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TPP and Bangladesh

June 5, 2015

Trans-Pacific Partnership (TPP), a Free Trade Agreement (FTA), could be a game changer for Bangladesh RMG industry. Preliminary round of talks to chalk out a framework is almost over. Yet when a final deal will be struck is not clear.  When it will come into being Bangladesh’s rival in US market, Vietnam, one of the member countries of TPP, could eat away Bangladesh’s apparel exports to US market.

Bangladeshi RMG industry is coping with the chronic political instability and the image crisis abroad after the Rana Plaza disaster and Tajrin Fashions fire. The factory renovation works, as per the terms laid by European and North American brands, led to full and partial closure of factories laying off thousands of workers temporarily. Moreover, Bangladesh’s apparel exports to US declined in 2014 due to violent political programs. In 2014, apparel exports to US declined to $4.8 billion from $4.9 billion in 2013.

While Bangladeshi apparel goods will continue to pay heavy duties and tariffs in US market, those of Vietnam will have to pay less or no duties as per the TPP provisions.

Cotton blouse, cotton trousers, cotton underwear, knit shirts, non-knit shirts,  slacks  etc are the major apparel items Bangladesh exports to US. Vietnam have been doing well in exporting these items to US market over Bangladesh except in non-knit shirts and cotton trousers(see the screen grab). The TPP will make a further dent in Bangladesh’s exports of these goods to USA.

Bangladesh's Apparel Exports to US in 2013 and in 2014. Credit: Office of Textiles and Apparel, USA.

Bangladesh’s Apparel Exports to US in 2013 and in 2014. Credit: Office of Textiles and Apparel, USA.

Non-kknit Shirts and Trousers are the major apparel goods dominating Bangladesh's exports to US. Credit: Office of Textiles and Apparel, USA.

Non-knit Shirts and Trousers are the major apparel goods dominating Bangladesh’s exports to US. Credit: Office of Textiles and Apparel, USA.

Vietnam's Major Apparel Exports to US. Credit: Office of Textiles and Apparel, USA.

Vietnam’s Major Apparel Exports to US. Credit: Office of Textiles and Apparel, USA.

Strict nature of TPP can make Bangladesh optimistic. Yarn forwarding, a mean that allows the apparel good to be made in one of the TPP countries, is a strict rule of origin mechanism which could hold back Vietnam’s competitiveness; however, there are rooms for adjustments in TPP framework that will ultimately give Vietnam an upper hand in capturing a significant Bangladeshi share of apparel market in USA [1].

A little known fact is that VINATEX,a govt-owned company,is exporting the bulk of the apparel goods to US. Since the state is the sole authority for making the company profitable in a market-oriented communist regime,  the govt can draw resources from other sectors and ensure its smooth operation when things get tougher for the company or there is a stiff competition in international market. A duty-free market access to US is a further bonanza for the company.

Meanwhile, Bangladeshi factory owners are already incurring extra costs due to factory remediation and to a wage increase .In the current fiscal year, govt raised the tax level on the industry, which has been gaining hugely from tax ease and from cash subsidies for being the prime forex earner, to increase its tax revenue [2]. This will further increase the cost of doing business unless part of the tax revenue is forwarded to factory owners or workers as subsidy or social security scheme.

In brief, duty-free access of Vietnamese apparel items to US and a domestic rise in tax will affect competitiveness of Bangladeshi apparel goods.

There is still time for Bangladesh to devise remedial measures to offset the adverse effects the TPP will have on Bangladesh’s apparel exports as the final deal has not been signed yet and no definite timeline is set for that.

Bangladesh is deeply committed to democracy. Its media covers the news on industrial disaster. Nor does it bar itself from broadcasting news on workers’ maltreatment at the factories. Moreover, its factory owners’ show positive attitude to improve working conditions.

In a Muslim majority country, perhaps no other industry plays such a vital role in a society to ensure gender equality that ultimately helps making a liberal society. More the RMG industry grows, more women empowered. Any exceptions in the existing TPP framework will only restrain the possibilities of further women empowerment and of making a liberal society in Bangladesh.

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Notes:

[1].  There are other mechanisms under negotiations such as “short supply” list and “Tariff-Preference Level (TPL)”. The short supply list, contains the inputs that are in limited supply within the TPP countries, will allow the  partner countries to import the raw-material from a third non-member country and make their final goods eligible for FTA tariff benefits. Moreover, the TPL allows import of certain quantities of apparel input from non-member countries. Clearly, despite the “yarn-forward” rule, exceptions in the TPP framework may make Vietnamese apparel goods more cheaper.

[2]. Govt more than doubled the source tax on apparel goods in 2015-2016 budget.

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