Deemed exports: Import substitution par excellence

In the 1950s and 1960s a new paradigm of industrialisation and development had taken developing countries by storm - import substituting industrialisation (ISI). But that was shortly overtaken in the 1970s and beyond by the open up trade export-led growth approach that resulted in the tremendous economic victory of East Asian economies, followed by that of China before Global Financial Crisis (GFC) of 2008. Bangladesh had taken the leap of faith in export-led development in the 1990s that produced both double digit export expansion, and led to work creation, accelerated GDP expansion and rapid poverty lowering. Soon the export-oriented readymade garment (RMG) sector evolved into the professional icon of Bangladesh market, based on the nation's comparative advantage in low cost low-qualified labour, capturing a notable talk about of the global export industry. In so doing, it has had the effect of opening up sectors inter-connected to the final export product, an activity called backward linkage.

The rapid expansion of export-oriented primary textiles is a major development in Bangladesh's monetary landscape. A big industry has grown in the last three decades providing intermediate inputs to the top rated export sector of Bangladesh - readymade garments. That is clearly a fresh phenomenon in the Bangladesh market - called "considered exports" in local established jargon. Backward linkage sectors to the RMG sector can be another popular method of describing this professional development. They provide yarn, fabrics, and equipment to the RMG export industry comprised of knit and woven garments (Fig.1-2). RMG accounted for 84 per cent of the $40 billion exported in FY2019 (Fig.1). Over time, RMG has been relying not as much and much less on imported inputs leading to rising value addition predicated on domestic content (Table 1).

Typically, RMG firms import inputs under the system of back-to-back (BTB) which allows them to pay for imported inputs from export proceeds. Table 1 reveals that over time a small proportion of RMG exports had been staying imported under BTB program, with the domestic vale added articles rising from 32 % in FY92 to 60 per cent in FY2019. Increasing products from backward linkage industries made this possible.

**Foreign Exchange Operation Section, Bangladesh Bank. Quantity of L/C Settlement under back to back import.

The quantum of the domestic supplies is no more insignificant as BKMEA representatives indicate knitwear exporters source some 80 per cent of their input of yarn from native textile producers. The amount of yarn making mills have significantly more than doubled, from 200 in 2000 to 433 in 2019, while spindle ability has tripled to 13.5 billion kg of yarn (Table 2). A lot of this growth could be attributed to the rapid growth of knitwear exports which rose from $1.5 billion in FY2001 to $16.9 billion in FY2019 with somewhat lesser demand pull via woven RMG exports of $17.2 billion.

Woven garments still have to rely on imports of wide selection of fabric though local development has made strong inroads in to the export-oriented market. 800 fabric manufacturing mills produce 3.8 billion metres of fabric, which is processed for dyeing, printing, and finishing, for exports as well as domestic sales. Denim production is an totally export-oriented activity. 60 per cent of the twelve-monthly denim dependence on 840 million yards comes by 32 denim mills that have cropped up previously 20 years roughly. In addition, other cotton-based fabrics and the ones from man-produced fibre (MMF) are significantly getting up with demand to meet up some 40-45 per ent of need by woven garment exporters.

Provided these estimates of domestic content in RMG creation that may bring domestic development of deemed textile exports to around $21+ billion, or 63 per ent of RMG exports, up from under 5 per ent when the RMG sector started its export quest in early on 1980s. Back-to-again L/C settlement info from Bangladesh Bank as well show B-T-B imports of RMG intermediate inputs are actually down to 40 per cent of RMG exports, suggesting domestic worth addition to have risen to 60 per cent of exports in FY2019. With all of this happening, the framework of manufacturing sector is certainly transforming. Together with RMG, well over 50 percent of Bangladesh's manufacturing sector is now geared to export production.

Data on production ability of the Primary Textile Sector is also available from BTMA, also published by the US Department of Agriculture (USDA). Furthermore, assessments about the sector's size and source contribution come from broad brush judgments created by experienced BTMA leaders plus some BGMEA/BKMEA customers who are involved in RMG exports in addition to operating of composite mills (i.e., development of yarn to apparels in the same factory create). All explained, backward linkage or domestic content development intended for RMG exports is currently a major export-oriented manufacturing activity. It's time to treat this large market as a thrust sector up to RMG.

The backward linkage challenge starts with the RMG journey itself - early 1980s. True, the final level of digesting readymade garments was and still is certainly a labour-intensive activity, quite based on the source of Bangladesh's comparative edge. The onset of globalisation, fragmentation of production functions, and cross-border benefit chain integration, most of these built it easy for Bangladesh to take a leap of faith and go on a trip of exporting readymade garments manufactured up of generally imported yarn, materials, and accessories, that have been imported duty-free under particular bonded program. If produced competitively, marketplace gain access to was ensured by the Multi-Fibre Arrangement (MFA), an international contract that limited textile exports from few growing countries while checking scope for others. That contract could not have already been considerably more propitious for Bangladesh. So our first generation RMG business owners were among the early proponents of cross-border value chain integration, a phenomenon that started to be the fastest growing element of international trade in the past 25 years - trade in intermediate goods. However, given the amount of proficiency of our import-export clearance device, issues related to lead period, and the enormous capability of sourcing intermediate inputs locally, the backward linkage advantages was there to end up being exploited by another band of first generation entrepreneurs in the textile market - the one targeted at the export market, certainly not the old-technology textile mills catering to domestic demand of basic clothing, under high protection from competing imports. So emerged an internationally competitive sub-sector of backward linkage industries whose size grew in proportion to the expansion of RMG exports. After the wheels of backward linkage sectors were set in place, their expansion would simply be limited by how big is its downstream sector, the $34 billion RMG industry.

So, in the last 25 years, the market has made another $21+ billion sector group whose contribution to the economy and jobs can no longer be ignored. That is no mean achievement, and can no longer be relegated to only a sideshow to RMG. It is a major achievements tale in backward linkage, the evolution of a new internationally competitive textile industry, unlike the outdated textile sector that still caters to domestic demand for standard clothing but is not competitive enough to play the export card. What is notable is that considered export sector represents import substitution, exports, and export diversification, all rolled into one. Here is why.

Earliest, the import substitution part. As the RMG market grew from a $600 million industry in 1990 to the $34 billion industry nowadays, the demand for imported yarn, fabrics, and accessories grew by leaps and bounds. It had been an evergrowing opportunity our entrepreneurs wouldn't normally miss for the world. Textiles, the development of yarn and fabrics, is a relatively capital intensive industry. However they are the main backward linkage industries' expansion with the sole objective of substituting for the large levels of imported yarn and materials, demanded as inputs by the $34 billion RMG sector. Also to feed a globally competitive RMG sector with intermediate inputs means they need to end up being globally competitive too. That is import substitution at its greatest. We can explain the phenomenon in the next terms, "from import substitution to deemed exports". In that situation a dollar preserved by import substitution is the same as a dollar received through exports. If the complete import substituting backward linkage sector can be saving declare $21+ billion, it means we are importing $21+ billion less than what would have been imported by the RMG sector. Predicated on the statement that Knit RMG uses 80 per cent localized sourcing of yarn and materials, and Woven RMG uses 45 % local sourcing of fabrics, the percentage show of local content involves 63 %, with 37 % of RMG exports counting on import content (Desk 3). In the lack of these considered exports, hypothetically, our imports in FY2019 could have been $80 billion rather than $60 billion. It is also possible to think of our comprehensive export basket with regards to genuine exports plus "considered" exports, which then would have totalled $60 billion instead of $40 billion in FY2019.

Second, the export portion. Quite logically "deemed" exports of yarn and fabric (and accessories) are believed to be indirect exports, as they are exported as pieces of the final export item, knit or woven garments. They happen to be "embedded" exports just like what overseas economists are now describing digital or IT solutions that are increasingly becoming sizable inputs into completed products that are exchanged across borders. Trade in these worth added providers is another swiftly growing component of overseas trade. Under this reformulation of trade in elements of finished goods, our deemed exports happen to be nothing but exports. It is now period to think of them as the next largest export category, after RMG.

Third, the export diversification portion. The necessity for export diversification can be recognised by just about anybody, but progress has been sluggish, if any. Quite in addition to the typical constraints to exports - viz., low quality trade infrastructure, poor governance, high cost of doing business, etc. - PRI exploration has identified the fundamental policy conflict between large tariff coverage and export orientation. Non-RMG exporters, who produce for the domestic industry along with exports, lack the get and enthusiasm for exports as the guarded domestic market yields significantly higher income than exporting activity. That's not to say that people lack competitiveness in export goods other than RMG. PRI research discovered that of the 292 non-RMG goods (at HS-6 digit), more than $1 million each that we exported in FY2019, 40 % were highly competitive with various other exporting countries to the same vacation spot markets. But, except for jute and jute merchandise, footwear and leather merchandise, and home textiles, there are hardly any other item showing promise of quick growth. Somewhat significantly less encouraging was the problem with the remaining 1100 HS-6 items (below $1 million) that people exported in the same season. Our summary: though potential comparative gain exists for vast amounts of non-RMG and labour-intensive export products, the inherent plan conflict identified above makes export diversification a lifeless equine. Furthermore, these non-RMG exporters, almost all of whom will be SME business owners, rarely get specialized bonded warehouse (SBW) center for duty-free of charge import of inputs. Without that facility, non-RMG exports happen to be doomed to extinction in a higher tariff regime.

But deemed export of primary textiles (yarn and materials) supplemented with garment add-ons production is another matter. These are the main inputs for the outfits industry. Achievement of RMG has powered this sector's rapid development. Here is the go up of a non-RMG sector with indirect exports, but exports nevertheless. We are able to call up it export diversification of the Bangladesh kind. Which has come to remain as long as we have a show in the global clothing market. This export-oriented primary textile sector is now the predominant the main textile sector. A much small domestic market (estimated by BTMA at $8 billion) is still catered to by the less competitive textile mills from good old times that just survive under excessive tariff protection to meet up local demand for standard clothing.

Arguably, a nascent export-oriented textile sector deserves policy support and protection. That justifies the support this sector has got received from the government regarding tax exemptions, subsidies, duty-no cost bonded imports, or concessional credit rating. To make sure sustainability and lasting competitiveness it is merely as vital that you put some limits to the support steps, by making them time bound and effectiveness based. Also note that money subsidies to backward linkage sectors will be regarded as "domestic content material" subsidies by the WTO and will turn into prohibitive for Bangladesh once it graduates out of LDC position in 2024. They are the plus and minus items to come to be reckoned with by all stakeholders in this dynamically developing and thriving sector.

To conclude, we have come quite a distance since the times when RMG exports used to improve the spectra of a highly import-intensive activity generating hardly any forex net of import content. The strategy of developing backward linkage to the dynamic RMG sector has produced benefits - another feather in the Bangladesh plan cap. No longer can the principal textile sector end up being dismissed as a non-competitive domestic market-oriented industry. It really is nowadays predominantly an export-oriented sector with a smaller sized part focused on catering for domestic demand. That is import substitution par excellence based on comparative-advantage-following (CAF) approach of protection - that's, import substitution resulting in export orientation. That is exactly the protection final result trade economists have already been looking for.