by Apparel Resources
12-October-2018 | 6 mins read
What lies ahead for Bangladesh’s growing apparel industry in the face of dwindling global growth and slowing down trade? World Bank warns of robust growth and some risk factors involved. Warnings are, Bangladesh should heed those risks seriously to stay in the game.
In their report ‘Bangladesh Development Update: Powering the Economy Efficiently’, released in October, World Bank says, considering all variables, growth of Bangladesh’s major export item – the Readymade garments – should continue robustly in the next few years at a time when global factories are pursuing a China plus sourcing strategy.
The report forecasts, global growth is expected to moderate out – projected to reach 3.1 per cent in 2018 and edge down to 2.9 per cent by 2020, with global slack dissipating, trade and investment moderating, and financing conditions tightening. The growth in the United States is projected to reach 2.7 per cent in 2018 and come down to 2.5 per cent in 2019. Growth in European Union is projected to slow from 2.1 per cent in 2018 to 1.7 per cent in 2019. But, growth in Middle East and North Africa is expected to rebound and reach 3 per cent this year.
Also, the global trade is projected to slow down. Though global goods trade growth rose to 4.6 per cent in 2017 and the momentum was seen to have continued in early 2018; over the medium term, slower growth of global value chains and a reduced trade liberalisation policies are expected to constrain global trade growth.
Despite the challenges, the World Bank says, growth in Bangladesh will remain resilient. The country will be enjoying the benefits of favourable exchange rates, rising shipment of higher value-added items, and gaining a brighter image after mass factory remediation. Coupled with automation, political calm and rebound in the economies of major export destinations from shocks of Brexit and general elections in the European Union; Bangladesh’s apparel exports ‘should prop up’ in the coming future. Additional prospects have popped up with new factories being expected to emerge with goals of capturing the sourcing shift from China (buyers pursuing the China plus strategy).
According to the forecast, overall, Bangladesh’s exports of goods (around 83 per cent of which are the Readymade garments) and services are projected to be 4.5 per cent in 2018, 4.9 per cent in 2019, 5.1 per cent in 2020, and 6.3 per cent in 2021. The projections, however, leave a huge gap in the targeted US $50 billion export market for Bangladesh’s readymade garments industry.
Risks to consider
The biggest risk currently for Bangladesh’s apparel industry is its limitation in product and market diversification; warnings are, the country risks losing its footing in the global market with the competitive edge it was holding on to for the past few years if it fails to do so.
It said, Bangladesh’s garments industry may suffer external shocks, like reduced demand, higher price of cotton, or higher tariff in Europe – its biggest regional export destination for apparel items. The strong footing Bangladesh currently has – cheap labour and shoddy factories – are ‘thinly based’; among which the latter factor has already been greatly amended through expensive remediation.
It added, Bangladesh may soon start losing market share as trade alliances and tariff preferences shift. “The cost of labour is increasing and will increase further as the living wage movement gains ground. Improved compliance has also raised the cost of production,” WB stated.
The World Bank also observed that initiatives towards export and market diversification have failed to yield visible results for Bangladesh. It added, Bangladesh was weak in taking advantage of China’s displacement and that it benefitted others – namely Vietnam, Bangladesh’s closest competitor, the most.
Prospects of tariff hike
In the purview of a prevailing trade war between the US and China, the World Bank notes that the escalating tariffs across markets and restrictions on global trade might present an opportunity as well as a risk for developing countries.
Bangladesh, a country that is dependent on cotton imports for its apparel industry, imports 60-65 per cent of its yarn from China and India. “Yarn production in China and India will be costlier, as they largely depend on US cotton to produce yarn. Also, Bangladesh cannot replace overnight the Chinese and Indian yarn manufacturers with the US cotton supply, as raw material for the domestic spinning mills to substitute yarn imports,” it said.
As tension continues to mount, World Bank predicts that with the current US strategy, a coordinated global withdrawal on tariff commitments from existing trade agreements, as well as from unilateral preferential schemes coupled with increase in cost of trade services could result in income losses of 0.3 per cent or US $211 billion.
This, will be bad news for product and market diversification of Bangladesh.