Rmg in Bangladesh
CHALLENGES FACED BY BANGLADESH RMG Enactment of US Trade Development Act 2000 The Trade and Development Act 2000 more popularly known as US Trade Development Act 2000 was enacted in the USA on May 19, 2000. This act consisting of the African Growth and Opportunity Act (AGOA) and the United States-Caribbean Basin Trade Partnership Act was aimed to introduce a new trade and investment policy for Sub-Saharan Africa (SSA), expand trade benefits to countries in the Caribbean Basin Initiative (CBI), enhance the GSP and strengthen the US Trade adjustment assistance programmes.
The US TDA 2000 provided preferential trade access, especially in textile and apparel sectors, to the countries of Africa and Caribbean Basin. The US Trade Development Act 2000 provided duty-free and quota-free access to 48 countries of Africa and 24 countries of the Caribbean Basin for exporting textile and apparel products to the US market on certain eligibility criteria. Some of the beneficiary countries, especially in the Caribbean Basin, are Bangladesh’s direct competitors in the US apparel market.
Since this act was enacted, Bangladesh’s RMG had to struggle harder to maintain its competitiveness and prevent losing market share to these beneficiary countries. Accession of China to WTO China is perhaps the largest supplier of textiles and clothing in the world. The accession of the country to WTO happened on December 11, 2001 opening up a new vista of market access for itself. China has a very large production base of fabric, by using competitive and appropriate technology. China also has a very large pool of labor force for the highly labor intensive apparel industry.
Both these factors ensure a very high degree of competitiveness. China’s accession to WTO has removed their major market access constraint. The high degree of integration that China already had between their textile and clothing sector enabled them to respond quickly to the demand of garment buyers. This posed the threat of the diversion of business to China in large quantum from countries like Bangladesh, urging them further to remain competitive. End of the MFA Era The beginning of the year 2005 marked the birth of the post MFA era. The MFA Multi Fibre Arrangement, also known as the Agreement on Textile and Clothing (ATC)) governed the world trade in textiles and garments from 1974 through 2004, imposing quotas on the amount developing countries could export to developed countries. It expired on 1 January 2005 in accordance with the WTO Agreement on Textiles and Clothing (ATC) of 1994. The period of MFA (1974-2004) enabled Bangladesh to emerge as a global supplier of RMG (Readymade Garments). But its termination threatened to change this scenario. Countries that relied on the secured market of quotas had to face enormous challenges amid intense global competition.
Bangladesh’s heavy reliance on this sector gave rise to certain vulnerabilities. With neighboring countries, such as India and China, building ever more formidable RMG industries, a substantial part of Bangladesh’s RMG workforce was put at risk of job loss if the industry failed to stay competitive, not to mention considerable losses in foreign exchange earnings. In order to prevent such losses and remain a notable player in the apparel market, Bangladesh had to devise and implement strategies to improve its overall competitiveness and that of the RMG sector.
A study by the World Bank titled, “End of MFA Quotas: Key Issues and Strategic Options for Bangladesh Readymade Garment Industry,” explored the factors that have brought success to Bangladesh’s RMG industry and examined the probable threats and key constraints in the post-MFA era. It also set out a number of strategic options for the sector to pursue, building on past achievements and competitive advantages in order to be able to enhance Bangladesh’s export competitiveness in the global marketplace. It suggested a dual approach that assisted Bangladesh to compete efficiently.
They are as follows: •A focused strategy for strengthening the competitiveness of the RMG industry. •A diversification strategy to reduce Bangladesh’s vulnerability from export concentration in RMG. A summary of the approaches are as follows: Reducing lead time: Lead time (refers to the time required for supplying the ordered garment products after the export order has been received) has emerged as an important issue in the global market. Retailers value those manufacturers who can respond quickly to orders.
Bangladesh has the longest lead time among its competitors, and it needs to find a way to reduce lead time if it is to maintain international competitiveness. Improving the domestic and regional supply chain: Contributing to the problem of lead time is the gap between demand and supply of raw material, particularly for woven garments. Local sourcing has not been able to reduce this gap significantly, and it will take time to increase domestic capacity substantially. One option may be to forge closer links with neighboring suppliers for sourcing textile and clothing (T & C) inputs at reasonably short notice.
Warehousing for a quick turnaround: An innovative solution to the problem of long lead time could be the establishment of a central bonded warehouse (CBW) to stock duty-free imported inputs. A CBW could be set up by any firm, and its duty-free imports would not be subject to conditions, unlike individual bonded warehouses. The CBW operator could be permitted to stock a whole range of T & C inputs, such as finished and grey fabric, accessories, dyes and chemicals, yarn, RMG, and textile machinery and spare parts in amounts determined by expected demand.
RMG and textile manufacturers could then purchase these inputs duty-free from the CBW directly as export orders are received and save on the shipping time required for importing inputs. Opening land routes and modernizing port facilities: To reduce the time taken to source inputs from the region Bangladesh Government recently removed the ban on importing yarn from India via land routes. This should be followed up with other logistics and infrastructural reforms, such as modernizing Chittagong Port and addressing inadequate power supply, which act as major constraints on efficiency.
Simplification of tariff regime: Despite increasing liberalization, Bangladesh remains one of the most protected economies in South Asia and, indeed, the world. As pointed out in a previous World Bank report, Export Competitiveness and Growth, high tariffs that protect domestic industries create disincentives to export activities and cause an anti-export bias. High import duties also increase the cost of production and reduce profit margins of manufacturers. The RMG sector has been insulated from this anti-export bias through schemes such as bonded warehouses and EPZs.
This shows that Bangladeshi producers will respond to opportunities and can compete in the global market when they do not face disincentives in the domestic market. Simplifying the cumbersome import regime as a whole could make export diversification a reality. Diversification, aggressive marketing, and pursuing new markets: In order to forge a “competitive edge,” Bangladesh could diversify into a new range of higher-value products, aside from the traditional T-shirts, shirts, trousers, sweaters, and jackets which make up 60 percent of the RMG exports.
This would need to be associated with vigorous promotion and aggressive marketing in order to secure a position in the market for high-value apparel. Furthermore, with only a handful of countries accounting for 98 percent of Bangladesh’s RMG export market, opportunities to exploit other potential markets should be explored, including East Asia and other middle-income countries, and others which have given zero-tariff access to Bangladeshi exports. Bangladesh National Council (BNC) of Textile Garments and leathers Workers has proposed eight-point strategies to attain sustainable RMG sector in the post-MFA era.
The proposal included formation of multi-stakeholder national Committee on occupational health and safety for the garment workers, healthy and secured work environment, recognition and established workers rights by Bangladesh Garments manufacturers and Exporters Association (BGMEA) as a precondition to access global market, global brands and buyers investments, building stronger backward linkage, financial support from the government, establishment of universally-recognized working hours and a formation of national investigation on the Spectrum incident. Rise of the Financial Crisis
In 2007, not long after the end of MFA era when Bangladesh’s RMG sector just started to gather itself and prepare to fight the amplified global completion and remain competitive, the Global Financial Crisis surfaced ominously. The crisis aroused due to the bursting of the United States housing bubble (a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in valuations of real estate property such as housing until they reach unsustainable levels relative to incomes and other economic elements).
This financial crisis that surfaced in the United States gradually spread its tentacles all over the globe. Since its emergence till present, major market stocks registered nonstop fall, leading financial institutions steadily moved towards the brink of bankruptcy; making some of them to get sold at incredibly low price and governments of wealthiest countries came up with rescue packages to save their financial system. Bearing in mind that the world’s robust economies are struggling to cope with the crisis, it did not seem farfetched to believe that the weak and fragile economy of our country will be affected as well.
In a report, the World Bank (WB) said that the Bangladesh’s development will start getting hit right away. It projected that the Bangladesh’s economic growth will fall by 2 percent to 4. 8 percent in fiscal 2008-09 contrasting the government projection of 6. 8 percent. In response, Bangladesh Bank (BB) Governor Salehuddin Ahmed firmly ruled it out stating that WB’s projection is grossly underestimated and is not backed by thorough analysis. He said for now Bangladesh is save from any blow from the crisis but if it prolongs then the impact might be felt in the long run.
According to the Governor, as Bangladesh produces low-end garment products, the sector may not be affected. He urged everyone involved to keep their eyes open as a precaution along with the suggestion that exporters should improve competitiveness by improving productivity and efficiency, instead of seeking a favorable exchange rate. A high-powered technical committee was formed on November 3, 2008 to closely monitor the impact on the country’s economy from the fallout of the current global financial crisis and take instant remedial measures.
The committee comprised of 8 members with the Finance Secretary Dr Mohammed Tareque as the head. The other members of the committee were the National Board of Revenue Chairman, Bangladesh Bank Deputy Governor, Securities and Exchange Commission (SEC) member, Controller of Insurance Companies, vice chairman of the Export Promotion Bureau (EPB), additional secretary of Economic Relations Division (ERD) and one representative from IMED. Unlike the government officials, the garment exporters and major buyers believed that the global financial crisis will not Bangladesh’s RMG sector as it exports mainly basic products.
According to them, sales of cheaper RMG products increased both in Europe and the US by 20 percent following the global financial turmoil and number of orders that they received from foreign buyers was high as the buyers started to look for cheaper RMG products. But they also thought that the bad impact of the global recession may be felt in February or March of 2009 if the situation in the western financial markets does not improve. They were confident that Bangladesh’s strong market position will not diminish if the crisis prevailed for a short time period.
Bangladesh set an export target at $16. 298 billion for fiscal 2008-09, with the readymade garment sector to earn the highest amount of foreign currency. Of $16. 298 billion, $12. 267 billion were expected to come from two main sub-sectors of RMG: knitwear and woven. The export of readymade garments (RMG) from Bangladesh experienced a hefty growth last fiscal despite the ongoing global recession. The overall apparel shipments in the fiscal 2008-09 ended in last June and witnessed a growth of 15. 4 percent to stand at over $ 12. 47 billion. Country’s shipment to 26 out of total 27 EU member countries reached US$ 8. 2 billion at the end of last fiscal year, which was US$ 7. 6 billion in FY 2007-08. THE FUTURE CHALLENGES FOR RMG However, the president of Bangladesh Garment Manufacturers and Exporters Association (BGMEA) Abdus Salam Murshedy is not happy about the last fiscal’s (2008-09) growth rate. He thinks it could have been much higher. According to the BGMEA president, hard time is yet to come in the sector of readymade garments.
He thinks that the recent export figures are reflecting the earliest hits of the financial crisis on the RMG sector. According to him, the industry is under pressure from falling export orders, drastically falling retail price and demand of the products, which pose the actual threat. Increased fuel price, bank interest rates, shortage of power are further threatening the existence of the country’s apparel sector. He urged the government to disburse funds that have been promised to rescue the country’s largest export earning sector to fend off recession impact.
Bangladesh now enjoys extra competitive edge in the EU market with the GSP facility under which the exporters get zero tariff entry to the 27 member-states of EU when India, China and some other countries have to pay certain amount of tariff. But the competitive edge will be eroded if the EU signed TFA with India and other nations and ease the rules of origin, offering them greater market access with lower tariff or no tariff at all. Ready-made garment (RMG) sector is about to face another setback as competitors like Pakistan and Sri Lanka are likely to get duty advantage in the US market after the current WTO negotiations are over.
Duty on RMG export from Pakistan and Sri Lanka will be reduced to 5. 0 percent within five years after the negotiations are over but for least developed countries (LDC) including Bangladesh, the time limit is 10 years. These two countries will get the facilities under disproportionately affected countries (DAC) as Pakistan has war like situation and Sri Lanka is war-torn and affected by tsunami. So for the last five years, Bangladesh will be in a less competitive position by 10 percent duty as the average tariff duty on RMG to the US market is 15 percent.
The World Trade Organization (WTO) negotiations will be over by 2010 and when it is over within the three months, the duty cut facilities will become effective. For more than 30 years Bangladesh has been one of the best RMG (ready-made garments) exporting countries in the world. However, being one of the world`s best in this sector, Bangladesh is not receiving the treatment and facilities that it deserves in the market of importing, rich countries. According to African Growth and Opportunity Act Competitiveness Report (AGOA), more than 37 LDCs (least developed country) got a duty-free access in the market of USA till September 30, 2009.
Whereas, 13 LDC’s including Bangladesh have yet not got this privilege in the USA. This places us in a tough position to compete with the rest. Being an LDC had we been receiving this privilege from the USA and other importing countries would have enormously contributed to pace up of our growth. Moreover, the global financial crisis is still ongoing. Many politicians, economists, world leaders and others concerned are still working on to fix the crisis. The longer the crisis would last, the deeper would be its impact on Bangladesh economy whose prime driving force is RMG.
EXPORT TREND OF BANGLADESH RMG The RMG business started in Bangladesh in the 70’s but it was then a merely casual effort. The first consignment of knitwear export was made in 1973 and the first consignment of woven garments was made in 1977. In 1981-82 the contribution of woven garments in the total export was 1. 10%. Afterwards it is a story of sustained success for Bangladesh RMG sector. The knitwear sector has grown over the years in geometric progression and become the prime driving force of Bangladesh’s export earnings.
Within a decade the contribution of woven to the export basket became 42. 83% (1990-91) and the knitwear sector’s contribution was 7. 64% (1990-91). Now knitwear has become the largest export earning sector of Bangladesh contributing 41. 79% to national export earnings at the end of FY 2008-09 (July-April). The entrepreneurs of the knitwear sector stepped forward with their expertise in the late 80’s. With their earnest efforts they were able to export US $14. 84 million in 1989-90. Out of this, US $12. 22 million was exported to EU and US $2. 02 million was exported to US.
The trend continued in the knitwear sector because of the market access opportunities provided to the LDC’s under the Generalized Systems of Preference (GSP) benefit. Source: BGMEA This is the rejuvenated beginning of the epic story of Bangladeshi knitwear sector that in true sense has been possible due to the massive industrialization in a sustainable way with effect on all probable human development aspects which is the encouraging part of the story. The growth of knitwear sector is increasing in an increasing rate. The cumulative average growth rate of the sector is 20%.
And it is continuously grabbing more portions in the export pie of Bangladesh. This is mainly attributed to the facilities provide under the EC, GSP and ROO. The knitwear sector is heavily driven by favorable policies and took the opportunity to develop a strong backward linkage for the sector. Source: Export Promotion Bureau The EU is the main export region for Bangladesh knitwear constituting 76% (US $4. 2 billion) of total knitwear export followed by USA (14. 59%, i. e. US $807 million) in the year 2007-08. This is mainly attributed to the facilities provide under EC, GSP and favorable ROO.
The knitwear sector is driven heavily by these favorable policies and the opportunity to develop a strong backward linkage for the sector where the value addition is about 75%. The two-stage transformation requirement of ROO in 1999 boosted market penetration in EU further; it contributed a growth of 101. 9% since 2000-01. Source: BGMEA Bangladesh RMG sector has successfully passed some critical tests and is now sailing with two masts: knitwear and woven. The sub-sectors are now in healthy competition among themselves to take the role of leadership within the country. Source: BGMEA
In FY 2003-04, knitwear for the first time exceeded woven wear and became the leader in terms of quantity exported with 91. 6 million dozens. Knitwear is still leading in terms of quantity exported and is widening the gap day by day. Export quantity of knitwear items increased to 241. 59 million dozens which is higher than the year 2003-04 to 2007-08. On the month of December of the FY 2008-09, total knitwear export was 146. 5 million dozens higher than the same period of last year. Source: BGMEA Bangladesh knitwear is performing a well increase in terms of terms of quantity which is a clear indication of capacity in this sector.
In year 2007-08, contribution of woven wear to the export earning was 36. 17% and in knitwear was 38. 97%. In the current year, the performance of both the sector are as follows: knitwear export US $5,231. 01 million FY 2008-09 (July-April); woven export US $4,902. 48 million FY 2008-09 (July-April). Figure: Exports to various destinations WORKS CITED http://www. worldbank. org. bd/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/BANGLADESHEXTN/0,,contentMDK:20849416~pagePK:141137~piPK:141127~theSitePK:295760,00. html http://bgmea. com. bd/home/pages/aboutus http://www. thefinancialexpress-bd. om/2009/08/04/75255. html http://www. thefinancialexpress-bd. com/2009/10/05/80758. html http://www. tg-supply. com/article/view. html? id=28649 http://english. people. com. cn/90001/90777/90851/6526368. html http://www. thedailystar. net/story. php? nid=65258 http://www. newsfrombangladesh. net/view. php? hidRecord=225118 http://en. wikipedia. org/wiki/Financial_crisis_of_2007–2009 http://www. unescap. org/tid/publication/aptir2456_haider. pdf http://dhakachamber. com/cipe/EPPs%20&%20Studies/Expansion%20and%20diversification. pdf www. bdiusa. org/Publications/JBS/Volumes/Volume2/jbs2. 2-3. pdf