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Graduation from LDC: Challenges and way forward for Bangladesh’s RMG industry

Bangladesh economy is growing at more than 7% for the last couple of years and becoming one of the highest growing economies in Asia led by double-digit manufacturing sector growth. The leading manufacturing sector of Bangladesh, Ready Made Garments, is contributing largely to this growth while sharing 11.15% of GDP and 83.49% of the total export of Bangladesh.

BD Graduation from LDC

The remarkable socio-economic development of Bangladesh in the last decade has made Bangladesh eligible to graduate from Least Developed Countries.

In the first review by Committee for Development Policy (CDP) in 2018, Bangladesh was awarded the eligibility to become a developing country fulfilling the all three criteria- namely GNI per capita, Human Assets Index (HAI) and Economic Vulnerability Index (EVI).

BD Eligibility for LDC
Source: Least Developed Country Category: Bangladesh Profile, UN

Bangladesh has a per capita GNI of USD 1274 against the threshold of USD 1230, HAI 72.9 against 66 and EVI 24.8 against 32 threshold points in the assessment.

After successfully fulfilling the criteria in the 2nd triennial review in 2021 and 3rd review in 2024, Bangladesh may finally be graduated into a Developing Country. But with this achievement, Bangladesh will lose some trade and Intellectual Property (IP) related facilities which were dedicated to LDCs by developed countries.

As an LDC, the facilities Bangladesh enjoy can be classified into three groups- preferential treatment in international trade, development assistance including development financing and technical cooperation and thirdly, general support and other forms of assistance.

As the readymade garment industry is an export-oriented industry the ‘preference erosion’ in international trade due to graduation will impact the industry most in Bangladesh.

Challenges of Bangladesh RMG sector while graduation

RMG industry is currently facing challenges like shifting market demand and consumer behavior featured by customized wearing, continuous price shrinkage from the buyer, image crisis and more labor and environmental compliance and lack of product diversification and low-value addition, etc.

Moreover, Bangladesh is graduating in a time when WTO situations are getting worse due to rising protectionism in the international market. This situation may worsen when the Fourth Industrial Revolution (4IR) will come into its full effects with its robotics and automation features creating huge job loss and nearshoring idea for buyers.

Challenges of BD RMG Industry
Figure 2: Challenges RMG Industry of Bangladesh.

In this context, when preference erosion due to graduation will happen after the transition period in 2027 it may pose extra pressure in competitiveness and sustainability of the RMG industry.

After graduation from LDC bloc Bangladesh will lose DFQF (Duty-Free Quota Free) facility in all developed and developing markets.

In the European Union market, like Vietnam and India Bangladesh may face 9.60% duty though the rate may vary.

According to the Center for Policy Dialogue, due to the additional tariff, Bangladesh may lose 8% of its export by imposing an average 6.7% duty without preferential treatment. Thereby, Bangladesh may lose USD2.7 billion of export and RMG will face the largest part of this loss as it constitutes the largest part of the 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 erode and that will pose pressure on the competitiveness and profitability of the companies.

After graduation, there will be an opportunity to get a 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.

According to GSP regulation, first of two criteria is that the seven largest sections of the products which are exporting to EU have to constitute 75% of the total export of that exporting country which Bangladesh already met as RMG constitutes 83% of total export.

Second, the import of that product under GSP from a single country must represent less than 6.5 percent of the total EU import of those products. This will be a great challenge for Bangladesh to meet this requirement as Bangladesh already export 9% of total RMG import of EU countries under GSP.

Way forward for RMG industry

To address the graduation challenges RMG entrepreneurs and policymakers of Bangladesh has to make a collaborative effort.

To address LDC graduation specific challenges it is important to concentrate on securing GSP+ facilities in the EU market. Ratifying 27 conventions and including minimum wage convention of International Labor Organization (ILO) is critical to get this facility.

On the other hand, economic diplomacy needs to be strengthened to convince the EU authority to widen its import threshold for a single country to 12-15%.

BD RMG Way forward
Figure 3: Way forward for Bangladesh RMG Industry.

Bangladesh needs to diversify its preference effort beyond WTO. As the country has committed to achieving SDGs within 2030 Bangladesh 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.

In addition, the prime task for Bangladesh RMG sector is to strengthen productive capacity, diversify product base and expand market access further. According to the Asian Productivity Organization, per hour labor productivity of Bangladesh is USD3.4 which is lower than average productivity of other competing countries except for Cambodia.

As the productivity of Bangladesh is less than all of its major competitors, we need to address this issue critically as preference erosion will force us to compete in terms of productivity and quality of the products.

Only five products i.e. Shirts, Trousers, Jackets, T-Shirt & Sweater constitute more than 73.17% of total RMG export. We need to diversify our products base and add more value to final products with state-of-art design and quality.

Around 61% of total RMG export goes to only five countries i.e. Germany, USA, UK, France and Spain indicating market concentration creating obstacles for negotiation. We need to expand our market beyond the EU and USA.

In this context, Bangladesh needs to 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.

In addition, Bangladesh needs to respond proactively to face the challenges of the fourth industrial revolution and leveraging the opportunities of new technologies. Skill mapping needs to be undertaken to find out how many people are required in which skills.

According to the skill mapping, a coordinated approach needs to be initiated including entrepreneurs, policymakers, buyers and development partners to design curriculum and start re-skilling the people.

Above all, strengthening institutions for facilitating factories being compliant, 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.

Conclusion

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 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.

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