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Trade war: Impact on the industry of Bangladesh

The world has witnessed various trade wars throughout history. The recent trade dispute of the USA and China engendered a new threat and destabilized the geo-economic balance of the world. A unilateral trade for China to become WTO member in early 2000 was over. Now, Chinese and the US-led war is apparently to attain the economic hegemony in the World. LDCs are already in unwritten battle on tariff and non-tariff barriers for their sustainable existence.

Trade war Impact on the industry of Bangladesh

However, the war of China and USA is considered unsolicited and undeserving. However, on 1 December the U.S. and China have agreed to a 90-day trade ceasefire in a bid to work out their trade differences. At a post-G20 summit meeting in Buenos Aires, President Trump agreed not to boost tariffs on US$200bn of Chinese goods from 10% to 25% on 1 January 2019.

There have been five major tariffs related trade wars occurred in the world in different centuries, which stirred the world trade. Remarkable wars were the Opium war between 1839 and 1842 between the UK and China, the Smoot-Hawley Tariff Act in 1930 was to protect the falling stock market and domestic industry, US President Herbert Hoover signed the Smoot-Hawley Tariff Act led to 61% dip in US export by 1933 and led to great depression, the Chicken war in the early 1960s where France and Germany imposed high tariffs on American chickens and the USA retaliated with imposing higher tariffs on a bunch of commodities. The Pasta War- the Regan administration of USA raised tariffs on Pasta from Europe in 1985 as its’ complains of discrimination against its Citrus products fell and the Banana war was to restrict the import of Bananas to its colonies in Africa and the Caribbean. Europe imposed heavy tariffs on the import of Latin American bananas in 1993, which ended 20 years later. It is worth mentioning that the USA was involved in four of five historic trade wars.

After the triumph of Donald Trump in the US election, the world economic state has come across various instabilities, challenges rather than unity. The so-called patriotic ideology of President Trump “Make America First” and other unnecessary policies of the US government have politically and economically made the nation volatile.

The long-held trade relationship of China and the USA became stagnant due to the unwise and adverse decision of putting an extreme duty on Chinese products and trigger many crises in the world trade. The size of global trade is around $23.01 trillion having $17.73 merchandise trade and rest is service with 4.7% growth in 2017, which may stumble and hurdle the global economic growth, hovering around 3.6% to 3.8%.

Initially, 25% border tax was imposed by the USA on $34 billion worth of Chinese goods imported into the USA though planned $200 billion tariffs. China responded to this policy with a 25% tariff on $34 billion worth US goods like soybeans, cotton linters, uncombed cotton, lobsters, and automobiles.

The intent behind the 25% trade tax by the USA was to punish China for its controversial trade policies, by making their products expensive for American consumers, pushing them to find an alternative market.

The war seems to continue and have long-lasting damaging effects and different assessment and forecast especially (IMF) indicated the cost of the trade war is about US$430 billion, which is 0.81% of world GDP. There are various vulnerabilities, which will affect many economies globally including Bangladesh.

The trade imbalance of the USA with China was on the rise and this move is also expected to affect the middle-class American citizens, as China imports around $200 billion of US goods whereas America’s dependence on Chinese goods is huge, and fulfilling the gap created by these tariff will not only increase the prices within the American market substantially is also going to be stern for American industry to match the demand. 41% of US apparel consumption, 72% of America’s footwear consumption and 84% of travel goods sold in the USA are sourced in China.

The USA is the traditional export market for China’s textile and apparel production. Although China has substantial penetration in the EU, ASEAN and Japanese markets as well.

China is the largest global exporter as many countries rely on China pushing its export to $4.5 trillion.

Bangladesh is an import dependent and export-oriented economy and trade and GDP ratio is around 13.5% and many countries in ASEAN like Vietnam, Malaysia and Cambodia are heavily export-oriented economies. Our export has emerged underpinned by RMG export but far behind the ASEAN neighbors.

Trade war impact on Bangladesh especially in our textile and RMG industry 

Textile sector is expected to expedite our export growth. Many Asian economies, which are potential sources of Textile products for the USA and other countries, can end up in trouble. Bangladesh has strong trading relation with USA and China and these relations are very instrumental. The USA is the single largest RMG export destination for Bangladesh. Bangladesh is a potential source of import and low cost production hub to supply many countries in the world and the trade battle is creating risk on the other hand generating some opportunities to attract new relocation business from Japan, South Korea, Malaysia, Singapore and Taiwan especially countries which are maintaining smooth political and diplomatic relation with USA to sustain low cost export business in the USA.

The escalating labor cost in China and other South East Asian economies have tensed them to sustain their market share and recent tariff escalation will add fuel to the flame in the export market. Bangladesh can remain safe and secure in terms of grabbing the attention of global textile, leather goods, and other potential local consumables export market position. As tariffs on Chinese clothing would escalate price, America may lower existing tariffs on imports of clothing from Bangladesh and Vietnam. Bangladesh has meanwhile become renowned as the second largest global RMG exporting country in the world.

In a bid to find some alternatives elsewhere, China decided to lower or cancel tariff on thousands of goods from Bangladesh, India and three other countries to sustain their global export market. The trade war needs to be ceased in order to ensure conducive global trade environment. However, as a whole, our export could gain comparative and competitive benefits due to this trade war.

Due to the trade war, already Bangladesh is facing some new phases and if the USA reactivates the trade war after the three months truce, Bangladesh may face more new challenges and may have some new opportunities also.

The overall scenario following the trade war is highlighted here:

  • The Trans-Pacific Partnership (TPP) deal has been canceled which would have given Vietnam, Bangladesh’s major trade competitor, a considerable advantage in the American market.
  • Bangladesh imports scraps, a raw material for steel, mainly from the United States but steel millers in the country are stockpiling the raw material anticipating more protectionist measures.
  • Bangladesh could benefit taking advantage of the supply chain relocation in the long run if the trade war persists.
  • Bangladesh needs to identify strategic advantage and challenge of the situation and address accordingly to reap economic benefits.
  • Bangladesh will also receive a lot of investment as the Chinese sunset industries are looking for a new destination as production costs in China rose coupled with a higher tariff.
  • It is imperative to protect the growth of local industries. Therefore, we need to exert caution when receiving FDI because in many areas like in the garment sector as the local entrepreneurs are performing well.
  • To compete with the ASEAN and neighboring countries which are potential relocation hub, Bangladesh needs to take advantage and start building its logistics, distribution and strong regional connectivity other competitiveness factors as inadequate logistics facility and connectivity can hold back our growth.
  • Since the USA is the single largest export destination for Bangladeshi goods, it can harvest better opportunity from the trade war. In doing so, Bangladesh has to increase the supply side capacity to meet demand. Improving the doing business position and Investment climate of Bangladesh require to be improved.
  • Building collaboration among researchers, academia, industry is crucial for moving up the product value chain and product diversification in reaching our larger market.
  • An overall “strategic plan” by the government and the private sector needs to be made. And, the SEZs need to be implemented in fast-track basis to address relocation investment in Bangladesh.
  • The trade war between USA and China may not last long but Bangladesh has to develop integrated infrastructure including competitiveness in transport, port, and logistics facility in a way so that FDI trend can be routed to Bangladesh and be sustainable.
  • The focus should be made on improving productivity, efficiency in production and export diversification to sustain the competition.
  • Because of this trade war, the country’s backward linkage industry would flourish more to position Bangladesh as the rewarding investment hub in this region.
  • Bangladesh also needs steps in order to improve in the ease of doing business index, such as allowing currency other than Dollar in opening Letter of Credit which can ease cross-border trade.
  • Our capability is not enough to attract foreign investment in all sectors, as local industries are focused mainly on labor-intensive industries. Bangladesh also needs to invest in robotics and artificial intelligence and modern technology to attract investments to gain a high-value product market.
  • Bangladesh can conduct a study on trade war between the USA and China, outlining the emerging economic benefits in all export and potential export sectors for readiness focusing on building supply-side capacity.
  • EU put a sanction on Cambodia’s entitlement of (EBA) which opened a window of opportunities for Bangladesh to penetrate more into the EU and this opportunity is to be harnessed.
  • Bangladesh needs careful monitoring of the high-priority sectors to what extent those are affected during this trade war regime and ensure safeguarding policies.
  • Currency war and its possible impacts are already evident and mechanisms to offset the devaluation impact associated accordingly. We need to exercise caution when receiving FDI protecting the local industrial interests.
  • Bangladesh has to create a smooth transition process, establish an enabling situation focusing on ease of doing business for the factories to be relocated, and should have a planned branding and promotional mechanisms.
  • The balance of trade may shift upward in the coming years if export soars.
  • The readiness of Bangladesh to reap the opportunities provided by this on-going trade war requires a supply of capable human resources along with an orientation of modern technology.
  • The government must put strategic stances during the negotiation of the relocation of Chinese sunset industries because there will be chances that China cuts the price and cost of manufacturing while doing business in Bangladesh. If this happens, there will be a negative impact on the growth of our local industries.
  • Light engineering sector should be brought under compliance framework to attract the sunset industries in the long run.
  • Strengthening the PPP platform through essential reforms to attract Chinese investment under the PPP scheme.
  • EPB needs to map out the export dynamics needed within this trade war regime which will help secure readiness of Bangladesh in the long run.
  • To compete with the regional countries, which are potential relocation hub, Bangladesh needs to start building its logistics and distribution strength for becoming a Centre for Supply Chain Hub – and therefore, logistics and warehousing should be looked into as a priority, declared as thrust sector for reducing lead-time for major industries, import, and export items.
  • Transform focus to other sectors and orient them in the global supply chain and endeavors to bring necessary certification and compliance standards to ease other growth drivers.

To implement and gain utmost benefits of a trade war in our industry and economy, we must mobilize our trade and investment diplomacy with China and other industrially rich countries affected by trade war and attract relocation of Chinese sunset industries in Bangladesh. To gain optimum outcome, we also need to stress on infrastructure development, skills development, and technology-based industrial capacity above all economic competitiveness in doing business state to harness real economic leverages.

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