Suspension of US GSP: What does this mean for Bangladesh?

THE US government suspended Bangladesh from the Generalized System of Preferences (GSP) which allows duty-free entry of over 5,000 goods to the US market from least developed countries. This action comes as a result of Bangladesh government's failure to improve working conditions in the country. Although Washington based lobbyists have been making a case for Bangladesh's suspension for about a year now, the US government finally gave in to their demands after over 1,100 workers died in a tragic factory collapse earlier this year. What does this suspension mean for Bangladesh and its growing economy?
The probable financial loss in terms of falling export may be very small, at least in the short run. As RMG products (which make up most of the US import from Bangladesh) are not included in the list of duty-free products in GSP, there will an export fall of about $40 million according to Charles Kernaghan, executive director of Institute for Global Labor and Human Rights. At present, Bangladesh exports about $5 billion worth of goods (mostly RMG products) to the USA every year and hence, the suspension from US GSP will account for a fall in export of about 0.8 %.
However, this $40 million will translate to export loss for some small industries in the country, namely, ceramic products, tobacco, etc. Since global export of products from these industries are very small compared to that of RMG sector, this $40 million export fall will make up a much larger proportion total export for these small industries. However, the GSP Program is set to expire on July 31, 2013. It may take some time before Congress renews the programme and so short-run tariff on these goods was inevitable. It will be interesting to wait and see whether these exported items make it back to the list of the GSP Program.
More importantly, Bangladesh's image as a trade partner of the USA is tainted. This may discourage US and other foreign investors, new and old, from venturing into Bangladesh, which may have a moderate effect on the prospect of future export growth of the country, particularly in US market.
The biggest short-run fear for the country will be to see a similar action adopted by European Union. EU had previously threatened to remove preferential access of Bangladeshi RMG products in EU market if the government did not take measures to improve the working condition in Bangladeshi factories. Bangladesh RMG export to EU grew to about $11.37 billion as of June 2012. Hence, such an action will be devastating for the country's RMG sector which exported about $19 billion dollar worth of products in the last fiscal year and employs about 4.5 million people at the bottom of the population pyramid, 80 % of whom are women.
Thus, there will be increasing pressure on the government to improve working condition as EU will be closely observing Bangladesh. Several European importers have already come forward to help the country in improving safety features of RMG factories, which is a good sign for the country.
The interesting point to take into account here is America's lack of effort in coming forward to help Bangladesh to improve its working conditions since April's Rana Plaza collapse. So far, main US importers like Walmart have not made any concrete commitment to improve the working conditions of the factories from which they import clothes for their outlets. Disney has terminated its RMG import from Bangladesh. Interestingly, the US government has always charged a rather hefty tariff from Bangladesh and other countries' RMG export. In 2010, Bangladeshi RMG export faced a tariff about $650 million (which was about 17% of the total 2010 RMG export value).
To conclude, this suspension from US GSP is little more than a symbolic action by the US government to punish the factories concerned for the recent RMG factory tragedies. All eyes are now on the Bangladeshi government and US importers that source apparel from Bangladesh. So far, neither has taken any major initiative to address the poor working conditions in Bangladeshi RMG sector.

The writer is a third-year Economics student at Princeton University, USA.
He can be reached at @shafinfattah on twitter