CHALLENGES FACED BY BANGLADESH RMG

Enactment of US Trade Development Act 2000

The Trade and Development Act 2000 more popularly known as US Trade Development Act

2000 was enacted in the USA on May 19, 2000. This act consisting of the African Growth and

Opportunity Act (AGOA) and the United States-Caribbean Basin Trade Partnership Act

was aimed to introduce a new trade and investment policy for Sub-Saharan Africa (SSA),

expand trade benefits to countries in the Caribbean Basin Initiative (CBI), enhance the GSP and

strengthen the US Trade adjustment assistance programmes. The US TDA 2000 provided

preferential trade access, especially in textile and apparel sectors, to the countries of Africa and

Caribbean Basin. The US Trade Development Act 2000 provided duty-free and quota-free access

to 48 countries of Africa and 24 countries of the Caribbean Basin for exporting textile and

apparel products to the US market on certain eligibility criteria. Some of the beneficiary

countries, especially in the Caribbean Basin, are Bangladesh’s direct competitors in the US

apparel market. Since this act was enacted, Bangladesh’s RMG had to struggle harder to

maintain its competitiveness and prevent losing market share to these beneficiary countries.

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 Accession of China to WTO

China is perhaps the largest supplier of textiles and clothing in the world. The accession of the

country to WTO happened on December 11, 2001 opening up a new vista of market access for

itself. China has a very large production base of fabric, by using competitive and appropriate

technology. China also has a very large pool of labor force for the highly labor intensive apparel

industry. Both these factors ensure a very high degree of competitiveness. China’s accession to

WTO has removed their major market access constraint. The high degree of integration that

China already had between their textile and clothing sector enabled them to respond quickly to

the demand of garment buyers. This posed the threat of the diversion of business to China in

large quantum from countries like Bangladesh, urging them further to remain competitive.

End of the MFA Era

The beginning of the year 2005 marked the birth of the post MFA era. The MFA (Multi Fibre

Arrangement, also known as the Agreement on Textile and Clothing (ATC)) governed the

world trade in textiles and garments from 1974 through 2004, imposing quotas on the

amount developing countries could export to developed countries. It expired on 1 January 2005

in accordance with the WTO Agreement on Textiles and Clothing (ATC) of 1994.

The period of MFA (1974-2004) enabled Bangladesh to emerge as a global supplier of RMG

(Readymade Garments). But its termination threatened to change this scenario. Countries that

relied on the secured market of quotas had to face enormous challenges amid intense global

competition. Bangladesh’s heavy reliance on this sector gave rise to certain vulnerabilities. With

neighboring countries, such as India and China, building ever more formidable RMG industries,

a substantial part of Bangladesh’s RMG workforce was put at risk of job loss if the industry

failed to stay competitive, not to mention considerable losses in foreign exchange earnings. In

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order to prevent such losses and remain a notable player in the apparel market, Bangladesh had

to devise and implement strategies to improve its overall competitiveness and that of the RMG

sector.

A study by the World Bank titled, “End of MFA Quotas: Key Issues and Strategic Options for

Bangladesh Readymade Garment Industry,” explored the factors that have brought success to

Bangladesh’s RMG industry and examined the probable threats and key constraints in the post-

MFA era. It also set out a number of strategic options for the sector to pursue, building on past

achievements and competitive advantages in order to be able to enhance Bangladesh’s export

competitiveness in the global marketplace.

It suggested a dual approach that assisted Bangladesh to compete efficiently. They are as

follows:

• A focused strategy for strengthening the competitiveness of the RMG industry.

• A diversification strategy to reduce Bangladesh’s vulnerability from export concentration

in RMG.

A summary of the approaches are as follows:

Reducing lead time: Lead time (refers to the time required for supplying the ordered garment

products after the export order has been received) has emerged as an important issue in the

global market. Retailers value those manufacturers who can respond quickly to orders.

Bangladesh has the longest lead time among its competitors, and it needs to find a way to reduce

lead time if it is to maintain international competitiveness.

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Improving the domestic and regional supply chain: Contributing to the problem of lead time

is the gap between demand and supply of raw material, particularly for woven garments. Local

sourcing has not been able to reduce this gap significantly, and it will take time to increase

domestic capacity substantially. One option may be to forge closer links with neighboring

suppliers for sourcing textile and clothing (T & C) inputs at reasonably short notice.

Warehousing for a quick turnaround: An innovative solution to the problem of long lead time

could be the establishment of a central bonded warehouse (CBW) to stock duty-free imported

inputs. A CBW could be set up by any firm, and its duty-free imports would not be subject to

conditions, unlike individual bonded warehouses. The CBW operator could be permitted to stock

a whole range of T & C inputs, such as finished and grey fabric, accessories, dyes and chemicals,

yarn, RMG, and textile machinery and spare parts in amounts determined by expected demand.

RMG and textile manufacturers could then purchase these inputs duty-free from the CBW

directly as export orders are received and save on the shipping time required for importing

inputs.

Opening land routes and modernizing port facilities: To reduce the time taken to source

inputs from the region Bangladesh Government recently removed the ban on importing yarn

from India via land routes. This should be followed up with other logistics and infrastructural

reforms, such as modernizing Chittagong Port and addressing inadequate power supply, which

act as major constraints on efficiency.

Simplification of tariff regime: Despite increasing liberalization, Bangladesh remains one of

the most protected economies in South Asia and, indeed, the world. As pointed out in a previous

World Bank report, Export Competitiveness and Growth, high tariffs that protect domestic

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industries create disincentives to export activities and cause an anti-export bias. High import

duties also increase the cost of production and reduce profit margins of manufacturers. The RMG

sector has been insulated from this anti-export bias through schemes such as bonded warehouses

and EPZs. This shows that Bangladeshi producers will respond to opportunities and can compete

in the global market when they do not face disincentives in the domestic market. Simplifying the

cumbersome import regime as a whole could make export diversification a reality.

Diversification, aggressive marketing, and pursuing new markets: In order to forge a

"competitive edge," Bangladesh could diversify into a new range of higher-value products, aside

from the traditional T-shirts, shirts, trousers, sweaters, and jackets which make up 60 percent of

the RMG exports. This would need to be associated with vigorous promotion and aggressive

marketing in order to secure a position in the market for high-value apparel. Furthermore, with

only a handful of countries accounting for 98 percent of Bangladesh’s RMG export market,

opportunities to exploit other potential markets should be explored, including East Asia and other

middle-income countries, and others which have given zero-tariff access to Bangladeshi exports.

Bangladesh National Council (BNC) of Textile Garments and leathers Workers has proposed

eight-point strategies to attain sustainable RMG sector in the post-MFA era. The proposal

included formation of multi-stakeholder national Committee on occupational health and safety

for the garment workers, healthy and secured work environment, recognition and established

workers rights by Bangladesh Garments manufacturers and Exporters Association (BGMEA) as

a precondition to access global market, global brands and buyers investments, building stronger

backward linkage, financial support from the government, establishment of universally-

recognized working hours and a formation of national investigation on the Spectrum incident.

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 Rise of the Financial Crisis

In 2007, not long after the end of MFA era when Bangladesh’s RMG sector just started to gather

itself and prepare to fight the amplified global completion and remain competitive, the Global

Financial Crisis surfaced ominously. The crisis aroused due to the bursting of the United States

housing bubble (a type of economic bubble that occurs periodically in local or global real

estate markets. It is characterized by rapid increases in valuations of real estate property such

as housing until they reach unsustainable levels relative to incomes and other economic

elements).

This financial crisis that surfaced in the United States gradually spread its tentacles all over the

globe. Since its emergence till present, major market stocks registered nonstop fall, leading

financial institutions steadily moved towards the brink of bankruptcy; making some of them to

get sold at incredibly low price and governments of wealthiest countries came up with rescue

packages to save their financial system. Bearing in mind that the world’s robust economies are

struggling to cope with the crisis, it did not seem farfetched to believe that the weak and fragile

economy of our country will be affected as well.

In a report, the World Bank (WB) said that the Bangladesh’s development will start getting hit

right away. It projected that the Bangladesh’s economic growth will fall by 2 percent to 4.8

percent in fiscal 2008-09 contrasting the government projection of 6.8 percent. In response,

Bangladesh Bank (BB) Governor Salehuddin Ahmed firmly ruled it out stating that WB’s

projection is grossly underestimated and is not backed by thorough analysis. He said for now

Bangladesh is save from any blow from the crisis but if it prolongs then the impact might be felt

in the long run. According to the Governor, as Bangladesh produces low-end garment products,

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the sector may not be affected. He urged everyone involved to keep their eyes open as a

precaution along with the suggestion that exporters should improve competitiveness by

improving productivity and efficiency, instead of seeking a favorable exchange rate.

A high-powered technical committee was formed on November 3, 2008 to closely monitor the

impact on the country's economy from the fallout of the current global financial crisis and take

instant remedial measures. The committee comprised of 8 members with the Finance Secretary

Dr Mohammed Tareque as the head. The other members of the committee were the National

Board of Revenue Chairman, Bangladesh Bank Deputy Governor, Securities and Exchange

Commission (SEC) member, Controller of Insurance Companies, vice chairman of the Export

Promotion Bureau (EPB), additional secretary of Economic Relations Division (ERD) and one

representative from IMED.

Unlike the government officials, the garment exporters and major buyers believed that the global

financial crisis will not Bangladesh’s RMG sector as it exports mainly basic products. According

to them, sales of cheaper RMG products increased both in Europe and the US by 20 percent

following the global financial turmoil and number of orders that they received from foreign

buyers was high as the buyers started to look for cheaper RMG products. But they also thought

that the bad impact of the global recession may be felt in February or March of 2009 if the

situation in the western financial markets does not improve. They were confident that

Bangladesh's strong market position will not diminish if the crisis prevailed for a short time

period.

Bangladesh set an export target at $16.298 billion for fiscal 2008-09, with the readymade

garment sector to earn the highest amount of foreign currency. Of $16.298 billion, $12.267

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billion were expected to come from two main sub-sectors of RMG: knitwear and woven.

The export of readymade garments (RMG) from Bangladesh experienced a hefty growth last

fiscal despite the ongoing global recession. The overall apparel shipments in the fiscal 2008-09

ended in last June and witnessed a growth of 15.4 percent to stand at over $ 12.347 billion.

Country's shipment to 26 out of total 27 EU member countries reached US$ 8.2 billion at the end

of last fiscal year, which was US$ 7.6 billion in FY 2007-08.

THE FUTURE CHALLENGES FOR RMG

However, the president of Bangladesh Garment Manufacturers and Exporters Association

(BGMEA) Abdus Salam Murshedy is not happy about the last fiscal’s (2008-09) growth rate. He

thinks it could have been much higher. According to the BGMEA president, hard time is yet to

come in the sector of readymade garments. He thinks that the recent export figures are reflecting

the earliest hits of the financial crisis on the RMG sector. According to him, the industry is under

pressure from falling export orders, drastically falling retail price and demand of the products,

which pose the actual threat. Increased fuel price, bank interest rates, shortage of power are

further threatening the existence of the country's apparel sector. He urged the government to

disburse funds that have been promised to rescue the country's largest export earning sector to

fend off recession impact.

Bangladesh now enjoys extra competitive edge in the EU market with the GSP facility under

which the exporters get zero tariff entry to the 27 member-states of EU when India, China and

some other countries have to pay certain amount of tariff. But the competitive edge will be

eroded if the EU signed TFA with India and other nations and ease the rules of origin, offering

them greater market access with lower tariff or no tariff at all.

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Ready-made garment (RMG) sector is about to face another setback as competitors like Pakistan

and Sri Lanka are likely to get duty advantage in the US market after the current WTO

negotiations are over. Duty on RMG export from Pakistan and Sri Lanka will be reduced to 5.0

percent within five years after the negotiations are over but for least developed countries (LDC)

including Bangladesh, the time limit is 10 years. These two countries will get the facilities under

disproportionately affected countries (DAC) as Pakistan has war like situation and Sri Lanka is

war-torn and affected by tsunami. So for the last five years, Bangladesh will be in a less

competitive position by 10 percent duty as the average tariff duty on RMG to the US market is

15 percent. The World Trade Organization (WTO) negotiations will be over by 2010 and when it

is over within the three months, the duty cut facilities will become effective.

For more than 30 years Bangladesh has been one of the best RMG (ready-made garments)

exporting countries in the world. However, being one of the world`s best in this sector,

Bangladesh is not receiving the treatment and facilities that it deserves in the market of

importing, rich countries. According to African Growth and Opportunity Act Competitiveness

Report (AGOA), more than 37 LDCs (least developed country) got a duty-free access in the

market of USA till September 30, 2009. Whereas, 13 LDC’s including Bangladesh have yet not

got this privilege in the USA. This places us in a tough position to compete with the rest. Being

an LDC had we been receiving this privilege from the USA and other importing countries would

have enormously contributed to pace up of our growth.

Moreover, the global financial crisis is still ongoing. Many politicians, economists, world leaders

and others concerned are still working on to fix the crisis. The longer the crisis would last, the

deeper would be its impact on Bangladesh economy whose prime driving force is RMG.

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 EXPORT TREND OF BANGLADESH RMG

The RMG business started in Bangladesh in the 70’s but it was then a merely casual effort. The

first consignment of knitwear export was made in 1973 and the first consignment of woven

garments was made in 1977. In 1981-82 the contribution of woven garments in the total export

was 1.10%. Afterwards it is a story of sustained success for Bangladesh RMG sector. The

knitwear sector has grown over the years in geometric progression and become the prime driving

force of Bangladesh’s export earnings. Within a decade the contribution of woven to the export

basket became 42.83% (1990-91) and the knitwear sector’s contribution was 7.64% (1990-91).

Now knitwear has become the largest export earning sector of Bangladesh contributing 41.79%

to national export earnings at the end of FY 2008-09 (July-April).

The entrepreneurs of the knitwear sector stepped forward with their expertise in the late 80’s.

With their earnest efforts they were able to export US $14.84 million in 1989-90. Out of this, US

$12.22 million was exported to EU and US $2.02 million was exported to US. The trend

continued in the knitwear sector because of the market access opportunities provided to the

LDC’s under the Generalized Systems of Preference (GSP) benefit.

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 Source: BGMEA

This is the rejuvenated beginning of the epic story of Bangladeshi knitwear sector that in true

sense has been possible due to the massive industrialization in a sustainable way with effect on

all probable human development aspects which is the encouraging part of the story.

The growth of knitwear sector is increasing in an increasing rate. The cumulative average growth

rate of the sector is 20%. And it is continuously grabbing more portions in the export pie of

Bangladesh. This is mainly attributed to the facilities provide under the EC, GSP and ROO. The

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knitwear sector is heavily driven by favorable policies and took the opportunity to develop a

strong backward linkage for the sector.

Source: Export Promotion Bureau

The EU is the main export region for Bangladesh knitwear constituting 76% (US $4.2

billion) of total knitwear export followed by USA (14.59%, i.e. US $807 million) in the year

2007-08. This is mainly attributed to the facilities provide under EC, GSP and favorable ROO.

The knitwear sector is driven heavily by these favorable policies and the opportunity to develop

a strong backward linkage for the sector where the value addition is about 75%. The two-stage

transformation requirement of ROO in 1999 boosted market penetration in EU further; it

contributed a growth of 101.9% since 2000-01.

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 Source: BGMEA

Bangladesh RMG sector has successfully passed some critical tests and is now sailing with two

masts: knitwear and woven. The sub-sectors are now in healthy competition among themselves

to take the role of leadership within the country.

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 Source: BGMEA

In FY 2003-04, knitwear for the first time exceeded woven wear and became the leader in terms

of quantity exported with 91.6 million dozens. Knitwear is still leading in terms of quantity

exported and is widening the gap day by day. Export quantity of knitwear items increased to

241.59 million dozens which is higher than the year 2003-04 to 2007-08. On the month of

December of the FY 2008-09, total knitwear export was 146.5 million dozens higher than the

same period of last year.

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 Source: BGMEA

Bangladesh knitwear is performing a well increase in terms of terms of quantity which is a clear

indication of capacity in this sector. In year 2007-08, contribution of woven wear to the export

earning was 36.17% and in knitwear was 38.97%. In the current year, the performance of both

the sector are as follows: knitwear export US $5,231.01 million FY 2008-09 (July-April); woven

export US $4,902.48 million FY 2008-09 (July-April).

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Figure: Exports to various destinations

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