The great aspiration for graduating into a developing country from the LDC status has moved the citizens of Bangladesh and it has also instigated many discussions. One issue of such discussions is the impact of our export volume due to the forthcoming preference erosion, which is, foregoing the current privilege and benefits of duty-free market access Bangladesh enjoys in the markets of developed nations, once Bangladesh becomes a developing country, and the allowable transition period is over, by 2027.
Would we be able to sustain our exports? What would happen to the people employed in the export-oriented industries, if we lose exports? These questions are important, and we need to come up with plausible answers and prepare ourselves against possible shocks.
A point to note here is that we enjoy the most substantial privilege of duty-free access in the European Union bloc. Though the USA still remains the single largest destination for Bangladesh, we do not receive any duty preference there since the last few years.
We enjoy duty-free market access in Japan, Australia, China, and India too, among others, but the limited volume of our exports to these countries render them somewhat not as important as the EU market. Hence, when we discuss duty-free market access, we practically refer to our exports in the EU.
Before we can attempt to quantify the preference erosion in the EU, we must consider a few important issues – the current competitive scenario, analyzed by which or the competing countries are exporting the same items to the EU, where Bangladesh stands compared to these competitors in terms of export value and volume, comparative market share and annual growth or decline rate of the market share, and respective duty preference applied to them by the EU.
Another important issue to note here that, due to diversified economic and productive capacity of its member states, EU do not need to import from non-EU countries, many items for which EU members have own production in significant volume and at a competitive price. Even if they do import such items, the volume and value of such imports from outside EU region remain insignificant.
Due to graduation to LDC, the preferential advantage that Bangladesh is enjoying now over India, Vietnam, and China due to duty-free market access at present will be eroded.
Let us first take a look at the top export items from Bangladesh to the 28-member EU. For a period of five years, from 2013 to 2017, the top export products were knit and woven garments (HS 61 and HS 62), leather footwear (HS 64), home textile products (HS 63) and frozen fish (HS 03). These are generally our top export products globally, and not for the EU only.
The main competitors of Bangladesh to the EU for exports of these five products are China, India, Vietnam, and Cambodia. Now we will analyze the competitive scenario among these countries but will keep the analysis limited to knit and woven apparel products only. Such an analysis will highlight Bangladesh’s current position, and the possible trajectory of Bangladeshi RMG exports when we become a developing country and lose duty-free access in the EU by 2027.
For knit and woven apparel products (HS 61 and HS 62) combined, Bangladesh currently stands in the second position after China among exporters of these two products to the 28-member EU bloc. India ranks the third position for these two items. For knitwear products, Cambodia ranks the fourth position, followed by Vietnam in the fifth. For woven apparels, the positions of these two countries are reverse – Vietnam ranks the fourth, and Cambodia is ranked the fifth.
As we can see in Table 1 below, during the 2013- 2017 period of the last five years, the 28-member EU experienced the import growth of a meager 1.66% for knitwear products.
Against this meager growth of import demand in the EU for knitwear, China experienced an average annual negative growth of -1.96% during this 5-year period, resulting in a gradual decrease of China’s export market share in the EU from 2013 to 2017, standing at 22.87% of average market share during this period. During the same period, Bangladesh enjoyed a positive and moderate average annual growth of 5.93% for exports of knitwear, and currently commands 12.49% of the market share in EU-28. India’s exports of the same product grew at 3.08% annually on average and currently stands at 4.26% of the market share during the same period.
The average market shares of Cambodia and Vietnam, though standing at 3.73% and 1.44% respectively, both countries enjoyed a phenomenally high average annual market growth of 11.76% and 12.15% during this period.
|Table 1: Knitwear (HS 61) Export by Major Exporters in the EU-28 during 2013 – 2017|
|Exporting Country||Rank||Average Market Share||Average Growth|
Table 2 below shows the export market growth situation for the same five exporters in the EU-28 for woven apparels (HS 62). The 28-member European Union block experienced a market growth of only 1.25% of average annually during this 5-year period from 2013 to 2017.
During this time, the top exporter China lost its market share annually by -1.94% on average and held 25.65% market share, while Bangladesh annually gained 7.43% on average and commanded 8.96% of the average market share for woven apparels. India too experienced a negative growth in market share during this period. For Vietnam, the average annual growth enjoyed were 5.87% and for Cambodia, a whopping double-digit annual average growth of 13.06% during this period.
|Table 2: Woven Apparels (HS 62) Export by Major Exporters in the EU-28 during 2013 – 2017|
|Exporting Country||Rank||Average Market Share||Average Growth|
Among these 5 countries, only Bangladesh and Cambodia enjoy duty-free access to EU at the moment. India and Vietnam are subject to 9.60% import duty, and Chinese exports attract 12% duty (Source: ITC Market Access Map).
It means, the EU is likely to impose a 9.60% import duty on Bangladeshi exports from onward 2027, once the 3-year transition period is over for Bangladesh after graduation from the LDC status in 2024. Of course, the actual duty rate may vary, but we are considering the current rate of 9.60% valid for India and Vietnam at the moment.
So, the preferential advantage that Bangladesh is enjoying now over India, Vietnam, and China due to duty-free market access at present will be eroded, effective from 2027, and our exports will face direct competition from these other competing countries.
Now, for the simplicity of quantification, if we assume exports of knit and woven apparels from Bangladesh to EU-28 to increase by 10% by 2027 from the level of 2017, then we project a total export of about 23.55 billion US dollars, a 10% increase over the 2017-level exports of 21.41 billion US dollars for these two products.
Further assuming the current duty rate of 9.60% to be imposed on the projected 23.55 billion US dollars, there will be duty imposition of 2.26 billion US dollars on exports of these two products from Bangladesh.
In other words, assuming that other things will remain unchanged, or the ceteris peribus conditions, if apparel exports from Bangladesh to the EU-28 bloc increases by 10% from 21.41 billion US dollars in 2017 and becomes 23.55 billion US dollars in 2027, the amount of preference erosion will be equivalent to 2.26 billion US dollars due to tariff imposition at 9.60%.
It should be noted that preference erosion does not necessarily mean a reduction of export quantity, and assuming only a 10% increase in export volume over a period of 10 years, that is 1% annually is also a very conservative estimate. The projected amount of 2.26 billion US dollars is just an attempt to quantify the preference erosion. But a preference erosion of 2 billion US dollars or more is likely to have a not so favorable impact on the export-oriented apparel industry of Bangladesh. We need to prepare ourselves to make our industry more competitive.
Note: The trade statistics used in this article have been taken from the UN Comtrade Database for the years from 2013 to 2017 for the 28-member European Union.