Amidst the spectacle of Khan-Trump camaraderie, one of the bones tossed
around was the increase in bilateral trade.
“I see great trade with Pakistan. And I’m not talking about a little bit more.
I’m talking about 10 and even 20 times what we’re doing right now,” said US
President Donald Trump.
Those are big numbers to throw around. The United States is Pakistan’s top
market accounting for 16 per cent of its exports in 2018. An increase of this
magnitude would mean a jump of over $67 billion in our bilateral
relationship, with exports increasing by $38bn.
Clearly, the words are hyperbolic. Trump pooh-poohed a 20pc increase in
trade but even that would indicate a nearly $1bn increase in exports. Textiles
dominate and make up over 80pc of exports to the United States.
Assuming an ideal scenario in which Pakistan and the United States are best
buddies, what would it take for Pakistan’s textile sector to make such a leap?
Amongst the many hurdles are the age-old woes of ease and cost of doing
business that the textile sector has been lamenting since time immemorial.
Then there is the current macroeconomic environment that is scaring off
investors. And last but not least, the shortcomings of the textile sector that
render it uncompetitive even if all other variables are in place.
Better Work programme
After the 2012 Baldia fire tragedy at a garment factory, Walt Disney sent a
letter expressing concern about the safety standards in the industry. The
upshot of it was that Pakistan was removed from the list of permitted
sourcing countries since it scored 18 points on the World Governance Index
(WGI) when the minimum qualifying requirement was 25 points.
“When Disney pulled out, it gave us two options — improve our WGI
standing or join the Better Work Programme,” said Pakistan Textile
Exporters Association Chairman Khurram Mukhtar.
Better Work is a programme run by the International Labour Organisation
and the International Finance Corporation. Its objective is to improve
working conditions in the garment industry and make the sector more
competitive by bringing together diverse groups such as governments, global
brands, factory owners, unions and workers.
However, when Pakistan approached Better Work, it was informed that it
“currently had more candidate countries that it could accommodate”. This
was back in 2013. An arduous process followed requiring feasibility studies
and assessments.
Fast-forward to 2019, the process is finally bearing fruit and Pakistan is
expected to be part of this programme this year, which will be funded by the
Export Development Fund.
While there may not be a direct link between the Better Work programme
and Pakistan’s exports, it increases arsenal in Pakistan’s ammunition, says
Majyd Aziz, president of the Employers’ Federation of Pakistan.
Compliance
The Disney ban did not materially impact Pakistan’s exports, which have
averaged around $3.6bn over the last 10 years.
However, it did highlight concerns regarding compliance.
“We can’t take the risk to not be compliant, we will be sued!” Soorty
Enterprises Managing Director Shahid Soorty says, contending they have to
be ready for spot checks at all times. These words represent the generally
held views of different big manufacturers/exporters representing various
associations.
While the major players may be compliant with international standards, they
do tend to outsource to Cut-Make-Trim (CMT) units, said a source in the
sector.
CMT units are the most basic form of operations in the ready-made garment
industry. Input and product specifications are provided by the retailer while
garments are manufactured and packaged by CMT units.
Compliance covers issues like minimum wage, working hours, child labour,
fire-fighting systems, working conditions, treatment plant, disposal of
hazardous waste and so on. Some renowned international chains require a
suite of additional compliance certificates as well.
While the big boys fulfil the requirements, the CMTs fly below the radar and
adhere to far lax standards. Incidents like the Baldia factory fire draw
attention to non-compliance in the sector and paint a negative picture, which
costs the textile sector across the board.
Cost of doing business
A lot of pens have dwelled on the high cost of doing business in Pakistan,
especially in the current macroeconomic environment, but it bears
repeating.
“About 90pc of garment exporters are small and medium enterprises
(SMEs),” says Shaikh Muhammad Shafiq of the Pakistan Readymade Garment Manufacturers and Exporters Association. “With the withdrawal of
zero-rating and a liquidity crunch, they will have to leave the market.”
This sentiment was echoed by various associations of textile exporters that
asserted that the medium and smaller players were being forced to exit.
“Bangladesh can supply five-pocket jeans at $7-7.5 while Pakistan quotes $8-
8.5,” said Mirza Ikhtiar Baig, a denim exporter. “This is why the bulk of
orders go to countries like Vietnam, Cambodia and Bangladesh whereas
Pakistan gets only spillover orders.”
“We have a factory in Bangladesh because of its lower cost of production. We
get a 7pc discount there by default,” said Mr Soorty. In order of importance,
he stated the ease of doing business, wages, labour laws, energy and other
facilities were the reasons why Soorty Enterprises opts to export from
Bangladesh while also having operations in Pakistan.
Since the majority of Pakistan’s exporters are SMEs, they do not have the
critical mass to enjoy economies of scale. At most, they manage to get a stall
in international exhibitions but lack marketing skills. Nor are they savvy
enough to bid online for tenders with competing nations.
Sector shortcomings
The sector’s concerns and complaints notwithstanding, demand-side trends
have changed over the last decade, which makes a dramatic increase in
textile exports to the United States unfeasible in the short and medium
terms.
Oil-based synthetic fibres have a lion’s share at 60pc of the world market
while cotton’s share is about 25pc. Technological advances in synthetic
fibres, better moisture absorbency and a lower cost of raw material make
manmade fibre textiles a preferred option compared to Pakistan’s cottondominated
exports.
There is a lack of research and development within the sector, a factor
highlighted by the State Bank of Pakistan’s 2016-17 annual report that
flagged a decrease in textile exports to the United States. The report stated
that textile players are still “excessively focused on cotton-based textile and
apparel products” when the market is moving elsewhere.
This situation is exacerbated by the absence of a strong domestic polyester
industry with demand for manmade fibres largely met by imports.
The share of cotton products in the US textile imports decreased from 40pc
in 2010 to 29.7pc in 2017, indicating a changing preference of consumers in
foreign markets.
Pakistan’s share in the textile and apparel imports of the United States in
2016 was 3pc, as per the US Office of Textile and Apparel. It was 5pc for
cotton-based products. The manmade fibre imports by the United States in
2016 were $52bn, of which Pakistan’s insignificant exports were $200
million.
Yet the sector opts to fixate on its cost of doing business woes without taking
into account the evolving trends that have come after years of high cotton
prices and improving synthetic technology.
The polo shirts and assorted apparel manufactured nearly two decades back
are still the bread and butter of the garment industry.
Admittedly, the macroeconomic and business environments are key
variables for Pakistan’s textile export competitiveness. However, till firms
move out of their comfort zones and take it upon themselves to improve
operations and product offerings, any increase in exports will remain
marginal at best.
Source: The Dawn, Pakistan Monday, 29 July 2019