United States Tariffs and Bangladesh

Forrest Cookson, PhD

On April 2, 2025 The United States announced a reciprocal tariff of 37% on goods imported from Bangladesh. It is understood that this is an addition to the existing average 15%. This implied that there would be a total tariff of 52% on Bangladesh’s exports. Later, on July 9 the reciprocal tariff was reduced to 35%.  The two governments have been in negotiation to try to settle the issues. In this article we begin with a brief look at the current situation of trade between two countries and then examine the grievances of the United States. Then we examine the likely outcome and the implications for the Bangladesh economy.

To begin one must recognize that the major foreign policy concern of the United States is its Cold War with China. This dominates most of the American thinking about international affairs. The second important point is to understand that the world trading system is working quite well. There are impediments to the functioning of the World Trade Organization but these largely arise from the United States. What has happened in the United States is a belief that the world trading system has caused great harm to Americans and the American economy. In fact the American economy has prospered on the basis of this world trading system that has developed since 1945. The problem arises as the United States did not take seriously the negative consequences of the growth of trade shifting much of the manufacturing sector to countries able to produce products more cheaply than can the United States. Rather than carrying out a careful program to deal with the consequences of the expanding foreign trade the United States Government never took these issues seriously. The harm that was caused by this neglect resulted in a large part of the population dissatisfied with the consequences and a widespread sense of unfairness. This resulted in Mr. Trump becoming president and carrying out his two major undertakings: deporting millions of persons who are illegally in the United States and second raising tariffs to encourage investments in industry to provide better jobs for American workers. Mr. Trump’s vision of the United States is shaped by these two concepts. Mr. Trump is right, the management of immigrants is completely unsatisfactory and no serious effort has been made to offset the shift of the manufacturing sector to growing economies such as China, Vietnam and Bangladesh. Trump is responding to widespread, legitimate complaints about the management of the American economy and weak control of immigrants over the past 30 years.

Tables 1 to 5 present a brief summary of the balance of payments between the United States and Bangladesh. It presents data for three years FY22, 23, and 24. We focus on FY24. Table one gives the earnings of U.S. dollars by Bangladesh from transactions with the United States; the total comes to $11.8 billion of which $7.7 billion were Exports of goods, $1.1 billion exports of services and $3.0 Billion was remittances. The data indicates a fairly sharp decline in total earnings by Bangladesh. US earnings from sales to Bangladesh in FY24 totaled $4.2 billion, of which $2.6 billion were goods, $0.9 billion dollars were services and $0.6 were returns to capital either profits or interest. The total debits have been approximately steady at $4 Billion. From Table 3 and 4 we see that the capital flows between the two countries are very low; portfolio Investment showed a regular outflow and foreign direct Investment was negative. In FY24 the balance of payments showed a positive $7.7 billion a decline from the previous two years when it was about $10 billion.

Grievances: These are USA’s grievances:

1. Bangladesh runs a large trade surplus with the United States. The United States has over the years encouraged and supported the development of the RMG sector. But Bangladesh’s trade policies have discriminated continuously against the United States. The result is the large trade surplus Bangladesh runs. In addition to the trade surplus there is a transfer of remittances from the United States to Bangladesh approaching $3 billion a year. This remittance flow largely arises from Bangladeshis who are illegally resident in the United States.

• Bangladesh has a very large trade deficit with China. In effect Bangladesh is selling garments to the United States and using the earned dollars to purchase Chinese goods. As the United States sees China as a mortal enemy these trade flows are not acceptable. Farther much of the value of the garments originates in China (40%-45%).

• The US Trade Representative believes that there are major violations of intellectual property rights owned by American citizens. In effect many people in Bangladesh are stealing from American citizens and the government makes little effort to do anything about this. In fact the Bangladesh Government is involved in the stealing of intellectual property rights through use of computer programs that have been stolen, not paid for.

• Bangladesh has extremely high tariffs and para tariffs protecting its manufacturing sector. This is a well understood problem and Bangladesh economists have complained to the Government about this for years as it has a strongly adverse impact on economic growth. But no change has been made. This anti export bias in Government’s tax policies results in a failure to diversify exports and in parallel the exchange rate has been overvalued for much of the past 35 years. The failure to diversify exports has now come home to roost. A few points are worth making: the jute industry has been destroyed by government interference and mismanagement resulting in a failure of jute exports to grow: the shrimp industry has been mismanaged by the Department of Fisheries to such an extent that in the past 15 years little progress has been made in growing the volume of shrimp exports, whereas India’s shrimp exports have increased by 500%. The failure to develop the shrimp industry arose from pure corruption. Footwear which should be exporting billions of dollars has been hamstrung by Customs continuous interference and corrupt practices. Hence management of imported components of shoes is expensive. Domestic leather exports are limited by the inability of the Government to provide environmental controls despite 20 years of effort.

• The Government has allowed the importers to under invoice a large percent of imports into Bangladesh. After years of trying the Government finally established a pre shipment inspection system which revealed the extent of this under invoicing. Invoices from China checked by the PSI system found all of them were under invoiced at an average of 100%. Under invoicing by Indian companies is also at a very high level. The result of this is threefold: a loss of government revenues as much as 1% of GDP; reduction the effectiveness of the protection system as the under invoicing effectively reduced the import taxes by half; creating a bias against companies and countries where exporters were not prepared to under invoice. This applies particularly to the EU and the United States. The Customs authorities successfully attacked the PSI system through lies and misrepresentation eventually leading to its cancellation. This is clear discrimination against American imports.

• The United States since the 1990s has been complaining about the labor laws and the suppression of worker rights by the Bangladesh Government. The issue of Labor Unions and labor rights is very complicated in Bangladesh but somehow there has being a failure on both sides to come to a resolution of this issue. The US Trade Representative perceives that Bangladesh authorities continuously promise to do something about labor rights but never do. Suppression and manipulation of Labor Unions goes on all the time. The Government formed a strong industrial police force whose real purpose is to contain complaints by garment workers.

• U.S. companies report to the American Government that they are not treated fairly in Government tenders which seem always to be won by Indian or Chinese companies. American bidders report demands for corrupt payments, changed conditions to favor other companies and so forth. The so-called second bid round for production sharing contracts to develop gas was completely corrupted in such a way as to keep out leading American and European gas companies. That was long ago but it illustrates the conditions. All American successful participation in infrastructure was achieved partly without bidding. They are four great successes:  The Chevron PSC; the two power plants that transformed the electricity AES; the facilities for degasification of LNG. The AES contracts won by international Bidding faced great implementation problems. One can see by the bidding results that there are very limited American company participation in infrastructure projects

• The United States Government made serious efforts to promote free and fair elections in Bangladesh. The United States Government believes in democratic systems and that people should have the right to elect those who rule them. This is an essential point of the American view of government. But efforts to work with the Bangladesh Government to have free and fair elections were rebuffed. In the future things will be better put it left a bitter taste.

• There have been two attacks on American Ambassadors in recent years. One of these attacks was organized by an Awami League leader who was never held responsible for his actions and in fact was reportedly promoted within the structure of the party for his achievements. In the second case the police probably deliberately refused to provide protection for the American Ambassador when a hostile crowd led by Awami League hoods threatened him. Nothing has been done about this transgression. The Interim Government has not done anything about these actions.

In negotiating with the United States these grievances must be kept in mind. Several of these may be resolved in the agreement emerging on the tariff issues to the benefit of both countries. How is this negotiation likely to be completed? Bangladesh has a limited amount of space for increasing imports from the United States. An aggressive stance by the Bangladesh Government to the cotton importers would increase the volume of cotton that is imported. It is also possible to promise to purchase airplanes from Boeing, but that is only possible with loans from the US Export Import Bank. Procurement for the military demands can be shunted to US companies. But much of this may come from reconditioned equipment owned by other countries and hence does not actually change the trade balance.

An agreement was just completed between Indonesia and the United States. The reciprocal tariff rate was reduced to (19% from the original 32%) Indonesia is reported to offer zero Customs duties. This seems for imports from the United States. Indonesia agreed to 15 billion of energy imports and purchase 50 Boeing planes. Such an arrangement would be Impossible for Bangladesh to make. It is not really feasible to provide the United States with zero tariffs on selected items while maintaining those levels for other countries.

One must keep in mind that Bangladesh has important trading relationships with many other countries on both imports and exports. With respect to exports it is surely more important to improve productivity and reduce costs associated such as Customs induced delays; improved gas supply for export industries; improved quality and reliability of electrical power.

With respect to imports it is in Bangladesh’s interest to adjust tariff levels downward and remove the anti-export bias in the current tax system. All though the VAT is meant to be trade neutral the implementation of that tax is not neutral.

One hopes that the Government negotiators will be able to obtain an agreement that reduces the reciprocal tariff by a significant extent. But it is most likely that the industry will be disappointed in the outcome and will blame the Government for incompetence in the negotiations. But there are actions available to the government to significantly reduce the costs of production of both woven and knitted garments as well as opening channels for greater economic relationships with the United States. A third paper will cover these.