Tuesday | 20 May 2025 | Reg No- 06
Bangla
   
Bangla | Tuesday | 20 May 2025 | Epaper

Prep for tariff escalation for RMGs after LDC graduation

Published : Saturday, 23 December, 2023 at 12:00 AM  Count : 764
Ferdaus Ara Begum
Ready-made Garments (RMGs) recognized as one of the key sector of Bangladesh economy is in a transition now period to face tariff escalation after LDC graduation. Its capabilities to absorb the price shocks due to discontinuation of preferential tariffs are limited. However, there might be some comforting prospects considering pricing of other countries and its already established networks in the developed countries especially in the UK, EU, Canada and Australia. Can Bangladesh increase mark-ups of its existing product range while switching over to high-end products. However, at the moment Bangladesh is in a perfect competition and there are a few alternatives to do on prices.

After graduation, Standard GSP or GSP+ in the EU depends on complying with certain criteria, which will definitely increase price. Clothing products from Bangladesh may not receive any tariff preferences due to safeguard measures, resulting in an 11.8 per cent tariff hike against zero duty facilities under EBA and GSP+. This may cause a significant loss of competitiveness.

Bangladesh has some degree of market power in apparel exports which the country might lose in 2027. A recent study by RAPID has tried to see the product specific price elasticities of demand and mark-ups of apparel export to Europe. The case of top 50 RMG products of Bangladesh and top 12 exporting countries have been considered. Bangladesh exports RMG at a slightly lower price than world average and the case is the same for the weight per item. The estimated elasticity for Bangladesh is quite consistent and lies between 3 to 4.

The median own price elasticity of demand for the RMG products of Bangladesh in the EU ranges between 2.5 to 5. Being highly elastic, it is subjected to any price shocks in the EU market. The median markups ranging from 1.5 to 3.5 also makes the RMG products of Bangladesh vulnerable to price shocks in the EU market. Bangladesh exports in bulk amount in the EU market resulting in high economies of scale. After LDC graduation the global price might rise as tariffs are imposed on a big supplier like Bangladesh. A significant amount of tariff if can be absorbed by the importers, it may help to improve Bangladeshs overall competitiveness.

In 2022-23, Europe-bound merchandise exports from Bangladesh amounted to $30.5 billion, of which apparel exports comprised $28.6 billion. The EU and the UK account for more than 60% of Bangladeshs garment exports while apparel products constitute more than 93% of total exports to the EU and the UK. RMG exports are still confined to 5-6 low value added products, mostly made of cotton. Market demand has been shifted to more MMF based products. Product diversification and switching over to MMF is now the priorities of the sector.

In case of the EU apparel exports, Chinas share dropped from 43% to 29% from 2010 to 2022. In this period Bangladesh experienced a jump from 8% to 22%. The other competitors share remained steady. Similarly, Bangladesh is also capturing the Chinas UK market. The EUs duty-free market access for Bangladesh and the Derogation of Rules of Origin requirement from double-stage to single-stage transformation contributed it.

Chinas declining share in the RMG export to EU can create enough room for Bangladesh to capture the market. In an attempt to diversify the supply sources, the western countries are adopting the China+ 1 policy from which Bangladesh can tap the potential. Cost efficiency by automation can raise markups for the firms. It will also ensure value addition. To ensure a secured trade preference, engaging with the trade partners is essential.

Range of Chinese products replaced by Bangladesh if reflected in the study, could have given some flexibilities. Products varied at the disaggregated level. Considering only price, can not give a conclusion in the market. Wage increase is a type of tariff, there might some new other issues in the form of not tariff also. The buyers are absorbing a part of markups to ensure their own profitabilities. Withdrawing incentives in this sector will force the buyers to absorb more markups. In view of this situation, more and more automation to reduce costs, signing FTAs are necessary as our competitors are doing so. Compliance is more necessary than price factor. Exchange rate depreciation is another issue needs to be considered. Workers unrest needs to be taken into account. Enhancing expertise for capacity building and diversifying the RMG products are necessary. The losses of engaging in FTAs & PTAs need to be considered.

Parties with lower elasticity will have to bear the higher burden. In 2005, many predicted the extinction of RMG due to MFA phase-out. But it persisted and sustained. Even the threats of the 2007-08 global financial crisis could not impact the RMG. Our internal resilience is the big power to sustain this industry. However, the incentive practices need to be phased out gradually to make the RMG sector self-dependent.

About a four-decade old sector, it is still having financial and non-financial support. It is viewed by some experts that the loss of preference are too some extent a case for European importers also and it might be a reason to the deferment of the proposed GSP scheme.

We need to consider our competitiveness in the home front. Exports in our country are import dependent, importing raw materials for RMG takes 11 days making it time-consuming. Customs clearing time should be reduced. Chinese investment in Bangladeshs RMG can also be sought and their efficiencies in this sector might be a learning for the country. Quality in the education and the analytical power of the students should be improved. Share of knowledge needs to be incorporated into the RMG products.

BGMEA is working to create value addition and innovate products. Policy obstacles exist in attracting FDIs. Duties on importing environment-compliant machinery is very high.

Common bonded warehouse facilities need to be created. Social audit guidelines are non-existent in Bangladesh. Institutional relation-building across countries is essential. Product development through R&D is essential though so far per-head R&D cost in the RMG sectors is very low in Bangladesh.

It could have been improved by considering the lower or higher-end products. The net effect after the price increase should have been addressed. Internal policy mechanisms are not working properly in Bangladesh impacting inflation and exchange.

Situation in UK market is much favourable, under the Developing Countries Trading Systems (DCTS), Bangladesh will enjoy duty free access under comprehensive preference(CP), till graduation, with an enhancement of another three years as like as EU. As such, apparel exports from Bangladesh are benefitting from an 11.5 per cent margin of preferences, against 6.5 per cent for Vietnam and 2.3 per cent for India.

After graduation and the transition period, Bangladesh will get Enhanced Preferences (EP) in the UK , the tariff rate for apparel items is zero, therefore, the country will continue enjoying duty-free exports for apparel. However, rules of origin criterion has to be maintained. Product Specific Rules (PSR) for processing products have to be maintained, even though alternatives will be available that could give an easy solution to the exporters. Another important aspects is to utilize the benefits of compendious regional cumulation availability. Bangladesh will be able to enjoy regional cumulation benefits with a number of regional and intra-regional countries.

Under the DCTS, 69% ( 117 out of 169) of Product Specific Rules (PSR) allow alternative or rules so business that can meet at least one PSR. Double Transition for Textile will be required when it is at the Enhanced Preference(EP). Even in the EP, for all products, the general RoO requirement for non-originating materials (NoM) is of 20-70%. In that respect Knit Garments having high Value Addition might have sustained in the UK market, however raw material for yarn could be an issue. From experiences of SAARC, regional cumulation could be helpful for Bangladesh. Safeguard measures under DCTS are also liberal in UK than EU.

Online markets should have been considered and the choices in this platform change frequently. Apparel governance is a positive implication that will make the RMG sector strong. The UK will continue to share social compliance issues with Bangladesh. As 75% export of Vietnam is foreign investment driven, comparing the RMG sector with Vietnam is not a feasible study. Cooperation and coordination among all stakeholders are essential.

The buyers have a preference for low-cost suppliers. The relationship should be based on the firm level and also with the brands. To improve management quality, easy access should be given to companies to bring in foreign mid-level managers. It should be made easier by the govt. Higher output per worker should be increased.

With the changing context of Bangladesh, after graduation, sustainability of export sector needs to be strengthened. We will have to compete with those developing countries which may enjoy the status of developed countries. As a newly upgraded non-LDC developing country, Bangladesh should take full preparation to continue with its export-led manufacturing-based growth strategy.

The writer is CEO, BUILD-a public private dialogue platform working for private sector development.



LATEST NEWS
MOST READ
Also read
Are we prepped to face climate change?
Big push for Bangladesh to adapt to changing climate  
The unraveling of military rule in Myanmar
How to win an argument
Recognise Pakistans 1971 atrocities as genocide
Its time we diversified our export trade
Stop ecocide to gain green economy
Conservation of our wildlife is a must
Editor : Iqbal Sobhan Chowdhury
Published by the Editor on behalf of the Observer Ltd. from Globe Printers, 24/A, New Eskaton Road, Ramna, Dhaka.
Editorial, News and Commercial Offices : Aziz Bhaban (2nd floor), 93, Motijheel C/A, Dhaka-1000.
Phone: PABX- 41053001-06; Online: 41053014; Advertisement: 41053012.
E-mail: [email protected], news©dailyobserverbd.com, advertisement©dailyobserverbd.com, For Online Edition: mailobserverbd©gmail.com
🔝
close