Exports to EU may shrink by 30% after LDC graduation

Summary:

• Bangladesh will have to pay carbon tariff in a few years

• It will also lose out on everything but arms scheme after LDC graduation

• If no GSP+, more tariff will be imposed

• No carbon market, tax exists in the country

• Some competitor countries have already started carbon markets

• RMG sector to be hit by 27% decrease

• Some exporters positive owing to most green factories in world

Bangladesh set to see exports to the European Union – its biggest market – shrink by 28-30% once it transitions from a least developed country and comes under the purview of the carbon border adjustment mechanism (CBAM) and loses out the duty-free facilities under the everything but arms (EBA).  

The CBAM is a proposed carbon tariff on carbon intensive products imported by the European Union being legislated as part of the European Green Deal initiative. 

On the other hand, the EBA only applies to least developed countries.

Of the loss in exports, apparels will also be hit, with the decrease for the segment expected to be around 27%, according to a study by the Research and Policy Integration for Development (RAPID), a research institute.

The report, however, said the export damage would be low for China and Vietnam – less than 3% – compared to Bangladesh. 

Despite the possible losses, there has been no discussion at a government level about introducing a carbon tax or setting a carbon market to reduce emissions in Bangladesh. 

While some Bangladesh exporters maintain that the country is less likely to be affected if the EU imposes a carbon tax, others say carbon-emitting sectors in the supply chain will suffer.

Shahidullah Azim, vice president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) told The Business Standard that Bangladesh's carbon emissions are among the lowest in the world. 

"We have more than 150 certified green factories with environmental compliance. Two hundred more are in the pipeline. As a result, exports will not be hampered by carbon issues.

"If there is a free trade agreement with European countries to continue the tariff benefits after LDC graduation and if we ensure the ease of doing business in the country, we can maintain the ability to export to the EU."

The EU signed its signature programme, the Green Deal, in December 2019 to implement its goal of reaching carbon neutrality by 2050. 

Under the deal, the EU will levy carbon taxes on imports from non-EU countries.

According to the European Commission, the CBAM will initially apply only to a selected number of goods at a high risk of carbon leakage, like cement, iron and steel, aluminium, fertilisers and electricity.

Initially, major export items of Bangladesh, such as apparel, leather, footwear will not be included, but these are among the 63 sub sectors identified as those with a risk of carbon leakage and may be included later.  

Discussions are underway to start it partially from 2027 and then go full-scale by 2032. 

Competitiveness at stake

According to RAPID's study, as per the EU's proposed GSP policy, Bangladesh's products will face 10-12% duty after 2029 under the Most Favored Nation (MFN) tariff in EU markets if the garment industry does not get duty-free benefits under GSP Plus after graduation from LDC status. 

On the other hand, if Bangladesh does not take effective steps to control CO2 emissions and its apparel products are added to the list of carbon tax, an average of 6-7% carbon tax will have to be paid. 

Taking into account all this, RAPID said Bangladesh may lose the segment of the European market after the entire program is started.

While other countries, such as China, India and Vietnam, have launched a carbon market to ensure a lower carbon tax, Bangladesh has not done any such thing.

According to EU policy, there will be no more than one carbon tax on the same product. If a country imposes an equivalent carbon tax at any stage of the supply chain, that product does not have to pay tax on entry into the EU.

The 27 EU countries collectively are Bangladesh's largest market. Almost half of Bangladesh's exports go to this market, including the United Kingdom, which accounts for 60% of the trade.

Dr MA Razzaque, chairman of RAPID, said, "These results are based on hypothetical scenarios with various assumptions. However, the bottom line is, CBAM charges along with tariff hikes on clothing items in the EU could seriously affect Bangladesh's export competitiveness.

"Overall, Bangladesh's exports to the EU market are estimated to decrease. However, even after Bangladesh's LDC graduation, if it gets duty-free benefits in the EU market, reduces carbon emissions in the supply chain of export-related products, establishes a carbon market and ensures sustainable production practices, this export market can remain intact."

He said if the EU introduces a carbon tax, other countries could also follow, recommending Bangladesh to take preparations in this regard.

According to the EU, textiles, garments, leather, and footwear (TGLF) are playing a serious role in environmental pollution. 

About 1,900 types of chemicals are used in the textile sector, especially at the dyeing and finishing stages, and the EU has identified 165 of them as highly hazardous.

Recently, BGMEA President Faruque Hassan told TBS that Bangladesh should introduce carbon trading to make itself competitive in the global market.

Shahin Ahmed, president of Bangladesh Tanners Association told TBS, "If Europe introduces a carbon tax and the export sector does not take action in this regard, exports to that market will be hindered. However, if Bangladesh takes appropriate initiatives, there will be an opportunity to benefit."

The EU has been maintaining an emission trading system (ETS) to reduce greenhouse gas emission for high carbon emitting sectors from 2005 for its domestic industries. 

There is talk of green tax on fossil fuel consumption in the 8th Five-Year Plan of Bangladesh. Besides, there is a surcharge of 1% on companies that pollute the environment.

But nothing is said about carbon tax or the carbon market.

Giving an idea of how the carbon market could be, Dr Razzaque said, the government will fix a certain amount of carbon emission ceiling in exchange for a certain amount of money to the carbon emitting companies. If a company wants to use more than that, it has to be purchased with extra money.