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Bangladesh’s LDC graduation: challenges and way forward for RMG

Bangladesh has met, for the second time, all the three criteria for graduating from the Least Developed Country (LDC) and if everything goes right, will finally be graduated in 2026. The remarkable socio-economic development in the last decade has made Bangladesh eligible for this graduation. Graduation from the LDC group would mean relinquishing a wide variety of preferences and privileges currently enjoyed by Bangladesh.

Bangladesh-LDC-graduation-challenges-way-forward-RMG
Figure 1: RMG will face the largest part of post-LDC graduation loss as it constitutes the lion’s share of the country’s total export.

As an LDC, the facilities Bangladesh enjoys can be classified into three groups: (i) preferential treatment, (ii) development assistance and technical cooperation and (iii) general support and other forms of assistance. The most severe shock is supposed to be felt in the country’s flagship sector, the export-oriented RMG industry: what will be the possible repercussion for LDC graduation on this sector?

In no sector will the implications of Bangladesh’s LDC graduation be felt more acutely, and in such impactful ways, as the RMG sector. Not only because the sector accounts for more than four-fifths of Bangladesh’s total export earnings, but also because RMG faces tariff peaks in almost all key markets of Bangladesh. For example, tariffs facing Bangladesh’s apparel are, on average, about 12 percent in the EU and 16-18 percent in Canada. Accordingly, the depth of preference erosion will be significantly high in the case of exports of RMG items from Bangladesh.

The Generalized System of Preferences (GSP) provides duty-free quota-free (DFQF) market access for Bangladesh. Under the “Everything but Arms” (EBA) initiative, the EU grants DFQF. The country may experience shortfall of 8-10% of its gross export revenue due to loss of DFQF which is almost $2.5 billion annually.

RMG will face the largest part of this loss as it constitutes the lion’s share of the country’s total export. According to the WTO Agreement on Subsidies and Countervailing Measures (SCM), Bangladesh will lose the flexibility to offer export incentives and subsidies to the exporters. In this context, the incentives the RMG industry is enjoying currently will no longer be available and that will pose pressure on the competitiveness and profitability of Bangladeshi companies.

Bangladesh-regional-trading-arrangements
Figure 2: Bangladesh should design appropriate strategies and take the needed preparatory steps towards sustainable LDC graduation and sustainable transition of its RMG sector.

After graduation, Bangladesh may get access to GSP+ facility in the European market. But it requires ratification of 27 international conventions (7 UN conventions on human rights, 8 ILO conventions on labor rights, 8 conventions on environment protection and 4 conventions on good governance) and two numerical criteria. Rules of origin (RoO) for preferential access of apparel exported by the LDCs tend to be highly LDC-friendly (e.g. only a single-stage conversion requirement in the EU and a flat 25% domestic value addition requirement in Canada).

Graduation to a developing country will mean that the RoO are going to be more stringent which will create new challenges for RMG sector. There will also be implications in the form of preference erosion currently enjoyed by Bangladesh as a member of regional trading arrangements such as the South Asia Free Trade Area (SAFTA), where India, for example, offers DFQF market access to the four LDC members for all products including the apparels or the LDC scheme run by China.

Some competitors of Bangladesh are going for aggressive regional trading arrangements (RTAs), with serious implications for our RMG sector. For example, the Vietnam-EU FTA will allow Vietnam, a major competitor of Bangladesh, duty free access to the European market. This will eliminate the preferential margin that Bangladesh currently enjoys vis-à-vis Vietnam, a developing country, in the EU market. Indeed, there may be a time, beyond 2027, when Vietnam’s apparels would have duty-free access to the EU market while apparels exported by Bangladesh would need to enter duty-paid (if the current scenario prevails).

RMG competitiveness will also be impacted by indirect factors. For example, LDC graduation will have implications arising from stringent compliance requirements under the trade-related intellectual property rights (TRIPS) of the WTO, as also from changes in the support from the enhanced integrated framework (EIF) and the various special and differential treatment of the WTO. The RMG sector has been benefited from the technical assistance and capacity-building support received by Bangladesh as an LDC; these will no longer be available after graduation.

Meanwhile, minimum wages in the RMG sector will, justifiably, continue to rise at a time when the sector will be facing the challenges mentioned above. Cost of borrowing is rising already because of its recently acquired middle-income country status; competing development demands and prevailing domestic resource mobilization performance could mean that fiscal space for the type of incentives that the RMG sector has been traditionally enjoying could shrink in future.

Bangladesh should design appropriate strategies and take the needed preparatory steps towards sustainable LDC graduation and sustainable transition of its RMG sector. For ensuring a sustainable and robust future for the RMG sector, aligned with the aspiration of Bangladesh for LDC graduation, all concerned stakeholders will have to do the needed homework and start preparing for the post-2026 future of the RMG sector.

Bangladesh-RMG-entrepreneurs-collaborative-effort-post-LDC
Figure 3: To address the graduation challenges, RMG entrepreneurs and policymakers of Bangladesh has to make a collaborative effort.

To address the graduation challenges, RMG entrepreneurs and policymakers of Bangladesh has to make a collaborative effort. Government should concentrate on securing GSP+ facilities in the EU market by ratifying 27 conventions mentioned earlier. Economic diplomacy of the country needs to be strengthened to convince the EU authority to widen its import threshold.

The country should diversify its preference effort beyond WTO. As Bangladesh has committed to achieving SDGs within 2030, it can approach to United Nations Conference on Trade and Development (UNCTAD) and Enhanced Integrated Framework (EIF) for more trade-related preference opportunities under SDG framework.

According to the Asian Productivity Organization, per hour labor productivity of Bangladesh is $3.4 which is lower than average productivity of other competing countries. It is important to strengthen productive and labor productivity of the country.  Only five products, i.e. shirts, trousers, jackets, t-shirt and sweater, constitute more than 73.17% of total RMG export. Bangladesh should diversify products base and add more value to final products with design and quality.

Bangladesh should play an effective role in the regional and sub-regional forums like BBIN, BCIM and BIMSTEC, etc. Bilateral Free Trade Agreement can be a critical tool for offsetting the pressure of preference erosion. The government should respond proactively to face the challenges of the fourth industrial revolution and leveraging the opportunities of new technologies.

A coordinated approach needs to be initiated by entrepreneurs, policymakers, buyers and development partners to design curriculum and start re-skilling the people. Strengthening institutions for facilitating factories, reducing the cost of doing business through building physical and soft infrastructures and improving the business environment are critical for attracting local and foreign investment which will create confidence among RMG industry stakeholders to face the challenges of LDC graduation. Bangladesh will need to pursue negotiations in various forum, jointly with other graduating LDCs, to secure their common interests in view of the emerging challenges.

LDC graduation poses both opportunities for rebranding the country and challenges of losing trade preferences. Responding proactively with proper policy instruments and business level strategy can help RMG companies face the challenges effectively. Responding to LDC graduation specific challenges with changing market behavior efficiently will help to make the RMG industry sustainable and spearhead the growth journey of Bangladesh to a developed economy by 2041.

If anyone has any feedback or input regarding the published news, please contact: info@textiletoday.com.bd

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