Prepare for preference erosion after LDC graduation

Bangladesh's ready-made garment sector, a cornerstone of its export earnings, faces substantial trade preference erosion upon graduation from least developed country (LDC) status, said Mohammad Abdur Razzaque, chairman of the Research and Policy Integration for Development (RAPID) Bangladesh, at a seminar yesterday.

To thrive amid heightened competition, Bangladesh must lower margin costs through efficiency enhancements, focus on producing high-value-added items with more substantial profit margins and leverage evolving geopolitical dynamics for sustained growth, he added.

Razzaque was presenting a study, titled "Can Bangladesh Absorb LDC Graduation-Induced Tariff Hikes? Evidence Using Product-specific Price Elasticities of Demand and Markups for Apparel Exports to Europe", at a seminar organised by RAPID in collaboration with the International Growth Centre at the Sheraton Dhaka in Banani.

Bangladesh is set to graduate out of the group of LDCs on November 24, 2026, about 50 years after it first became a member of this cohort of nations in December 1975.

Various studies indicate that tariff hikes after LDC graduation will result in a significant shock to Bangladesh's exports.

The United Nations Conference on Trade and Development estimated Bangladesh's potential export losses to be between 5.5-7.5 percent while the World Trade Organization suggests a decline of more than 14 percent in Bangladesh's exports.

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 percent of Bangladesh's garment exports while apparel products constitute more than 93 per cent of total exports to the EU and UK.

Currently, as an LDC, Bangladesh enjoys duty-free access to the EU for all exports, barring arms and ammunition.

In his presentation, Razzaque said the sector should consider raising the mark-up on current garment products by capitalising on cost efficiency through improvements in infrastructure, power, utilities, skilled labour and management, modern technologies and advanced supply-chain management techniques.

The sector should explore opportunities to diversify the readymade garment product portfolio by focusing on high-value-added products that inherently offer higher profit margins, he added.

He went on to say that the garment sector should capitalise on the evolving geopolitical landscape.

"Many European countries are increasingly adopting the 'China plus one' policy to diversify their supply chains. Bangladesh can proactively engage in negotiations with these nations to secure a share of these expanding markets."

Bangladesh holds a significant market share in the apparel sectors of both the EU and UK.

According to Razzaque, the introduction of tariffs on its imports could lead to a general rise in garment prices across these markets.

Consequentially, higher prices could potentially assist Bangladeshi exporters in cushioning the impact of preference erosion.

China's strategic transition towards producing more technologically-intensive goods and geopolitical developments prompting western buyers to diversify their sourcing could be another boon, he added.

As China's market share diminishes, it opens avenues for other nations, including Bangladesh, to fill the void, he said.

Speaking about challenges after LDC graduation, Razzaque said concerns regarding safety, compliance, and environmental matters should be critically evaluated in the post-LDC era.

Trade agreements between the EU and competitor countries exporting apparel, such as Vietnam's free trade agreements (FTAs) with the EU and UK, also mean that while Bangladesh may face a tariff of 12 percent, nations with FTAs such as Vietnam will get duty-free access, he added.

Sharifa Khan, senior secretary of the Economic Relations Division, and Tapan Kanti Ghosh, senior secretary of the Ministry of Commerce, also spoke at the event.