Bangladesh’s RMG sector has been playing a pivotal in facilitating country’s export earnings, contributing 83.4% of the country export (source: EPB), apart for generating employment to the tune of 4.4 million, 80% of which are women. (Source: WB). Considering the sector’s importance to the country’s economic stability, ensuring steady growth for RMG export in the short to medium term, is a key concern for policymakers. In the recent past, the sector’s growth has been marginal, with exports growing by 0.2% and 8.7% for 2016-17 and 2017-18 respectively. Future growth would be contingent on the outcome of multitude of internal and external factors, which could potentially determine the sector’s competitiveness vis-à-vis its closest competitors.
RMG Export Growth Rebounded in 2018
The sector got back on its growth trajectory in 2018, mainly due to a depreciating currency and growing export trend to the US market, which is the single largest importer of Bangladeshi apparel. The US government’s cancellation of Trans-Pacific Partnership (TPP) agreement with 11 partner countries- Australia, Japan, New Zealand, Canada, Mexico, Singapore, Malaysia, Vietnam, Brunei, Chile and Peru- have resulted in reduction in cost competitiveness for Vietnamese apparel, which have directly benefited Bangladesh. The uptick of the US economy has also resulted in rising domestic consumer spending, which have resulted in higher apparel orders.
The near completion of remediation work by Accord and Alliance post the Rana Plaza industrial incident have improved perception of Bangladesh’s RMG sector among foreign buyers. However, RMG owners point to squeezing profit margins, which is forcing them to shelve plans on making further investments to make workplaces safer.
Although RMG players are tapping into emerging East Asian and Latin American markets, US, UK and EU countries remain the largest buyers. While Bangladesh receive GSP facilities in the EU market, US market is more competitive, as the Bangladesh receives not special trade privileges in the market. While cancellation of TPP is a big respite, the country has to contend with emerging competitors in Africa, with Ethiopia leading the way. African apparel exporters enjoy trade benefits in the form of African Growth Opportunity Act (AGOA) and shorter freight time to the US and EU markets.
Apart from emerging players, regional competitors like Vietnam, Cambodia, India and Pakistan have been growing their export. Myanmar has joined the fray by slowly growing their apparel export to regional players, but recent political turmoil pertaining to Rohingya crisis will peg them back, at least in the short to medium term.
US-China Trade War
Donald Trump, the US President, has long been correlating US’s large trade deficit with China as a major cause for the country’s economic woes. In line with the president’s protectionist worldview, US government has started imposing protectionist measures on import from major trading partners like China and Canada. US has recently decided to slap 25% tariff on imports worth up to USD 200 billion from China. China has reciprocated with a tit for tat measure by imposing tariff on cotton and Soybean.
Bangladesh can directly benefit in the event of escalating trade war between US and China, especially if the US hikes tariff on Chinese apparel. Alongside, Bangladesh can benefit from capital flight, as some Chinese apparel manufacturers would be seeking to relocate to a country having normal trade ties with the US. Current trade war would likely contribute to volatility in prices for cotton, which already is undergoing upheaval after China imposed tariff on US cotton.
Elevation to Middle-Income Status
Bangladesh has achieved the middle-income status, and will have to maintain the growth indicators till 2024 for successfully consolidating its position to the next tier. Although this would be a landmark event for the country, the economy would have to wean off from different preferential trade benefits. The European Union, which contributes 50% of country’s apparel export, has been providing GSP facility enabling tariff and quota free entry for all products. Revoking GSP would be catastrophic for the sector, as the sector would immediately lose cost competitiveness. Industry leaders and policy makers would have to chart their strategies keeping in mind that Bangladesh would be ineligible for different preferential trade benefits within 5-7 years.
Minimum Wage Rate Hike
Based on recent tripartite negotiations between the Government, BGMEA and RMG worker trade unions, the minimum wage rate was revised to BDT 8K, effective from Dec 2018. This 50% jump in salary costs would negatively impact the sector competitiveness. To tackle rising costs, some RMG owners have been automating operations by adopting technology.
The RMG factories would have to find ways to either increase worker productivity by securing higher pricing from apparel buyers. Due to intense local and international competition, apparel prices are proving to be upward sticky.
Medium Term Growth Horizon
The Apparel sector is at a cross-road and needs to break free from the low value-low margin market segment. Unfortunately, majority of the sector players are ill-prepared for transitioning to a higher margin segment. Recent compliance purge by Accord and Alliance has resulted in closure of at least 1,500 factories, while 2,500 factories remain operational. The surviving top and mid-tier players need to be offered organizational development support by facilitating human resource development, in terms of designing, merchandising and operations management.
The government also needs to offer market development support to growing markets by utilizing local embassies. The main objective would be to facilitate the sector’s shift towards offering higher margin apparel products, which can absorb growing overhead costs.