GSP suspension - blessing in disguise? | The Daily Star
12:00 AM, March 10, 2015 / LAST MODIFIED: 04:22 PM, March 23, 2015

24th Anniversary of The Daily Star (Part 1)

GSP suspension - blessing in disguise?

Hafiz G. A. Siddiqi

Prompted by the Rana Plaza disaster that killed about 1137 workers in April 2013, the US government suspended duty-free privileges it had granted under the GSP programme to products exported from Bangladesh. The suspension might be reinstated if and when Bangladesh complies with the conditions stated in the Bangladesh Action Plan 2013. The US consumers, retailers and government had earlier expressed their displeasure because Bangladesh did not, according to their assessment, fully uphold workers' rights, ensure safety in the workplace, improve working conditions, etc. to the level that would satisfy US consumers. Several devastating fires in RMG factories in the recent past, particularly the Rana Plaza episode, changed displeasure into anger, resulting in the suspension. Rana Plaza drew global attention and the whole world including the Parliament and retailers of EU accused Bangladesh anew for violating labour rights, workplace safety norms, etc. Soon after, EU also got involved through its “Sustainability Compact” programme. The collapse created suspicion about the structural integrity of factory buildings comprising the whole apparel industry. Eventually, USTR, EU trade tepresentative and retailers of both sides of the Atlantic decided to have all the factory buildings inspected to determine if they were safe to house RMG factories. Bangladesh has already made it clear that it is committed to full compliance with Action Plan 2013 and also to abide by the 'Sustainability Compact' initiated by EU that calls for detailed time-bound implementation of remedial steps proposed by EU in the areas of labour rights including freedom of association and collective bargaining,  labour law reforms, structural integrity of buildings, workplace safety, health hazards and responsible business practices such as more responsible supply chain management in garment manufacturing.
The US government, Bangladesh government, retailers from US and EU, BGMEA and ILO came together to protect the Bangladesh RMG industry. US buyers formed a consortium of 26 retailers called the 'Alliance for Bangladesh Worker Safety.' Similarly, EU retailers formed an 87 member consortium called 'Accord on Fire and Building Safety in Bangladesh.'  It was decided that the Alliance and Accord would inspect some 1800 factory buildings to determine the actual status.  It is to be noted that reinstatement of GSP privileges by the US would greatly depend on recommendations of Alliance. And whether EU would cancel GSP benefits for RMG or not would partly depend on recommendations of Accord.
The Alliance and Accord have submitted their preliminary reports on the factory inspection.  As reported in the media, initial findings of the inspection indicate that the assumption that a large number of factory buildings of the RMG industry are unsafe is incorrect. During inspection, structural integrity of only 17 factory buildings were found structurally vulnerable and therefore unfit for housing RMG factories. However, since this small percentage is statistically insignificant, it is not a matter of concern. Bangladesh's coimmerce minister highlighted this point by revealing that Accord and Alliance had inspected about 1800 garment factories and found structural faults in less than 2 percent of the factories. This number compares fairly well with the global average. The percentage of global vulnerable factory buildings is 2 percent (New Age). 
Full compliance of the Action Plan and Sustainability Compact will generate additional costs of relocation and reconstruction of factory buildings, installation of fire-fighting equipment in individual factories, wage hikes up to “living wages” with supplementary benefits, improved medical services and other compliances. This will increase the total cost of production. Consequently, profits in this sector will decrease unless labour productivity or managerial/operational efficiency or the prices Bangladeshi RMG makers get from foreign buyers increase. If labour costs increase too much, Bangladesh will lose its trump card — low labour cost or the low FOB price. Eventually, the industry will cease to be competitive. Buyers will look for new destinations. Investors will move to more profitable sectors. Consequently, millions of workers, for whom the consumers and the political leaders of US and EU are concerned, will be laid off without any immediate employment opportunity. The consumers and retailers of the US and EU would not want to happen because it is against their ethical buying practices and doing business responsibly. This is evidenced by the fact that US and European consumers refuse to buy apparels produced by sweatshops even if these apparels are cheaper. But for economic reasons, US consumers prefer to continue buying RMG imported from Bangladesh because it is cheaper. If Bangladesh does not export RMG to the US market, US consumers will be deprived of the opportunity to buy clothing at lower prices. This is a dilemma. One way of dealing with this may be for the US government to consider withdrawing the duty on RMG imported from Bangladesh. US consumers will have to agree to buy Bangladesh RMG at higher prices as suggested above if they want the Action Plan and Sustainability Compact implemented.
The above discourse implies that RMG workers need to be empowered. Empowering workers is a shared responsibility of the factory owners, retailers and other actors who play money making roles in the global supply chain. The consumers do not make money but they save money at the cost of the workers. Consumers in US and EU seem to be conscious of their obligations. As regulators, the governments in exporting and importing countries play important roles in changing the status of workers. The government, consumers, retailers and manufacturers need to work jointly to create an environment in which workers can get their “liveable wages” and other legitimate dues.  To create the environment,one must know the answer to the question - why RMG manufacturers do not pay workers “liveable” wages and other legitimate dues. This question has been answered by Jean Lambert, Chairperson of the  EU Delegation for South Asian countries. During her recent visit to Bangladesh, she said, “Global brands should raise the prices they pay to Bangladeshi garment makers so that they can provide a living wage to workers and the brands have to increase the prices they pay to the manufacturers out of corporate conscience”. (The Daily Star, December 11, 2014).
Lambert raised both economic and ethical issues referring to the case of t-shirts made in Bangladesh and sold in EU. She questions, if a t-shirt is sold at two euros in retail markets, how much money is left after deducting the costs of fabrics, threads, buttons, zippers, packaging materials, and other auxiliary items used in making a t-shirt? Besides, one has to adjust costs of electricity, gas, water, factory building maintenance and insurance, local transport,  international freight and insurance, mark-up of the retailers, and all other related costs. Not a hefty amount. The t-shirt manufacturer has to share the leftover amount between themselves and the factory workers. How much remains after the profit for the shirt makers is taken out from the balance? It is unlikely to be large enough to pay the workers all their legitimate dues. The manufacturers are helpless but ethically guilty of exploiting the workers. Who is actually at fault? Lambert points the finger at the big retailers. The retailers usually refuse to pay the t-shirt makers ethical prices because they operate from a stronger bargaining position. Similarly, local manufacturers of t-shirts, and for that matter any apparel maker can get away by paying lower than ethical (liveable) wages to workers because workers do not have bargaining strength. In the process, the manufacturers are blamed. Jean Lambert wants ethical production and buying processes to replace the exploitative process. Lamber'st proposal is however a departure from traditional thinking. It is true that charity does not have any place in business negotiations. But in this globalised world many unbelievable changes have occurred.      
Ethical practices have already permeated in business. Ethics and economics have become two sides of the same coin. For example, the application of CSR, an ethical tool, has become an economic tool as well for business enterprises. Ethics in business is now more pronounced than it was three decades ago. Consumers in the US and EU demonstrate their ethical buying practices by refusing to buy apparels made by sweatshops even if they are cheaper. But at present they buy apparels at prices fixed by the market forces. These prices incidentally are lower than the prices consumers would perhaps be willing to pay if the apparels were made by ethical producers. This implies that consumers enjoy an undefined amount of consumers' surpluses. 
One may examine the global supply chain from the manufacturers to the final consumers and determine who benefits most. Since we do not have data we cannot make any estimate. However, on the basis of media reports and also on a-priori reasoning, one may conclude that manufacturers in Bangladesh who are at the lowest end of the supply chain make lower profits than those made by marketing people or retailers at the highest end of the value chain. Finally, consumers enjoy the benefits of using cheaper clothing produced by badly exploited poor workers, whom the consumers want to help. Since consumers care for these poor workers, they should agree to share their wealth and income. As suggested by Lambert the retailers may pay the manufacturers higher prices for the merchandises they buy. The retailers can recover their loss from the consumers by charging higher prices. Since western consumers enjoy a certain amount of consumer surplus they may agree to pay higher prices if labour standards and working environment in Bangladesh RMG factories improve to the expected level. It is admitted that this is a value loaded proposition. So is the pronouncement of US consumers that they would not buy Bangladeshi garments if factory workers' rights are not fully respected, if workers' are treated inhumanly, etc. US Senator Menendez expressed similar sympathy for some four million poor workers who make apparels for millions of US citizens. According to him, the US has an obligation to help RMG workers in Bangladesh to improve their overall status. We admire his feeling for RMG workers of Bangladesh. I believe that full compliance with EU's Sustainability Compact and the US-sponsored Action Plan 2013 would encourage American and European consumers to pay higher prices for the benefit of workers. This will need a substantial change in the attitude of the US and EU consumers, brands, retailers and Bangladeshi garment makers. Now it is the obligation of the retailers and producers of apparels to negotiate and formulate policies for arriving at the legitimate amount, and methods of transferring the money from the consumers to the workers.  
Full compliance to Action Plan 2013 and Sustainability Compact takes a long view of ensuring better quality of life for workers and will benefit Bangladesh most. Once full compliance becomes a reality, the RMG industry of Bangladesh will be at its best provided Menendez and Lambert can convince the consumers to pay ethical prices for RMG they buy from Bangladesh. The factory buildings will not only be safe places but also comfortable for workers to work in. Adequately paid and properly treated happy and healthy workers will work harder to increase managerial/operational efficiency and productivity. Under pressure from the industry, the Bangladesh government will assign highest priority to developing infrastructure, particularly the Dhaka-Chittagong four-lane highway and ensuring uninterrupted gas supply to the RMG industry. This will eventually reduce the cost of doing business in Bangladesh. Bangladesh has already established the largest apparel production capacity in the world with an unlimited reserve of a quickly trainable labour force. Consequently, Bangladesh will continue as the preferred destination for outsourcing by ethical brands/buyers. Although the process of complying with the Alliance and Accord initially appeared distressful, like swallowing bitter pills it should eventually prove to be good medicine for recovery and pave the way for the industry to rise to new heights. Bangladeshi entrepreneurs have already planned to increase RMG exports from the current USD 25.00 billion to USD 50.00 billion by 2021. Our experienced industry leaders will overcome the current challenges as they overcame similar challenges in the past, and prove that the GSP suspension, often dubbed as a wake-up call, is really a blessing in disguise.


The author is Professor Emeritus, BRAC University and Former Vice Chancellor, North South University.

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