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Trade war opportunities for RMG exports to the US

Muhammad Mahmood | Published: October 19, 2019 21:08:06 | Updated: October 25, 2019 20:55:22


There is an air of optimism in Bangladesh that the RMG (ready-made garments) industry is likely to be a winner of the US-China trade war. The optimism is premised on the assumption that many fashion brands will now relocate their production facilities away from China to countries across Asia including Bangladesh. Also, Chinese manufacturers themselves are likely to shift production to cheaper South and South-East Asian countries. As for China, the trade war has just accelerated the process which has been in the making over the last one decade. China has been facing rising costs including labour cost which necessitated taking a decision on whether to invest in labour-saving technologies or relocate elsewhere.

The Asian Development Bank (ADB) in its annual outlook 2019 further added to Bangladesh's optimism. It estimates that the trade conflict between the US and China will add 0.23 per cent to Bangladesh GDP (gross domestic product) over the next two years. This contribution to GDP will mostly come from exports of RMG and leather goods, especially to the US. Of the added contribution to GDP (0.23 per cent), 90 per cent will be from RMG exports alone. The report also mentioned that Vietnam will gain 2.31 per cent added growth in its GDP from the trade conflict. Furthermore, one potential effect of US tariffs is likely to be fall in prices for clothing as production continues to move from high-cost China to lower-cost countries like Bangladesh, Vietnam and others.

According to the Office of the US Trade Representative (USTR), Bangladesh was the 51st largest goods trading partner (two-way trade) of the US in 2018 with the US running a trade deficit of US$4.0 billion during the same year. The data further reveal that since 1995 the US has been running trade deficits with Bangladesh. These deficits are concentrated in manufactures imports from Bangladesh while during this period the US has always been running trade surpluses in agricultural goods but the overall trade balance remained favourable to Bangladesh. Bangladesh ranked as the 43rd largest supplier of goods to the US in 2018. The value of goods imported from Bangladesh totalled US$6.1 billion in the same year and this represents an increase of 7.3 per cent in imports from Bangladesh relative to the previous year (2017). In fact, the value of imports from Bangladesh increased by 62.8 per cent since 2008.

The major manufactured goods imported into the US from Bangladesh include clothing and footwear with clothing exports constituting the bulk (almost 99 per cent) of manufactures exports to the US. But despite increased exports to the US, the trade deficit with the US recorded a decline by 5.2 per cent in 2018 from 2017 indicating the US exports to Bangladesh was growing at a faster rate than Bangladesh exports to the US during the year under consideration. However, the trade dispute has also caused steel prices to rise in Bangladesh which in turn is negatively impacting on the housing and construction industry.

It must be borne in mind that finished clothing has not yet been hit by Trump tariffs on Chinese imports but if talks fail it will be hit in the next round of US tariffs on Chinese imports. China still remains the largest clothing-exporting country with an export industry valuing at US$41 billion. But Trump's erratic behaviour in decision-making process caused serious concerns among US retailers and to hedge their risks they are moving away from Chinese sources to other countries to maintain steady supply of clothing. At the same time, the Chinese faced with rising costs are also looking to move into overseas locations, in particular to less developed countries. Both factors now offer great opportunities for Bangladesh to seize upon not only by capturing an increased share of the global clothing market but also to attract Chinese FDI (foreign direct investment) into Bangladesh.

HIGH RELIANCE ON ONE MANUFACTURING INDUSTRY: The RMG industry in Bangladesh now employs 4.5 million people and accounts for 13 per cent of GDP. But such high reliance on one manufacturing industry with disproportionate share of exports with highly concentrated export destinations can make the economy vulnerable to external shocks. In 2018, Bangladesh exported US$36.7 billion worth of manufactured goods of which RMG exports accounted for 83.5 per cent of total exports. The country appears to have just moved from jute and jute goods exports in the earlier days to RMG exports in the present days.    

The Bangladesh RMG industry is the second largest in the world of its kind only after China. The industry is also marked by lowest wage rate in the world. Bangladesh needs to create 2  (two) million jobs per year just to keep up with the growing population. To this end many suggest that Bangladesh needs to attract FDI in the manufacturing sector, including the RMG industry, to absorb this increased labour supply. The US tariffs definitely provides an opportunity for Bangladesh and that calls for enhanced capacity to compete with countries like Vietnam, Cambodia, Sri Lanka, Ethiopia and other clothing suppliers to the global market. To achieve this competitive edge, Bangladesh must have to gain increased efficiency, productivity, quality, price and logistics lead time advantages. Furthermore, Bangladesh must also pursue trade liberalisation by completely overhauling its tariff regime which will create a more competitive environment and product diversification to put the manufacturing sector in a better position to compete globally. The country must make sweeping reforms of its taxation and regulatory regimes.

Bangladesh has not been able to attract much FDI either in the RMG sector or into other industries to enable it to diversify its manufacturing base. In the very recent period (2019) Bangladesh has slipped into 176 out of 190 countries in Global Ease of Doing Business. Bangladesh seems to be not able to cut its lengthy bureaucratic tape along with poor infrastructure and transport which deter to enable the country to attract FDI to further consolidate and diversify its manufacturing base. Also, Bangladesh taka appears to be maintaining a fixed exchange rate with the US dollar (like in Hong Kong) causing the taka to appreciate as the US dollar appreciates putting Bangladeshi exporters, including RMG exporters, at a competitive disadvantage. In fact, a Bangladeshi RMG manufacturer has moved to Ethiopia to invest in RMG manufacturing creating 4000 jobs there.

RMG FACES LONG-TERM STRUCTURAL CHALLENGES: Meanwhile, the clothing (RMG) industry globally is facing long-term structural challenges from both demand and supply sides. On the demand side, as consumers are increasingly feeling that they are overburdened with too much of clothing than they really need, they are cutting back their expenditures on clothing. This is an example of the Law of Diminishing Marginal Utility in operation. Moreover, increased consumer awareness about the impact on the environment of the textile industry is also further contributing to declining consumer demand for clothing which even new fashion designs may not be able to reverse. Overall, now there are clear indications that the market for clothing is in a long-term declining phase in developed countries including the US, the principal market for Bangladesh RMG exports. 

On the supply side, there is growing problems with inventories which have been growing faster than sales thus increasing the cost of supply. Now Trump tariffs have further added to the already existing inventory problem in pushing up prices.

Bangladesh's economic relationship with the rest of the world, including the US, possibly makes it easier to make the diagnosis of its problems but reaching consensus on prognosis and remedy may not be very easy given the structure of the economy and its institutional framework. If one looks at the sophistication and breadth of exports, they are not much different from countries at the similar stage of development - low-tech labour-intensive products from the primary or secondary sectors and limited in number. The commodity concentration of the country's exports remains highly concentrated, overwhelmingly made up of RMG, leather goods and frozen fish and seafood, accounting for 95 per cent of total merchandise exports in 2018. Also, destinations of exports remain rather limited, primarily the US and the European Union or EU (also a  very limited number of countries within the EU), resulting in both high commodity and market concentration which put the exports sector at risk.

Trade redirection away from China is no guarantee to benefit Bangladesh alone. RMG exports in particular also face competition from countries such as Vietnam, Turkey, Ethiopia and others. Such a very narrow range of export products, in particular RMG exports, makes the  country vulnerable  to external economic shocks such as global economic slowdown or global financial crisis. Also, historically the RMG industry has been a very mobile industry and any country can move into and out of this industry quite easily.

Trade can enable a country to enrich materially if it can sell its products at high prices and import from others at low prices. The terms of trade for Bangladesh do not indicate that is happening. In this context such an over-reliance on the RMG industry can prove to be a potential barrier to future growth of the economy. That obviously calls for a more diversified economy. Poor infrastructure (Bangladesh infrastructure ranks 103 in the World Economic Forum's  Global Competitiveness Index), regulatory rigidities as reflected in Bangladesh's very low ranking in the Global Ease of Doing Business (176 out of 190), lack of skilled workforce as reflected in need for a large number of foreign workers in the RMG industry and low productivity  need urgent attention. Access to business capital should also be made easy. Otherwise, they will not only constitute roadblocks to future growth potentials but also competitive disadvantage for the country.

Muhammad Mahmood is an independent economic and political analyst.

muhammad.mahmood47@gmail.com

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