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Pakistan Exports Survive Slumping Chinese Demand; GSP Status a Game-Changer

In a sign of Pakistan’s growing stability as a textile exporter, the country has weathered a considerably diminished Chinese demand for yarn and fabric in January, a development that previously would have brought austere economic consequences.

Typically, Pakistan exports low valued-added fabric to China, which is subsequently transformed into higher value-added form. China is the principal buyer of both Pakistani fabric and yarn and, until recently, those regular purchases counted as an indispensable component of Pakistan’s textile export business.

Now that Pakistan has won special trade status under the E.U.’s Generalized System of Preferences (GSP Plus) program, it is no longer heavily dependent on Chinese imports, or as deeply affected by fluctuations in the Chinese economy. SM Tanveer, chairman of the All Pakistan Textile Mills Association (APTMA), noted that the steep drop in fabric and yarn exports to China was more than compensated by the rise of exports to the E.U. He said, “Even fabric exports — basic textile — registered an increase of 3.7 percent from $203.29 million in January 2013 to $210.81 million in January 2014.” He added, “This is just the beginning. We expect much higher value in processed fabric exports to EU in the coming months.”

Currently, the E.U. is Pakistan’s primary destination for its textile exports. Overall, Pakistan’s textile exports topped $13.06 billion last fiscal year, including $2.7 billion worth of yarn and $2.5 billion of fabric to Bangladesh, specifically. Pakistan’s exports have grown by approximately 12.5% per year, with a growth of 10.3% to the E.U., in particular. The textile industry accounts for more than 50 percent of the nation’s total exports. While forecasts regarding the full reverberations of the new status for Pakistan vary widely, many predict growth by as much as 100 percent over the next four years.

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While the new GSP status doesn’t exclusively impact Pakistan’s textile industry, it should be among the biggest beneficiaries. Bilal Qamar, an analyst at JS Research in Karachi, said, “The domestic textile industry is likely to take the benefit of adding value itself and increase direct exports to the EU after GSP Plus status.” More than 20 percent of Pakistan’s exports will enter the E.U. market’s tariff-free, and more than 70 percent will enjoy dramatically reduced tariffs.

Thirteen textile products are included on the list of those than can be exported duty-free to the twenty-seven members of the E.U., accountable for $231 million worth of goods last year. Some are predicting this will increase Pakistan’s exports to the E.U. by $1 billion.

Gohar Ejaz, an executive at APTMA, said that Pakistan’s exports would have increased by a vigorous 15 percent had China’s appetite for its fabric and yarn maintained its normal levels. And, despite the contraction of Chinese demand, exports of knitwear leapt 16 percent from $160.67 to $186.31 million. Also, home goods like bed linens increased 8.8% to $168.18 million while readymade garment exports surged 8.4% to $171.93 million.

Ejaz also observed that the slowdown in Chinese demand is typical of its economy heading into its new year and that China is expected to recover its normal hunger for yarn and fabric shortly. He even said that Pakistan’s struggles with chronic energy shortages is all but solved, paving the way for the country to take full advantage of its GSP status. Other experts are less sanguine about Pakistan’s ability to adequately respond to troublesome electricity shortages. Sheikh Mohammad Ilyas, chairman of the Pakistan Textile Exporters Association (PTEA), said, “The EU trade concessions can push our textile exports and generate significant economic activity. But much will depend on regular availability of regular supply of gas and electricity to operate factories.” An estimated 40 percent of Punjab’s textile manufacturing capacity is expected to be stymied by the gas shortages. This is especially worrisome since nearly 80 percent of the industry’s overall capacity is located in Punjab.

Chronic energy shortages continue to undermine manufacturing across the nation, especially in Punjab, where many of the captive power plants are expected to be deprived of natural gas for the duration of the winter season. And more than 50 percent of the factories in Faisalabad have been shut down due to electricity shortages.

Nevertheless, Pakistan’s newly expanded catalogue of yarn and fabric buyers has lessened its reliance upon any one nation. APTMA vice chairman Aptma Punjab Syed Ali Ahsan said that the full extent of the GSP’s benefits have not yet revealed themselves since European apparel orders for the winter were made before the trade status become effective.

The GSP program was specifically developed to provide a boost to emerging nations struggling to take advantage of trade opportunities exclusive to international agreements to which they typically did not belong. According to E.U. Trade Commissioner Karel De Gucht changes to the GSP eligibility criteria are responses to the fact that “key developing economies have become globally competitive,” adjustments necessary given the success of the program itself. De Gucht also said, “This now allows us to tailor our pro-development trade scheme to give the countries still lagging behind some additional breathing space and support.”