As a nation, we should be proud that Bangladesh has become one of Asia’s most remarkable and unexpected success stories in recent years and has been ranked 41st among the world’s largest economies in 2019 in a report published by the UK-based Centre for Economics and Business Research (CEBR).
Hand-in-hand with this upturn in financial fortunes is the fact that the country accomplished its eligibility for Least Developed Country (LDC) status in 2018, and is predicted to upgrade itself to developing country status in 2024, if the criteria set by the United Nations Economic and Social Council’s Committee for Development Policy (CDP) are fulfilled on time.
The rapidly growing ready-made garment (RMG) sector in Bangladesh has contributed greatly to this success. Currently, Bangladesh is the second largest global supplier of apparel, with a 6.4 percent market share in global clothing. The RMG sector also accounts for 83 percent of Bangladesh’s exports, and employs around four million people.
It cannot be denied that this economic boom of the industry has been partly assisted by the nation’s duty-free market access to the European Union, which accounts for about 63 percent of apparel exports, under the Everything But Arms (EBA) scheme and the Generalized System of Preferences (GSP) arrangement.
If Bangladesh’s graduation to developing country status is confirmed by the CDP five years from today, the GSP arrangement with the EU will have another three-years to run and the country would no longer be entitled to enjoy any LDC-specific benefits from the international community.
This emerging situation directly raises a number of questions: how is the RMG industry preparing for Bangladesh’s graduation from LDC status to developing country status, and how do we minimise any negative impacts from the eventual loss of the GSP arrangement and other trading benefits offered by countries outside the EU?
I would first note that now is not the time for the industry to panic. It is rather a critical moment to obtain a level-headed approach and implement a system of apparel diplomacy to be undertaken by the government and non-government bodies with existing and potential customers in the apparel business market.
In order to qualify for graduation from LDC, any country must meet two of the three criteria stipulated by the CDP. The three areas that need to be considered are Gross National Income (GNI); Human Assets Index (HAI) which covers factors such as child mortality rate, percentage of undernourishment in the country, maternal mortality rate, secondary school enrolment and adult literacy rate; and Economic Vulnerability Index (EVI) which assesses various factors including population, export breakdown, stability of agricultural production and stability of the exports of goods and services.
If these three conditions are fulfilled, Bangladesh would qualify for graduation to developing country. However, this is not a matter for complacency and is rather a call for action. After achieving developing country status, under EU terms, the nation will have the opportunity to enjoy the benefits of GSP under the “GSP Plus” scheme, established to aid developing countries.
In order to be awarded GSP Plus, a country must fulfil two criteria set by the EU: products that qualify for GSP Plus must be in the top seven largest exports from the country (where apparel is the largest in Bangladesh) and the three-year average export of that product cannot exceed 6.5 percent of the total import of that product into the EU.
Here, Bangladesh faces an issue, as apparel exports from the country already constitute nine percent of the total apparel imports into the EU. Given the importance of the apparel sector to the Bangladesh economy and the EU market’s significance to run the industry, apparel diplomacy is urgently required to negotiate with the EU and convince them to extend the threshold to 12-13 percent. If a satisfactory outcome cannot be reached, the future development of the country will be severely jeopardised.
Additionally, now is the perfect time for Bangladesh to actively seek international investment, which requires a concerted effort to facilitate the mechanism for establishing business investments in the country, something that has proved problematic in the past.
The current apparel industry in Bangladesh is heavily reliant on “basic” low ticket price production, although some 40 percent of exports in 2018 were on higher ticket price fashion items. As a result, the sector functions on very low profit margins, often eroded through increasing taxes, rising charges for fuel and power, greater expenditure on transportation and wages, all of which discourage international investors.
This demonstrates Bangladesh’s need to improve its infrastructure as it lags behind other countries in the region such as India, and the new “star on the block” Vietnam. Improvements are required in road networks and port services to promote lead-times in production, which would attract investment.
The above factors need to be addressed and communicated to international governments and trade bodies to increase investment and initiate healthy debates that negotiate extensions to GSP Plus agreements. This is, obviously, an area where apparel diplomacy needs immediate enactment to secure stable trading terms with our established partners.
However, I don’t believe we should solely rely on negotiating favourable GSP terms with our traditional markets, the US and the EU, when we achieve developing country status. Non-traditional markets offer a fantastic opportunity for expansion of the RMG business.
As a nation, we currently trade in smaller quantities with a number of countries that offer huge potential for apparel export growth, including China, Russia and Brazil (to name a few). It is most urgent to develop a diplomatic approach to constructively address the high import duties imposed on goods from Bangladesh, and promote the RMG industry’s potential in these significant markets.
The RMG industry can no longer just depend upon its traditional business markets. There are growth markets all over the Asian region and beyond. The industry needs diplomatic support to nurture trade relationships with non-traditional markets that could largely benefit the sector.
However, given the rise in Bangladesh’s economic status (something viewed as miraculous by outside bodies for a nation that is not yet 50-years-old), we need to accept that the improvements in the welfare of the country come with conditions. We cannot expect to depend on favourable or subsidised trading terms. We need to learn to stand on our own and continue developing the RMG industry, as we have in the past decades. With the right form of workforce training and introduction of apparel diplomacy with our international business partners, we can establish an industry that is fit for purpose in the years ahead.
Mostafiz Uddin is the Managing Director of Denim Expert Limited. He is also the Founder and CEO of Bangladesh Denim Expo and Bangladesh Apparel Exchange (BAE). He can be reached at email@example.com.