As is well known, LDC graduation will result in Bangladesh losing the preferential market access facilities enjoyed by the LDCs thanks to the various unilateral, and bilateral, regional and global initiatives. While the EU has offered to extend the preferential market access for an additional three years following graduation (i.e. till 2027 in case of Bangladesh), there is no denying that future market access scenario for Bangladesh will undergo profound changes in the coming years.
In no sector will the implications of Bangladesh’s LDC graduation be felt more acutely, and in such impactful ways, as the RMG sector of the country. Not only because the sector accounts for more than four-fifths of Bangladesh’s total global export earnings, but also because apparels face tariff peaks in almost all key markets of Bangladesh. For example, tariffs facing Bangladesh’s apparels are, on average, about 12 percent in the EU and 16-18 percent in Canada. Accordingly, the depth of preference erosion will be significantly high in case of exports of RMG items from Bangladesh.
It is also to be noted that the rules of origin (RoO) for preferential access of apparels exported by the LDCs tend to be highly LDC-friendly (e.g. only a single stage conversion requirement in the EU and a flat 25 percent domestic value addition requirement in Canada). Graduation to non-LDC developing country status will also mean that the RoO are going to be more stringent. Thus, on both counts, LDC graduation will require the apparels sector to face new challenges. There will also be implications in the form of preference erosion currently enjoyed by Bangladesh as a member of regional trading arrangements such as the South Asia Free Trade Area (SAFTA), where India, for example, offers DF-QF market access to the four LDC members for all products including the apparels or the LDC scheme run by China. Indeed, apparels feature prominently in all the 40-odd preferential schemes from which Bangladesh currently benefits (excepting the US GSP scheme which does not include most of the apparels items exported by Bangladesh; however, in any case, US had withdrawn the GSP facility for Bangladesh following the Rana Plaza tragedy in 2013).
Estimates carried out at the Centre for Policy Dialogue (CPD) indicate that Bangladesh’s exports will face an additional tariff of about 6.7 percent, on average, once the current DF-QF market access is no longer available. The corresponding figures for the EU, non-EU and Canadian markets are 8.7 percent, 3.9 percent and 7.3 percent respectively. Thus, preference erosion and more stringent rules of origin will adversely, and significantly, impact the competitiveness of Bangladesh’s apparels exports to the global market. The market signals are quite clear: business as usual scenario is going to fundamentally change and business as usual mind-set will also have to change profoundly.
Some of the competitors of Bangladesh are going for aggressive regional trading arrangements (RTAs), with serious implications for our RMG sector. Mention may be made in this connection of the Vietnam-EU FTA which will allow a major competitor of Bangladesh (Vietnam) to access the European market on duty-free terms. This will eliminate the preferential margin that Bangladesh currently enjoys vis-à-vis Vietnam, a non-LDC developing country, in the EU market. Indeed, there may be a time, beyond 2027, when Vietnam’s apparels would have duty-free access to the EU market while apparels exported by Bangladesh would need to enter duty-paid (if the current scenario prevails). Aggressive foreign exchange policies pursued by competitors could bring new challenges for the RMG industry of Bangladesh.
RMG performance will also be impacted by indirect factors. For example, LDC graduation will have implications arising from stringent compliance requirements under the trade-related intellectual property rights (TRIPS) of the WTO, as also from changes in the support regime concerning the enhanced integrated framework (EIF) and the various special and differential treatment provisions of the WTO. In the past, the RMG sector has benefited from the technical assistance and capacity building support received by Bangladesh as an LDC; these will no longer be available.
Meanwhile, minimum wages in the RMG sector will, justifiably, continue to rise at a time when the sector will be facing the challenges mentioned above. Cost of borrowing by Bangladesh is rising already because of its recently acquired middle income status; competing development demands and prevailing domestic resource mobilisation performance could mean that fiscal space for the type of incentives that the RMG sector has been traditionally enjoying could shrink in future.
The upshot of the discussion is that, targeted policies and actions will need to be undertaken at macro, meso (sectoral) and micro (enterprise) levels to address the emerging challenges facing this flagship sector of the country.
Source:
https://www.thedailystar.net/opinion/macro-mirror/ldc-graduation-what-it-means-bangladesh-1550542
