Tea leaves of trade

Published January 4, 2021
Pakistan’s eggs belong to the textile market when it comes to exports.
Pakistan’s eggs belong to the textile market when it comes to exports.

Predictions, forecasts, voodoo economics and crystal balls. This time last year, same as every year, mumbo jumbo about hopes of economic recovery and higher export figures was sprouted by every stakeholder, along with the usual rhetoric of government support and incentives. Yet, as policymakers, economists and journalists keep an eye on the future, one reads tea leaves of what the trade scenario of this year ought to be.

By one estimate, global trade was down by 18.5 per cent in the second quarter of 2020. Potentially, the biggest fallout from the pandemic was limiting trading opportunities with the developing world as growing protectionism in more advanced economies is dressed up as national security protection.

Keeping the reverberations of the pandemic aside, 2020 was historic in other terms as well that will influence broad global trends and impact Pakistan’s exports in 2021 as well as the years to come.

The China effect

Between Trump and the pandemic, the era of just-in-time global supply chains is being questioned but the economic incentive to outsource still prevails.

According to AmCham Shanghai 2020 China Business Report, American manufacturers are not considering to shift back to the US but are mulling over shifting production to other lower-wage countries. According to the New York Times, Samsung, Hasbro, Apple, Nintendo and GoPro are relocating to countries with lower wages.

Samsung and Apple have shown interest in India, reports its media. The government has announced a production-linked incentive scheme for large scale electronics manufacturing which will later be extended to other sectors such as textiles.

While Pakistan’s textile sector has managed to route home some orders it faces a lot of competition from regional players for foreign direct investment (FDI) by other low-wage countries.

India’s bounce back

Others’ losses are Pakistan’s gains. Relatively less hit by the pandemic, Pakistan’s outbound shipments grew at a faster pace than Bangladesh and India as textiles led the country’s recovery. Garment manufacturers are operating near-maximum capacity as this windfall came on top of the China-US trade war which helped divert orders to Pakistan as well.

However, despite the high number of cases, India in September 2020 was among the small group of countries that reported a year-on-year increase in the value of exports. In April 2020, its exports fell by a whopping 61 per cent year-on-year but by September had recovered to rising by 6pc compared to the same month in 2019.

According to India’s National Investment Promotion & Facilitation Agency, it has become the second-largest manufacturer of personal protective equipment (PPE) in the world. More than 600 companies are certified to produce PPE whose global market worth is expected to be more than $92.5 billion by 2025, up from $52.7bn in 2019. Even though it was badly hit by the pandemic in 2020, FDI into the textiles and apparel industry was $3.45bn. And the country is eyeing exports of $300bn in textiles and apparel by 2024-25.

So the question remains whether Pakistan can retain its orders in the post-pandemic world.

Brexit

As yet, every indication points to the UK continuing to provide the preferential access that Pakistan has to the EU under GSP Plus.

But things may not be as simple as that.

For example, Pakistan’s Basmati rice exports increased to the EU after stricter standards made Indian exports less tenable. EU’s basmati imports were nearly $2bn in 2019 with the UK being the third-largest importer in the bloc, after France and Germany. However, softening of stance on standards would allow India to regain its share of the pie. With Pakistan’s basmati rice geographical indication tagging already hanging in the balance, 2021 maybe a year of scrambling to maintain market share.

The UK appears to be amongst the most adversely affected countries since it has to contend with Brexit as well as the pandemic. Bloomberg Economics estimates that the UK’s growth rate will be half a percentage point lower per year for the next decade than it would have been had it remained part of the EU. Since the UK is the most important textile market for Pakistan (after the US), this could lower demand.

Furthermore, oil-based synthetic fibres have the lion’s share compared to cotton, with a ratio of 70:30. Man-made fibres are cheaper, environment-friendly and more durable and lower oil prices will make polyester more competitive in a market where consumers may have decreased purchasing power. Nevertheless, Pakistan’s textile exports continue to be heavily cotton based.

Iran, Trump & Biden

Lack of banking channels meant the bulk of trade with Iran was through the informal economy even without sanctions. However, Trump’s harsh measures increased Iran’s proximity to China. Both countries have signed a 25-year comprehensive partnership under which China will invest $400 billion in Iran.

Without banking channels, Pakistan can little benefit from its oil-rich basmati-rice-eating neighbour. However, better ties with Iran under Biden and China’s increasing involvement may open channels if not in 2021 then in the years to come.

Pakistan’s eggs belong to the textile market when it comes to exports. Running on the pandemic and trade war fumes, 2021 may continue to be a good year for textiles, even if the trend does not continue further down the road.

Published in Dawn, The Business and Finance Weekly, January 4th, 2021

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