As the US-China trade war intensifies, pundits on both sides of the Pacific
and elsewhere are wondering: who is the real winner? Interestingly, it is not
China or the United States, but countries like Bangladesh, Vietnam, and
Chile that may reap the most benefits from a widening trade dispute between
the world’s two biggest economies. The impending effect of the trade war on
supply chain dynamics and investment patterns could help Bangladesh
emerge as a potential winner from the conflict.
China and the United States have been stable trade partners to Bangladesh
for decades. The volume and value of trade Bangladesh has with both
countries are significant. However, the nature of trade with both countries is
different.
Bangladesh’s top import partner is China, with Bangladesh importing over
USD 15 billion in Chinese goods as of 2017. Meanwhile, the United States is
the second largest destination for Bangladesh’s exports, taking in more than
USD 5.8 billion in 2017 (Germany was the largest destination at just over
USD 6 billion).
The changes in the geopolitical relationship between the United States and
China through this trade war have alarmed many countries that have trade
stakes with these two nations—though this raises hope for Bangladesh. As
the Asia Development Bank’s chief economist Yasuyuki Sawada argues,
“Trade war to generate additional USD 400 million exports for Bangladesh.”
The garment sector is expected to reap the most benefits, as it accounts for
80 percent of Bangladesh’s total exports. As the trade war escalated, the
country’s garment industry observed significant growth as American
retailers are placing more work orders with Bangladesh in order to offset
increasing tariffs. According to the US Office of Textile and Apparel
(OTEXA), Bangladesh enjoyed a 6.46 percent growth in share in the United
States’ market during the first three quarters of 2018.
In 2012, a report by McKinsey forecasted that as ready-made garments from
China declined, Bangladesh would become the next hotspot for textile
manufacturing, and the Bangladeshi market would triple in value by 2020—
up from USD 15 billion in 2010. This forecast entails China’s gradual phasing
out from labour-intensive industries to a higher value-added, high-tech,
capital-intensive manufacturing sector and a greater Bangladeshi stake in
labour-intensive industries such as the textile industry.
To avoid higher tariff, factories are relocating from China to elsewhere in
Asia. Bangladesh has more competitive advantages than its competitors such
as Cambodia and Vietnam. Due to the presence of strong unions, setting up
factories in Cambodia is more challenging these days. Moreover, in contrast
to 160 million Bangladeshis, Cambodia has a population of just 16 million,
which gives Bangladesh a competitive edge for this labour-intensive
industry.
Due to higher wage and production costs, Vietnam also looks less attractive
to investors. The minimum wage in Bangladesh is currently USD 95 per
month, which is almost half of USD 182 per month in Cambodia and USD
180 per month in Hanoi and Ho Chi Minh City.
Unlike Chinese foreign direct investment (FDI), Bangladesh can also benefit
by increasing imports from the United States. According to the American
Farm Bureau Federation, soya bean exports to China have declined by 97
percent after China’s tariffs on American soya beans came into effect.
Currently, Bangladesh imports 2 million tons of crude vegetable oil, of which
30 percent or 600,000 tons is soya bean; 98 percent of those soybeans come
from Argentina, Paraguay, and Brazil. If the country can redirect its supply
chain from Latin America to the United States, it may have the potential to
supply oil to consumers at cheaper prices without sacrificing profits in the
long-run.
Moreover, being the 51st largest trading partner of the USA, Bangladesh
enjoys USD 4.0 billion trade surpluses. As President Trump is going after
one trade-surplus country after another, Bangladesh, by importing soya bean
from the USA, can be benefited both by getting it at a cheaper rate and
reducing the trade deficit that may ultimately contribute to stronger bilateral
relations.
Furthermore, Bangladesh and other low-income countries in South Asia face
US duties of 15.2 percent of the total value of exports, which has a possibility
to ease if the US wants to increase imports from these countries to minimise
its gap from China.
The majority of steel demands of Bangladesh come from importing scrap
iron from the United States and its domestic ship-breaking industry.
However, the US imposed a 25 percent tariff on all steel imports in March
2018, in efforts to revitalise its declined steel industry.
This action led the US suppliers of scrap iron to store their reserves in
anticipation of higher tariffs. Consequently, Bangladesh has seen a
significant rise in the price of rod, an important product required for its many
infrastructure projects.
In 2017, Bangladesh scrapped 25 percent of the ships dismantled worldwide
and it is considered as a prospective industrial sector. In light of growing
development projects, the country might craft an industrial policy to develop
its shipbreaking yards, hoping to source a greater amount of cheaper steel
domestically, which is already providing more than half of the country’s steel
supply.
Although Chinese policymakers are seeking to tighten capital flows in hopes
to prevent a depreciation of the yuan, China’s increasing involvement in
various projects of Bangladesh may mean these constraints will not be as
effective in the case of Bangladesh. Additionally, Bangladesh sees an increase in foreign direct investment (FDI)
from China to be higher than forecasted through factory relocations,
especially in the growing export processing zones (EPZs), as the trade war
increases the costs of doing business in China.
Furthermore, since Bangladesh is a member of the Belt and Road Initiative
(BRI), it is more meaningful for China to increase the investment in sectors
of Bangladesh that are affected in China by the trade war.
Beijing’s support of Bangladesh was evident in the 27 agreements for
investments and loans signed by the two countries—amounting to USD 24
billion—when President Xi Jinping visited Dhaka in 2016.
The net FDI from China into Bangladesh exploded after Xi’s visit. It
increased to USD 506 million in the 2017-18 financial year, which was only
USD 68.5 million in 2016-17, according to The Financial Express.
Putting all these together, it clearly appears that the unwarranted trade war
between the United States and China opens a sudden window of opportunity
for Bangladesh. However, whether the country can reap those benefits will
depend on a host of factors.
Bangladesh is struggling with a crumbling infrastructure, a weak rule of law
regime, and a poor business environment. Many observers are also alarmed
that Bangladesh government’s excessive and reckless borrowing from
Chinese credits may put the country in a longer-term debt trap, like some
other countries.
It is, therefore, critical for Bangladesh to work on a favourable policy regime
to seize new opportunities as they come by, and to provide enabling
conditions for more foreign direct investments—all by avoiding unintended
risks and consequences.
Source: The Daily Star, Bangladesh Wednesday, 19 June 2019