Balancing global and regional value chains for RMG industry

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As the Covid-19 pandemic ravages global creation and trade linkages, the insurance plan makers are increasingly exploring the options of shifting more towards regional value chains (RVCs) from global value chains (GVCs) as pathways to sustaining export development. Bangladesh's RMG and clothing sector is probably the country's biggest development drivers with a worldwide apparel market show of 6.8 per cent in 2019. The sector makes up about about 84 % of the country's total exports and employs practically 4 million people which 61 % are women.

The country's RMG and apparel industry has seen a devastating impact of Covid-19. Cancelled orders, unsold stock and declining demand have led the sector to struggle for sustaining its previous successes at expected amounts. Bangladesh's close competitor in the RMG industry is Vietnam which acquired 6.2 per cent of the global industry share found in 2019; and Vietnam managed to achieve strong export growth because the late-2019. Vietnam has also displayed better performance than Bangladesh in including the Covid-19 pandemic and is currently threatening rather successfully to capture Bangladesh's situation as the 2nd major exporter of RMG after China.

Vietnam in addition has entered into a free trade agreement (FTA) with the EU in August 2020 which is the most comprehensive contract that EU has ever concluded with a good developing country. At the moment, only 42 per cent of Vietnamese exports to the EU appreciate zero tariffs beneath the GSP. It'll be almost 99 per cent elimination of duties following the FTA. The EU can be a major export destination for Bangladesh's RMG. Bangladesh is yet to negotiate an identical FTA or bilateral trade agreements once the GSPs are eliminated. Vietnam's RMG export basket can be more diversified with comparatively higher value-added products than Bangladesh; and each hour labour efficiency per worker is 19 % larger in 2016--USD 4.09 in Vietnam weighed against USD 3.45 in Bangladesh as approximated by the Asian Efficiency Organisation (APO). It really is much more likely that Vietnam even now holds this gain although the labour expense is lower in Bangladesh. It is therefore about time for Bangladesh's RMG sector to restore its position of vitality and adopt a sustainable pathway for in the years ahead. 

Along with sustained low labour costs, Bangladesh's big advantage is its leadership in LEED (Leadership in Energy and Environmental Design) qualified green RMG with 91 LEED-accredited factories in Bangladesh, which is certainly higher than in virtually any different country. Of the 10 highest rated LEED-authorized factories in the world, six are located in Bangladesh. These give a preference for the foreign purchasers and investors for importing RMG from Bangladesh and handle the country as a lucrative destination for FDI. However, some vital constraints for Bangladesh happen to be that the country does not have a diverse selection of export destinations and possesses a low product selection of RMG and low labour efficiency.

At the moment, the urgent need for Bangladesh is to secure FTAs or bilateral trade deals to expand the access of its RMG to multiple destination markets. China has released a tariff exemption for 97 % of Bangladesh's goods in July 2020 which gives an excellent possibility to benefit from trading with China and adopt more advanced production operations and technology from China to move up in the ladder of global RMG marketplace. The main element for Bangladesh is to take the benefit of being a world leader in Green RMG to include higher benefit to its RMG items. Specifically, Bangladesh's RMG sector must provide more attention towards maintaining factory requirements and labour welfare regulations to conquer the disruptions in the post Covid-19 world.

Since its beginning, Bangladesh's RMG exports are led by the GVC-led development and distribution channels. The procedure has got been characterised by cross-border fragmentation of creation functions, which entails specialisation in a narrower selection of tasks by domestic organizations organised within the global production networks. With limited effective capacities, integrating  with  GVCs has  furnished  wider  trade  possibilities  for Bangladesh's  domestic RMG market to gain  usage of new market segments through specialising in a single or limited number of  tasks in the creation chain.

The  typical  feature  of  the  GVC-oriented RMG is  that  the companies  in Bangladesh  focus  predominantly  on  making (processing) activities, while research and style (R&D) for product production is supplied by the global makes or importers in the developed country markets, recycleables are sourced from a cheaper source in another country,  and  advertising  and  after sales services are given by the providers in countries where in fact the individuals are located (that is called the 'smile curve' process). The problem for Bangladesh is normally that the manufacturing level in the smile curve generates very little value in proportion to the retail rates paid by the customers of the RMG products.

With an enormous advantage with regards to cheap labour, Bangladesh  is  largely  involved  in  two  low-value  stages  of  cut,  make  and  trim  (CMT)  and  original  equipment  developing  (OEM)/free  on  table  (FOB). In short, almost all of Bangladesh's RMG export  does  not  fall  under the  high-value  added   types,  such  as  original  style  manufacturing  (ODM)  and  classic brand manufacturing (OBM). Consequently, Bangladesh is mostly known as a way to obtain low-cost garment items in bulk instead of a source of relatively high-priced garment goods purchased by the global brands.

Thus, the key for Bangladesh in RMG upgrading is usually to go up the GVCs through growing product and method upgradation capabilities. Merchandise upgrading involves producing quality value garment things by moving into larger segments of the worthiness chain, while process upgrading requires advancing development strategies using better and modern technologies and more qualified labour pressure. Although Bangladesh has manufactured a beginning, even now it requires to go quite a distance in both upgradation functions.

Additionally, the impending graduation from the LDC position, which represents a significant development changeover for Bangladesh, as well gives rise to concerns about the adverse implications of the loss of usage of various support measures on RMG export such as for example duty-free market gain access to and   relaxed rules of origin (ROO) provisions in the EU. Bangladesh's RMG industry must go for commercial upgradation within GVCs incorporating automation and deepening of capital-intensive techniques for promoting export competitiveness of its products.

It really is true that the GVCs are building important contributions to the development of the export-oriented RMG found in Bangladesh because the 1980s including rapid expansion of women occupation in the industry. Alternatively, the part of RVCs possesses been somewhat limited--the strength which is based on supporting higher-value actions, such as style and branding. At the moment, the heightened uncertainty unfolding in the GVCs because of latest trade wars and the Covid-19 pandemic possesses forced countless stakeholders to give a new appear at RVCs as complementary drivers of RMG. In this context, the major way is normally to strengthen intra-regional trade and RVCs for which designing of ideal regional policies is the key to move forward.

In Bangladesh, no severe study comes in the textiles and apparel sector on the worthiness chain directionality of organizations - their orientation to numerous value chains - and how these affect upgrading opportunities and outcomes. Further, simply limited knowledge exists on the impression of industrial and trade plans on businesses' incentives to capitalise strategically on the benefits created by several types of value chains. Obtainable evidence from various other countries suggests that numerous kinds of value chain give distinct prospects for upgrading, work creation, and expansion of backward linkages to domestic and/or regional suppliers.

Generally, GVC-oriented RMG help to make the best contribution to current work creation and export growth. However the focus is mostly on a narrow selection of lower-value products. On the other hand, the RVC-oriented RMG will tend to be more involved with a wider selection of product categories and related activities, including vertical integration to the textiles sector creating own yarn and textile inputs and higher-value activities involving style and branding. These RMG are also much more likely to origin inputs from the regional markets.

Through the years, Bangladesh's RMG have experienced significant economical and social upgrading; but weak linkages with the RVCs still preclude the industry to avail the full advantages of these regional networks as stepping stones to more demanding but lucrative global markets. An effective RVC-oriented RMG organization can build its functions, to get started with, as an own-brand producer in the domestic market, then figure out how to export by serving the regional industry, before meeting the hard requirements and competition of the global industry.

Used, all RMG organizations undergo process upgrading, but GVC-oriented companies remain closest to the technical frontier. The reason why are manifold. The excessive degree of process upgrading (and low level of useful upgrading) by GVC organizations is partly due to its nature of ownership. Almost all of the GVC-oriented organizations are either foreign-possessed or under foreign-partnerships where bigger value actions are reserved for his or her overseas parent companies.

In conditions of policy, rents allocated through multi-scalar commercial and trade policies (e.g. removal of tariffs under regional trade agreements) both at the regional and global amounts can be crucial for RVC-oriented RMG. For the RMG industry, Bangladesh must carefully evaluate the implications for the look of ROO and very similar initiatives such as for example whether to choose double transformation requirements or the more calm single transformation rules allowing manufacture from imported inputs. Quite often, the more relaxed solo transformation rules favouring regional RMG export might cause backward linkage results (e.g. more fresh investments in textiles). The relaxed single transformation guidelines of origin makes it possible for Bangladesh's RMG makers to import their inputs but still take advantage of the duty-free market access to the significant importing countries.

With the graduation of Bangladesh from the LDC status soon, it is about time for the GVC-oriented RMG organizations to reconsider their business models since the uncertainty over the near future course may decrease incentives for new investments and the investors may prefer to wait for policy stability. An integral concern for the policymakers is to secure the continuity of industry access in the produced countries without exposing the domestic RMG makers to additional competition.

At the present degree of development of the country's RMG industry, the worthiness chain directionality matters for Bangladesh. Although GVC-oriented organizations have made the greatest contribution to the expansion of RMG industry previously, global experience shows that the RVC-oriented RMG organizations perform a wider range of higher-value actions, have increased incentives to go towards quality value products, procure considerably more inputs locally, and also have a tendency to activate more in end-industry upgrading. The main element for Bangladesh's policy is to redefine the country's multi-scalar professional and trade policies to strategically incorporate the benefits associated with both types of value chain.
Source: https://thefinancialexpress.com.bd

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