Bangladesh's garment export to the European Union market may fall 20 per cent under a combined effect of the country's LDC graduation and the EU-Vietnam Free Trade Agreement (EVFTA), economists say and show remedies.
Vietnam's ready-made garment (RMG) export is currently subject to average 9.6-percent duty on the EU market that will hurtle down to zero-rated taxing by 2027 by virtue of EVFTA. On the contrary, Bangladesh is likely to count a jacked-up 12-percent duty after 2029 for the lapse of duty-free access to the EU under the Union's EBA programme, as a status-change cost the country's graduation from the least-developed country (LDC) club.
This twin trade-preference erosion, stemming from Vietnam's enhanced access under the EVFTA and the tariff hikes facing Bangladesh after its graduation, scheduled for 2026 with a three-year transition period until 2029, could significantly undercut the latter's export competitiveness on its most vital market, economists predict.
Besides, Bangladesh is lagging behind in implementing policy to develop backward linkages, especially for MMF-based garments, while Vietnam has rigorously taken right policy by making significant simplification of business environment and opening up trade and investment.
As such, Bangladesh may also face strong competition from Vietnam on account of MMF-based apparel exports to the European Union.
The statistics and observations were made Wednesday at a dissemination event on 'The EU-Vietnam Free Trade Agreement Implications for Bangladesh's Export Competitiveness' organized by Research and Policy Integration for Development (RAPID) and FES Bangladesh at a city hotel.
Economic relations division secretary Md Shahriar Kader Siddiqy was chief guest at the event moderated by RAPID executive director Dr M Abu Eusuf. FES Bangladesh resident representative Dr Felix Gerdes and Business Initiative Leading Development chief executive officer Ferdaus Ara Begum also spoke.
The EVFTA, effective since 2020, grants Vietnam significant trade advantages, including zero-duty access to the EU market, replacing its previous Standard Generalised Scheme of Preferences (GSP) tariffs.
In addition to tariff eliminations, the EVFTA addresses non-tariff barriers, opens markets for services and investment, and aligns Vietnam with the EU's labour and environmental standards, collectively strengthening its competitive edge and investment appeal.
Speaking there, RAPID chairman Dr MA Razzaque said the combined impact of EVFTA and LDC graduation on Bangladesh's exports to the EU is simulated a nearly 20-percent fall in apparel exports and a one-third reduction in leather, textiles, and processed-food exports.
"Macroeconomic effects would be that Bangladesh's GDP is projected to decline by 1.0 per cent driven by LDC graduation-related tariff hikes and trade diversion under the EVFTA," he explains, to underscore necessary preparedness.
Bangladesh remains dominant in apparel exports, accounting for 21.7 per cent of the EU's non-EU apparel imports, largely due to duty-free access under the Everything But Arms (EBA) scheme and relaxed Rules of Origin (RoO) requirements.
Bangladesh absorbed much of the EU market share lost by China as it shifted away from low-value apparel production, while Vietnam benefited more from this shift on the US market, he told the meet.
The country's share of the EU apparel market rose from 6.0 per cent in 2010 to 22 per cent in 2023, compared to Vietnam's modest growth from 2.0 per cent to 4.7 per cent over the same period.
However, in the United States, where both countries face identical tariffs, Vietnam captured a significantly larger slice of market cake, rising from less than 1.0 per cent to 18 per cent, compared to Bangladesh's slow-pace increase from 3.3 per cent to 9 per cent.
The RAPID made a number of recommendations, including engaging with the EU to negotiate an additional extension of the post-LDC graduation transition period by 3-5 years to soften tariff hike and pursue relaxed rules of origin and safeguard provisions to retain apparel-sector preferences under GSP plus and fulfilling GSP+ eligibility requirements by aligning with the EU's 32 international conventions.
Other suggestions include initiating discussions for an FTA or Comprehensive Economic Partnership Agreement (CEPA) with the EU to secure long-term market access and attract FDI and undertake reforms in labour standards, trade facilitation, and regulatory alignment to meet EU requirements and enhance competitiveness.
To enhance firm-level competitiveness, the recommendations include support to industrial upgrading and innovation with policies such as tax incentives, low-interest financing, and supply-chain development for ancillary industries.
Export Promotion Bureau vice-chairman and BGMEA administrator Anwar Hossain told his audience that the quality and reliability of power supply remain a significant challenge for all industries, particularly for the textiles, as many of them are unable to fully operate due to gas shortages.
"Despite government policies allowing bonded-warehouse facilities for partial exporters, the National Board of Revenue (NBR) has not extended this benefit to furniture exporters, which hampers the potential for export diversification and limits opportunities for growth in potential sectors."
Dr Mashrur Reaz, Chairman of Policy Exchange Bangladesh, said traditional business practices would no longer sustain growth at the time when global regulations and consumer preferences are changing rapidly.
"The US trade policies as regards China may remain unchanged, rather intensified, and the ongoing trade war would create new business opportunities for Bangladesh," he said, raising the question how much Bangladesh takes advantage largely depends on its preparations.
Abu Sayed Belal, trade counsellor at the EU Delegation in Bangladesh, said Vietnam has adopted effective policies focusing beyond just market preferential access and implemented the policy reforms to streamline processes, which have been instrumental in attracting higher levels of foreign direct investment or FDI.
He is, however, of the opinion that Bangladeshi exporters are satisfied with their export performance while local manufacturers benefit from a highly protected domestic market.
"This protectionism that discourages innovation and risk-taking, undermining Bangladesh's competitiveness in the international market, should be avoided," he said, suggesting Bangladesh should prioritise regional connectivity and establish more trade agreements with its trading partners.
Fazlee Shamim Ehsan, Executive President of Bangladesh Knitwear Manufactures and Exporters Association (BKMEA), however, differed on this score. Bangladesh's export growth might slow down and export volume is unlikely to decline, he said.
"China and Vietnam have labour shortage as workers there are not willing to work in garment factories as they consider the jobs not prestigious, which could lead a shift in orders to Bangladesh," he added.
Explaining difficulties like banking, shortage of gas and electricity and inconsistency in policies they face, he said, "Everything is against business environment."
© 2024 - All Rights with The Financial Express
