Challenges of Garments Export in EU Market after LDC Graduation and Policy Options for Bangladesh – Md. Imran

Economy

Every entitlement brings both chances and challenges. Mighty people always transform their chances into success by challenging impediments. Bangladesh is about to lift its Least Developed Country status one step forward to become a developing country by 2024 as expected. Bangladesh has shown a sound economic growth for decades. The Committee for Development Policy, a UN mandated department, assesses countries on the basis of income, human assets and economic vulnerability once after three years to understand the categorical condition of them. Bangladesh successfully met those criteria for the first time in the history of Bangladesh in 2018. Second assessment would take place three years later in 2021 and may recommend Bangladesh for the status of developing country. This is good news indeed for a country like Bangladesh who wants to move forward by forgetting bitter pasts. Developing country status will naturally dignify Bangladeshis to the world but at the same time this status brings immense challenges and confinements. By 2024 traditional easy access for LDCs to free markets, aids, concessional loans, policy preference, lower organizational subscription and wider development partners would be replaced with restricted market with higher tariffs and regulations, reduced aid especially for climate change and poverty reduction schemes, limited options for loans with higher interest rate, implementing international standards notably intellectual property rights, 5-5.5 million increased subscription fee annually in UN organizations alone.

We are well aware that international trade is one of the strongest pillars of our economy in which garments sector is the largest one. Bangladeshi exports go almost 59% in European Union’s market including United Kingdom. Interestingly garments industry occupies 83% of all exports of Bangladesh and its overall contribution in EU market specifically is approximately 90%. Bangladesh is currently enjoying full free access in EU market under Everything but Arms (EBA) initiative as an LDC. Bangladesh’s transformation to developing country would end this blessing policy preference. Analysts are predicting to lose a vast amount of profit in EU market upcoming days when duty free and quota free access would be lifted. Garments industry would fall in panic most since this sector possess royal share of Bangladeshi exports in EU market. Eventually Bangladesh would have to choose standard GSP and Most Favored Nation (MNF) principle. Bangladesh will have to pay on average 9.65 to 12% tariff for garments export under standard GSP and MNF respectively. GSP+ could give a comfort which also provides duty-free access for garments but attainment of it is far away from Bangladesh. Critics may point out a growing US market in the wake of trade war as an alternative source of export but this would be infeasible in a long run. Bangladesh garments industry did not hurt after withdrawal of GSP from US markets in 2013 because Bangladesh had and still has to pay almost 15% tariff as usual for exporting garment goods in its market. In this sense, European market is unique and crucial for Bangladesh garments industry to flourish. Notably Bangladesh uses highest EBA initiative among LDCS. Obviously Bangladesh’s achievement of developing country status would bring obstacle but limited alternative policy options can be maximized to eradicate upcoming challenges. Next section will try to review Bangladesh’s probable policy options in the light of current reality.

Free Trade Agreement (FTA):
FTA is the most viable option depending on economic capability of a country since the multilateral trade agreements are becoming unpopular under WTO. Bangladesh should focus on signing FTA with potential countries where Bangladesh can export and import. Due to LDC graduation, international market will be limited for Bangladesh that is why free trade is preferable for Bangladesh as a recent UN report suggests. 41 states have already concluded FTA with European Union while dozens are waiting to go in force. Bangladesh could not sign a single FTA while other developing countries have already signed FTAs, notably Vietnam. Bangladesh will lose its duty free access in EU market once it is graduated. A chart can be presented with different policy preferences of EU comparing current exports to EU market. 2018’ export is taken sample to compare at current situation since we cannot predict the amount of Bangladeshi export by that time.

Tariff policy EBA GSP MFN
%of tariff 0% 9.6% 12%
Total garments export
in 2018 in EU
19.32b 19.32b 19.32
Return after duty
19.32b 17.47b 17b

Just read the abovementioned table carefully which depicts how Bangladesh would gain under different policy preference. Obviously profit margin of garments industry would be reduced if Bangladesh cannot figure out a FTA with EU while EBA initiative would lift after LDC smooth transition by 2027. Bangladesh foreign policy should be activated as such which would promote economic diplomacy to foster exports. Bangladesh should start lobbying with EU to keep its garments export high in EU.

Moving for GSP+:
EU provides GSP+ for sustainable development and good governance. There are some conditions but it is blessing for a newly graduated developing country to achieve. It grants full removal of tariffs on over 66% of EU tariff lines including textiles export. Basically GSP+ is designed to help vulnerable developing countries who lack in export diversification. But conditions must be filled to get the status of GSP+ beneficiary. A country must be vulnerable with a non-diversified economy and low level of imports into the EU. EU listed 27 conventions including labour rights, human rights, environmental protection and good governance, non-discrimination to women must be ratified and implemented. EU would inspect progress of those conventions in GSP+ holder country. Bangladesh does not fulfill at least two conditions which are convention ratification and exceeds import ceiling in EU. Though, Bangladesh has a possible way to obtain GSP+ by ratifying those conventions. Realist critics may argue signing those conventions like giving labor rights at fuller length would hamper current progress in garments industry. But we should not forget that a exploitative system cannot sustain in long run. We have advance in balanced rules and regulations in future so those conventions would help us to build a better and equitable system.
Previously EU had to reform ceiling of rules of origin because of LDCs inability to meet those criterions. Similarly new tariff introduction will take place in 2023 where LDCs are partners in dialogues. Bangladesh may escape loss of EBA initiative by lobbying for GSP+. Currently 8 countries get benefit from GSP+. We should observe those countries who are Armenia, Bolivia, Cape Verde, Kyrgyzstan, Mongolia, Pakistan, the Philippines, and Sri Lanka. It is evident that Bangladesh is well off comparing to those countries as well. Serious diplomatic efforts might secure GSP+ status for Bangladesh. Textiles can be exported in EU at duty-free. It is very crucial time for Bangladesh garments industry to keep its advancement. Obviously EU market is the vital means of this advancement. So, we have to put more focuson it.

Policy of Adjustment:
This section does not deal with policies of others rather interacts with domestic policy. Author of this paper would try to strengthen Bangladesh’s capability which would help Bangladesh garments industry to move forward as well other industries. It is known that garments industry is flourishing in the womb of Bangladesh government’s direct care. Garments industry is used to get domestic policy preference which would not be applicable abroad forever. Vietnam had duty free incentive for a long in EU market till very recent FTA with ASEAN. But Vietnam was able to export almost $3.92 billion worth textiles despite paying 12% tariff in 2018. It is all about survival what most of the experts and garments owners fear. Bangladesh can introduce new rules concerning developing country status in smooth transition period of 2024-2027. These three years can be used for final revamp of developing country journey. We should let matured our garments industry to survive on its own to some extent.
There is claim that Bangladesh produce cheap products what defame Bangladeshi textiles globally. International buyers take this chance and buy products at minimal rate without any bargaining from sellers. It is time for Bangladesh garments industry to focus on quality. There is hardly any brand known from Bangladesh globally except Denim. We have produce quality product if we want to move on.We should follow the path of industrialization gradually. On the other hand Bangladesh could not develop export oriented sectors in the meantime. Emerging industries (e.g. footwear) shouldalso try to stand on their footings. Truly developing country status would give a positive image for Bangladesh abroad. Planned efforts may help Bangladesh to receive huge Foreign Direct Investment like Vietnam and early Singapore. So that international investors would try to open international markets for Bangladesh at the same time. After all, these are potential possibility what we have to transform into reality.
In conclusion, this paper has tried to show a scenario which is likely to emerge after LDC graduation of Bangladesh garments industry. Since Europe is the most important destination of Bangladeshi goods including textiles that is why there will have notable consequences on trade. Bangladesh will not be eligible for EBA initiative anymore. So author of this paper tried to show feasible alternatives. Obviously FTA is a major tool of current international trade trend. Also noted Bangladesh should hurry for FTAs with EU and other countries. GSP+ is also another tool of policy preference in EU market which Bangladesh can utilize for securing duty free access for textiles. Finally author preferred a move on policy which would let garments industry to advance facing realities. It might be tough but possible to overcome. Surely developing country status brings burdens but also carries potentialities to advance.