports. Also, the share of cotton-based exports has declined for the other countries. For Pakistan, it effectively means that it’s competing for a larger piece of a shrinking pie.

There are two main factors behind the lack of growth in MMF-based exports. First, the industry lacks the production capacity necessary to manufacture MMF-based products. Second, and more importantly, investment in MMF-based manufacturing capacity has been disincentivized by economic distortions, especially in the realm of trade policy.

PSF is the basic raw material required for the MMF production, and purified terephthalic acid (PTA) is the main input for the manufacturing of PSF. As it stands, there is a 5% import duty on PTA and resultantly a cascading import duty of 7% on PSF with an additional anti-dumping duty of 12% on PSF.

The duties on imports were raised from 4% and 6% to 5% and 7%, respectively, in June 2016. However, Pakistan’s sole PTA manufacturing facility, using outdated technology is already outcompeted by newer, more efficient facilities in China and India. The plant survived on cheap gas ($4/MMBtu) for conversion from paraxylene to PTA and subsidized by high duties on imported PTA/PSF at the expense of the export sector. Following recent gas pricing reforms, the plant’s operational viability has vanished, leading to the argument that the 5% duty on PTA is unnecessary and should be eliminated along with a reduction in PSF import duty to 2%.

Figure 1 Import and anti-dumping duties on PSF have created opportunities for rent-seeking in the domestic market leading to an anti-export bias.

Moreover, in the PSF domain there are only 3 major manufacturers that enjoy a protected monopoly due to the imposition of 7% import duties and up to 12% anti-dumping duties on imports of cheaper and higher quality PSF. Effectively, this has created opportunities for rent-seeking in the domestic PSF market that Pakistani PSF manufacturers have capitalized on by keeping domestic PSF prices significantly above international prices (Figure 1). Higher PSF prices are further enabled by import LCs faced by the spinning industry.

This rent-seeking behavior is further enabled by the National Tariff Commission (NTC) of Pakistan. Adam Smith’s famous law of invisible hand which states that people who intend only to seek their own benefit are led by an invisible hand to serve a public interest which was not part of their intention. Conversely, Milton Friedman’s concept of ‘reverse invisible hand’ suggests that people who intend to serve only the public interest are led by an invisible hand to serve private interests, which was not part of their intention.

This has been the case with anti-dumping and import duties on Polyester Staple Fiber (PSF). National Tariff Commission actions, intended to protect the domestic market and support the broader public interest, have unintentionally favored a small group of domestic manufacturers. This has come at the expense of a larger group of exporters, highlighting the unintended negative consequences of protectionist trade policies.

In case A.D.C.No.33/2015/NTC/PSF dated February 02, 2016, according to Para 33.3, the three domestic producers account for 97.48% of the total domestic production of PSF. While in the case A.D.C No. 59/2021/NTC/PSF dated February 03,2022, according to Para 9.2, the same producers account for 100% of the domestic production. It clearly indicates that the three producers have a monopoly over the domestic PSF market.

Also, in case ADC No 33, para 12.2.1.1, it is clearly stated that the products being used by the domestic industry are not being produced locally and hence in 2015, varieties of colored PSF and regenerated PSF were exempted from the investigation. In 2021, the commission determined that the domestic and imported product are ‘like products’ due to similarities in their physical, chemical and end use cases.

However, in the case ADC No 59, according to Para12.2, the commission terminated the change circumstances review and conducted only the sunset review, concluded that anti-dumping duties must be imposed on exporters of PSF from China. If the domestic producers had started producing the products required by domestic consumers, then it should have conducted a change circumstance review. Due to the above reasons, it necessitates a change circumstance review to determine the import and dumping duties.

Furthermore, as detailed in para 35 of ADC No.33 and para 50 of ADC No. 59 under ‘Price Effects’ and their respective sub-sections titled price undercutting, price suppression and price depression, there is a noticeable similarity in the price-effect patterns in both instances. This similarity strongly indicates that domestic PSF producers, when faced with competition from international counterparts, resort to masking their lack of competitiveness and inefficiencies by seeking refuge in import and anti-dumping duties. It appears that the commission consistently aids them in this approach.

Additionally, within para 18.2 of ADC No 33 and para 22.2 of ADC No 59, titled ‘Confidentiality’, crucial information and data pertaining to the applicants, including their production costs, sales figures, and pricing details etc., were classified as confidential. Disclosing this information could have facilitated a more transparent process and outcome. The lack of access to this data suggests that any decision benefiting the applicants might imply collusion on the part of the NTC.

Moreover, it raises questions as to why these three entities are regarded similarly to public enterprises, using their lack of international competitiveness as grounds for protectionist policies. Typically, in economics, a non-competitive private entity would be shut down. However, public enterprises are treated differently, often receiving support through expansion, or protectionist policies, thanks to their access to extensive financial and political resources, which perhaps is not the case or domain for the Lotte PTA plant.

This situation exemplifies the issue of concentrated benefits and dispersed costs. By levying import and anti-dumping duties, a small group of manufacturers reaps the benefits, while the burden of these costs is spread across a wide array of exporters. The domestic manufacturers are aware that the removal of or reduction in these duties would primarily disadvantage them, prompting their advocacy for continued protectionism through such duties.

The imposition of high duties on PSF significantly undermines Pakistan’s textile exports by making the production of MMF economically unfeasible. This situation is discouraging for domestic textile and apparel firms considering investments in MMF production. The disparity is stark when comparing the cost of PSF in Pakistan to international rates; for instance, textile exporters in China can acquire PSF at 91 cents (Rs 255) per kg, whereas in Pakistan, the price soars to around Rs 362 per kg, marking a 40% increase. Given the elevated costs of both PSF and PTA, manufacturing MMF is neither viable in the domestic market nor competitive internationally.

This leads to an understanding that the primary contributors to the unusually high PSF prices in Pakistan are the extensive import duties on PTA and PSF, coupled with additional anti-dumping duties on PSF. Moreover, the situation is exacerbated by the ability of local manufacturers to maintain inflated prices, a consequence of the import Letter of Credit (LC) restrictions confronting the spinning industry. These factors collectively stifle the growth of the MMF sector, highlighting the urgent need for policy revision to alleviate the burdens on the textile export market.

The need to reevaluate import and anti-dumping duties becomes critical, especially now that nearly half of Pakistan’s PSF-based spindles are shut down. As the industry aims for an export resurgence amid rising demand in major Western markets, the domestic supply of both cotton and PSF is insufficient to operate these machines. This shortage is compounded by local PSF manufacturers operating at reduced capacities due to the diminished demand for PSF, a result of Pakistan’s PSF prices being significantly higher than those of its regional rivals. Lowering the import and anti-dumping duties on PSF would facilitate enhanced production levels across the supply chain, leading to increased exports and job creation.

“Lastly, enhancing the exports of MMF is pivotal for bolstering Pakistan’s textile exports, a crucial step for the country to emerge from its ongoing economic difficulties. Increasing MMF exports would diversify and strengthen Pakistan’s export portfolio, making it more competitive globally and instrumental in its economic recovery.”