China, the European Union (EU), Bangladesh and Vietnam were the world's top four garment exporters in 2017. Together, they accounted for 75.8 per cent of the world's market shares - growing from 74.3 per cent a year earlier and a substantial increase from 68.3 per cent in 2007. Globalisation has transformed China into the "world's factory." Eighteen years ago, developed and newly industrialised countries moved their labour-intensive and low-tech industries to China. It is the world's largest exporter of apparel, with shipments of $158.4 billion in 2018, or more than 30 per cent of the global total.
China is gradually moving towards higher technology. It is also under pressure of higher wage for workers, steadily rising labour costs, mounting compliances, social insurance commitments, stringent environmental checks etc. Along with this, the recent US-China trade war and sanctions over Chinese goods prompt China to re-locate factories from China to other countries.
The onset of the Sino-US trade war prompted a growing number of foreign companies to leave China and move to Southeast Asia. China, the "world's factory," is losing its competitive edge. The Sino-US trade war seems to have accelerated the process of relocation of companies from China to the other countries.
Foreign companies and even the Chinese can use industrial automation as a strategy to offset high labour costs for some of the products. But the low-tech and labour-intensive industries, such as the clothing industry, rely heavily on skilled labour which cannot be fully automated. Low-tech and labour-intensive industries are not complicated to set-up and its workers are easy to train, making it feasible for a foreign company to move production to another country.
The head of global research at Standard Chartered Bank pointed out that according to a survey by South China Manufacturing Centre in 2015, reportedly, 11 per cent of factories in southern China planned to move to ASEAN countries, India and Bangladesh to avoid increasing costs. The fact that these countries have a Free Trade Agreement with China under the fold of the Association of Southeast Asian Nations (ASEAN) is an added advantage. According to the American Chamber of Commerce in China, with membership of more than 3,300 individuals from 900 companies operating across China, 35 per cent of the companies it surveyed have moved or considered moving their production bases out of China to other countries or regions such as Southeast Asia.
Not only garments, to avoid the high tariffs imposed by the United States, many Chinese factories are transferring their assembly lines abroad. Taiwanese factories in China that manufacture shoes for Nike, Adidas, Under Armour and other brands have moved their production lines to Southeast Asia and India, according to a September16, 2018 report in the Japanese financial newspaper Nihon Keizai Shimbun. Chinese companies that manufacture bicycles, tires, plastics and textiles are also moving out of China.
Kerry Logistics Network Ltd, Asia's largest shipping and Logistics Company based in Hong Kong, is currently moving its production lines from China to Malaysia, Vietnam, Myanmar and even Laos. An increasing number of manufacturing companies have been setting up their production lines in Indonesia, the Philippines and Malaysia.
International trade experts and economists have said that Bangladesh appears to gain from the trade conflict between the US and China. The chief economist of the Asian Development Bank (ADB) Yasuyuki Sawada calculated that the gain could be 0.19 per cent of the GDP or $0.40 billion as China's exports will decline following the US tariff measures and there will be relocations of productions.
Having one of the lowest minimum wages in Asia, Bangladesh is an apparent choice for garment exporters looking for lower production costs. Bangladesh is one of those alternatives since labour cost is still cheap in Bangladesh. Bangladesh is the world's second-largest apparel exporter, with a 6.40 per cent share of the global apparel market. Vietnam comes in third at 5.80 per cent. Wages in Vietnam are less than half of that in the big Chinese cities like Shanghai and Guangzhou.
The expected gain would not be automatic though. Bangladesh will "need to compete with others" since other Asian countries are apparently better placed than it to gain out of the US-China trade war. These countries can replace Chinese exports by expanding their exports with better logistics and other services along with a Free Trade Agreement (FTA) with China thus facilitating investment and sourcing raw materials. ASEAN and India have FTA with EU and USA allowing their exports duty-free access to the latter destinations.
The ASEAN countries also have low cost and unskilled workers suitable for garment factories. But the labour is still the cheapest in Bangladesh. This is why most investors are considering relocation of their factories to Myanmar and Bangladesh. Some Chinese apparel producers also want to set up factories under joint venture in Bangladesh as they see the country as a competitive destination amid raging US-China trade war and rising costs in the world's second largest economy.
US apparel buyers are also diversifying suppliers out of China. This is why US-bound apparel exports from Bangladesh grew 14 per cent in the last fiscal year to $1.48 billion in the July-September period, and rose 3.0 per cent in the year through June.
Vietnam's apparel and textiles exports are expected to climb 16 per cent to a record $36 billion in 2018, according to information from a trade body. Apparel accounts for more than 10 per cent of Vietnam's exports.
The reasons for the change in focus include a lack of skilled workforce in Chinese textile and garment industry, rising cost of production, shifting industrial base to industries such as IT and over-investment in Vietnam and Cambodia where labour costs are lower.
Chinese textile and garment industry owners have invested heavily in neighbouring Vietnam and Cambodia in the last two decades. This has happened despite the fact that Vietnam's monthly minimum wages in 2019 varied by region from $125 to $180. The highest rates were in urban areas like Ho Chi Minh City and Hanoi. These wages are sometimes half of China's which vary by province from $143 to $348. Vietnam's minimum wage growth is showing signs of stability. Minimum wages increased by an average of 5.30 per cent in 2019, a lower increase than in 2018 (6.5 per cent) and 2017 (7.3 per cent).
Labour costs are always the major consideration for any labour-intensive manufacturing factory like footwear and garments. The cost to rent industrial land ratio on a long-term lease at one Vietnamese industrial park in 2018 increased to $90 per square metre (10.76 square feet), up from $60 to $70 in 2017. And the monthly rent for existing factory buildings in industrial parks near Ho Chi Minh City has risen to $4.0 per square metres, up from $3 last year. Comparatively, the wages of workers in Bangladesh is still below $100.
Bangladesh's wage is half of India's, and less than one-third of China's or Indonesia's. Cambodia, Pakistan, and Vietnam are other apparel exporters taking advantage of extremely low labour costs. The 'low-cost workers' failed to attract reasonable foreign direct investment (FDI). Myanmar is Bangladesh's new competitor in the garment sector.
So far, Bangladesh has not allowed foreign investment in basic apparels, limiting the presence of Chinese and other companies in high-end and value-added textile and garment items.
There are some investments in the garment sector in Cambodia. But the country lacks mature management. The Chinese are thus thinking of establishing manufacturing plants in Bangladesh with potential partners although they have expressed concern about the higher lead time, poor infrastructure, corruption etc. especially in the garments sector of Bangladesh.
In order to take full advantage of this opportunity, Bangladesh should sign an FTA (free trade agreement) with USA and EU. Once this is complete, the country can think about signing FTAs with China and other countries so as to make value addition competitive for the end-buyers.
The so-called fear of loss of revenue due to FTA is a wrong, obsolete and abandoned theory for the present globalised market. Bangladesh should also bring about reforms in rules and policies so that these can reduce bureaucratic obstacle and corruption and attract investments from overseas.
MS Siddiqui is a legal economist.
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