LDC graduation: Our shirts will be 25% costlier, we have 5 years to act

In 2026, when Bangladesh will no longer be a least developed country (LDC), a shirt made in a Dhaka factory would be 20-25% pricier in Montreal or Sidney than the one shipped from Vietnam.

Average tariffs on Bangladesh-made apparels will go up by 10-15% when Vietnam, a key competitor, will enjoy duty-free access to markets of Canada, Australia, China, Japan and the European Union.

Bilateral and regional free trade agreements and engagement in trade blocks will give Vietnam a competitive edge.

To offset the impacts of graduation from the LDC and stay competitive, Bangladesh needs to make efficient use of the next five years carrying out tough negotiations bilaterally, or as a group, says Professor Mustafizur Rahman, distinguished fellow of the Centre for Policy Dialogue (CPD), analysing costs and benefits of graduating from the LDC to a developing country.

Preparedness to deal with complex issues such as tariff and trade liberalisation, the opening of sectors for foreign investment, labour and environmental compliance are among the priorities for Bangladesh during the transition, the CPD lists in its presentation made yesterday on Bangladesh transitioning to a developing country: strategies for graduation with momentum.

According to the World Trade Organisation (WTO) Secretariat estimates, Bangladesh's export loss will be almost 90% of the losses that 12 graduating LDCs will incur.

Bangladesh will lose export earnings amounting to $5.37 billion, which is about 14.3% of the country's total export value, while the remaining 11 graduating countries' losses will be only $650 million.

Aggressive plurilateral and mega-regional agreements will have important implications for Bangladesh's competitiveness, it suggests.

Bangladesh should try to make the best use of the additional time at its disposal, following LDC graduation in 2026, Prof Mustafizur stressed, feeling that the 12th ministerial meeting of WTO scheduled in Geneva in November would be a proper forum to press for continuation of trade and other privileges until 2031 – five more years after graduation.

He also suggested enabling a proper business environment to increase productivity, reduce production costs to maintain the competitiveness of the private sector.

CPD Chairman Prof Rehman Sobhan hoped that Bangladesh's apparel industry, the second largest in the global market, will not need to seek more time to be more competitive even after LDC graduation. But the pharmaceutical industry may suffer when the Trade-Related Aspects of Intellectual Property Rights (TRIPS) waiver is over and if the Active Pharmaceutical Ingredients (API) industrial park is not developed immediately, he felt.

State Minister for foreign affairs Shahriar Alam acknowledged that Bangladesh, like other graduating nations, would have to walk through new challenges as international support measures in trade, loan and climate mitigation will cease once Bangladesh moves out of the LDC group.

"We have proved our resilience time and again…our expert committees are working on how to use the remaining five years effectively for smooth graduation," he said, joining the CPD dialogue virtually.

The eighth five-year plan is based on six themes and one of them is how to overcome post-graduation challenges and proceed towards an upper-middle-income country status by 2031, he added.

While completion of megaprojects such as Padma Bridge, Payra deep seaport, Bangabandhu industrial city, third terminal of Shahjalal Airport and metrorail will enhance infrastructural strengths, Bangladesh is in talks for bilateral, regional and sub-regional trade deals, he told the event.

"We have to work hard for GSP Plus or continuation of EBA facilities in the EU and continued access to UN tech bank or climate fund," Shahriar Alam said, referring to initiatives for enhancing both domestic strengths and global access.

Rubana Huq, president of the Bangladesh Garment Manufacturers and Exporters Association, said Bangladesh's apparels are exposed to the "buy one, get one free" approach to western buyers.

"Bangladeshi T-shirt is offered half the price of what Vietnamese one gets despite being of the same quality. There is a price war," she pointed out, stressing the need for concerted efforts for ensuring fair prices.

The association leader said the industry now welcomes foreign investment in backward linkages for non-cotton products in view of changed perspectives in global demand.

A Matin Chowdhury, former president of the Bangladesh Textile Mills Association, recommended opening up foreign direct investment in the apparel sector.

In response to a question from Prof Rehman Sobhan why Vietnam attracts more foreign direct investment (FDI) than Bangladesh, Naser Ezaz Bijoy, chief executive officer of Standard Chartered Bank, Bangladesh, pointed out that Vietnam draws more FDI due to the country's re-export facilities, its huge coastline, a wide range of resources and its association with trade blocs like the Asean. Of nearly $16 billion of investment by Samsung there, only $2 billion is intended for the domestic market, he said.

While presenting the keynote, Mustafizur Rahman said graduation from the LDC is an issue of pride for the nation and it will bring some opportunities with more FDI inflows, commercial loans because of enlightened branding, credit rating and image of the country.

He also said Bangladesh exceeded the graduation threshold in all three indicators in 2018 and the surplus will be wider with time. But these achievements will not ensure sustainable development.

The achievement in all of the indicators are measured with average, which does not reflect the position of poor and deprived people, Mustafizur added.

To ensure smooth graduation and sustainable development, the issues regarding inequality should be addressed, he also mentioned.

Bangladesh was among a very few LDCs, which has been able to reap most benefits originating from preferential market access, offered by developed countries. Consequently, it has the most to lose after graduation, he said.

About 70% of Bangladesh's global exports are covered by preferential access, one of the highest in the world, he explained.

Among the 12 candidates graduating LDCs, Bangladesh is going to face the highest rise in tariffs, about 9%. 

However, for Nepal and Bhutan, for example, since they have bilateral free trade agreements with India, their key trading partner, effective tariff rise will be as much as 7%, while it will be below 4% for Myanmar.

Talking about Bangladesh's loss in export earnings, he said the private sector should work on reducing the production of exportable items by increasing productivity.

The government should help the sector by reducing logistic costs, enabling a conducive environment for businesses and providing policy support like an intervention in the exchange rate.

He said the industry will not able to sustain with the additional 5-15% tariff; that is why the government should seek the provision of bilateral economic cooperation. After graduation, the country should provide some facilities to other countries to get some from them, he added.

He recommended strengthening the negotiation with Canada, China, India, Japan and other friendly countries to enhance economic partnership to maintain free trade facilities after graduation.

"Graduation will not destroy all of the possibilities of international trade," he said, adding that proper strategy can increase exports to some major destinations.

He said LDCs placed a proposal to enlarge most trade facilities for 12 years even after the graduation. "Developed countries will not agree to provide the facilities but it is possible to extend for five years," he said and recommended negotiating the issue properly in the upcoming ministerial meeting of the WTO.

 Deeper study needed

Dr Mustafiz urged the government to conduct a detailed study on rules and regulations of WTO and other trade-related organisations to seek the facilities even after the graduation.

Placing an example, he said the agreement on agriculture denies strictly to provide credit subsidy in exports for a developing country. The government should provide an exchange rate facility to overcome the problem.

He also said Bangladesh is a net importing country as the country imports more than it exports. Net importing countries have a provision to provide subsidy in exports.  

Bangladesh will lose the waiver facility after graduation, which is accessible for the LDCs up to 2033, he added.

The prices of medicines will increase after the graduation when the intellectual property rights will be mandatory, Dr Mustafizur said adding that a strong backward linkage and development of the API park will reduce the costs of the pharmaceutical industry.

CPD Executive Director Fahmida Khatun moderated the seminar.