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Bangladesh’s Exports Could Shrink as EU Forges FTAs with its Competitors

While Pakistan celebrates its recently won trade status from the E.U. under its Generalized System of Preferences program (GSP), many in Bangladesh are worried that the E.U.’s strengthening ties with its regional competitors will hurt its export business.

A study recently released by the Bangladesh Foreign Trade Institute (BFTI) estimates that Bangladesh’s exports to the E.U. will contract by 0.18% per year as a consequence of new free trade agreements with Pakistan, India and Vietnam. Pakistan already secured GSP status which has been effective since January 1, and both India and Vietnam are close to concluding their own deals.

The report also estimates that Bangladesh’s GDP will shrink by 0.27% and will lose as much as $54 million annually. Pakistan stands to gain $674 million per year, India $1.75 billion and Vietnam $898 million. Pakistan’s GDP stands to increase 2.1%, India 0.67% and Vietnam 2.46%.

Of the three nations, Pakistan is the one whose cozier relationship with the E.U. will come at the immediate expense of Bangladesh. Currently, the E.U. is Pakistan’s primary destination for its textile exports. Overall, Pakistan’s textile exports topped $13.06 billion last fiscal year, including $2.7 billion worth of yarn and $2.5 billion of fabric to Bangladesh, specifically. Pakistan’s exports have grown by approximately 12.5% per year, with a growth of 10.3% to the E.U., in particular. The textile industry accounts for more than 50 percent of the nation’s total exports. While forecasts regarding the full reverberations of the new status for Pakistan vary widely, many predict growth by as much as 100 percent over the next four years.

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While the new GSP status doesn’t exclusively impact Pakistan’s textile industry, it should be among the biggest beneficiaries. Bilal Qamar, an analyst at JS Research in Karachi, said, “The domestic textile industry is likely to take the benefit of adding value itself and increase direct exports to the EU after GSP Plus status.” More than 20 percent of Pakistan’s exports will enter the E.U. market’s tariff-free, and more than 70 percent will enjoy dramatically reduced tariffs.

Thirteen textile products are included on the list of those than can be exported duty-free to the twenty-seven members of the E.U., accountable for $231 million worth of goods last year. Some are predicting this will increase Pakistan’s exports to the E.U. by $1 billion.

Bangladesh’s $20 billion garment manufacturing industry is heavily dependent upon its access to European markets. Despite its recalcitrant political troubles, Bangladesh continues to be a magnet for apparel suppliers. Its readymade garment exports climbed nearly 20 percent year-on-year during the first half of 2013. From July to December 2013, garment exports hit $11.93 billion, a significant improvement over the same period the previous year, which achieved $9.95 billion. Exports of woven garments did particularly well, leaping 20.37% to $5.98 billion while knitwear exports increased by 19.55% to $5.95 billion. The Bangladesh government expects total garment exports this year to increase by a little more than 12 percent to approximately $24 billion.

Bangladesh has managed to increase its economic cooperation with the E.U. as well, despite weathering a steady torrent of criticism for its factory safety and labor conditions. The International Apparel Federation (IAF) was recently awarded a grant from the E.U. to improve the South Asian nation’s jerry-built infrastructure. The grant to the IAF is also extended to two of its member associations, the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) and the Hellenic Clothing Industry Association (HCIA).

The scope of the project funded by the E.U. is wide including the building of additional capacity, the updating of knowledge transfer technology, the extension of existing networks, and access to various training seminars to be held in both Europe and Bangladesh. The IAF is a prominent trade organization whose membership largely comprises retailers and apparel manufacturers, as well as some industry-related associations.

Some have interpreted the grant as an important step for Bangladesh in maintaining good commercial relations with the E.U. Rumors have swirled that, as a symbolic show of protest against Bangladesh’s crawling progress toward improved factory safety and labor conditions, the E.U. might pull its duty free access to European markets, including apparel products. A member of the WTO since 1995, Bangladesh benefits from the E.U.’s “Everything But Arms” arrangement, which allows it duty free access for all exports, excluding arms and ammunition. And while the U.S. has suspended duty free access for Bangladesh until it improves factory safety, this has little effect on the garment industry since it only applies to goods like golf equipment, kitchen appliances and ceramics. Bangladesh’s garment industry has never qualified for duty free access to the U.S. market.

Still, Bangladesh will need to craft a strategy that accommodates newly invigorated competition for E.U. importers from its geographically proximate competitors. According to the BFTI report, this will require broadening its export offerings. “Bangladesh will need to diversify her exports to sustain and capture more market share in the EU.”