The export-oriented and Micro-level Dynamics of RMG Industry in Bangladesh sector has had a great role in the graduation of Bangladesh from being a predominantly aid-receiving nation to a trading-nation. When the once thriving jute sector of the country started to wane, the RMG sector took the pole position and kept the economic wheels of the nation into motion with its dynamic incorporation of backward and forward linkage activities. The RMG sector started in Bangladesh as a non-traditional sector and the first consignment of goods was exported in 1978 for a trivial earning of foreign currency. This industry first started its journey under the congenial international environment of the Multi-Fibre Arrangements of 1974, which imposed relatively less strict import quotas on Bangladesh as an LDC compared to larger apparel exporters from developing countries like India and China. This ensured a safe and certain market for Bangladesh’s garments products in the developed world and helped its industry to flourish. All these international reasons along with some other suitable domestic conditions catapulted the industry, and within three decades it has become the backbone of Bangladesh’s export-oriented economy with more than 4 million workers. More than 90% of its two sub-components, knit and woven, are directly exported with the export figures nowadays reaching almost US$20 billion per year. Both Table 1 and Figure 1 show how the RMG sector grew over the years and how it has come to dominate the country’s export basket. It has also managed to diversify into many ranges of knit and woven products. This industry has also propelled the growth of many backward and forward linkage industries and services which is absolutely vital for the nation’s economy. According to a latest Reuters report, Bangladesh’s RMG sector is second only to China in world ranking.
The quota-free access of Bangladesh’s garment products to the EU helped immensely in the initial growth of the RMG sector, as imports from all the other major competitors of Bangladesh into the EU were restricted by quota until 2005. The spectacular growth of the country’s RMG sector persisted even after 2005 when all MFA import quotas were fully abolished, exposing it to the challenges and competition of the quota free world. But it must be mentioned that over the years Bangladesh’s GSP utilization rate was never more than 30-35%. This had been largely due to the heavy import-dependency for raw materials of its woven sector which, most of the time, failed to qualify under the strict 2-stage Rules of Origin (RoO) system of the Generalized System of Preferences (GSP) owing to the lack of quality backward linkages in this area.
Over the years the apparel sector has shown phenomenal success, as during the whole of the last decade it accounted for almost 75% of the total export earning, 80% of the manufacturing export earning, 27% of manufacturing GDP and 9.5% of the total GDP of the country. In order to understand the apparel industry, first we need to understand the production chain of apparel commodities. In general, apparel commodities follow the production chain depicted in the following Figure 2. Up to the fabric stage, the product is considered to be textile and then through the process of cutting and sewing it becomes apparel. There are various intermediate stages between textile becoming apparel e.g. dyeing and printing (where necessary).
The two broad categories of apparel i.e. knit and woven use different types of yarn, fabric, machinery, manufacturing technique and, even, labor force. Woven apparel uses mostly female workers and knitted apparel uses mostly male workers due to different skill requirements. Initially, Bangladesh was producing and exporting only woven apparel. Since the early 1990s production and exports of knitted apparel started and experienced a very robust growth. While the share of knitted apparel was 15.1% in total apparel export earnings in 1991, it became 33.7% in 2003. Over the years the number of apparel factories rose from 134 in 1983/84 to 3093 in 2005, and there is no sign of any decline in this trend.
One of the biggest challenges the industry faces is that the domestic textile industry cannot fulfill the growth and quality needs of the apparel sector. So, most of the final goods are made of imported fabrics. There are three different types of apparel manufacturers in Bangladesh: firstly, integrated manufacturing, where factories import the cotton and do the rest of the production process; secondly, factories importing yarn and then doing the rest; and thirdly, factories importing fabric and sewing the apparel. Most of the knitted apparel producing factories in Bangladesh belongs to the first two categories, and woven apparel producing factories belong to the third category. Thus, as the World Bank has found out in a study done in 2005, the knitted garments sector, with 25% imported goods, is relatively less dependent on foreign raw materials than woven wear, with 85% of its inputs being imported. As a result of this, value-addition of the apparel industry is quite low. For woven apparel, value-added is only 25% to 30% of the export value. The knitted apparel industry has a higher value-addition, between 40%-60%.
Although the apparel industry has a share of 75% in total exports, the net export earning is of only 40%, as much cost is incurred on imports. This dependency on imported goods means the lead time, the time to fulfill an export order, is prolonged; and, understandably, the problems are more complex for woven products. Manufacturers cannot keep large inventories as it is very costly for them, and the type of raw materials to be used changes form buyer to buyer and from season to season. The following Table 2 vividly illustrates the demand and supply gap of fabrics in Bangladesh’s apparel sector.
The apparel export of Bangladesh is also highly concentrated on a few low value-adding and cheap-range of products. Moreover the markets for the apparels are also concentrated, with the US and the EU being the destination of the lion’s share of the exports, and the EU nudging ahead of the US by some percentage rates. As of May, 2011, Bangladesh’s share of the total GSP-covered imports into the EU was 2.17%. Almost 5.2% of all of EU’s apparel import came from Bangladesh. According to the European Commission’s Directorate General for Trade, the five largest sectors of export form Bangladesh, among them apparel being the paramount of course, supplied 98.59% of all products under the EU-GSP scheme stipulated for Bangladesh.
The concept of ‘quota’ as practiced by the EU needs to be clarified too to understand the actual worth of quota-free access for Bangladeshi goods. Tariff Rate Quotas (TRQ) regulates imports into the EU. As distinct from quota, which puts a ceiling on imports, a TRQ is a system where a particular tariff rate is imposed on import, up to a certain quantitative limit. Beyond this, imports are allowed, up to unlimited levels, but at higher tariff rates. Thus, quota-free access to the EU provided significant advantages as it eliminated the higher tariffs beyond the quotas. Therefore, Bangladesh has to pay no tariffs and can export without any limit whereas its rival developing countries, like India and China, have to pay higher rate of tariffs once they go beyond a certain level. Under the regular GSP, India gets a 15-20% tariff drawback on 12.5% tariff rate whereas Bangladesh gets a 100% drawback under the special Everything-But-Arms (EBA) GSP scheme for LDCs, making its products cheaper and more competitive in the EU market.
The discussion above makes it clear how important the EU market is for Bangladeshi RMG. The fact that the US does not provide Bangladeshi RMG any GSP facility and Bangladeshi companies pay more than USD 750 million each year to the US in duties and taxes, makes the EU market more important. After the recent tragedies that took place in Tazreen garments and Rana plaza, the US has suspended its GSP to Bangladesh showing such accidents as a cause. The irony is that the manufacturers producing products but RMG would have to bear the cost of such penalties for negligence of others. On the other hand, the EU has taken a path of engagement and cooperation. Recently, during a meeting at Geneva between the EU, Bangladesh, and ILO, the EU has announced a compact titled ‘Staying Engaged: A Sustainability Compact for continuous improvements in labour rights and factory safety in the Ready-Made Garment and Knitwear Industry in Bangladesh’. This compact vowed to “work together on improving exercise of labour rights, addressing safety concerns, uplifting factory building conditions and ensuring responsible business contact” between the EU, retailers, and Bangladesh. Bangladesh’s foreign minister Dr. Dipu Moni also assured the EU Trade Commissioner present at the meeting that Bangladesh would do the utmost in addressing the EU’s concerns over labor rights and safety by enacting new laws and increasing manpower of relevant ministries.
The retailers and apparel brands of Europe have also joined together in sharing responsibilities and costs of labor safety with their Bangladeshi suppliers. The ‘Accord on Fire and Building Safety in Bangladesh’ is a binding agreement between 72 big clothing retailers, mostly European, which will look to work with Bangladeshi businesses and government for better building and fire safety, training the workers, and for creating a ‘fund’ from which money will be spent to improve factory safety measures. But, most of the North American retailers refused to join this legally binding plan for fear of facing litigations and of increasing cost. They have launched the ‘Alliance of Bangladesh Worker Safety’ instead. Under this, they will provide low-interest loans to Bangladeshi factories for improving their conditions along with other punitive measures if factories fail to comply with internationally accepted rules and regulations.
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The position taken by the EU seems more balanced and sincere. Just abandoning long-term partners or refusal to share burdens of ethical business is not a good example to set. At the same time, retailers should also be prepared to share their profits with suppliers for improving work environments. Their quest for lower prices in the supply side and higher profit must not compel local RMG-units to cut cost by hook or by crook compromising occupational safety, which is sadly the case in many instances.
The writer is one of the founding members of FAIR. He currently works for the Institute of Governance Studies (IGS), Brac University as Research Faculty.
