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Bangladesh may lose 14.28pc export earnings after LDC graduation

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Bangladesh may lose out significantly for facing greater adversities and stricter rules-of-origin (RoO) requirements in export destinations, where it enjoys trade preferences, after its LDC graduation.

A UN agency report predicts that Bangladesh's prospect of trade loss is greater compared to other Asian graduating countries, because of the country's overwhelming dependence on trade preferences and other factors on the domestic front.

The country is likely to lose 14.28 per cent or US$5.73 billion worth of export earnings annually after its graduation to a developing nation from the least-developed country (LDC) status, says the latest UNCTAD report.

It is because of the country's overwhelming dependence on textiles and clothing (T&C) exports bound for markets with high preferential tariff margins.

"As tariff hikes reduce its competitiveness, an ex-ante analysis using a partial equilibrium model suggests graduating Asian LDCs could experience loss of exports ranging from as much as 14.3 per cent for Bangladesh to just 1.45 per cent for Lao PDR," says the UNCTAD in its prediction.

The United Nations Conference on Trade and Development or UNCTAD joint study titled 'Textiles and Clothing in Asian graduating LDCs: Challenges and Options', published this month, investigated graduation impacts of five countries: Bangladesh, Cambodia, Lao People's Democratic Republic (PDR), Myanmar and Nepal.

The issues included individual countries' market-access provisions after graduation, the nature of their participation in the T&C global value chain and associated implications for policy options, firm-level perceptions and preparedness about graduation-related challenges and export prospects, and perspectives of global fashion brands and retailers on their future sourcing strategy in connection to LDC graduation.

Another previous study had shown that graduation could lead to an overall export decline for Bangladesh and Myanmar of around 7.0 per cent each while Cambodia could experience an export shock of around 11 per cent.

Previously, other studies taking different methodological approaches predicted an impact ranging from 8.0 to 12 per cent of Bangladesh's exports.

"At the individual level, two Asian graduating LDC T&C exporters, Bangladesh and Nepal, were found to experience much higher tariff increases, of 8.9 and 8.1 percentage points," says the latest report.

This was due to the high preference erosion associated with T&C items and their proportionately larger share in the two countries' exports, it explains.

For the two other Asian graduating countries that were included in the analysis, Myanmar and Lao PDR, the estimated weighted average tariff rise would be lower, at 3.8 and 3.2 percentage points, respectively.

After graduation, LDCs will lose LDC-specific trade preferences, resulting in considerable changes to their tariff preferences and RoO requirements, especially in the absence of alternative trade arrangements such as Generalized System of Preferences (GSP) facilities for non-LDC countries and bilateral/ regional free-trade agreements (FTAs).

Citing most Bangladeshi manufacturer respondents the report says: "RoO requirements would be more stringent and difficult to comply with after LDC graduation. In general, knitwear factories are more likely to meet the rules of origin requirements than those making woven apparel."

Regarding Bangladesh's largest export market, the European Union (EU), it says as per the proposed EU GSP 2024-34, Bangladesh is found to be the only Asian graduating LDC whose T&C exports could potentially be subject to the EU's safeguard measures, resulting in their removal from GSP+ preferences.

According to the EU's safeguard provisions, if the combined share of HS sections 61, 62 and 63 from a country exceeds 6.0 per cent of the total EU imports of the same products, safeguard measures would be triggered to remove duty-free market access for these items.

Bangladesh's current level of clothing exports exceeds the thresholds, being more than 13 per cent.

"Therefore, if the proposed GSP provisions remain unchanged, Bangladesh could find itself in a unique situation to qualify for GSP+, while its clothing products will not be eligible for duty-free access."

China and India do not provide any preferences to non-LDCs. "Following its LDC graduation, Bangladesh will have to forgo both India and China's LDC schemes, which currently cover more than 97 per cent of tariff lines, including those of textile and clothing items," the report reads.

It may be entitled to Asia-Pacific Trade Agreement (APTA) tariff concessions, which, however, are not necessarily comprehensive.

Although Bangladesh and India are both members of the South Asian Free Trade Area (SAFTA), most clothing items are not covered by India's tariff-liberalization schedule for non-LDC SAFTA members.

Graduating LDC exporters are not expected to be impacted in the United States because the US preferential treatment is based on the country's own list of GSP-eligible beneficiaries and T&C items from Asian LDCs are excluded from GSP facilities.

The author of the report, Mohammad Abdur Razzaque, says: "The European Union aside, Bangladesh has sizeable clothing exports to, amongst others, Canada, China, India, and Japan, and for these markets it may have to negotiate trade arrangements to maintain the duty-free status quo."

Bangladesh and Nepal will be subject to the GSP or MFN rate in their exports to Japan, as they are not part of ASEAN and therefore do not benefit from the ASEAN-Japan Comprehensive Economic Partnership Agreement (CEPA).

In this context, Bangladesh and Nepal will face tariffs on their clothing exports ranging from 8.5 to 9 per cent, the report said.

When asked about such trade scenarios, Bangladesh Garment Manufacturers and Exporters Association (BGMEA) president Faruque Hassan said Bangladesh's graduation to a middle-income country would definitely cause some significant changes which need collaborative and joint effort to overcome.

"We currently enjoy single transformation rules of origin under Everything But Arms (EBA) scheme of EU GSP. With the graduation we'll have to follow 'double transformation' rules of origin which will be difficult for many of the items, especially woven garments," he said.

Besides, he adds, the changes in the internal fiscal policies may affect the competitiveness. "We need to realign those policy supports to meet the need of the industry as well as to facilitate potential areas of growth and investment, especially in the area of investment in primary textiles and non-cotton textiles and garments."

The main export-industry leader makes an appeal to the developed nations for extending the trade preferences for a longer transitional time.

"To prepare for facing the graduation challenges, we need empathetic considerations from our longstanding trade partners like the EU and other preference-giving countries in terms of extending the current scheme by at least 10 years," he says.

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