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The relaxation of Rules of Origin: is it at all blessing for our economy?

redwan main mainExport of a country is usually affected by both external and internal factors. International trade laws are the well known external forces that influence trade volume of a country significantly. The rules of origin (RO), one of the international trade laws drive global business significantly.

These are the criteria needed to determine the national source of a product for the purpose of determining what tariff, if any, applies. The RO are used to implement anti-dumping duties and safeguard measures and so on.

Though a note on RO was prepared by GATT (General Agreement on Tariffs and Trade)  Secretariat in 1981 and ministers of member countries agreed to study the RO used by GATT contracting parties in November 1982, not much more works were done on RO until well into the Uruguay Round negotiations. After transforming GATT into WTO (World Trade Organization) in 1995, the RO have been frequently used in the trade arena. These rules have been playing a critical role in the export of many countries, especially LDCs like Bangladesh. The trade structure of Bangladesh is unique in nature. The export bundle of the country is mainly composed of garments items. Moreover the export destination is generally European Union (EU). Nearly 79 percent of the total exports of the country comprises of ready-made garments (RMG) in which about 58.73 percent were exported to EU in FY 2010 – 11(EPB). Therefore, apparel experts need to know what requirement of RO EU fixed for accessing Bangladesh RMG into their apparel market. Prior to 2011, Bangladesh RMG must have been ensured more than 70 percent local value addition for access in the market. Japan, another larger importer of Bangladesh apparel after EU and USA imposed also same condition like EU. To fulfill the value addition requirement, Bangladesh had to follow three stage transformations for clothing export, i.e. Stage 1 – Fiber to Yarn, Stage 2 – Yarn to Fabrics and Stage 3 – Fabrics to RMG.

Though apparel exporters thought of existing condition of RO as a road block for export more using foreign fabrics and raw materials (which might result in more than 30% value addition), the RO played a significant role in developing the backward linkage factories of RMG industry, i.e. Spinning mills, Textile mills and so on. Currently more than € 4.00 billion or $ 5.34 billion has been invested and about 4.00 million people are employed in these mills (BTMA). According to the estimation of Bangladesh Textile Mills Association (BTMA), about 100 percent of the domestic fabric and yarn requirements are met by local factories, whereas 50 percent of the cotton woven fabric requirement of export oriented garments sub-sector and over 95 percent of the yarn and fabric requirement of export oriented knitwear sub-sector are fulfilled domestically. By the January 1st 2011 and April 1st in the same year, EU and Japan relaxed the condition of RO from 3rd stage to 1st stage. The relaxation resulted in a mixed effect among different groups of clothing production, i.e. RMG, Textile and Yarn producers and exporters. The apparel manufacturers and exporters welcomed the relaxation mentioning it as a blessing for our economy. However the textile and yarn manufacturers and suppliers became disappointed and identified it as an immediate threat for textile mills as well as harmful for apparel sector in near future. They referred it to a curse to our economy rather than a blessing. But we are the general people cannot refer it as either blessing or curse for our economy without assessing the impact of the relaxation. It is the time after one year passed of the relaxation to examine the impact of the relaxed RO.

In order to enjoy a sustainable RMG export over the coming years, production cost should be lower and continuous supply of raw materials must be ensured. No one would argue that only well established domestic backward linkage factories can provide raw materials constantly. The supply of foreign raw materials is normally uncertain. This could be proved enough by mentioning recent export ban of fiber by India. The RMG, a leading industry is no longer secured in future without its backward linkage factories.

Undoubtedly the relaxation of RO enables RMG exporters to export more. As a result the imports of Bangladesh RMG by EU and Japan rose to $10.814 billion and $0.351 billion in 2011 from $9.841 billion and $0.197 billion in 2010 respectively (ITC). The impact of RO relaxation has been appeared clearly in Japan apparel market. In the market import of RMG from Bangladesh has increased by more than 78.17 percent (ITC). The apparel exporters are very much optimistic about the future success of apparel export. Mohammad Shafiul Islam Mohiuddin, President of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) said “the new rules of origin will enhance market access for Bangladesh’s ready-made garments, and will raise our bargaining capacity,” (REUTERS). However, the relaxation of RO hampers the domestic Textile and Spinning mills directly. Since RMG manufacturers and exporters under the new RO can produce exportable RMG product using foreign fabrics and accessories, they import Chinese or Indian fabrics at prices lower than domestic fabrics production cost.

As a result, Bangladeshi millers have a stockpile of 2.5 million tons of unsold yarn, worth $121 million. Moreover, the factories and employment in both Textile and Spinning sectors have fallen significantly. The number of factories and employment level in the area reduced to 1313 and 3.85 million in 2011 from 1364 and 4.00 million in 2010 respectively (BTMA). Realizing the fact Jahangir Alamin, President of Bangladesh Textile Mills Association (BTMA) expressed his dissatisfaction saying that “Local garment factory owners have been importing knit and woven fabrics from India at prices lower than our production cost, but the government did not take any initiative to check the import despite repeated requests,” (REUTERS). However, the representatives of apparel sector reported that the price of domestic fabrics is not only higher but also volatile. As a result, they could not calculate costing of new order easily when they are in bargaining process with foreign buyers. They think that textile suppliers should reduce and stabilize fabrics price as much as possible to attract apparel manufacturers.

In order to enjoy a sustainable RMG export over the coming years, production cost should be lower and continuous supply of raw materials must be ensured. No one would argue that only well established domestic backward linkage factories can provide raw materials constantly. The supply of foreign raw materials is normally uncertain. This could be proved enough by mentioning recent export ban of fiber by India. The RMG, a leading industry is no longer secured in future without its backward linkage factories. The government and concern private bodies should concentrate on developing backward linkage factories. It is true that using foreign fabrics, RMG industry can show better performance presently but it will be in short time of span.

Therefore, the RO can help RMG industry to raise RMG export in short run, but not in long run and for long run performance backward linkage of the industry must be developed. Now it is the duty of the readers of the article to judge the relaxation of RO as either a blessing or a curse for our economy.

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

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