Overcoming cost hurdles for export growth

The recent Agreement on Reciprocal Trade (ART) between the U.S. and Bangladesh is currently the most discussed topic regarding Bangladesh's profitability, since the pact carries many conditions that may affect actual returns through bilateral trade. Although more than seven thousand U.S. products will gain duty-free access in Bangladesh, and about two thousand five hundred Bangladeshi products will receive the same in the U.S. market, the pivotal issue is the importation of U.S. cotton, for which zero tariff will apply for garments made from this cotton when exported to the U.S.

Since U.S. cotton is significantly more expensive, production costs will inevitably increase. Consequently, garments made from cotton other than U.S. sources may remain cheaper, even if a 20 per cent tariff is applied.

Nevertheless, the deal was indispensable for Bangladesh at this time to boost exports, especially after the EU-India FTA was recently executed. The EU is Bangladesh's largest market, accounting for approximately 44 per cent of total exports. After India availed the tariff-free facility, the market may become more competitive for Bangladesh in the EU until a bilateral arrangement is reached. Therefore, identifying alternative markets is necessary for sustainable growth.

In terms of revenue, it may initially appear that garment exports to the U.S. will not be highly profitable. However, if order volumes increase and production costs are properly managed, profitability will improve. Thus, it is important to focus on volume rather than profit margin. There is also a risk of reduced import duty revenue, estimated at around 150 million dollars, from granting duty-free access to a significant number of U.S. products. The key lies in product diversification in the U.S. market, including sourcing new buyers with large volumes.

With proper integration of this pact, exports to the U.S. market may increase from 8.70 billion dollars to 12 billion dollars within two years. Bangladesh should immediately adopt a vigorous initiative to encourage export-oriented industries to ensure sustainable growth.

Kawsik Azad Pronoy

A banker