Mozena vs Tofail: Who pays for US tariff on Bangladesh's garment export?
US Ambassador Dan Mozena recently said that Bangladesh pays “zero, zero,..... zero tariffs” on apparel exports to his country, while Commerce Minister Tofail Ahmed refuted this claim by saying it was “false, false,.....false” (DS Business, November 13). The exchange would seem both amusing and baffling, particularly to those uninitiated in the complexities of trade economics. The uncontested simple math is that the tariff levied on Bangladesh's apparel export to the US market at a rate of more than 15% generates about $800 million annually to the US exchequer. Mozena's contention is that the burden of this tariff is borne by the US consumers who buy the imported apparel, while Tofail's claim is that it is the Bangladeshi garment producers who have to ultimately pay the entire bill. Unfortunately, most economic controversies, including this one, are hardly amenable to such simple math.
Much depends on whether we are considering import duty in the US on apparel import in general or import from Bangladesh in particular. Ambassador Mozena is right that Bangladesh is not particularly discriminated against regarding tariffs, since most other major apparel exporters to the US markets also face the same high tariff rates. The average high tariff rate faced by all exports from Bangladesh to the US -- above15% compared to, say, about 3% for China -- is because our exports to the US consist of little else other than garments. That's why Bangladesh is more adversely affected than other countries by the generally high tariffs on apparel imports in the US. These high tariffs are liable to raise the apparel price in the US domestic market -- while also lowering the trade volume and the price received by the exporting countries -- so that a part of the burden is borne by the US consumers. To that extent, again, Ambassador Mozena is correct. In fact, the consensus among economists is that the high US tariffs on apparel imports cause net welfare loss to the US economy and are retained only because of lobbying by organised labour.
But if the US authorities were to consider the question of whether or not to offer tax-free facility to Bangladeshi apparel exports in particular, its impact on the US domestic apparel price would be marginal, if at all, because exports from Bangladesh constitute only a fraction of the US domestic apparel market. In that case, the impact of US import tariff can be said to fall largely, if not entirely, on the Bangladeshi exporters, including the marketing intermediaries -- both in respect of lower export price and lower export volume.
This much is from standard economic theory. International trade in the real world, however, does not exactly follow the economic theory of competitive global markets. There are unequal bargaining powers, unfair practices, firm heterogeneity and other asymmetries. A number of in-depth studies have recently been carried out on these issues regarding garment exports from Bangladesh by the International Growth Centre at the London School of Economics with researchers from Warwick University, UK, and Pennsylvania State University, USA. By analysing detailed information on firm-level production efficiency and by tracking detailed data on transactions along the entire value-chains of the industry over a period of time, these studies have come up with many interesting insights.
The analysis of the value-chains, for example, show that out of the average retail price of a Bangladeshi shirt paid by a US consumer, less than 30% goes to the local producer of the shirt, covering the cost of materials, other production costs, wages and profits; the rest 70% is accounted for by shipment and marketing costs and profits of intermediaries and retailers abroad. The wages of the garment factory workers not only constitute the most severely squeezed bottom end of this long value chain -- accounting for hardly 3%-4% of the final retail price -- but these workers are also found to be subjected to even further stress at times of supply disruptions and external shocks.
Bangladeshi garment industry is also found to comprise of a unique variety of “born to export” firms, that is, factories that are set up only to export. As such, they have weak bargaining power particularly at times of external shocks, since there is no room for shifting to domestic market. Many factories export only intermittently, so that there is little incentive for productivity-enhancing investments and for hiring regular workforce. The factory-owners can try to overcome these weaknesses by incorporating more of the design and intermediate stages of the values chains that are now mostly in the hands of foreign parties; this will give them more room for absorbing shocks. The fact that our garment exports can remain competitive both in the tariff-free European Union market and in the high-tariff US market suggests that there are perhaps extra fats at the marketing intermediary stages of the value chain. Moreover, results from experimental research show that even some rudimentary form of worker training on factory floors can enhance productivity substantially, which in turn can help increase wages, upgrade product quality and capture a larger part of the value chains.
Another interesting research finding regarding the characteristics of “born to export” firms is that they are likely to move as a herd -- or not at all -- since they respond to the same global market signals, perceived or actual. Such an industry can thus generate dramatic export surges such as in response to changes in export barriers in large markets, but they can also be stubbornly unresponsive to modest tinkering with export stimuli. There thus seems to be potentially large benefit to be reaped by Bangladesh's garment industry from getting tax-free export facility to the US. Short of granting such a facility, an alternative is for the US to use the tariff revenues generated from Bangladeshi garment exports as aid to improve the labour standards of garment factories in Bangladesh.
Unfortunately, far from getting such a facility as a Least Developed country, Bangladesh is being deprived from even getting the GSP facility for its non-garment exports to the US. More than two-thirds of all countries, including almost all developing countries, currently benefit to a varying extent from the duty-free access to the US market under its GSP programme. For Bangladesh to be picked up almost singly as a developing country not deserving the facility sends a wrong signal to the consumers of our exports worldwide and to potential foreign investors. Both Bangladesh and the US need to do some soul-searching as to why our bilateral economic relations have come to such an impasse.
The writer is an eminent Economist and Advisor to International Growth Centre's research programme in Bangladesh.