Pakistan Textiles Value Chain

Textiles Value Chain 3 Cotto n Ginnin g Spinnin g Weaving Knittin g Processin g Stitching PTAPSFPFY Fashion and Marketin g

Capacity of Textile Sector The textiles sector in the country represents a complete value chain.  million bales of cotton production  1200 ginning mills  500,000 tons capacity of PTA production  650,000 tons of manmade fibres including polyester fibre  21 filament yarn units having capacity of 100,000 tons capacity  11.3 million spindles, 0.03 million rotors  35,000 shuttle-less looms, 350,000 power looms  18,000 knitting machines  Around 765 processing units  700,000 industrial stitching machines 4

Importance of Textiles Sector Share in national value added (GDP) 8% Share in industrial value added (GDP) 23% Share in total exports53% Share in industrial employment40% Share in banking credit (manufacturing) 36% Source: Economic Survey /TDAP website, SBP

Pakistan Standing in World Cotton PercentRank Production9.54 th Consumption10.03 rd Yarn Production9.03 rd Yarn Export26.02 nd Cloth Production7.03 rd Cloth Export14.03 rd Total Textiles Export2.015 th Source: ICAC

Value Addition in Textiles Value Chain Sub SectorValue addition % US$ Value (per Kg) lower slabs Woven Garments Knitwear Bed ware Processed Fabric Cotton Fabric (grey) Towels Yarn Analysis of UN Comtrade Figures

Recent Export Performance  Textiles exports during the last six years have failed to reflect the true potential of the sector: US$ Billion Source: TDAP

Supply Chain *5% Kg loss on Exports

M&P Diversification of textiles Pakistan Product Wise: 13 products share more than 50% of textile exports

Per Unit Export Values Eurostat Figures PakistanIndiaChinaBangladeshTurkey Cotton Knit Shirts Denim Trouser Woven Bedsheets Towels

Regional Competitors US$ Million Source: UN Comtrade

Import Mix of USA In 2007 the ratio was 50.63% and 27.65% respectively. Product Identity CottonMMF Textile Material Not Specified OthersWoolSilkVegetableMetalRubberTotal Garments 39.38%22.96%5.60%3.66%2.81%0.52%0.00% 74.93% Made-ups 4.35%2.06%3.47%0.13%0.03%0.00% 10.04% Fabric 0.97%2.40%0.58%0.01%0.15% 0.00% 4.41% Other Products 0.09%1.43%1.25%0.11%0.00% 0.07%0.00% 2.94% Special Fabrics 0.05%0.79%1.39%0.04%0.01%0.00% 2.29% Yarn 0.15%1.69%0.00% 0.12%0.01%0.05%0.02%0.00%2.05% Carpets & Carpeting 0.00%0.82%0.27%0.28%0.61%0.00%0.02%0.00% 2.00% Raw Material0.01%1.12%0.00% 0.06%0.00%0.03%0.00% 1.21% Thread 0.01%0.04%0.00% 0.03%0.08% Waste 0.02% 0.00% 0.01%0.00% 0.05% Total 45.04%33.33%12.55%4.24%3.78%0.68%0.34%0.02%0%US$ 107 b

Import Mix of Germany In 2007 the ratio was 41.81% and 33.74% respectively. Product Identity CottonMMF Textile Material Not Specified WoolOthersSilkVegetableMetalRubberTotal Garments 35.57%19.79%5.39%3.87%4.87%0.34%0.00% 69.83% Fabric 1.71%4.52%0.86%0.57%0.01%0.11% 0.00% 7.89% Made-ups 2.44%1.60%2.23%0.02%0.14%0.00% 6.44% Yarn 0.54%2.62%0.00%0.57%0.00%0.06%0.10%0.02%0.00%3.91% Raw Material0.23%2.07%0.00%0.98%0.00%0.02%0.04%0.00% 3.33% Special Fabrics 0.11%0.93%2.08%0.01%0.03%0.00% 3.16% Carpets & Carpeting 0.00%1.46%0.42%0.44%0.19%0.00%0.01%0.00% 2.51% Other Products 0.09%1.19%0.90%0.00%0.22%0.00%0.02%0.00% 2.43% Waste 0.12%0.10%0.00%0.01%0.00%0.02%0.01%0.00% 0.26% Thread 0.02%0.20%0.00% 0.02%0.24% Total 40.83%34.46%11.88%6.47%5.46%0.55%0.29%0.02%0%US $ 46 b

Import Mix of Japan In 2007 the ratio was 37.66% and 37.76% respectively. Product Identity MMFCotton Textile Material Not Specified WoolOthersSilkVegetableMetalRubberTotal Garments 34.52%25.47%5.27%5.78%5.49%0.45%0.00% 76.98% Made-ups 1.83%2.67%3.25%0.02%0.05%0.00% 7.82% Fabric 2.36%0.83%0.60%0.55%0.01%0.16%0.09%0.00% 4.60% Yarn 1.94%0.65%0.00%0.46%0.00%0.19%0.08%0.00% 3.33% Other Products 1.71%0.36%0.76%0.00%0.03%0.00%0.01%0.00% 2.87% Carpets & Carpeting 1.09%0.00%0.35%0.14%0.17%0.00% 1.75% Raw Material0.39%0.38%0.00%0.45%0.00%0.08%0.03%0.00% 1.32% Special Fabrics 0.51%0.06%0.54%0.00%0.03%0.00% 1.14% Waste 0.03%0.04%0.00%0.02%0.00%0.01% 0.00% 0.11% Thread 0.06%0.00% 0.03%0.09% Total 44.43%30.46%10.77%7.41%5.78%0.89%0.23%0.00%0%US$ 41 b

GSP Plus Scheme Article 9 and Annexure VII of Regulation 978/12 A GSP beneficiary country may benefit from the tariff preferences provided under the special incentive arrangement for sustainable development and good governance if they have: Less than 2% share in imports of EU and seven largest GSP sections of its imports into the Union of products listed in Annex IX and represent more than the threshold of 75 % in value of its total imports of products listed in that Annex, as an average during the last three consecutive years And Ratified all the conventions listed in Annex VIII of the Regulation, undertaking for maintaining the ratification, accepting of regular monitoring and reporting in accordance to the conventions etc.

Incentive Article 12 “The Common Customs Tariff ad valorem duties on all products listed in Annex IX which originate in a GSP+ beneficiary country shall be suspended”

Graduation/Removal of Incentive Article 10(5) Where a GSP+ beneficiary country no longer fulfils the conditions referred to in points (a) or (c) of Article 9(1), or withdraws any of its binding undertakings referred to in points (d), (e) and (f) of Article 9(1), the EU may remove the concessions. Graduated from vulnerability parameter i.e. 2% of EU Imports or 75% product diversification Failure in implementation of ratified conventions Failure to maintain ratification of the conventions Reservation in the process of monitoring and review as per ratified contentions Failure to participate and cooperate in monitoring process according to Article 13

GSP+ Scheme Coverage Article 11 and Annex IX, EU Regulation 978/12 “The products included in the special incentive arrangement for sustainable development and good governance (GSP+) are listed in Annex IX of the Regulation” Annex IX includes complete textiles and clothing value chain i.e. Harmonized commodity description and coding System (HS) chapters 50 to 60 under Section 11a and chapters 61 to 63 under Section 11b”

Duration of the Scheme Article 43(3) “The scheme shall apply until 31 st December However, the expiry date shall neither apply to the special arrangement for the least-developed countries, nor, to the extent that they are applied in conjunction with that arrangement, to any other provisions of this Regulation”

Reporting Mechanism Article 14 “By 1 January 2016, and every two years thereafter, the Commission shall present to the European Parliament and to the Council a report on the status of ratification of the relevant conventions” That report shall include: (a) the conclusions or recommendations of relevant monitoring bodies in respect of each GSP+ beneficiary country; and (b) the Commission’s conclusions on whether each GSP+ beneficiary country respects its binding undertakings to comply with reporting obligations,

Safeguards Article 29 Under this Article, the Commission can remove tariff preferences in face of certain trade performance criteria Increase by at least 13,5 % in quantity (by volume), as compared with the previous calendar year Those products of a country which exceed 6% of total EU imports of that product referred to in Article 29(1), shall attract the above restriction.

Rules of Origin Article 33, “To benefit from the tariff preferences, the products for which the tariff preferences are claimed shall originate in a beneficiary country” For the purposes of the preferential arrangements referred to in Article 1(2) of this Regulation, the rules of origin concerning the definition of the concept of originating products, the procedures and the methods of administrative cooperation related thereto shall be those laid down in Regulation (EEC) No 2454/93 Products originate in a particular beneficiary country if they are: wholly obtained in that country, or sufficiently worked or processed there

Example of Rules of Origin Manufacture of a garment starting from non-originating yarn confers origin. This means that weaving and all subsequent manufacturing stages must be carried out in the beneficiary country. HS HeadingDescription of Product Qualifying Operation (Working or processing, carried out on non-originating materials, which confers originating status) For LDCsOther Beneficiary countries Chapter 61 (Knit Garments) Obtained by sewing together or other wise assembling two or more pieces of knitted fabric Manufacture from Fabric Knitting and Making up (including cutting)

Regional Cumulation Groups that may benefit from Regional Cumulation are four: Group III: Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka Materials originating in one country of the group which are further worked or processed in another beneficiary country of the same group are considered to originate in the latter country. Regional cumulation between countries in the same regional group shall apply only under the condition that the working or processing carried out in the beneficiary country where the materials are further processed or incorporated goes beyond the minimal operations set out in Annex 16

Pakistan and the Scheme Pakistan’s application for attaining the status of a GSP Plus Beneficiary has cleared all pre-requisites and procedures successfully. Pakistan has won majority of the votes of MoEP in its favor through well planned and coordinated efforts The benefit of zero rate duty will be applicable to Pakistani products entering in EU on or after January 01, 2014.

EU Market Total EU Imports is around US$ 2.1 t EU imported US$ 113 b worth of textiles which is around 5% of their total market. Pakistan total exports to EU is around US$ 5 billion out of which 3.6 is of textiles i.e. 72% share. Pakistan overall share in EU market is 0.2% while in textiles our share is around 3.2%

Keeping all other factors constant, Pakistan can now achieve an increase of around 29% in total exports to EU due to emergence of GSP Plus with in an year The increase in textiles and clothing exports can be expected around 38% The tariff advantage is maximum for the apparel sector of Pakistan and hence Pakistan should gear up towards value added market. The experience of ATP has also shown us that we have better chances to capture the apparel sector as our utilization percentage is expected to be more than 93% of quota in apparel product lines in 2013 It is also expected that due to various safeguard provisions in the new GSP Scheme the strong product lines of India and China may go further into disadvantage as an outcome of expulsion from the GSP benefit.

EU Imports from Pakistan Million Euros Source: EUROSTAT, * forecasted on the basis of 9 month performance ** forecasted using data of EUROSTAT/WITS and SMART Software, general supply elasticity and substitution elasticity at generic software value of WITS at i.e. 99 and 1.5 respectively

The prime products in which Pakistan is expected to do the best includes: printed bed linen of mmf cotton trousers (men and women both) dyed and printed bed linen of cotton men’s knit trousers Towels Socks cotton jerseys printed twill cotton cloth etc The real challenge for Pakistan will be to ensure 100% utilization of its capacities and resources and its diversion towards value addition.

Opportunities and Challenges The GSP+ will act like a catalyst to rejuvenate Pakistan’s entire export products range Benchmarking of products in which we have a competitive edge, rather than comparative edge Modernization of management and processes Greater use of IT, especially for monitoring of T&C exports Enabling environment must be created at all levels – legislation, facilitation and export-friendly policies Product diversification will be necessary to avoid saturation – 13 tariff lines share more than 50% of our textiles exports mix

Future Strategy Industry Vision GSP+ Textiles Facilitation Committee Data sharing with PRAL on a weekly basis FBR to issue single consolidated SRO for apparel sector Revision of rates of drawbacks by Input Output Coefficient Organisation HS Codes synchronization where necessary Training for skill and product development Strategy for Product Diversification Marketing Strategy Pursue for proper implementation of 27 Conventions

Future Strategy Sr. No. IssueProposed MeasureExecuting Department 1Awareness of GSP+ Scheme and EU Rules of Origin Seminars and workshops to disseminate information on GSP+ Scheme and Rules of Origin Textile Industry Division, Commerce Division, FBR 2Easing the liquidity crunch of SMEs Pending liabilities of Textiles Policy Initiatives be paid; Timely refund of Sales Tax and Drawbacks (textile sector may again be declared Zero Rated Sector) Finance Division and FBR 3Unskilled LaborRelease of EDF funds for revival of Stitching Machinery Operator Training Scheme (SMOT) Commerce Division, Textile Industry Division

Sr. No. IssueProposed MeasureExecuting Department 4Value additionSimplification of SROs and other schemes for import of raw material and accessories for value addition; Awareness Seminar on Temporary Importation schemes FBR, Commerce Division and Textile Division 5Product diversification More than 50% of our exports are confined to only 13 products; Funds to be allocated to textiles educational institutes including National Textile University for development of new products Commerce Division and Textile Industry Division Future Strategy

Sr. No. IssueProposed MeasureExecuting Department 6Drawbacks on deemed import basis are warranted to increase share of Blended Products NTC recommendations be implemented Commerce Division 7Increase in Cotton Production (1 million cotton bales earn $ 1 billion) Availability of Certified Seed Enactment of Plants Breeders Rights Act Amendments in Seed Act 1976 Improvement in Extension Services NBC meeting to be held National Food Security Division, Climate Change Division and Provinces 8Cotton StandardizationImplementation of Cotton Control Act and introduction of quality based pricing system for seed and lint cotton Provinces Future Strategy

Sr. No. IssueProposed MeasureExecuting Department 9Cotton Leaf Curl Virus (CLCV), prevailing from last 27 years Research Funds be allocated for not only CLCV control but other cotton related measures such as Extra Long Staple, heat and drought tolerance, water and pesticide efficiency etc Finance Division 10Stringent Regulatory Regime (27 regulations of different kinds) for monitoring and inspecting of operations of units. There are also a variety of local levies which increase cost of doing business Simplification of procedures and collection of levies; One Window Operation Federal and Provincial Governments Future Strategy

Sr. No. IssueProposed MeasureExecuting Department 11Facilitation to Exporters GSP Plus Cell to monitor performance and to facilitate the exporters Textile Industry Division 12MarketingDedicated Textiles and Clothing Events be held in EU countries and in Pakistan Textile Industry Division/TDAP/Com merce Division Special Funds to be allocated by Finance Division Future Strategy