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On July 31, US President Donald Trump issued an executive order imposing tariffs on almost all US trading partners. His actions represent a departure from the open liberal trading system established after World War II under the auspices of the General Agreement on Tariffs and Trade (GATT), later adopted by the World Trade Organization (WTO). The post-war global trading system was established with an emphasis on reducing tariff and non-tariff barriers. The regime aimed to boost economic growth and prevent a repeat of the 1930s trade wars that preceded WWII.
Trump's trade wars will create an environment of uncertainty and that is always bad for trade. His protectionist tariff policies would cause economic growth around the world to slow down. More alarmingly, this US tariff measures could rival those of Smoot-Hawley measures of the 1930s that led to a global trade war, thus creating the conditions for the WWII.
As for Bangladesh, bilateral trade with the US is increasing, with the U.S. being a major export market for Bangladesh, particularly for ready-made garments (RMG). Despite uncertainty created by Trump tariffs, Bangladesh recorded a significant boost (25.13 per cent) in RMG exports to the US in the first half of this year both in terms of value and volume (FE, August 7). Bangladesh also runs trade surpluses with the US. The U.S. is also a significant investor in Bangladesh, especially in the energy sector. Recent export performance was likely driven by US importers making advance purchases to avoid upcoming Trump tariffs.
As the deadline approached for the next phase of Trump tariffs, the US was set to impose a 35 per cent tariff on exports from Bangladesh, down from 37 per cent that was indicated in April. This proposed rate was still more than double the rate Bangladeshi exports faced in the US market. This proposed tariff on Bangladesh exports to the US which are primarily composed of RMG could have serious consequences. RMG accounts for about 80 per cent total exports from the country. In fact, the proposed tariff rate could completely wipe out its price competitiveness over its regional rivals. This is the only competitive advantage Bangladesh has in RMG exports.
Up until "reciprocal tariffs" (RT) were introduced, Bangladeshi exports faced an average tariff of about 15.7 per cent. When the new tariff eventually comes into effect, the average tariff rate could jump to about 50 per cent. In 2024, Bangladesh exported goods worth nearly US$8.4 billion to the US, of which US$7.34 billion were RMG. The RMG industry contributed 8 per cent to the country's GDP in 2024-25.
Over four million people are employed in the RMG industry in Bangladesh, with the majority being women. Many of these workers rely on regular wages to meet their expenses and are experiencing rising job insecurity. The Trump tariffs could force factory closures ?and workers being laid off, as such the stakes are not only?economic but also existential.
In fact, the impact of Trump tariffs goes far beyond the RMG industry and the people directly and indirectly associated with it. The flow on effects of any declining export earnings will negatively impact macroeconomic stability of the country, and further exacerbate the balance of payments crisis.
But Bangladesh remains the most protected economy in the South Asian region and relatively tariff protected compared to other countries in the world, with a significant portion of its tariff lines not bound, meaning the government has the flexibility to raise applied tariff rates. This practice of trade mercantilism also creates uncertainty in market access for manufactured goods. Currently, the average nominal tariff rate for imports into Bangladesh stands at 28 per cent and the total tax incidence (that includes the burden of all taxes importers pay) is 54 per cent.
There are several taxes that are imposed on imports in Bangladesh, such as Customs Duty (CD) Value Added Tax (VAT), Supplementary Duty (SD), Regulatory Duty (RD) Advance Income Tax (AIT) and Advance Trade VAT (ATV). Tariffs (CD). These constitute a significant source of government revenue, which greatly complicates efforts to lower tariff rates.
Following the announcement of the 35 per cent tariff decision by the US, a Bangladeshi trade delegation travelled to Washington to renegotiate the trade deal. It remains a mystery what they have been doing during the three months tariff pause period.
Bangladesh is one of the most protected economies globally and had a US$6.2 billion trade surplus with the US in 2024. Therefore, Bangladesh does not have much of a negotiating or bargaining leverage with the US. Additionally, Bangladeshi goods, particularly its main exports such as RMG, can be replaced by US importers from other countries.
Bangladesh is already experiencing a difficult political and economic situation. The RMG industry that grew and expanded under the current trade and industry regime, is charaterised by structural inability to explore markets beyond primarily to the US and then to a few west European countries. The primary factor associated with the structural rigidity is the country's limited exposure to international competition.The problem worsens when a corrupt, inefficient bureaucracy controls the economic policy making process.
If Bangladesh continues to focus on RMG exports instead of shifting to a competitive diversified manufacturing base, the industry will need to adopt new technologies and innovate to maintain its position in the global apparel market. Now the future of the RMG industry depends on robotics and AI technologies which will begin to reshape the RMG industry as has happened in most other industries already.
Despite odds against Bangladesh's negotiating position, the Bangladesh trade delegation has been successful in bringing down the tariff rate to 20 per cent. The negotiated rate is similar to those of Bangladesh's major competitors in the US apparel market, including Vietnam, Sri Lanka, and Pakistan.
India, however, failing to reach a comprehensive trade agreement with US will face 25 per cent plus penalties for its economic ties with Russia. On August 6, Trump imposed an additional 25 per cent tariff on Indian good raising the rate to 50 per cent. Since the start of the Russia-Ukraine conflict, India has emerged as the second largest buyer of Russian oil after China, purchasing US$133.4 billion worth of oil last year, compared to minimal imports prior to the Russia-Ukraine conflict. Trump claims that India is making money from Russian oil by reexporting refined Russian oil to countries like US ally Australia and others. Australia purchased US$6.2 billion of oil from India last year, largely sourced from Russia.
To add insult to the injury, Trump also said Moscow and New Delhi "can take their dead economies down together, for all I care. We have done very little business with India, their tariffs are too high, among the highest in the world". But Trump is right on both counts that India is making big profits out of Russian oil and India is a dead economy. Indian remains a highly protected economy which has engendered a highly inefficient economy. As such India continues to face significant poverty over 80 years after gaining independence notwithstanding continuously in military and political conflicts with its all neighbouring countries. However, higher tariffs on Indian exports including clothing to the US will work in favour of Bangladesh.
The specifics of Bangladesh's offer to secure tariff concessions and reduce its trade surplus with the US remain crucial. Bangladesh has agreed to import 700,000 metric tons of wheat annually from the US for five years, as part of a wider effort to facilitate further trade talks with the US.
Bangladesh will also increase import of soybean oil and cotton from the US. Additionally, the Ministry of Commerce placed an order for 25 Boeing aircrafts. However, Biman, the national flag carrier, stated that it was not consulted regarding this procurement decision. This kind of decision-making is common in Bangladesh.
One of the objectives of Trump tariffs is to expand the market access for US agricultural products to bridge the trade gap. In fact, Bangladesh mostly imports agricultural products from the US among others. Not surprisingly the trade negotiation with the US to bridge the trade gap involved Bangladesh agreeing to import more agricultural products.
In 2023, the share of agriculture in Bangladesh's gross domestic product (GDP) was 11 per cent, but the sector is a significant employer, with approximately 45 per cent of the total labour force engaged in agricultural activities. The sector is beset with various challenges such as unsafe work environments, low wages, and long working hours.
Also, a high proportion of rural women are engaged in farm activities. Therefore, importation of highly subsidised US farm products like wheat and soybean could pose a threat to the livelihood of marginal to small farmers and farm labourers notwithstanding the impact on country's drive to attain food grain self-sufficiency.
Trump's attempt to address the issue of US$12 trillion trade deficit has more to do with macroeconomic factors than the unfair trade practices which he cites as the reason to wage a trade war on the rest of the world. Trump tariffs will raise a lot of revenue but that will be coming from US firms and consumers, and not from exporters to the US. This will drive up price levels affecting consumers, squeeze profit margins of US companies, slow down economic activity and damage relations with trading partners including allies.