VZCZCXRO1743
RR RUEHLH RUEHPW
DE RUEHIL #4208/01 2720923
ZNR UUUUU ZZH
R 290923Z SEP 07
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 2075
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 4103
RUEHNE/AMEMBASSY NEW DELHI 1860
RUEHKA/AMEMBASSY DHAKA 2230
RUEHLM/AMEMBASSY COLOMBO 1437
RUEHLO/AMEMBASSY LONDON 6391
RUEHML/AMEMBASSY MANILA 2875
RUEHKP/AMCONSUL KARACHI 7506
RUEHLH/AMCONSUL LAHORE 3560
RUEHPW/AMCONSUL PESHAWAR 2041
RUEHDO/AMEMBASSY DOHA 1441

UNCLAS SECTION 01 OF 05 ISLAMABAD 004208 
 
SIPDIS 
 
STATE FOR SCA/PB, EB/TPP, EB/IFD/OIA, AND EB/IFD/OMA 
USAID FOR ANE MWARD 
TREASURY FOR OSSA 
COMMERCE FOR ANESA/OSA 
MANILA PASS USED AT ADB 
STATE PASS USTR FOR RGERBER, DHARTWICK 
DOHA FOR PEASLEE 
 
SENSITIVE 
SIPDIS 
 
E.O.  12958:  N/A 
TAGS: ETRD ECON EINV PK
SUBJECT:   PAKISTAN'S TEXTILE EXPORTS DROP; COMPETITIVENESS AN ISSUE 
 
REF:  STATE 114799 
 
Summary 
- - - - - - - 
 
¶1.  (SBU)  Textiles and apparel account for 38 percent of Pakistan's 
total industrial production but almost 2/3 of exports. Despite $6 
billion in investment in the textile sector in the last six years, 
textile exports growth slowed down in FY07 to just 5.2 percent 
versus last year's 16.8 percent. Textile exporters attribute the 
slowdown to high utility charges, low labor productivity, 
competition from India, China, Bangladesh and Sri Lanka and high 
cotton prices. While Pakistan provides various tax breaks and duty 
concessions to the textile industry, GOP officials maintain that it 
is unable to remain competitive in the world market due to inability 
to match textile sector subsidies by the governments of India, 
Bangladesh and China. 
 
¶2.  (SBU)  Pakistan is a beneficiary of various preference programs 
including a FTA with China that extends duty free access to most 
textiles and apparel, the South Asian Free Trade Area and EU GSP 
program.  However, high production costs and a focus on low value 
products mean that Pakistan is unable to take full advantage of the 
current preference programs.  GOP officials allege that its 
exclusion from the EU's GSP-Plus program favors Bangladesh and Sri 
Lanka over Pakistan. Pakistan exports mostly raw material and yarn 
to China rather than manufactured products.  However, U.S and EU 
safeguards on Chinese textiles have helped Pakistani exports, but 
their expiration in 2008 may further hit market share and stunt 
potential growth. 
 
Textile and Apparel Production 
- - - - - - - - - - - - - - - - - - - - - - 
 
¶3.  (U)  Pakistan's textile and apparel production was  $12.04 
billion, or 38 percent of  total industrial production of $26.18 
billion, for the Pakistani fiscal year 2006-2007 which ended June 
¶30.  This represents a 2.1 percent decrease over the previous fiscal 
year.  The industrial sector employed approximately 6.9 million 
workers; the textile industry's share of industrial employment was 
estimated at 38 percent, or 2.6 million.  The GOP estimated total 
textile sector employment at 16 million, which includes cotton 
farmers and ginners.  In FY07, textiles' share of total exports was 
63.2 percent. 
 
Mixed Price Trends 
------------------------ 
 
¶4.  (U)  Textile price trends were mixed, with the value of some 
export categories rising while others declined.  From FY06 to FY07, 
the price of cotton yarn increased by 2.9 percent, while knitwear 
.prices increased by 1.79 percent.  During the same period, prices 
for Pakistani bed linens dropped by 1.28 percent, while readymade 
garment prices fell by 3.92 percent.  The price of cotton cloth, 
however, increased by 15.1 percent.   The GOP calculated that unit 
price drops in major textile exports from July 2006 to April 2007, 
compared to a year earlier, translated into a loss of $484 million 
in export revenue. 
 
¶5.  (SBU)  GOP interlocutors attributed the price decline to 
competition from low-priced Chinese, Indian and Bangladeshi 
textiles, increases in prima cotton prices used in the production of 
bed wear and garments and use of contaminated domestic cotton. 
(Comment:  In some cases, cotton producers do not remove foreign 
materials during the cotton and seed separation process.  These 
materials (e.g. hair, dust, pieces of cloth) are then incorporated 
into the thread and cloth.  No data is available regarding the 
magnitude of this problem or export revenue foregone because of 
low-priced contaminated cotton.  End comment.)  The GOP has begun a 
small-scale program to encourage farmers to clean cotton properly. 
Pakistan receives very little foreign direct investment in the 
 
ISLAMABAD 00004208  002 OF 005 
 
 
textile and apparel sector - less than $50 million, or 1.2 percent 
of total FDI between July 2006 and April 2007. 
 
Textile Export Performance Falters 
- - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶6.   (SBU)  More than 24 months after the end of the Multi Fiber 
agreement, Pakistan's exports decreased in FY2006-07. After 16.8 
percent YoY growth in FY06, textile exports increased only by 5.2 
percent to $10.75 billion in FY07.    Even star categories like 
cotton cloth exports (11.8 percent of total exports) dropped by 4.3 
percent and bed linens exports (11.5 percent of total exports) 
slumped by 3.9 percent.  However, finished garment exports increased 
by 5.3 percent and knitwear exports increased by 12.1 percent. Yarn 
exports, principally to China, Bangladesh and Sri Lanka, were up by 
3.1 percent. Increased competition principally from China, India, 
Bangladesh and Turkey, combined with Pakistan's focus on lower value 
added products are reasons for this mixed picture. 
 
¶7.  (SBU)  Pakistan only had limited success in diversifying its 
exports beyond the textile sector.  Textiles increased as a share of 
total exports from 62.1 in FY06 to 63.2 percent in FY07.  Pakistani 
textile exports to the U.S. dropped by 4.5 percent, compared to 
China (up 27.3%) and India (down 0.6 %) during January-July 2007. 
The removal of   safeguard measures by the U.S. and EU on textile 
exports from China in 2008 will further hit Pakistan's textile 
exports.  (Comment:  In our conversation with GOP trade and finance 
officials, we've noted a lack of planning for what will happen once 
the China safeguards expire in 2008.  End comment.) 
 
¶8.  (SBU)  Pakistan's private sector has invested $6 billion in the 
textile industry over the last six years: 47 percent to the spinning 
sector and only 15 percent to the weaving sector. Neither sector is 
at full capacity.  Very little of this investment has gone into the 
value added sectors, such as garments and home textiles.  However 
the few, large firms which have invested in these products are 
highly automated, comply with international labor and environmental 
standards, and are very profitable.  However, they are worried about 
competition from China following safeguards expiration.  Moreover, 
Pakistan's Textile Ministry sources do not believe the sector will 
be able to sustain this level of investment because of rising 
interest rates. 
 
¶9.  (SBU)  Pakistan has enjoyed a comparative advantage in textile 
categories, including bed linens, cotton fabrics, denim jeans, and 
knitted shirts; however, India is entering into these areas and is 
becoming more competitive. Textile Ministry officials told us that 
India provides Rs.350 billion (USD 7.2 billion) in subsidies to its 
textile sector and has identified it as a major employment 
generation sector.  Compared to India, Pakistan's textile industry 
faces high utility prices, low labor productivity, and energy 
shortages, which make its products less competitive.  GOP officials 
regularly acknowledge that Pakistan's overall textile industry also 
focuses more on low end products finished goods export market. The 
lack of brand ownership and export quality are impediments to moving 
up in value added chain. However, any move to the high end market 
will require new investment in high tech plants that comply with 
international environmental and labor standards, which is unlikely 
for the small family firms which still dominate Pakistan's textile 
sector. 
 
Chinese textile safeguards help Pakistan 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶10.  (SBU)  U.S and EU safeguard measures on Chinese textile and 
apparel exports have opened export opportunities for Pakistan in 
certain  categories, including socks, ladies' outer garments, cotton 
trousers and cotton tee shirts.  Pakistan, however, is not 
competitive in many of the 34 categories of the U.S.- China 
safeguard agreement.  Pakistan has not imposed any safeguard 
measures on Chinese textile imports, nor is it contemplating any 
such measures. In fact, Pakistan and China signed an FTA in November 
 
ISLAMABAD 00004208  003 OF 005 
 
 
2006, which permits duty-free imports of most of Chinese textiles 
into Pakistan. Pakistan is importing raw cotton, filament yarn, 
woven fabrics, apparel and finding and trimmings., knitted fabrics 
and hosiery from China.  China mostly imports raw cotton, cotton 
yarn, cotton thread and grey fabrics from Pakistan. 
 
¶11. (SBU)  According to Textile Ministry sources, some 30 of 525 
spinning factories closed within the last fiscal year. Mostly 
unskilled labor lost jobs due to these closures.  Belated GOP 
efforts to boost vocational training have not kept up with demand 
for skilled textile workers, and Pakistan continues to experience 
shortages of skilled workers and mid-level managers.  The GOP 
recently increased the national minimum wage from 4000 ($65.57) per 
month to 4600 rupees ($75.40) per month. 
 
¶12.   Pakistan's labor legislation is generally consistent with the 
core ILO conventions, but enforcement is spotty, due to a lack of 
capacity.   Better working conditions, pay, work schedules, 
maternity leave and other similar issues tend to be concentrated in 
the export sector.  Very few plants, however, are unionized.  The 
government is amending its labor laws and factories acts to bring 
textile exporters into compliance with ILO standards. However, labor 
laws do not apply in EPZs. The Labor Ministry is working on labor 
regulations for EPZs with the help of Asian Development Bank.  Labor 
laws do apply in industrial parks. 
 
Initiatives Undertaken to Increase Pakistan's Textile 
Competitiveness 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
- - - - - - - - - - - - - - 
 
¶13.  (SBU)  The GOP and private sector have undertaken a number of 
initiatives to improve the industry's competitiveness.  The State 
Bank of Pakistan is providing long-term financing for 
export-oriented projects at 7 and 6 percent, respectively, for 
7-year and 3-year periods (well below current market interest rates 
of 12 to 13 percent).  A research and development subsidy of 6 
percent of the export value given two years back for ready-made 
garments and knitwear exports will continue this year. In addition, 
a research and development subsidy has also been provided to exports 
of dyed/printed fabrics and home textiles at 3 percent of export 
value, and to dyed/printed home textiles at 5 percent of export 
value.  The purpose of these research and development subsidies is 
to improve quality and to increase market share. The GOP considers 
that its R&D subsidies are WTO-consistent. 
 
¶14.  (SBU) The GOP is constructing textile/apparel industrial parks 
in Karachi, (completed by the end of this year), Lahore, and 
Faisalabad (both to be completed by the mid-2008).  The GOP still 
has not established tax break and duty incentives. The Commerce 
Ministry has advised the GOP that such a package would violate WTO 
rules. These new parks will provide infrastructure and utilities. 
By contrast, Pakistan's EPZs offer infrastructure facilities along 
with the tax and duty concessions on exports.  The GOP has also 
eliminated the sales tax on the import and local supply of raw 
materials utilized in the entire textile manufacturing process and 
the import duties on the raw materials, sub-components and 
components used in the manufacturing of textile machinery for the 
production of textile products. Custom duties, sales tax and other 
taxes on imported raw materials for the manufacture of textile 
products have been eliminated to avoid the need for duty drawback 
and refund claims under the revised and simplified 
Duty Drawback Scheme for all textile producers. 
 
Pakistan a Textile Preference Program Beneficiary 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
- 
 
¶15.  (SBU)  Pakistan is a beneficiary of various textile preference 
programs. China provides Pakistan with duty free access for its 
textiles under their bilateral Free Trade Agreement, which came into 
force in July 2007.  According to Pakistan's Textile Ministry, China 
 
ISLAMABAD 00004208  004 OF 005 
 
 
is mostly importing raw materials such as cotton yarn, grey fabrics 
and unprocessed fabrics from Pakistan, rather than the higher value 
finished items. Pakistan is importing raw cotton, filament yarn, 
woven fabrics, apparel and clothing accessories, knitted fabrics and 
hosiery from China. 
 
¶16.  (SBU)  Most Pakistani textiles and apparel are beneficiaries of 
the EU's regular GSP program since January 2006. This program gives 
a 20 percent reduction in MFN duties for textiles. This program, 
however, does not compare favorably with the GSP-Plus concessions 
granted to other countries.  (Comment:  The EU's GSP Plus Program 
extends duty free treatment to textile products and also covers 
larger number of commodities compared to the EU's regular GSP 
program.  End Comment.) GOP officials maintain that Bangladesh's and 
Sri Lanka's EU GSP-plus status gives their products a competitive 
advantage. The EU also imposed 13.1 percent anti-dumping duty on 
Pakistani bed linen, which was subsequently reduced to 5.8 percent 
after consultations. Pakistan has not taken this case to the WTO 
because consultations are on-going.  The GOP is pessimistic that it 
will be able to remain competitive in U.S. and EU markets, where 
Pakistani textiles face 12-18 percent duties compared to tariff 
treatment under NAFTA, AGOA, and CAFTA beneficiaries receive. 
Pakistan also has a free trade agreement with Sri Lanka, but 
textiles are excluded.   The South Asian Free Trade Agreement also 
extends duty free treatment to textiles but stringent non-tariff 
barriers effectively prohibit textile trade. 
 
 
Private Sector View 
- - - - - - - - - - - - - - 
¶17.  (SBU) All Pakistan Textile Mills Association (APTMA, which 
represents the producers of the yarn and fabrics) expressed its 
concern over last year's textile export performance. Textile exports 
fell short of the target by $600-700 million in FY06-07. They 
attributed the poor performance to rise in production costs, due to 
high cotton prices (70 percent of production costs) and expensive 
utilities (10 percent of production costs).  Currently Pakistan 
consumes 16 million bales of cotton, but only produces 13 million 
bales (Pakistan imported high quality prima cotton from U.S. 
amounting to $117.8 million in 2006.), thus driving up the overall 
price for production. APTMA also attributed slow growth in the 
textile sector to India and Bangladesh's textile sector subsidies 
and the EU GSP-plus trade preferences for Bangladesh and Sri Lanka. 
In addition, interest rates have always been crucial for Pakistan's 
highly leveraged textile industry. Tightening monetary policy has 
made it more difficult for textile manufacturers to repay the loans 
they took out in the era of cheaper money (When interest rates are 
low, Pakistani banks usually advance loans on floating interest 
rates.). 
 
¶18.  (SBU)  The All Pakistan Readymade Garments Association sources 
said that the readymade garment sector had seen an increase in 
orders and enjoyed good growth prospects in the post-quota regime. 
However, they also expressed concern about inadequate 
infrastructure, high utility prices and bureaucratic problems such 
as procedural delays and red tape from Ministries of Finance, 
Commerce and Customs which prevent the sector from realizing its 
full potential. The Association especially appreciated the GOP Trade 
Policy initiative that provides for granting export processing zone 
status to those garment units that export 70 percent of their 
production. 
 
Comment 
- - - - - - - 
 
¶19.  (SBU)  With textiles comprising nearly two-thirds of Pakistan's 
export market, the GOP is right to be concerned about the 
performance of this sector.  We were told in July that the part of 
the explanation for the drop in exports is the phase out of certain 
subsidies including duty and tax refund programs (which were being 
misused by small exporters) and their replacement with no duty/no 
drawback.  However, the decreasing competitiveness of the sector, 
 
ISLAMABAD 00004208  005 OF 005 
 
 
sizeable subsidy programs in competitor countries, and greater EU 
trade preferences for key regional competitors are the primary 
causes for the drop in exports.  We continue to be struck by the 
lack of planning and consideration for what could happen once the 
U.S. China safeguards expire.  We are hopeful the passage of the 
Reconstruction Opportunity Zone (ROZ) legislation and possible 
establishment of textile plants in the ROZs will help increase 
exports.  But the GOP and the textile sector need to focus on 
training, energy needs, infrastructure, and supply and 
competitiveness issues in order to maintain current market shares. 
End comment.