LAHORE, Pakistan — The textile industry here is primed to benefit in the new year from the Generalized System of Preferences Plus status granted to Pakistan by the European Union this month.

This story first appeared in the December 31, 2013 issue of WWD. Subscribe Today.

The deal gives 3,500 Pakistani products duty-free or preferential rate status for exports to the European market for three years beginning Wednesday, although it still faces competition from Asian neighbors.

The benefit covers 90 percent of Pakistan’s exports to 27 countries of the EU, with 67 percent of the products textile-related. The GSP Plus status will allow almost 20 percent of Pakistani exports to enter the EU market at zero tariff and 70 percent at low preferential rates. Pakistani textile exports to the EU now attract an average 11 percent duty. Apparel products from Pakistan, including denim jeans and knitwear, will enjoy a savings of 9.6 percent.

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GSP Plus status was conditional to ratification and implementation of 27 conventions on human and labor rights; governance issues such as terrorism, narcotics and money laundering, and development issues like environmental concerns. Pakistan has ratified these conventions and falls under the EU’s stipulation that countries having a vulnerable trade profile benefit from this plan. It is reported that 50,000 Pakistanis have died in the 12-year war on terror. Finance Minister Ishaq Dar has put the financial cost to the nation at $100 billion.

“Every $1 billion of extra textile exports will create 100,000 jobs for the workforce,” said Chief Minister Punjab Shahbaz Sharif.

According to Pakistan Readymade Garments Association estimates, the increase in Pakistan’s textile exports will be $580 million to $700 million in the first year, with knitted and woven apparel to increase $280 million in the same period.

Mills are utilizing and converting idle capacities in anticipation of the added business opportunity. Bashir Ali Mohammad, chairman of one of the country’s largest composite mills, Gul Ahmed, based in Karachi, said that the capacity of woven apparel mills such as Gul Ahmed is already booked six months ahead.

Last year, Nishat Mills, another large composite mill, converted a home textile unit to woven apparel manufacturing.

Shahid Butt, director of Shahkam Industries, a Lahore knitwear mill producing 75,000 dozen garments monthly, said, “Mills will have to expand to cash in on this opportunity.”

The escalating cost of energy is another issue. “The price of gas has just been raised by 30 percent, and our electricity bill has also gone up this year,” he said.

Ijaz Nabi, adviser to the Punjab Chief Minister, said the government is going to fulfill the industry’s requirements by providing infrastructure support to maximize the benefits from GSP Plus status and ease constraints. Sharif said that Garment City, being developed on the outskirts of Lahore, will benefit small and medium-size enterprises, provide training programs for textile workers, expedite Customs procedures for the import of raw materials and provide other measures to help the textile and garment industry.

“Shahkam’s EU export is 10 percent currently, but I envision it increasing to more than 20 percent in the next three years,” he said. “Since the Europeans will save duty, they will offer us a better price, giving mills options. The price for U.S. importers will increase.”

Nabi said the enhanced trade status will help Pakistan better compete with countries in the region such as China, Bangladesh, Sri Lanka and India.

“Importers go to Bangladesh for the lower price. With GSP Plus, European importers will be diverted to Pakistan for a better garment product, such as finished denim, fancier knits, washes, prints and embroideries, and heavier knits like terry and fleece, as the price offered by the two countries will be closely matched,” said Azfar Hasan, president of Matrix Sourcing in Lahore, which also sources out of Bangladesh for major international brands.

Another advantage is lead time. Since Pakistan uses local fabric for apparel, it cuts lead time to only 45 days, versus 90 to 120 days in Bangladesh, where fabric is imported, said Hasan.

“Increased EU business will refresh the Pakistan industry,” Hasan said.

Utilizing idle capacity will absorb mill overheads, so product price and availability will remain the same for U.S. importers. Expansion of mills next year should bring product prices down for all importers. Moreover, mills will gain know-how by making better and more fashion-forward European products, which they can also supply to U.S. importers.