Need for a textile-friendly trade policy

Last year's textile export figures were disturbing enough to demand a greater focus on the industry in the upcoming Trade Policy FY10, due on July, 27. Although, it eased just above 6 percent to $9.22 billion in FY09 from $10.59 billion in FY08, month-wise data shows that textile exports were thinning throughout last year - with May sales ebbing to its lowest ($741.8 million) since February 2006 ($702 million).
And while it edged back a bit in June to $809 million, exports were still down nearly a quarter from its monthly peak of $971.7 million seen in July 2008. Now one might question the sagacity of focusing too much on textile exports on the idea that failure to diversify and that over-exposure in a single sector makes the country vulnerable to external trade shocks.
While this holds truth at one end; at the other, however, does it really make any sense to change horses midstream to start focusing on export diversification - especially in an economic environment which is fragile in itself and perhaps does not warrant new experiments. Clearly textile sector is one the leading contributors in country's aggregate economic output - nearly 9 percent according to last available statistics.
Its contribution to total exports has averaged nearly 60 percent during the last six years, albeit tapering a bit to near 52 percent during FY09. More importantly, given that textile industry nearly accounts for one-fourth of total large scale manufacturing (LSM) output, it becomes more imperative to facilitate the industry in the upcoming trade policy, considering negative LSM growth in the last fiscal year.
A textile focused policy can also potentially resolve the joblessness problem, as the industry employs more than one-third of total industrial labour. There is also a need for market diversification, as the central bank rightly noted earlier this year - citing that current global recession highlighted the risks attached to over dependence on developed countries as export markets brought home the importance of greater export market diversification.
In this context, Pakistan should endeavour to enter into trade agreements with other regional countries, where in view of greater concentration of country's exports in textiles it should attempt to acquire more access for its textile and clothing exports through preferential trade arrangements. And just like, the government is trying to woo banks to generate financing for the power sector; it must do the same for textile industry.
This is because ever since the recent financial crises began many lenders have become cautious towards the sector owing to rising number of bad loans. On a more corrective note, the trade policy should also consider making its protectionist policies more stringent as previous ones have been rather loose - which provided lucrative rent seeking opportunities to strong lobbies, instead of benefiting the economy at large. The check and balance measures should ensure that allocated subsidies do not increase fiscal slippages when in fact it is intended to squeeze external deficits.
The recent influx of issues such as power shortages, hike in interest costs and lack of skilled labour has made our textile products less competitive, relative to goods coming out from neighbouring emerging markets of India and China. These issues call for some swift alternate policy reforms to help textile industry bring about price competitiveness by reducing marginal cost and increase product differentiation by better research and development.
One of the much-needed related measures is one which promotes capital expenditure in order to reduce marginal costs in the long run. These reforms also call for more attention on value added textile exports, rather than selling just raw material of production. Data released by Federal Bureau of Statistics shows Pakistan's share in global yarn exports hovered around 33 percent but that of cloth was a token 8 percent. These dismal figures call for a stronger policy action to boost value added exports in the long-term trade.
One way to achieve this is to increase the rate of cotton conversion into value-added products, which is currently much lower in Pakistan compared to regional rivals, India and China. However, a more important step, in long-run though, is to establish our own brands (or buy some established brand like the case in India) to extract maximum margins on our cotton production and help arrest the problem of high external deficits.
Given the magnitude of these tasks, consolidation seems to be the only way forward in Pakistan's textile industry. At present the industry is loosely structured with small production units: for example, Pakistan's largest composite Nishat Mills Limited had only about 2.5 percent share in the country's total export sales in FY08 - the rest going to many smaller players.
This sort of fragmented share makes Pakistani textile makers uncompetitive against giants from global and regional markets. But then the biggest impediment in potential consolidation is labour laws that are poorly structured at present and ward off textile makers from expanding capacities and product lines on the threat of labour unions. Will the government's policy measures be comprehensive enough in this regard? One wonders.