Exports running on borrowed time

Pakistan’s trade profile stands at a critical juncture. More than 55 percent of the country’s exports come from textiles, and over 80 percent of these are destined for just three markets: the EU, UK, and the US.

Together, these buyers dominate global textile demand of USD 795.4 billion, with the US alone accounting for around 15 percent (second only to the EU27).

Pakistan’s reliance on these markets reflects both their size as buyers and the advantages of unilateral preferences such as GSP+, reinforced by long-established commercial ties.

But the ground is shifting. The US is increasingly resorting to tariff and non-tariff measures, while the EU is tightening requirements on supply chain traceability and sustainability. Buying decisions are no longer shaped by historic relationships but by what has effectively become a “license to sell.”

This shift means Pakistan’s traditional anchors — preferential access in the EU and established relations with the US - can no longer guarantee sustainable market access. Instead, future survival will depend on three verticals: compliance, customization, and competitiveness.

By 2027, the EU’s Digital Product Passport (DPP) will be fully enforced. US tariffs are already in place. And production costs at home remain exceptionally high due to energy prices. The next 12 months will be decisive, determining whether Pakistan can put its export sector on a path to resilience or let it sink under the weight of inaction and global shifts it has failed to prepare for.

Compliance — the license to sell:

Meeting international standards should not be seen as a barrier but as an upfront investment in sustaining exports. The shift the world will increasingly witness is in their evolving enforcement, moving from a WTO-led multilateral framework to region-specific, buyer-driven requirements.

As a GSP+ beneficiary, Pakistan has ratified 27 UN conventions and achieved export growth, but progress on human and labour rights continues to raise EU concerns. In any case, the scheme is no longer an ‘easy window’ into Europe, as compliance is now embedded directly into export requirements. With new regulations such as the Eco-design for Sustainable Products Regulation (ESPR) and the DPP, market access after 2027 will hinge not on GSP+ status alone but on full product-level traceability backed by verifiable data.

The US has taken an equally firm approach through the “Uyghur Forced Labor Prevention Act (UFLPA)”. Reflecting this shift, the 2024 USFIA Benchmarking Study ranked managing forced labour risks as the second biggest business challenge in the US, after inflation.

Together, these measures illustrate how trade policy is being transformed into a tool for advancing social and environmental reforms. Whether viewed as external pressure or necessary correction is a separate debate, but for Pakistan the reality is evident: tailoring production processes is no longer optional.

Customization for relevance:

Western markets, as the largest buyers, remain the trendsetters, leaving export-oriented countries with no choice but to adapt. US fashion companies alone source apparel from 48 countries, making it vital for Pakistan to align its exports with evolving buyer preferences.

Here, however, Pakistan is competing in only a fraction of the global arena. Of the country’s USD 17.7 billion in textile exports, nearly 80 percent (over USD 14 billion) are in value-added categories. But global demand for these same categories stands at USD 529 billion — almost 40 times larger than Pakistan’s current supply. This gap is not just about capacity; it reflects a deeper mismatch between what Pakistan produces and what the world actually demands.

At the core of this mismatch is Pakistan’s reliance on cotton-based exports, which account for nearly half (49 percent) of value-added exports, while man-made fiber (MMF) products make up just 7 percent. The global market, however, has moved in the opposite direction, with MMF-based apparel now comprising 50 percent of the USD 529 billion value-added segment. The scope for growth is immense, yet Pakistan continues to cede ground to competitors that have already diversified their product mix.

Some argue that high US tariffs on China and India could redirect trade flows toward Pakistan. But this advantage will remain theoretical unless Pakistan reshapes its product mix to match tariff opportunities where global demand is strongest and simultaneously works on cost competitiveness.

This brings us to the final challenge: staying price competitive.

Competitiveness is the final arbiter:

Even compliant, customized products risk losing out without cost competitiveness. In textiles, price remains the final arbiter: with highly elastic demand, a product meeting all standards can still lose market share if not competitively priced.

This is where Pakistan struggles most. Energy, the single largest input for textiles, has tilted the cost equation against exporters. During the 2022-23 crisis, industrial power tariffs spiked to 16-17 cents. Although eased to 12 cents, they remain well above those in competitor countries supplying textiles to Western markets. Gas, another critical input, has also been priced out: the effective captive gas price is Rs. 4,291/MMBtu (including the grid transition levy), or about USD 15.4/MMBtu - nearly double the USD 6–9/MMBtu paid by exporters in Bangladesh, India, and China, where electricity costs only 5–9 cents.

Taken together, US tariffs act as an exogenous price shock, with the resulting inflation-driven contraction in Western demand further squeezing Pakistan’s exports from both ends. The only lever Pakistan can realistically control to make exports price-competitive is lowering domestic production costs.

The policy imperative:

Global trade winds are shifting. The US market has become uncertain, while the EU’s GSP+ review this November will decide the fate of Pakistan’s preferential access. Survival depends on immediate policy measures that prepare exporters for the rules of tomorrow.

First, mandate national-level traceability. A centralized framework with cotton testing labs and digital value-chain tracking must be mandatory for all exporters. Through a public–private partnership, the government should adopt a scalable, ready-to-implement traceability system by the mid-2026. This will align Pakistan with the EU’s upcoming DPP regime and U.S. due diligence laws, ensuring every export withstands traceability and sustainability scrutiny.

Second, demonstrate credible progress on GSP+ conventions. The EU’s repeated concerns regarding civilian rights, particularly those of minorities, and freedom of expression under the GSP+ cannot be ignored, as the scheme hinges on parallel progress in trade and sustainable development.

With a crucial review due, Pakistan must show visible reforms and credible enforcement. The revised GSP+ framework for 2024–2034 will raise the bar further, requiring all current beneficiaries to re-apply by 2027 under even stricter conditions. But is Pakistan prepared? Unless it delivers effectively on the 27 conventions today, market access tomorrow will remain precarious regardless of export performance.

Third, customize to buyer needs. Western markets increasingly demand products that are sustainable, repairable, reusable, and recyclable. Simply producing what Pakistan has always been comfortable with will not suffice.

The opportunity lies in categories where China and India are vulnerable. At present, MMF–based value-added products account for just 7 percent of Pakistan’s exports. This share must rise by at least some percentage points by the end of 2026, targeting tariff lines with the highest trade diversion opportunities amid high tariffs on India.

Fourth, restore cost competitiveness. A 19 percent US tariff may appear less severe than what some competitors face, but buyers decide on landed cost and quality, not tariff schedules alone. Unless Pakistan lowers domestic production costs, preferential margins will evaporate.

Industrial tariffs must be brought down to 9 cents through removal of cross-subsidies, and reliable RLNG should be prioritised for high-efficiency captive plants where grid instability threatens export orders. Performance-based energy allocations tied to export earnings could further ensure efficiency while safeguarding scarce resources.

Considering the new global trade order, Pakistan’s textile exports are running on borrowed time. The question is straightforward: how can Pakistan keep pace with the times? And the answer is equally clear — produce compliant, customized and competitive products.

Copyright Business Recorder, 2025