Millennium Post
Inland

Holding on to 'preference'

While Bangladesh will face most towering challenges among textile- and cloth-exporting graduating LDCs, West Bengal, in the neighbouring India, stands an opportunity to regain the shared repute it once enjoyed in the apparel industry prior to the industrial revolution

Holding on to preference
X

In the next four years, a major change in the global textile and clothing (T&C) market is expected as the world's second-largest exporter, Bangladesh, will graduate to a developing country status in 2026 from its current status as a least developed country (LDC). LDC support measures, offered by international development and trade partners, have immensely benefited the T&C sector of the least developed countries like Bangladesh.

A joint report produced by the WTO, the UN Department of Economic and Social Affairs, International Trade Centre (ITC), and UNCTAD, published on February 1, 2022, has recommended that the Asian countries, namely Bangladesh, Cambodia, Lao People's Democratic Republic, Myanmar, and Nepal — graduating from the least developed countries (LDCs) category — need to take measures to bolster the textile and clothing sector. The report entitled, 'Textiles and clothing in Asian graduating LDCs: challenges and options', focuses on the above five countries where the textile and clothing sector is a major industry and will be significantly impacted by graduation. Adjustments to these measures are part of the graduation process and will need to be managed to ensure a smooth transition for the countries, the report finds.

The exports of textiles and clothing of graduating LDCs have largely been driven by LDC trade preferences. The report notes that graduation presents an opportunity for the countries to develop strategies that can position the sector higher up the global value chain. Few salient features of the report, which are being used as the main source of information for this piece, include:

✵ Bangladesh, Lao PDR, and Nepal are scheduled to graduate in 2026. Cambodia first qualified for graduation at the 2021 review and thus its actual graduation will depend on the results of the 2024 review.

✵ Unilateral trade preferences granted by many developed and several developing countries – including duty-free and quota-free market access and more liberal rules of origin (RoO) requirements – are considered to be the most prominent LDC-specific international support measures (ISMs). T&C products have traditionally been subject to higher tariffs in many countries. Consequently, LDCs' T&C exports enjoy some of the highest preferential margins available. While LDCs generally lack manufacturing capacity, preference-driven trade in T&C products has acted as a catalyst for Asian graduating LDCs (along with several other African LDCs) to break into manufacturing activities.

✵ The combined T&C exports of Bangladesh, Cambodia, Lao PDR, Myanmar, and Nepal reached a peak of USD 63.6 billion in 2019. As much as two-thirds of this total was generated solely by Bangladesh which, during much of the 2010s, had been the world's second-largest apparel exporter (after China). The Asian graduating LDCs together account for about eight per cent of world T&C exports and about 14.5 per cent of global apparel (clothing) exports

✵ After graduation, LDCs will lose LDC-specific trade preferences. This could result in considerable changes to their tariff preferences and Rules of Origin (RoO) requirements, especially in the absence of alternative trade arrangements such as Generalised System of Preference (GSP) facilities for non-LDC countries and bilateral/regional free trade agreements (FTAs). The provisions available for graduated countries can vary depending on their participation in relevant FTAs and/or ability to satisfy any qualification criteria for preferences.

✵ While the LDCs, as a group, participate in world trade at the margins, with their combined share in world merchandise exports stagnating at around just 1.1 per cent, their comparable share in global clothing exports more than doubled from 6.9 per cent in 2010 to 15.2 per cent in 2020, largely because of the extraordinary performance of Asian graduating LDC's T&C exporters. More than 90 per cent of LDC T&C exports are from Asian graduating LDCs, with Bangladesh alone capturing more than 60 per cent of all such exports, followed by Cambodia (20 per cent) and Myanmar (9 per cent)

✵ Bangladesh shipped 5.8 per cent of world's T&C products in 2019, increasing from just 3.1 per cent in 2010. Cambodia and Myanmar captured 1.8 per cent and 0.9 per cent of world T&C exports, respectively. On the other hand, Lao PDR and Nepal – relatively small exporters from this region – had a meagre presence in world exports for such products.

✵ Asian graduating LDCs have varying degrees of export dependence on T&C products, ranging from as high as nearly 90 per cent in the case of Bangladesh to 53 per cent in Cambodia, 34 per cent in Nepal, 31 per cent in Myanmar, and just five per cent in Lao PDR during the period 2018-20.

✵ Cambodia's T&C exports are equivalent to more than 30 per cent of its GDP. The clothing sector employed 0.85 million people in 2017, accounting for 86 per cent of employment in the industrial sector. Approximately, 60 per cent of garment factories are foreign affiliates. There are also numerous "cottage factories" that are usually subcontracted during peak seasons. Cambodia is chiefly specialised in cut, make, and trim (CMT) activities, with its clothing export items being jerseys, T-shirts, women's and girls' suits, and men's and boys' suits. For Cambodia, the top export destinations are the European Union, which absorbs more than one-third of the country's T&C exports, followed by the United States (21.9 per cent), Japan (8.5 per cent), Canada (7.4 per cent), and the United Kingdom (6.9 per cent). It almost entirely relies on international sourcing networks for inputs and materials, which are mostly imported from China (57.8 per cent in 2019) and Vietnam (16.8 per cent). Knitted and crocheted fabrics, as well as woven fabrics of synthetic fibre, are among the country's top imported products.

✵ Myanmar, a latecomer in the export-oriented T&C sector, recorded a staggering yearly average clothing export growth of 40 per cent during the past decade. The reinstatement of the European Union's trade preferences in 2013 and the United States' easing of the ban on imports in 2012 significantly increased Myanmar's exports to these two markets. The share of T&C exports as a proportion of the country's total manufacturing exports increased rapidly, reaching 69 per cent from just 27 per cent in 2011. It is estimated that the sector employed more than 1.1 million workers in 2019 — 87 per cent of whom were women. Nearly half of garment firms in Myanmar are foreign-owned. Myanmar specialises in CMT activities, shows a high degree of product concentration, and is heavily dependent on imported raw materials, mostly sourced from China. Along with basic products, it has developed a niche in outerwear items such as jackets and coats that require rather sophisticated craftsmanship skills. The European Union accounts for 52.8 per cent of the total share of exports in the sector, followed by Japan (17 per cent), the United Kingdom (5.7 per cent), and the United States (five per cent). The success of Myanmar's T&C industry seems to have been set back by renewed political instability, triggered by the military coup of early 2021.

✵ Most of the Asian graduating LDCs have benefited significantly from a strong export performance that has been fuelled by the high preferential tariff margins and favourable rules of origin available for LDCs under various unilateral initiatives. This is reflected in their share in major markets with LDC-specific preferences, such as Canada, the European Union, and Japan, vis-à-vis the United States, where such preferences are limited.

Challenges before Bangladesh

According to the above report, Bangladesh's T&C sector generates export earnings that amount to more than 11 per cent of the GDP, and provides direct employment to over five million workers, more than 60 per cent of whom are women. Most of the country's exports are cotton-based items, such as T-shirts, trousers, sweaters, shirts, and jackets, falling within low- and mid-market price segments, for which competitiveness is largely based on low wage cost. Bangladesh's key markets are also highly concentrated, with more than two-thirds of its T&C exports going to the European Union (52.7 per cent) and the United States (14.2 per cent). The economy is very much dependent on the export of labour-intensive apparel. Such heavy reliance on garments is a source of significant concern for Bangladesh's growth prospects.

In 2003, Bangladesh had an identical clothing market share in Canada and the United States, of 2.4 per cent. Over the next two decades, its share in Canada, which provides duty-free market access, rose to about 9.3 per cent, in contrast to only around 5.1 per cent in the United States, where apparel and clothing items are mostly excluded from its GSP scheme. Similarly, thanks to trade preference, Bangladesh's export market share in the European Union rose from just above four per cent to 14 per cent during the same period. The same share in Australia and Japan – again, taking advantage of duty-free access – rose from virtually nothing to more than 10 per cent and 4 per cent, respectively.

Tariff preferences granted through GSP schemes, where available, are significantly lower than those granted through LDC-specific schemes (which mostly offer duty-free market access). As none of the Asian graduating LDCs, including Bangladesh, have trade agreements with Canada, meaning that once they graduate, all their exports will be subject to the general GSP or most-favoured-nation (MFN) rates. Canada has higher tariffs for clothing products, where the average post-graduation tariff would be between 14 and 16.5 per cent.

In the case of the European Union, graduating countries have the option to apply to the European Union's Special Incentive Arrangement for Sustainable Development and Good Governance — Generalised Scheme of Preferences Plus (GSP+) — upon graduation. Attaining GSP+, subject to fulfilling certain conditions, would provide them with duty-free market access to T&C products. Failure to do so would result in clothing exports being levied with tariffs of between 8 and 9.3 per cent through the Standard GSP scheme, or even with higher MFN rates. As per the

proposed European Union GSP 2024-34, Bangladesh is found to be the only Asian graduating LDC whose T&C exports could potentially be subject to the European Union's safeguard measures, resulting in its removal from GSP+ preferences

Bangladesh will be subject to the GSP or MFN rate in their exports to Japan, as they are not part of ASEAN and therefore do not benefit from the ASEAN-Japan Comprehensive Economic Partnership Agreement (CEPA). In this context, Bangladesh will face tariffs on its clothing exports ranging from 8.5 to 9 per cent.

Following its LDC graduation, Bangladesh will have to forgo both India's and China's LDC schemes, which currently cover more than 97 per cent of tariff lines, including those of textile and clothing items. It may be entitled to Asia-Pacific Trade Agreement (APTA) tariff concessions which, however, are not necessarily comprehensive. Although Bangladesh and India are both members of the South Asian Free Trade Area (SAFTA), most clothing items are not covered by India's tariff liberalisation schedule for non-LDC SAFTA members.

Bangladesh's overwhelming dependence on T&C exports, bound for markets with high preferential tariff margins, means the potential impact of its LDC graduation is likely to be much greater than that of other graduating LDCs. As tariff hikes reduce its competitiveness, an ex-ante analysis using a partial equilibrium model, employed in a WTO-EIF study, suggests graduating Asian LDCs could experience a loss of exports ranging from as much as 14.3 per cent for Bangladesh to just 1.45 per cent for Lao PDR. Given Bangladesh's export structure, it is almost certain that any potential loss of export earnings will be driven by T&C products.

Vietnam – already a top apparel exporter with strong backward linkages in the textile segment – has had an FTA with the European Union since August 2020. Vietnam will see tariffs on its clothing exports to the European Union gradually decline from an average nine per cent currently to around zero, at the same time, Bangladesh, following its official graduation, will complete its additional three-year transition period (in 2029) with the European Union's Everything but Arms scheme. If Bangladesh is eventually subject to the European Union's safeguard measures, average tariffs on its apparel exports to the European Union will rise from zero currently to around 11 per cent.

A survey on the major global apparel brands and retailers on the average rating (in a scale of 5) of four major supplying countries reveals that vis a vis Vietnam and China, Bangladesh is uncompetitive in many important areas. The table documents the details. Except in price, China and Vietnam are in a much better place in all major criteria like quality, vertical integration, innovation, efficiency, and tariff advantage. On the criterion of compliance and sustainability, both Bangladesh and China are at a low end.

Initiatives taken by Bangladesh

Many Bangladeshi exporters are investing in product upgrades and automation, with the objective of enhancing productivity and becoming more competitive. They are adopting new technologies and are training workers on upgraded machines and processes. Firms also reported adopting energy-saving and greenhouse gas (GHG) emission-reduction technologies, implementing software-based production tracing and digitalising administration activities, including employee tracking and payment processing.

It is reported that Bangladesh is discussing a free trade agreement (FTA) with China in an effort to boost exports to its massive market. The table reveals that Bangladesh is price competitive vis a vis China. FTA with China will open a huge Chinese market for Bangladesh's low-end products.

Advantage for West Bengal?

This transition phase of the LDC graduation process for major T&C exporters of South-East Asia may offer an opportunity to West Bengal which shares a glorious history of textile industry with Bangladesh. The state can emerge as a major textile hub, the Union Textiles Minister has claimed.[2] The state's finance minister has also said that the potential for export from West Bengal is far more than what had been tapped. Textile export from the state is around 2.7 per cent of the total export from the country, he said. In the next three to five years, it should go up to 10 per cent, he hoped. The readymade garments sector in Kolkata's Metiabruz itself is worth Rs 15,000 crores and has the potential of growing up to Rs 25,000 crores in the next few years. The minister has emphasised hosiery export to Europe, South East Asia, and the United States.

India's domestic apparel & textile industry contributes five per cent to the country's GDP, seven per cent of industry output in value terms, and 12 per cent of the country's export earnings. India is the 6th largest exporter of textiles and apparel in the world. The textile and garments industry is expected to reach USD 190 bn by 2025-26 from USD 103.4 bn in 2020-21. Cotton production supports 5.8 million farmers and 40-50 million people in allied sectors. A total of 1, 77,825 weavers and artisans are registered on Government-e-Marketplace [3]

The textiles and apparel industry of India has strength across the entire value chain from fibre, yarn, and fabric to apparel. The industry is highly diversified with segments ranging from products of traditional handloom, handicrafts, wool, and silk products to the organised textile industry in India. The organised textile industry is characterised by the use of capital-intensive technology for mass production of textile products and includes spinning, weaving, processing, and apparel manufacturing.

Conclusion

Prior to the industrial revolution in England, the Bengal region (consisting of present-day Bangladesh and West Bengal) was the world hub of the apparel industry. Though Bangladesh has regained its global status, West Bengal has lagged behind due to various socio-political reasons. But it has the potential to emerge as a major player in the textile, clothing, and jute sector. For this, elaborate strategic planning is required. To begin with, a free trade agreement (FTA) with Bangladesh, specifically to harness the untapped potential of cotton, jute, and readymade clothing sectors of this part of the subcontinent is urgently needed for the benefit of both the countries.

Views expressed are personal




Next Story
Share it