We feel proud that Bangladesh has been ranked 41st among the world’s largest economies in recent time. The country has qualified to graduate to become a developing country by meeting, for the second time, the criteria set by the Economic and Social Council’s Committee for Development Policy (under the United Nations).
The ready-made garment (RMG) sector which accounts for 83 percent of the country’s exports and employs around four million people (mostly women) has contributed greatly to the overall economic development of the country.
With a 6.4 percent share in the global apparel market, Bangladesh is the second-largest apparel exporting country in the world after China.
There is no denying the fact that the trade benefits the European Union (EU) has been providing to the country have flourished the local RMG industry significantly.
For Bangladesh, Europe is the largest trading bloc and accounts for more than 60 percent of the country’s exports (of which more than 90 percent are apparel items). Major export destinations in the EU include Germany, France, Spain, the Netherlands and Italy.
For low and lower-middle-income countries, the EU offers Standard GSP which means a partial or full removal of customs duties on two-third of tariff lines. As a least developed country under the EBA (Everything But Arms) facility, Bangladesh enjoys duty-free, quota-free access to the block for all products except arms and ammunition.
Let’s see what kinds of problems apparel exporters are facing at present. Bangladesh’s apparel industry is in badly need of a skilled labor force compared to its competitors like Vietnam. So, the scope to move up the value chain is being hampered.
Both Bangladesh and Vietnam are competing for neck and neck in the RMG market. That challenge from the Southeast Asian country has come in the form of price competitiveness and quality.
Furthermore, the EU has extended duty-free access to Vietnam, eliminating the competitive edge that the country held over its biggest rival in the trade. Now, the country has obtained the same privilege as Bangladesh thanks to the signing of a free trade agreement (FTA) with the EU.
“We are going to face tough competition,” said Mustafizur Rahman of the Centre for Policy Dialogue (CPD).
Bangladesh will face even tougher competition when the duty benefits come to an end in 2027. The country’s exports to the EU will then face 12 percent duty but Vietnam will continue to ship to the bloc at zero duty.
“So, we need to lobby with the EU either for the signing of an FTA or continuation of the duty benefit,” Rahman added.
Bangladesh Garment Manufacturers and Exporters Association (BGMEA) President Rubana Huq said, “With the gradual removal of the tariff on Vietnam’s exports, the price competition will be stronger.”
According to an international study, apparel workers in Bangladesh work for 60 hours per week while they toil for 47 and 46 hours in Cambodia and India respectively.
The country must integrate its economy regionally through platforms like the South Asian Association for Regional Cooperation (SAARC) and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) to expand its market within the region.
Economists opined that to attain GSP Plus status in the EU, Bangladesh must improve in four core areas— environmental protection, labor rights, curbing corruption and human rights.
Bangladesh must enhance its marketing and negotiation capacity to receive the work orders being shifted from China. We are now missing out on the opportunity.
Besides ensuring adequate wages for the garment workers, workplace safety and compliance issues must be addressed immediately to remain competitive in the global apparel market. However, the country has made good progress in ensuring safe workplaces and building compliant factories since the two major industrial disasters—Rana Plaza Collapse and the Tazreen fire incident.
Apparel exporters said poor services offered at Chittagong port is another major cause of concern for them.
Lead-time has been decreased drastically amid the fierce competition of the apparel business, they said, adding that retailers and brands have now reduced lead-time to 70 days from 90 days.
China, Vietnam, Cambodia and India can supply goods to retailers and brands at a shorter lead-time. But Bangladesh can’t do that at a fast speed due to lower productivity, port congestion and poor infrastructure.
Though Bangladesh is focused on less complex products, it has the potential to further strengthen its relative position if production capabilities evolve and quality can be improved, while ensuring social and environmental compliance standards, as per the international study.
Even though some 40 percent of exports in 2018 were on higher ticket price fashion items, the apparel industry here is heavily reliant on “basic” low ticket price production. The industry has embraced a lot of reforms since the 1980s but investment has been less in the production of value-added garment items. Consequently, the country has remained a prominent manufacturer of basic or semi-high-end garment items.
The apparel sector functions on very low-profit margins often eroded through increasing taxes, rising charges for fuel and power, greater expenditure on transportation and wages. These issues discourage foreign investment in the apparel sector.
Vietnam, which made the foray into the apparel business after Bangladesh, has become a major player in the global high-end garment segment investing in research and development in design and product quality.
According to media reports, about 70 percent of European clothing retailers skip out on using the ‘Made in Bangladesh’ line in the tags. Such practice undermines the aptitude of the country’s garment makers.
Industry insiders said the poor image of the country has compelled the European apparel companies to avoid the ‘Made in Bangladesh’ label. The same retailers use the countries of origin for others though.
However, since labeling the country of origin or the country of export is mandatory under the Tariff Act of 1930 in the US, all American retailers use the ‘Made in Bangladesh’ line in the tags.
The EU has also taken initiatives to impose a carbon tax on imported goods causing worries among the exporters of readymade garments as well as textile, leather, plastic, and agricultural products.
In late 2019, the EU announced its signature program the Green Deal stating that it wants to implement to reach carbon neutrality by 2050. As part of the program, the EU is going to levy a carbon tax on imports from non-EU countries.
Imposing a carbon tax would hurt Bangladesh’s exports because buyers in the EU would not shoulder responsibility for bearing that extra cost by themselves.
Based on a study, the BGMEA has said that if the duty-free trade benefit for the country comes to an end in the EU when it graduates to a developing country, local RMG exporters will incur a loss of USD 4 billion.
The loss will amount to USD 3.2 billion If the Standard Generalized System of Preferences (GSP) cannot be availed, said the study. It’s a matter of grave concern that Bangladesh’s exports to the EU will face the worst impact after a rise in the country’s status.
However, the EU has offered a three-year grace period (till 2027) on the EBA facility following graduation.
The BGMEA study said, “While all competitors are offering further price discounts, any imposition of tariff on Bangladeshi goods may proportionately erode competitiveness.”
Currently, 15 countries hold standard GSP status in the EU market while eight ones have GSP Plus status and 48 LDCs EBA status, according to the European Commission’s website.
The GSP Plus, a special incentive arrangement for sustainable development and good governance, decreases tariffs to zero for vulnerable low and lower-middle-income countries implementing 27 international conventions on labor rights, human rights, environmental protection and good governance.
The EU has already granted GSP Plus status to many countries after graduation.
Economists opined that to attain GSP Plus status in the EU, Bangladesh must improve in four core areas— environmental protection, labor rights, curbing corruption and human rights.
Moreover, Bangladesh will have to ratify the 27 UN Conventions for the EU trade facility.
Bangladesh has ratified almost all major conventions except the International Labor Organization’s Minimum Age Convention.
A country has to fulfill two criteria set by the EU to be awarded the GSP Plus status. Firstly, Products that qualify for GSP Plus must be in the top seven largest exports from the country (where apparel is the largest in Bangladesh). Secondly, the three-year average export of that product cannot exceed 6.5 percent of the total import of that product into the EU.
In this regard, the BGMEA study suggested lobbying with the EU.
The country’s apparel exports already constitute nine percent of the total apparel imports into the EU. Analysts have said that given the importance of the apparel sector to the Bangladesh economy, apparel diplomacy is urgently required to negotiate with the EU and convince them to extend the threshold to 12-13 percent. In absence of a satisfactory outcome, the future development of the country will be severely endangered.
However, we shouldn’t solely rely on negotiating favorable GSP terms with our traditional markets, the US and the EU, when we achieve developing country status. Because non-traditional markets offer a fantastic opportunity for expansion of the RMG business.
