Trump's trade war and Bangladesh

President Donald Trump had long been warning that the USA would impose higher tariffs on selected imports from its major exporters like China, the European Union (EU), and India.  He has now carried out the threat against China, the European Union (EU), Canada, Mexico and India who have also retaliated in kind by imposing higher tariffs on US exports to them.  By June, a veritable global trade war has started.

The futures traded in NASDAQ and International Commodities Exchange (ICE) show that US and international market prices of some key primary commodities, such as, cotton, soy, and maize are already experiencing a steady fall in prices.

For Bangladesh, these three commodities are very important - cotton for textile and readymade garments (RMG) industries, and soybean and maize for edible oil, poultry, fish, and livestock industries.

NASDAQ and ICE data show that since the middle of June 2018, the futures prices of #2 Cotton, a major US produce, have fallen from US $ 95 to US $ 85 per bale (480 lbs) - a fall by more than 10 per cent.

The futures prices of maize, another major US produce, have come down from over US$ 400 per ton in the third week of May to below US$ 350 per ton by the end of June. In other words, corn futures have depreciated by about 12.5 per cent in a span of just five weeks.

For soybean, another staple produce of the USA, has been hit the hardest. The futures of soybean, which were traded for around US$ 1,040  per ton in the 3rd week of May, have come down to US$ 860 per ton by the end of June 2018. Soybean futures have suffered a whopping 17 per cent decline.

A closer look at the import statistics reveals the importance USA as one of the major sources of direct and indirect imports for these three commodities in Bangladesh.

For cotton (HS 5201), the largest source of import has been India, Australia, USA, Uzbekistan, UAE, Singapore, and Malaysia, during 2008-2017 period. The UAE, Singapore, and Malaysia are not cotton producers themselves and simply re-exported cotton imported mostly from the USA, as the reports by the Global Agricultural Information Network (GAIN) from the United States Department of Agriculture (USDA) suggest. During this period, direct imports of cotton from the USA  ranked between the 3rd and 5th position for Bangladesh. According to mirror data available in the UN Comtrade Statistics, Bangladesh imported 6.2 million bales or 723,235 tons of raw cotton worth US$ 1.3 billion in 2017, out of which 152,144 tons worth US$ 283.67 million or 21 per cent was imported directly from the USA, while India and Australia commanded 32 per cent and 22 per cent share of Bangladesh's raw cotton import in 2017. But if raw cotton sourced from the master brokers located in Singapore, UAE, Malaysia is considered then the market share of US cotton in Bangladesh is more than 21 per cent. It is important to note that Bangladesh domestically produces only 2.0 per cent of its raw cotton requirement, and the rest 98 per cent is imported, according to 2018 GAIN Report. Besides, there is need for import of cotton yarns of various categories.

For maize, a major requirement for the high growth poultry and fish farming sectors of Bangladesh, the largest source of imports have been Brazil, USA, and India during the 2008-2017 period, with the USA steadily keeping its 2nd position after Brazil. China's requirement for American maize being stifled due to increased tariff, the major global suppliers like India, Brazil, and Argentina will look for expansion into the Chinese market. Hence, Bangladesh may expect to source more of its maize from the USA. During 2017-2018 (May-April), Bangladesh imported a total of 1.247 million tons of maize valued at US $ 220.94 million, out of which 119,999 tons or about 9.6 per cent of the volume worth US $ 30.88 million (commanding about 14 per cent of the import value) was sourced from the USA, according to the mirror data available in the UN Comtrade Statistics. Bangladesh produces domestically about 76 per cent of the maize it requires and needs to import the rest 24 per cent, according to the 2018 GAIN Report.

The USA was the largest source of imported soybean in Bangladesh during 2008-2017 period, with Uruguay and Paraguay remaining a distant second and third source. Soybean is used as feed for the fresh water fish farming industries, poultry and other livestock farms, and for extracting edible oil. Bangladesh needs to import about 90 per cent of its requirement for soybean grain, as domestic production of 156,000 tons constitutes only 10 per cent of the market demand, as per 2017 GAIN Report. According to the mirror data of UN Comtrade Statistics, Bangladesh imported grain soybean worth US $ 402.11 million, out of which 1.047 million tons valued at US $ 385.23 million or 95.08 per cent was from the USA in 2017.

In the context of falling prices of these three commodities and the major market share of the USA in Bangladesh's imports, it is likely that Bangladesh will import more of these commodities from the USA in the coming months.

The question remains, how the cheaper and larger volume of imports from the USA will affect the productivity, competitiveness, consumption, and exports of Bangladesh.

Maize and soybean are extensively used for domestic consumption in poultry, live stock, fish, and edible oil industries as feed and raw material. It would therefore be rational to assume that savings from cheaper import of these raw materials will result in cheaper production cost and increased competitiveness of these industrial sub-sectors in Bangladesh, with everything else remaining unchanged.

Analysing the impact of cheaper cotton prices is much more complex. Trade experts and analysts need to figure out such important questions, such as, if China stops buying US cotton, then how long are the cotton prices likely to remain cheap in the medium and long term? What is the possible price and demand elasticity? How about yarn prices? What will be the frequency and scale of trade diversion and deflection through other countries?

According to the reports of Bangladesh Textiles Mills Association (BTMA), Bangladesh needs to import about 60-65 per cent of its yarn demand for export-oriented woven products, mostly from China and India. Yarn production in China and India will be costlier, as they also largely depend on US cotton as their raw material to produce yarns.

Bangladesh is not ready at all to replace the Chinese and Indian yarn manufacturers and consume the US cotton supply as raw material for the domestic spinning mills to substitute yarn imports. At least it will not be possible overnight. Increasing the number of spindles in the spinning mills is also fraught with many other challenges, including those of access to finance, gas and electricity, port handling capacity, road and other transport infrastructure, and trade facilitation capacity of customs and other relevant government agencies, and maintaining the desired quality and variety of yarns.

To face these uncertainties, Bangladesh needs to further examine the strategic needs of its textiles and RMG sub-sector in the backdrop of the ongoing global trade war. There is not much time left, for competition is keen from countries like Vietnam, India, Pakistan, and others.

Shaquib Quoreshi is an enterpriser at Business Intelligence Limited.

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