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TPP and Bangladesh (Part-II)

July 1, 2015

US congress gave President Obama overwhelming power to finalize the deal on TPP. With this latest development, TPP has gone a step closer to final negotiations. Flexible rules of origin, huge investments in Vietnamese textile sector and reduction in tariff that will stem from TPP remain causes of concern for Bangladesh.

Vietnamese goods already pay lower tariff compared to Bangladeshi goods in US market. Removal of this lower tariff and sourcing of inputs from non-TPP countries, if member countries agree, will surely make things tough for Bangladeshi garment exports to US market.

A study by Peter A Petri of Brandei University revealed that Vietnamese Textiles, Apparel plus Footwear and Machinery exports will see biggest changes in TPP. What kind of impact the TPP will have on Bangladesh is still unknown. However, a study by University of Zhejiang’s School of Economics and Management predicts that Bangladesh may lose $101.6 million of business a year if TPP comes into being.

Moreover, Japan, a potential market for Bangladeshi RMG products, is keen to join TPP. In recent years, Bangladesh’s RMG exports to Japan have been growing steadily. When TPP will come into effect, Vietnamese apparel goods will elbow Bangladeshi ones out of Japanese market.

This mega free trade agreement will also create huge investment opportunities in garments and textile sector in Vietnam, as predicted by an economist. Though Bangladesh does not allow FDI in RMG sector, many foreign brands could open their own production facilities in Vietnam under the TPP provisions. More worryingly, our big RMG export houses could wind up their local factories and invest in Vietnam, and in Philippines if it has made up its mind to join TPP, to retain their North American buyers.

Already many reputed houses have heavily invested in Vietnam. With TPP, we will see many more houses rally behind them.

Wage rise and currency appreciation in China will open up the possibilities of relocation of Chinese garment factories in countries like Bangladesh. The TPP has even made that prospect grimmer. Flexible rules of origin, if it is allowed, may see huge Chinese investment in Vietnam, depriving Bangladesh that could also be a potential destination for this kind of Chinese investment.

If we look at the garment products we export to US market—trousers, cotton blouse, knit shirts, non-knit shirts, cotton underwear etc—we will notice that most of these goods are low-end products. Vietnam is a strong competitor of these goods in US market. One may argue that we should concentrate on high-end garments, which need more attention plus effort to make such goods and demand sophisticated works, in the wake of orders of low-end garments going to rival countries. In Bangladesh, this kind of garments is being produced by a handful of big business houses since these goods require capital-intensive production process and skilled worker. For average garment factories depending on exporting low-end products, it is not easier to switch over to this kind of production overnight. The factories have to invest aptly for the desired-level of production capacity and to upgrade workers’ skill. Moreover, minimum wages of manufacturing high-end goods are higher than that of making low-end garment products. Clearly, factories more or less discontent with the current wage increase may not be interested to go for making sophisticated garment goods in the short-run unless there is a huge rise in demand for these goods in the international market.

However, a more plausible scenario that could emerge from post-TPP is that Vietnam, a centrally planned economy, concentrates on high-end garment goods while Bangladesh focuses on making less-sophisticated garment goods.

Despite the fact that TPP will affect Bangladesh, it is too early to tell whether it will have a high or low impact on Bangladesh’s exports. There is a crying need for a comprehensive study on TPP’s possible impact on Bangladesh.

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