Retaining export competitiveness through traceability

Traceability has become essential in the modern textile supply chain as buyers increasingly demand transparency, sustainability, and compliance with their countries’ regulations. It involves tracking a product’s journey from raw material to the final garment.

Beyond meeting international standards, traceability can safeguard labor rights, promote environmentally sound and ethical practices, and enable Pakistan to effectively address persistent issues of tax evasion, Golmaal, and flying invoices.

The EU, the UK and the US, key markets for Pakistan’s textile exports, are increasingly demanding traceability to ensure sustainable sourcing. Together, they accounted for a significant 50 percent share of Pakistan’s total export earnings during FY 2024. Compliance with their traceability standards is essential for retaining market access and sustaining Pakistan’s exports.

A lack of traceability will immediately impact a whopping 75 percent of textile exports directed to these markets and put the remaining 25 percent at risk as global requirements become more stringent (Figure 1b). Over time, the other half of exports to countries outside these three key markets (Figure 1a) will face similar challenges as global standards continue to tighten.

While there are over 30 emerging legislations across the EU and the US focusing on due diligence, consumer claims, and transparency, the EU alone has enacted 16 legislations specifically addressing supply chain accountability. Among the EU directives concerning the value chain, traceability will become crucial for all suppliers under its Green Deal: Circular Economy Action Plan. A key component, the Digital Product Passport (DPP), mandates suppliers to provide exact information on products, processes, and stakeholders.

Meanwhile, the US has raised concerns about sourcing from countries linked to the Uyghur region in China over forced labor issues. Given the highly integrated regional textile supply chain and the reliance of Asian countries on inputs from China, traceability has become critical as companies face limited time to prove compliance.

Shifts in the EU and US textile and apparel market

US fashion companies are diversifying their sourcing beyond China, with the US Fashion Industry Association’s 2024 benchmarking study showing that buyers now rely on at least 40 percent of their sourcing value from other Asian countries. About 11-30 percent of orders come from large-scale suppliers like Vietnam, Bangladesh, and India, while 1-10 percent come from smaller countries (by manufacturing capacity) such as Cambodia, Indonesia, and Pakistan. This shift away from China signals that the EU and US are prioritising traceability as a condition for market access.

The data indicates a surge in EU textile and apparel imports from all countries except China, which have plummeted by over 38 percent since 2020 (Figure 2a). The surge in imports from other Asian countries can be attributed to their market access through the GSP arrangement.

Beneficiary countries are required to comply with the core principles of 15 fundamental conventions on human and labor rights (Standard GSP and EBA), while GSP+ beneficiaries must implement international conventions on environmental protection and good governance, in addition to the aforementioned 15 conventions.

In contrast, the decline in imports from China highlights the EU’s increasing concerns regarding the Due Diligence and Corporate Sustainability directives.

Similarly, US textile and apparel imports have declined from all suppliers (Figure 2b), with the sharpest drop observed from China (-20.3 percent). Since the enactment of the Uyghur Forced Labor Prevention Act (UFLPA) in 2021, traceability, transparency, and sourcing strategies have become critical, as both the US and EU emphasize their commitment to improving working conditions and enforcing human rights due diligence across the value chain.

Impact of Bangladesh’s political challenges on its RMG sector and opportunities for Pakistan

Escalating political tensions and unrest in Bangladesh have caused 30 percent of deliveries scheduled from December 2024 to March 2025 to be redirected to India, Vietnam, Sri Lanka, Indonesia, and Pakistan. The instability has deterred buyers from visiting Bangladesh, leading to factory shutdowns and job losses. Pakistan is strategically positioned to capitalise on these shifts in the short and long term. However, to actualize this opportunity, the country must go beyond only focusing on cost competitiveness.

By prioritising traceability, Pakistan can attract buyers seeking reliable supply chains and gain a first-mover advantage in the region.

The critical need for traceability in ensuring transparency and combating tax evasion

Pakistan’s textile value chain is 80 percent fragmented, highlighting the need for an integrated traceability system. While initiatives like Better Cotton, Loop Trace, and Fiber Trace have been adopted by many large manufacturers to comply with international standards, their effectiveness remains limited without national implementation across the entire value chain, including SMEs.

Establishing traceability as a legal requirement and designating a single regulatory authority are crucial for boosting exports and strengthening the national economy, especially considering the EU’s DPP, the USA’s diversification strategy, and the persistent menace of Golmaal in the country.

An integrated traceability system not only reinforces compliance with international standards but also strengthens tax collection.

According to the FBR, around 1.5 million cotton bales remain outside the tax net each year, indicating that up to 15 percent of cotton output goes unrecorded to evade sales tax on both cotton bales and seeds. In FY 2024, this resulted in an estimated loss of Rs 28.4 billion in sales tax revenue on cotton bales, with additional losses on cotton seeds.

A traceability system could have increased sales tax revenue on cotton bales from Rs 143.2 billion to Rs 172 billion. It is crucial to understand that the sales tax loss on cotton bales accumulate at every stage of the value addition process.

Addressing tax evasion is only one part of the solution. Misuse of the EFS is another challenge that needs to be tackled. Following the removal of exemptions on local supplies under the EFS, some textile players have exploited the scheme by importing cheaper yarn and selling it domestically instead of re-exporting it.

As a result, duty-free yarn imports surged by 422 percent during July-August FY 2025 compared to the same period of last year. To address this issue, random DNA testing at ports is essential to verify whether inputs imported under the EFS are processed and re-exported as claimed. Establishing an in-house DNA testing lab is crucial to facilitate this testing and to counteract the misuse of the EFS, the perpetual challenge of Golmaal, and the prevalence of flying invoices.

While addressing tax evasion and EFS misuse is vital, the overarching challenge of enforcement persists. Instead of confronting the underlying causes of tax evasion, the FBR has initiated an unsubstantiated crackdown on textile manufacturers over alleged sales tax fraud. These actions not only damage the industry’s reputation but also erode international business confidence and negatively impact exports.

Authorities should instead prioritise making traceability mandatory to promote transparency and ensure compliance with sales tax regulations.

Enhancing cotton quality and market access through traceability

In addition to enhancing tax compliance and curbing misuse of schemes, implementing traceability systems helps combat the use of fake or uncertified cotton seeds by promoting accountability in the supply chain.

Covering cotton’s origin, type, and breed has become crucial, as it improves transparency and enables farmers to secure premium prices and fair compensation for their certified produce, whether organic or regenerative. Improving Pakistan’s cotton grading system is also essential.

Currently, grading relies on manual inspections, while countries like the US, Australia, and Egypt employ automated systems such as the High-Volume Instrument (HVI) to measure fiber fineness, staple length, uniformity, tensile strength, color grade, and trash content.

By integrating traceability with automated grading, Pakistan can enhance cotton quality, increase production, and expand market access. This is particularly critical given the country’s reliance on imported long-staple cotton from the US and Brazil for value-added textiles.

The need for an integrated traceability system in Pakistan: a call to action

To effectively trace products in the value chain, Pakistan must develop a comprehensive ecosystem that integrates data using barcodes and RFID technology. Meeting US market requirements for identifying the origin of cotton necessitates adopting advanced forensic methods, such as isotope and DNA testing.

Additionally, to comply with the EU’s stringent monitoring of GMOs and accurately identify cotton varieties, establishing a dedicated DNA testing lab is crucial.

In 2023, APTMA partnered with the Ministry of Commerce (MoC) to establish the National Compliance Centre (NCC) to streamline international compliance and traceability requirements. However, despite being more than a year since its inauguration, the need for robust traceability remains urgent.

APTMA has proposed setting up a DNA testing lab at the National Textile University (NTU) through the Export Development Fund to improve tracking capabilities and enhance Pakistan’s global reputation. While large-scale manufacturers have implemented individual traceability systems, these efforts remain limited without integration with the Integrated Risk Management System (IRMS).

Therefore, making traceability a mandatory legal requirement for all exporters and designating the NCC as the primary authority for monitoring compliance is essential. The MoC will oversee the NCC, which will issue DPP to the exporters based on compliance.

If successfully implemented, this initiative will enhance Pakistan’s capacity for transparency, compliance, and export growth, marking a significant milestone in the country’s textile industry.

Traceability as a cornerstone for future exports:

With regulations like the EU’s DPP and U.S. scrutiny over forced labor, traceability has transitioned from being a value-add to a necessity. In simple terms, without traceability, exports to the West will cease. Compliance with these standards is essential for sustaining national revenue and improving Pakistan’s reputation among international stakeholders.

Implementing the proposed traceability framework can help Pakistan recover lost sales tax revenue and attract orders moving away from China and Bangladesh. Additionally, it can help reduce production costs and enhance capacity through increased orders.

This presents a timely opportunity for Pakistan to leverage shifting global sourcing trends driven by US and EU policies. Therefore, it is essential for authorities to act proactively rather than waiting to react to external pressures.

Copyright Business Recorder, 2024