Forrest Cookson, PhD
In this article we examine the consequences for Bangladesh of the changes in world trade brought about by Trump’s tariff increases. The impact on the world economy is also discussed. These tariff increases have caused significant changes in the direction of world trade. There are two aspects of the change in world trade conditions: First, the higher tariff levels reduce the size of the market in the United States. Second, the differences of tariffs among countries results in a redistribution of the source of ready-made garments sent to the United States.
At present the United States is attempting to not only reduce imports of wearing apparel but also trying to block imports originating from China. There are also agreements for investments to be made in the United States. Trump seems to be involving the United States directly in some of these matters including trying to be in control of investments made as a result of the tariff negotiations. It is potentially changing the nature of the US Governments relationship with private enterprises. It seems to be going beyond the regulatory approach and involves direct control of an enterprise. Such direct intervention by the United States will have consequences throughout the world.
The objectives of the United States are as follows:
- To reduce the trade deficit of the United States. It is the view of the American government that the trade deficit, at a high continuing level is to the disadvantage of the USA. The president has clearly set out his view that the rest of the world has taken advantage of the USA by imposing high protection barriers to block US exports, while simultaneously the USA accepts a large volume of imports from all the countries of the world.
- To induce foreigners to invest in the United States so as to produce products locally, providing greater employment and reducing imports.
- To induce American companies to invest in making products that are currently largely imported. The last 30 years have seen the reverse with American companies closing down factories in the United States, while investing in the rest of the world for export to the USA.
- To increase revenues earned from tariffs imposed on imports.
- To reduce the markets for Chinese exports through direct demands for other countries to take appropriate actions to curb the growing importance of China in the world economy.
The actions taken by the United States are to raise tariffs and to negotiate lower import tariffs of other countries as applied to US exports. It is not only tariffs that the USA seeks to have lowered but also reductions in non-tariff conditions which limit imports from the United States. The US government has raised tariffs dramatically and used the threat of higher tariff levels to achieve its objectives. This has resulted in the great instability and uncertainty as to the direction and volume of international trade over the next few years. The United States is discarding the Most Favored Nation approach that disconnects the source of imports from the tariff rate. The MFN allows production to take place in the location with the lowest cost given available resources of capital and labor. Tariffs distort this allocation and reduce the overall level of output. Trump argues that the higher tariffs outside the United States cause reduction in output in the USA to be greater than gains in other countries. He is attempting to raise tariffs so that the consequent resource allocation will be more favorable to the United States. Although the total output of the world will decline it will increase in the United States.
For example, the case of Bangladesh which runs a large surplus in trade of goods [about $6 billion] and an even great surplus in the current account due to the large volume of remittances from the United States [about $4 billion in 2024]. The Government of Bangladesh has been negotiating with the United States over the threatened tariff level to be imposed. At present with the negotiated reciprocal tariff the total tariffs are about 37% on RMG products. The impact of this on American markets is uncertain but the demand for wearing apparel will certainly drop in response to an estimated 35% in prices resulting from the worldwide tariffs increases. This should decrease Bangladesh RMG exports to the USA by about $800 million. This is an estimate of the immediate short run impact. Over time the wearing apparel will become lower as sources shift. Bangladesh is probably more competitive and will reclaim these lost imports. The Bangladesh Government reportedly believes it can reduce the trade deficit by 75% in one or two years, implying imports increasing by $4.5 billion a year. That is impossible to achieve. Indeed, with the weak Bangladesh economy imports are likely to be stagnant over the next year. The United States cannot compete with exports sourced to China and India. If commitments of this nature have been made one can expect difficulty when such a high level of imports cannot be achieved.
But there are two important points: (1) the negotiations are ongoing and there are important issues such as labor and intellectual property rights where Bangladesh will be challenged. (2) Trump believes he can use the tariff power to demand policy changes. In Bangladesh the US is likely to demand reduced reliance on China; a demand impossible and unwise for Bangladesh to accept. Fortunately for Bangladesh the relationship between the United States and India is very bad so Indian influence on the USA over Chinese issues such as the Teesta valley project is limited.
As trade is a central factor in achieving rapid economic growth and reducing poverty, the prospects for the world economy are pointed downward but with great uncertainty as to what will actually happen. There are three countries where their relationship with the United States is undetermined: China, India, and Switzerland. In each case the tariff levels imposed by the United States on imports from these countries are unlikely to be at their final level. Furthermore, the US government we’ll probably use the threat of tariff changes to persuade countries to take actions desired by the United States. One can look forward to continuing confusion and numerous special exemptions and actions.
The situation is further confused by the uncertainty of the legal ability of the Trump administration to make these changes in tariffs without the concurrence of the Congress. The courts are still dealing with the issue of the executive branch’s right to make tariff changes on its own. To increase the uncertainties there may be a change in the governing party in the 2028 election. The Democrat elected to the presidency would probably make significant changes in these tariff levels returning much closer to the levels prior to the Trump administration. It is fair to say that the driving forces behind the US international trade policy are volatile. There is nothing that can be done to reduce this volatility, but it does point to the difficulties all countries and all businesses will face over the next five years.
The uncertainties facing Bangladesh more complicated than the threat from higher US tariffs. India it’s far along in negotiating a free trade agreement with the EU that will ensure that India faces low tariffs for its exports. Bangladesh on the other hand is graduating from its LDC status and will face higher restrictions on its exports to the EU. In particular, there will be demanding rules about environment and labor challenging the RMG industry to meet the standards demanded. The rules and conditions of international trade are right now in great flux generating uncertainties and demanding rigor and dedication to those responsible for Bangladesh’s
trade policy.
Economic Growth and Trade Policy
Examining the present situation suggests that reliance on export led growth is no longer a feasible strategy to achieve high sustained increases in GDP. Bangladesh has been unsuccessful in diversification of exports. Although there is a constant refrain from government, universities, and the corporate sector for such diversification nothing has been achieved. There are at present no industries that promise to reach $5 billion exports in the next decade. The uncertainty about trade barriers and the resulting ferocious competition will make export diversification difficult.
The one instrument available to the government to achieve this diversification objective and to support continued growth of the RMG sector is the exchange rate. The government has over the years supported an overvalued Taka. Only in the past two years has the currency come closer to an equilibrium rate. But the continuing rapid inflation compared to other countries implies that the exchange rate, to maintain its true equilibrium level must be regularly depreciated. That is why the IMF has been so insistent on a flexible exchange rate. Such an exchange rate system if maintained would automatically allow adjustment. The problem is that a strategy of export diversification and growth relies on achieving an undervalued exchange rate. Diversification has failed due to the maintenance of the overvalued exchange rate and to achieve the desired change in exports the central bank will need a significant depreciation to improve the competitiveness of alternate export commodities. This will lead to a large increase of foreign exchange reserves. All of the Asian economies that achieved rapid economic growth did so through an undervalued exchange rate. This strategy was never supported by the IMF but there is no other means of reaching the goal of sustained rapid GDP growth.
This central point has not been accepted by the authorities and consequently we will see only words for an export promotion policy. Central is the need for increased FDI for both the garment sector and other potential export products. But government driven by the industry has done all it could to block FDI while simultaneously proclaiming its great wish to have more investment. A simple example is the need for investment in man-made fibers and improvements in weaving. Little has been done by the government to encourage such foreign investment. FDI should be focused on export growth. Here is an example: China invests in EV [electric vehicle] production. In time this output might go to Africa while certain parts would be produced efficiently and sold back to China. In effect Bangladesh gets a place in the supply chain.
Looking to the world economy we are almost certain to see slow growth or decline in international trade, slower GDP growth in the advanced economies, and reduced prospects for low-income countries. The Chinese economy for example built to generate exports to achieve rapid GDP growth now finds itself with excess manufacturing capacities for many products while access to markets is threatened.
Economists have long believed that successful growth of the Bangladesh economy would be based upon integration with the Indian economy. This has proved impossible to achieve and the attitudes of ordinary people in both countries are such that it is unlikely that any real improvement in cooperation in trade and investment can be achieved. More distant advanced economies such as Japan and the United states are unlikely sources of export demand and FDI. The one potential partner for Bangladesh to achieve rapid economic growth is with China. This would demand that the Chinese government would encourage exports to China from Bangladesh. Chinese investors would produce products for export to China. In all the discussions about relationships of the two economies none of these key points is ever raised. Chinese investments to serve the local market, with the exception of automobiles is unlikely. Chinese investments for the purpose of exporting to EU or to the USA are not going to be successful as such a strategy would be transparent and unacceptable.
The challenges facing Bangladesh due to the changed world trade rules are immense and will unlikely to be overcome. With respect to trade policy Bangladesh has followed an anti-export policy for many years while calling for increased diversification and growth of exports. There is no reason to believe that this contradiction between words and policy will not continue in the future.
The RMG industry
We turn to more specific problems of the RMG (readymade garment) sector in the light of the changing tariffs and other conditions imposed on the sector. With the higher tariffs imposed by the USA the buyers are likely, and it is so reported, to demand price reductions by the Bangladesh manufacturers. Similarly, we can expect some reductions in the markups by the retail and the wholesale sector in the United States. The competitiveness of Bangladesh depends on what price reduction will be acceptable to the manufacturers. Adjustment of the real exchange rate will support the industry.
The RMG sector itself seems reluctant to make the changes required to deal with the difficult future. The simple truth is the industry has been built on low wages and unpaid bank loans. The owners have relied upon bank loans to finance the industry and put in very limited equity. The solution to problems was to borrow more money from the banks. The industry has now reached a point where this strategy will no longer work. Asking the government for more help seems the only idea that the industry has in its mind. But what is needed is clear enough. There must be a greater effort at backward linkages to increase the domestic production of high-quality cloth. This requires training of workers in the textile skills, not currently taking place. We know this as the industry continues to rely upon a large number of foreign experts. The demand so often heard of the need to increase the quality of the products depends upon allowing the low-end part of the industry to shrink. Instead, the industry seeks help from the government to maintain their profitability by subsidy.
It is only higher productivity and higher end products that will enable increases of wages to workers. Over the past decade the real wages of workers have not increased. That has resulted in the outcome of low growth in productivity. To raise productivity requires greater investments in modern machinery and enhanced training of workers. Financing of this must be done by the leading firms in the industry going to the capital market and avoiding continuous growth of bank loans. Going to the capital market leads to a different approach for management of the industry. It is necessary to move away from the idea of a family business and rather establish a modern corporate structure. The industry must help itself. That is the determinate for success.
