LDC graduation and export prospects of Bangladesh

The strategic emphasis on export diversification has been a long-standing policy objective in Bangladesh, as evidenced in its various medium-term national planning documents and long-term perspective plans. Nevertheless, the country’s export structure continues to be predominantly concentrated in apparel products—most popularly known in the country as ready-made garments (RMGs)—contributing to more than 85 per cent of total merchandise exports in 2023. This heavy reliance on a single industry exposes the economy to risks associated with sector-specific disruptions.

After achieving remarkable socioeconomic achievements, including maintaining an average yearly gross domestic product (GDP) growth close to 6.0 per cent since the early 1990s and reducing the headcount poverty incidence from more than 60.0 per cent in the early 1990s to just 18.7 per cent in 2022, Bangladesh’s macroeconomic management has recently come under severe strain due to, among other things, declining foreign exchange reserves, necessitating robust export growth.

The urgency of increasing competitiveness and diversifying exports is further heightened by the impending graduation from least developed country (LDC) status in 2026, which will likely lead to increased tariffs in key export markets. Given the concentrated nature of the export basket, any negative impact on the garments sector could have major consequences on the potential growth rate and employment. Thus, focusing on boosting export competitiveness and deepening diversification efforts is particularly critical in the lead-up to LDC graduation.

With over 70 per cent of the country’s merchandise exports currently benefiting from LDC-specific trade preferences, the impact of Bangladesh’s impending LDC graduation on its export sector, particularly the dominant RMG industry, is a significant concern.

There is no other country that relies so heavily on LDC-specific trade preferences. It needs to be pointed out that more than 95 per cent of Bhutan’s exports also enjoy duty-free market access. However, 85 per cent of the Bhutanese exports benefited from a bilateral trade agreement with India. This is not related to Bhutan’s LDC status. Similarly, for Nepal, about 60 per cent of its exports enjoy duty-free market access due to a bilateral trade agreement with India (and thus not related to LDC status per se).

After the graduation, Bangladesh may lose these preferences and be subject to less favourable trade conditions or Most Favoured Nation (MFN) tariff rates, depending on the trade policies of donor countries. LDC tariff preferences have been crucial for Bangladesh’s rise in the global clothing export market. Leveraging these advantages, its market share in major importing countries increased rapidly. For instance, in the early 2000s, Bangladesh held a market share of around 3 per cent in Canada, the European Union (EU), and the US. LDC-specific market access conditions have since helped increase its share to almost 13 per cent in both the EU and Canada. However, in the US, where Bangladesh does not receive preferential access, the market share grew to just 6.8 per cent. Bangladesh also expanded its reach to Australia and Japan, benefiting from LDC preferences, growing from a negligible presence to holding 11 per cent of the Australian market and 4 per cent in Japan. This growth underlines the importance of LDC preferences for Bangladesh’s apparel exports, which face higher-than-average MFN tariffs in importing countries.

After LDC graduation, Bangladesh could face tariff hikes in most of its major export destinations (Table 1). The EU and the UK combined account for almost 60 per cent of Bangladesh’s merchandise exports, with apparel comprising more than 90 per cent of those export earnings. The US accounts for approximately 16 per cent of Bangladesh’s exports. Other major destinations are Australia, Canada, India, Japan, and China. Of these major markets, only the US does not provide any preferential market access to Bangladesh.

Bangladeshi exporters may face an increase in average tariffs on their exports. These tariffs range from zero to over 16.0 per cent in Canada, 8.6 per cent in India, 8.7 per cent in Japan, and about 7.0 per cent in China. Additionally, various items may be put back on the negative list for which India does not offer any preferences, even under the South Asian Free Trade Agreement (SAFTA). Post-graduation market access provisions in the EU have not been settled yet as it is devising its new Generalised System of Preferences (GSP) regime. However, under the proposed terms, which are at the time of writing this brief, under review by the EU Parliament and Council, Bangladesh’s garments exports will not be eligible for the GSP+ scheme that allows non-LDCs’ duty-free market access in the EU. This would result in the average tariff rate facing Bangladesh’s garments exports in the EU to rise from zero to about 12 per cent.

In the UK market, after LDC graduation, Bangladesh will benefit from the newly announced Developing Countries Trading Scheme Enhanced Preferences, with most of its exports enjoying duty-free market access. However, Rules of Origin requirements will be more stringent than those applied to LDCs. For garments, this will require fulfilling a double transformation, requiring Bangladesh to use domestically produced fabrics in the export industry. Given the limitations in the current backward linkage capacity, this could be a constraining factor.

What could be the potential implications of increasing tariffs on more than 70 per cent of Bangladesh’s exports? Within the realm of international trade literature, a tariff hike is invariably linked to a reduction in the exporting suppliers’ revenue of the impacted product. Several studies show that increased tariffs could potentially result in a significant decrease in Bangladesh’s exports, ranging from 5.5 per cent to as high as 14 per cent, with a particular impact on export earnings from the EU market.

LDC graduation will also restrict Bangladesh’s policy space in bolstering the export sector through subsidies. For instance, while World Trade Organization (WTO) members are generally barred from providing export subsidies, LDCs are granted exemptions from this regulation. Bangladesh has thus far sustained an extensive export subsidy program, which may be challenging to uphold following LDC graduation. While the efficacy of export incentives can be disputed, it remains a reality that the country will lose the capacity to contemplate such export support measures, not just for the RMG sector but also for all other exports. Regardless of one’s perspective on the appeal of export incentives, the cessation of these measures would also contribute to a diminution of export competitiveness. [On the other hand, continuation of these incentives after LDC graduation would make Bangladesh trade policy regime non-compatible with the global rules and could attract countervailing duties in importing countries.]

LDC graduation will be a defining moment for the future of Bangladesh’s export development—both in terms of general export expansion and diversification prospects. Despite the concerns, some believe that Bangladesh’s apparel sector is competitive enough to withstand the challenges of any tariff rise, especially as the industry has large-scale factories that benefit from economies of scale. The withdrawal of trade preferences from Bangladeshi suppliers could also potentially trigger a global price increase for apparel products, given that Bangladesh ranks as the second-largest exporter. This could provide a competitive buffer for a portion of the country’s exports. Furthermore, it is most likely that the People’s Republic of China (PRC)’s share in the global clothing market will continue to diminish, which will create opportunities for other exporters, including Bangladesh.

Bangladesh’s strongest competitive edge lies in cotton apparel, which holds a global market share of over 18 per cent and is likely to surpass that of the PRC. On the other hand, approximately 60 per cent of the global apparel market comprises non-cotton or man-made fiber (MMF)-based products, where Bangladesh claims a market share of about 5 per cent. There are suggestions that Bangladesh could enhance its export diversification potential within the RMG sector and boost export prospects by transitioning into MMF-based products. The PRC alone dominates more than 70 per cent of the global market share in MMF-based products, but its supremacy is waning, thereby creating growth opportunities for other players.

Like RMG, other sectors will also see tariff preferences getting reduced or entirely eliminated after LDC graduation. As Bangladesh’s overall exports remain small, it is essential to concurrently pursue both export diversification and sustain the dynamism of the RMG sector. The strategy of export diversification is to be complemented by expanding overall exports at a faster pace. The substantial RMG export base implies that achieving and maintaining high growth rates could be challenging, whereas the considerably smaller non-RMG sector needs to grow at a quicker pace to propel Bangladesh into a phase of rapid export growth fuelled by a variety of products. Given the current export composition, if non-RMG exports grow annually at a rate of 15 per cent compared to a modest 5 per cent increase in RMG exports, non-RMG exports could potentially reach approximately half the level of RMG exports in a decade. Overall, it seems Bangladesh’s fast export expansion in immediate terms, as the current macroeconomic situation demands, will critically rely on the RMG sector.

POLICY RECOMMENDATIONS: In the context of Bangladesh’s upcoming LDC graduation in 2026 and the current economic challenges, there is a growing realisation that policy reforms to enhance export competitiveness might receive stronger domestic support than in the past. While national planning documents like the 6th, 7th, and 8th Five-Year Plans have recommended relevant reforms, these have not been adequately prioritised for implementation. Given the urgency of the current economic situation, focusing on trade policy issues and improving export competitiveness should be a central part of Bangladesh’s reform agenda. This paper suggests several recommendations for promoting export diversification.

Tackling policy-induced export disincentives is crucial for export diversification. Bangladesh’s protective measures, through high tariffs and para-tariffs, encourage a focus on the domestic market over exports, creating an anti-export bias. Tariff rationalisation is thus critical in dealing with this policy-induced bias. Lowering tariffs can stimulate domestic manufacturing, potentially balancing any revenue loss from reduced import tariffs. Following the 8th Five-Year Plan’s recommendation to decrease the average nominal protection rate annually and monitoring the implementation of the National Tariff Policy 2023, which emphasizes tariff rationalisation, should be considered key steps in this process.

Enhancing the export performance of non-RMG sectors requires eliminating discriminatory access to policy incentives. The bonded warehouse facilities, in particular, should be granted to all export sectors and units irrespective of whether they are 100 per cent export-oriented or not. Many firms can serve both domestic and international markets, and requiring separate production facilities for exports to access bonded warehouses is impractical. Instead, all exporting firms should have access to bonded warehouses, with import duties adjusted later based on the proportion of goods for domestic and export use. In getting finance, subsidized loans, and other policy support measures, non-RMG sectors should be given equal access

For non-RMG export items, enhancing product quality and meeting international standards are key for market expansion, as higher standards often yield higher prices. Investing in capacity building to meet international quality and safety standards is essential for potential exporters. Acquiring relevant certifications is critical for building credibility and trust in global markets. The government can further aid businesses by establishing or supporting accessible testing and certification facilities. Strengthening institutions responsible for quality control and compliance is also crucial, which involves investing in laboratories, equipment, and skilled personnel for efficient testing and certification.

Attracting foreign direct investment can be a driver of export growth and diversification. It can facilitate knowledge and technology transfers and better management practices. FDI firms are well-integrated into global value chains and can command higher export prices. Bangladesh needs to improve its investment climate, streamline investment procedures, and promote sustainable investment practices to attract foreign investors.

Tackling the high cost of doing business is critical for boosting investment and trade competitiveness. Bangladesh faces a significant disadvantage due to the high cost of doing business. Weak infrastructure, inefficient inland road transport, complex customs procedures, inadequate port facilities, and inefficient trade logistics contribute to longer lead times and higher costs, which undermine competitiveness. The two-way shipping costs for exporters—importing raw materials and exporting final products—exacerbate the problem. Addressing these infrastructural and logistical inefficiencies presents an opportunity to offset some of the losses from the withdrawal of LDC trade preferences and to improve Bangladesh’s standing in international markets.

A prudent exchange rate management strategy could significantly enhance export competitiveness, benefiting sectors beyond the RMG industry. Maintaining a competitive and stable exchange rate ensures that exports remain attractively priced in international markets. This is particularly beneficial for non-RMG exporters who may be trying to establish a foothold in global markets and are more sensitive to price competitiveness. An effectively managed exchange rate can offset some of the cost disadvantages faced by these sectors, making their products more appealing to international buyers.

Addressing the sector-specific supply-side constraints can help with export response from non-RMG sectors. To enhance the supply response of potential export sectors in Bangladesh, it is recommended to address sector-specific supply-side issues through a time-bound action plan. This plan should be based on the constraints identified in studies like the Diagnostic Trade Integration Study and its 2023 update. The action plan should include specific measures tailored to the unique challenges of each sector, setting clear timelines and responsibilities for implementation. This targeted approach will ensure that interventions are focused and effective, directly addressing the issues that hinder the productivity and competitiveness of these sectors on the global stage. By systematically tackling these identified constraints, Bangladesh can significantly improve its export performance in these key sectors.

Devising WTO-consistent export-incentive mechanisms is crucial for Bangladesh, given its impending LDC graduation. As export subsidies may not be possible after LDC graduation, learning from non-LDC countries can guide in formulating effective support measures. For example, how the PRC and Viet Nam support their export industries can provide important lessons for Bangladesh. Complying with WTO guidelines, especially regarding subsidies and sector-specific support, should be important.

Seeking trade preferences beyond LDC graduation comprises an important strategy for export competitiveness. Graduating from the LDC group does not imply the cessation of preferential treatment altogether. The UK’s Developing Countries Trading Scheme, for instance, will continue to provide improved market access even after LDC graduation. Proactive engagements with the EU may be critical to secure similar preferences. Seeking unilateral trade preferences in the post-graduation period will be essential for Bangladesh, as many competitor countries have taken advantage of free trade agreements (FTAs) to obtain preferential market access. For instance, Viet Nam has secured FTA arrangements with Canada, the EU, and the UK; Cambodia, Myanmar, and Viet Nam benefit from duty-free access in India due to the Association of Southeast Asian Nations (ASEAN) free trade agreement; and in Japan and the PRC under the Regional Comprehensive Economic Partnership, among others. For Bangladesh, striking FTAs within a short period of time will not be feasible. Thus, a renewed focus on retaining trade preferences will be an utmost policy priority.

In preparation for Bangladesh’s upcoming LDC graduation, strengthening trade policy and negotiation capabilities to support the export sector is important. This involves developing a comprehensive capacity-building strategy that focuses on enhancing the skills and knowledge of trade officials, negotiators, and policymakers. It is also important to enhance the capacity of the private sector so it can comprehend the changes in trade preferences and policy space following LDC graduation and thus can take other measures for improving firm-level competitiveness.

Dr Mohammad Abdur Razzaque is Economist (Consultant), South Asia Department (SARD), Asian Development Bank (ADB). Barun Kumar Dey is Senior Economics Officer, SARD, ADB. Rabiul Islam Rabi Research Analyst (Consultant), SARD, ADB.

The piece is excerpted from ADB BRIEFS (No 293) tiled ‘Expanding and Diversifying Exports in Bangladesh: Challenges and the Way Forward.’ www.adb.org