Exports: riding the waves of uncertainty

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In the wake of Covid-19 spreading in Europe and the united states, global trade descended right into a free-fall.

Bangladesh's export found in March 2020-the first month to have the hit-was $2.73 billion, down by 18 % year-on-year.

Then came the virtually all devastating blow in April when the figure decreased 84 % year-on-time to $520 million.

Things improved slightly in-may, however the export receipt of $1.6 billion was still 62 per cent less than that of the same month this past year.

It is practically inevitable that shipments found in June may also register a poor growth.


While Covid-19 has made the problem an extreme one, 2019-20 was already a unique year for Bangladesh.

In the eight months to February this season, export earnings on six occasions were less than those of the corresponding months in the last year.

That is, aside from July and December, export expansion for 10 months found in the outgoing fiscal 12 months will be negative. 

For quite some time, our export success had defied overwhelming odds. Bangladesh has got repeatedly been displayed performing worse than its rivals in a variety of global surveys regarded as the determinants of competitiveness and trade performance.

Furthermore, vulnerability connected with excessive reliance on readymade garments features regularly dominated plan discussions and newspaper headlines.

Yet, in the newest past 10 years of 2008-18, Bangladesh achieved the next highest (after Vietnam) average annual export growth between the global economies.

Bangladesh's wheel of fortune has now apparently taken a good dramatic change for the worse exacerbated by the global pandemic.

Some global economies have seen their exports plummeting in April and May, Bangladesh looks extra vulnerable given its really concentrated export basket in which the share of apparel alone is about 84 per cent.

A recent review jointly undertaken by the Coverage Exploration Institute (PRI) and London-based Overseas Development Institute shows that Covid-19 induced recessions in Western countries would bring about an 8-per cent drop in the demand for Bangladesh's exports.

This will not include other factors such as for example supply-side disruptions, reduced travel and tourism activities, and low consumer confidence that also adversely impacts the demand.

McKinsey, a worldwide management consultancy organization, anticipates 40 % of European and US consumers would reduce home spending, but a much higher proportion of 60 % would cut back spending on clothing and footwear.

Various analysts expect an inverted J-curve in consumer spending for a while - an extremely short-lived upsurge in spending as persons leave lockdown, but a decline of longer duration.

Overall, a 27-30 % reduction in the combined demand for apparel and footwear is anticipated.

This financial downturn thus could have a disproportionately larger effect on Bangladesh's exports.

The emerging evidence seems to suggest new orders from the greatest buyers (global chains and brands) to be about 30 per cent of the 'normal' level.

Retailers found in the importing countries want to get rid of unsold spring/summer stock in markets with less seasonal differentiation.

It is now almost inevitable that the garment sector in Bangladesh will undergo significant consolidation and several smaller firms will go away.

Various analysts and officials on the policy circle kept strong views about Bangladesh's having low labour-cost advantage.

They argued that lower-income consumers in the developed countries are reliant on low-priced Bangladeshi products that there are no alternative suppliers.

However, the idea of comparative advantage predicated on the labour price alone has quickly changed because of technological improvement and automation.

Indeed, rival companies in China, Vietnam and Cambodia own adopted technologies to displace labour at a more rapidly pace than their counterparts in Bangladesh.

For each and every million-dollar garment export, 142 personnel are used in Bangladesh, which is 48 in both Vietnam and China and 75 in Cambodia.

Foreign immediate investment-led garment manufacturing on these countries has thus led to deepening of automation to put pressure on traditional labour-dependent production processes.

While Bangladeshi garment exporters have been complaining about buyers' offering unfair rates, the fact of the problem is technological improvement has made bulk creation elsewhere feasible in competitive prices.

In the above backdrop, the potential loss of duty-free markets access as a result of Bangladesh's graduation to a developing nation constitutes a trigger for serious concern.

Such market access is normally a critical way to obtain competitive advantage, particularly in the EU, which buys almost 60 % of Bangladesh's apparels at zero tariffs while most other suppliers need to pay 9-12 % tariffs.

Given the prevailing EU provisions, Bangladesh won't qualify for any sort of tariff concessions after its graduation accompanied by a three-year transition period.

Unless plenty of fundamental changes are introduced, Bangladeshi exporters will see tariff hikes on their exports after graduation.

On the other hand, Bangladesh's most significant competitor, Vietnam, has struck a free of charge trade handle the EU. This will cause a phased elimination of all EU tariffs on Vietnam's exports.

As issues stand, there could be a impressive coincidence where Bangladesh's garment exporters would find tariffs on their exports to the EU surge from zero to about 10 % on an average in 2027 when the Vietnamese exporters would start enjoying duty-free market access.

The estimated impact of this situation - produced from a quantitative modelling exercise - appears to suggest a lack of up to one-third of Bangladesh's garment exports to the EU.

Possibly without considering Vietnam's trade handle the EU, estimates due to numerous sources indicate a potential export loss in the number $2-$6 billion due to the LDC graduation.

In the aftermath of the Covid-19 pandemic, global discussions are underway about the United Nations-led LDC graduation course of action.

Bangladesh in collaboration with different LDCs could request the UN to defer its up coming triennial LDC status review (on 2021) until 2024 when the entire impact of the unfolding crisis will be clear.

Presented the unprecedented nature of it, the UN can even be asked to postpone all LDC graduation until 2030.  

Any additional period obtained before graduation can help Bangladesh enormously in rebuilding its export sector.

China's move to give duty-free industry access in 97 % tariff lines ought to be regarded as an exceptionally timely opportunity found in this respect.

Despite slowing down considerably, the world's second major market is projected to grow 5 per cent per annum over the medium-to-very long term, making huge market prospects.

This is the first-time China has given this considerable and non-reciprocal market usage of a country (Bangladesh) with potentially large supply-side capacity.

Unlike in established countries, typical tariffs in China, and so tariff margins due to duty-free access, are higher -- in the number 15-30 per cent for most products.

Such deep and complete preferential market access can attract Chinese organizations into Bangladesh to produce goods and export to China where wages have been rising reducing profitability.

Most global multinational businesses are wanting to capture market show found in China, which is likely to expand from currently $14.5 trillion to about $27 trillion by 2030.

The new duty-free Chinese market access can greatly boost Bangladesh's attractiveness and competitive strength in attracting investments from those companies across the world.

Securing an expansion of LDC graduation provides buyers a clear signal of their having the ability to make use of the duty-free market access in China for an extended duration thereby making their organization propositions in Bangladesh a lot more viable and profitable. 

For just about any populous and fast-developing developing country, local businesses will get the expanding domestic industry more appealing than foreign markets plus they have a tendency to invest less in export-oriented sectors.

The prevailing high tariffs then produce the domestic market a lot more lucrative.

Furthermore, lack of strict enforcement of merchandise quality and expectations in the local market means businesses targeting the domestic consumers have a tendency to compromise with top quality and, in turn, find it hard to break right into overseas markets.

Sustained appreciation of the true exchange rate has also acted as a disincentive for exporting organizations.

Despite towering waves of uncertainty, there are incredible prospects for Bangladesh to be strategic and unleash its correct policy options to emerge from this crisis more robust than ever.

The writer is a director at the Policy Research Institute of Bangladesh and chairman of the board of Research and Policy Integration for Development.
Source: https://www.thedailystar.net

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