Trade shock and policy response

Trade has long been a cornerstone of economic development and international diplomacy. By enabling the exchange of goods, services, and resources, it allows nations to specialise based on comparative advantage-driving efficiency, productivity, and improved living standards. From the ancient Silk Road to today's multilateral trading systems, global trade has not only spurred economic growth but also fostered cultural exchange and strengthened diplomatic ties.

Yet, the foundation of global trade is now under stress. On April 2, 2025, United States (US) President Donald Trump announced a sweeping Reciprocal Tariff policy aimed at revitalising domestic industry, reducing trade deficits, and countering what he described as unfair foreign trade practices. The policy introduced a 10 per cent universal tariff on all imports and country-specific tariffs targeting nations with significant trade surpluses with the US.

Following a 90-day implementation pause, the policy took effect in stages. By July 9, fourteen countries-including Bangladesh, Japan, Vietnam, and South Korea-had received formal tariff notifications, with rates ranging from 25 per cent to 40 per cent. Bangladesh's finalised tariff was set at 35 per cent, effective from August 1, placing it among the most severely impacted nations despite its modest trade footprint. While marginally lower than the initial 37 per cent proposed in April, it remains significantly higher than the 20 per cent rate secured by Vietnam through bilateral negotiation. Tariff decisions for other competitors such as India and Pakistan are pending, but existing rates on Vietnam, China, and Indonesia have already raised alarm among Bangladeshi exporters, who fear a loss of competitiveness in the US apparel market. 

These new tariffs compound existing duties. According to the US International Trade Commission, the average tariff on Bangladeshi exports in 2024 was approximately 15 per cent. With the additional 35 per cent, the effective tariff burden rises to 50 per cent, severely undermining Bangladesh's export competitiveness. President Trump has also warned that countries aligning with the BRICS ( Brazil, Russia, India, China & South Africa) bloc may face an additional 10 per cent tariff, while sector-specific duties-targeting automobiles, semiconductors, and pharmaceuticals-remain under review. These developments underscore the seemingly disproportionate nature of the US tariff regime.

LIKELY IMPACTS ON BANGLADESH: Bangladesh faces huge burden under the Trump administration's Reciprocal Tariff regime. Despite contributing less than 0.25 per cent of total US imports and maintaining a modest $6.2 billion trade surplus, it has been hit with a 35 per cent tariff-one of the highest among the 14 targeted countries so far. This tariff disproportionately threatens Bangladesh's ready-made garment (RMG) sector, the backbone of its export sector. The RMG industry accounts for over 80 per cent of national exports and employs four million workers, the majority of whom are women. The US is Bangladesh's single largest export destination, absorbing more than $7 billion in apparel annually. With the new 35 per cent tariff added to the existing average duty of 15 per cent, the effective tariff burden rises to 50 per cent, severely undermining price competitiveness.

The implementation of Reciprocal Tariffs under the Trump administration highlights a departure from established norms with established norms of proportional reciprocity and fairness within multilateral trading frameworks. Bangladesh, with one of the smallest trade surpluses and the greatest reliance on apparel exports, faces one of the most punitive rates. In contrast, countries with exponentially larger surpluses, such as Vietnam and China, have secured lower or negotiated ceilings. 

According to the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), the tariff shock could trigger a 15-20 per cent drop in US orders, as buyers begin shifting sourcing to countries with more favourable trade terms. The pricing gap is likely to shift US retailers to consider alternatives such as Vietnam, India, Pakistan, Egypt, and Kenya, where tariff rates are lower or negotiations are still underway.

RIPPLE EFFECTS ACROSS THE ECONOMY: The tariff is not merely a sectoral blow-it may threaten Bangladesh's broader export base and macroeconomic stability. The RMG sector is interwoven with multiple supporting industries. The disruption triggers a cascade across supply chains, service sectors, and financial institutions. 

The RMG sector in Bangladesh is deeply interwoven with a network of supporting industries, forming a critical ecosystem for national economic activity and employment generation. The recent imposition of a 35 per cent U.S. tariff is expected to exert pressure on this interconnected system, potentially disrupting multiple supply and service chains.

In the textiles industry, demand for raw materials and fabrics may decline as export orders contract, particularly for U.S.-bound shipments. Similarly, packaging industries could face reduced demand for cartons, labels, and polybags as the volume of export-ready goods drops. The transport and logistics sector may also experience a slowdown, with fewer shipments leading to underutilised fleets and possible inefficiencies at ports and inland container depots.

Financial institutions may come under growing strain, especially as export-reliant small and medium enterprises (SMEs) struggle with liquidity shortages. This could result in delayed repayments and a potential uptick in non-performing loans. The insurance sector, closely tied to cargo movement, may likewise experience a drop in premiums and increased exposure to claims.

Taken together, these ripple effects are likely to weaken Bangladesh's industry. They may dampen labor demand, contribute to job insecurity, and intensify the wider economic uncertainty and social stress already facing the country.

BANGLADESH RESPONSE: In an effort to manage the growing trade tensions with the US and reduce its trade surplus, the Bangladesh government has initiated several strategic measures aimed at damage control. The Trump administration's Reciprocal Tariff policy is pushing Bangladesh toward trade concessions, particularly in sectors such as agriculture, aviation, and energy. As part of this approach, the government has reportedly agreed to import 300,000 tonnes of wheat from the US under a government-to-government (G2G) agreement. The deal comes despite the wheat being $20-$25 per tonne more expensive than supplies from traditional partners like India, Russia and Ukraine, and with higher shipping costs as well.

Bangladesh is also exploring opportunities to expand its import portfolio. These efforts include potential procurement of Boeing aircraft to support the country's aviation growth, as well as streamlining procedures and developing warehousing facilities to facilitate the import of US cotton for the textile sector. In addition, the government is reviewing the possibility of tariff adjustments on selected US exports-such as gas turbines, semiconductors, and medical equipment-with a view to promoting balanced and mutually beneficial trade relations.

RISK OF TRADE DISTORTIONS & WELFARE LOSS: To address the US trade grievances and safeguard its RMG exports, Bangladesh has adopted a diplomatic posture aimed at narrowing the bilateral trade surplus. This strategy, while intended to de-escalate tensions and signal goodwill, raises concerns when assessed through the lens of trade theory and economic efficiency.

Through a government-to-government (G2G) procurement agreement, the Government of Bangladesh plans to increase imports from the US-most notably through the purchase of wheat and the potential acquisition of aircraft. While these moves may align with strategic or diplomatic objectives, serious concerns remain regarding their price competitiveness and fiscal implications.

Reports indicate that US wheat is significantly more expensive-by $20 to $25 per tonne-compared to supplies from traditional partners such as India or Russia, in addition to incurring higher shipping costs. To prevent domestic food inflation, the government may need to subsidise the higher import costs, thereby straining public finances or, alternatively, allowing consumer prices to rise-both of which carry economic and political consequences.

Similarly, the government is encouraging the private sector to import more cotton from the US. While the US cotton is known for its high quality, its price remains higher than that of regional suppliers like India, Pakistan, and Brazil. For a price-sensitive and highly competitive sector like RMG, this move could significantly raise input costs, eroding Bangladesh's competitiveness in global markets.

Such a shift could be justified if accompanied by reciprocal trade concessions-particularly a reduction in the 35 per cent tariff on Bangladeshi apparel. In that case, the higher input costs might be offset by improved market access or lower export duties. However, in the absence of any preferential trade arrangement or tariff relief, the increased cost of US cotton would simply raise production costs and make Bangladeshi RMG products less competitive, not only in the US but also in other key markets.

These steps, while politically pragmatic, raise concerns under economic rationale. As Jacob Viner (1950) argued, trade diversion without trade creation leads to welfare loss. Similarly, David Ricardo's theory of comparative advantage cautions against politically driven procurement that ignores cost-efficiency. Bangladesh's current trajectory risks reinforcing structural asymmetries, inflating public expenditures, and weakening its bargaining position in future trade talks.

CONCLUSION: President Trump's Reciprocal Tariff policy goes beyond unilateralism-it directly challenges the rules-based multilateral trading system anchored by the World Trade Organization (WTO). By imposing country-specific tariffs outside established mechanisms, it contravenes core principles such as the Most Favoured Nation (MFN) clause, which prohibits discriminatory treatment among trading partners. This undermines the institutional framework essential for smaller economies like Bangladesh, which depend on predictable, rules-based trade to sustain global market access.

In response, Bangladesh must adopt a forward-looking, principled strategy rooted in its graduation from Least Developed Country (LDC). This includes leveraging the 2013 Trade and Investment Cooperation Forum Agreement (TICFA) to promote reciprocal trade, investment facilitation, and regulatory alignment with the United States. The strategy should emphasise geographic diversification to reduce reliance on any single market, product diversification to shift toward higher-value and resilient exports, and trade diplomacy that balances bilateral engagement with multilateral commitments while protecting domestic competitiveness. Pursuing regional and preferential trade agreements will be key to expanding market access and insulating the economy from external shocks. Above all, Bangladesh must continue to champion multilateralism by defending a fair, rules-based global trading order.

Dr Golam Rasul is a Professor in the Department of Economics at IUBAT-International University of Business Agriculture and Technology, Dhaka, Bangladesh. golam.grasul@gamil.com