Productivity increase key to weathering tariff storm

The recent reduction of the US reciprocal tariff on products imported from Bangladesh - from a previously declared 35 per cent to 20 per cent - has come as a much-needed relief for stakeholders in the Ready-Made Garment (RMG) industry. This development follows a flurry of diplomatic negotiations and concessions by Bangladesh, including increased imports from the US and a broad reduction in tariffs on US goods entering the country.

This tariff relief places Bangladesh's RMG sector, responsible for approximately 84 per cent of the country's export earnings and for which the US is the single largest export destination, on a more level playing field with key competitors like Vietnam and Sri Lanka, which are subject to the same 20 per cent rate. In contrast, larger economies like India and China face tariffs of 25 per cent or more. Although some countries, such as Cambodia and Pakistan, have negotiated a slightly lower tariff of 19 per cent, Bangladesh's strong production capacity and well-established supply chains are expected to help offset this marginal difference.

In this context, RMG entrepreneurs can be cautiously optimistic about sustaining export growth to the US and capitalising on opportunities arising from supply chain shifts away from China. However, optimism must be tempered with realism, as several challenges persist, both international and domestic.

One of the most immediate concerns is cost burden. While US importers are officially expected to bear the increased tariffs and pass them on to consumers, inflationary pressures in the US may reduce demand for imported garments. Reports suggest that American buyers are already requesting Bangladeshi manufacturers to absorb a portion of the cost. This is a significant concern, given that many local manufacturers already operate with razor-thin profit margins. Further pressure on those margins could ultimately affect the industry's most vulnerable segment - the low-paid garment workers.

Adding to these pressures are two recent domestic policy decisions that threaten to inflate logistical costs. The interim government's decision to increase charges at Chattogram Port by 40 per cent, along with a hike in fees at private inland container depots (ICDs) ranging from 30 to 100 per cent, risks further eroding the sector's competitiveness. At a time when global apparel markets are undergoing rapid transformation, such decisions could place Bangladesh at a disadvantage relative to regional competitors.

Another structural weakness is the RMG sector's heavy dependence on imported raw materials. Bangladesh's limited import substitution capacity leaves it vulnerable to the Rules of Origin (RoO) clause in the US tariff regime. This clause rewards manufacturers using US-origin inputs, but penalises those sourcing raw materials - such as fabrics and yarns - from third countries like China. The solution lies in long-term investments in backward linkage industries to reduce reliance on imports and develop domestic input sources.

The benefits from reduced tariffs will ultimately depend on how efficiently Bangladesh's industries can respond. While the country enjoys the advantage of low-cost labour, many factories' competitiveness is compromised by low hourly productivity and insufficient production capacity. However, there are signs of progress. Some factories have already increased output significantly by adopting modern Italian and Taiwanese machinery, leading not only to higher efficiency but also better pricing on select products. If this trend continues, and more units adopt smart technologies, production costs may fall and profit margins could rise.

To ensure sustainable growth, experts think that the RMG sector must focus on five key areas: strengthening backward integration; manufacturing more value-added products, particularly those based on man-made fibres (MMF); improving workforce skills and productivity; adopting advanced technologies in line with Industry 4.0; and enhancing sustainability to improve ESG scores. Bangladesh's globally recognised green factories and LEED-certified units offer a strong foundation in this regard.

Despite remarkable progress over the last few decades, the industry is still largely dependent on exporting some basic cotton items. In recent years, the global fashion landscape has undergone a dramatic shift, with the reign of cotton fading and MMF taking center stage. While cotton initially fuelled the surge of the Bangladesh apparel market, that seems now to have reached its peak and its growth potential appears limited. This echoes the global trend in fibre demand, where the cotton-to-MMF ratio has shifted from 75:25 thirty years ago to a stark 25:75 today.

This strategic change underscores the growing significance of apparel made from artificial fabrics in the global market. In spite of the seismic shift in fibre demand, with non-cotton fibre accounting for 75 per cent of garments manufactured globally, Bangladesh still relies on cotton fibers to make 71 per cent of the country's export-oriented products. 

A recent study conducted by Wazir Advisors Pvt Ltd. suggests that the expansion of non-cotton garment exports holds immense potential for the country's economy. According to the study, conducted under the patronage of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), Bangladesh has the potential to increase its non-cotton garment exports from the current $15.6 billion to an impressive $46 billion annually by 2032, if entrepreneurs were to invest $18 billion to enhance manufacturing capacity and a fully integrated value chain. 

If Bangladesh can act decisively to produce high-end products and bridge technological gaps to boost productivity and lower production costs, there is hope that the economy can not only withstand the impact of higher US tariffs but also emerge stronger.

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