ADB report says biased policy foils export diversification
“The excessive protectionism directed toward domestic sectors competing with imports leads to discrimination against the export sector,” says the report.
High import tariffs create a disincentive for Bangladesh's export-oriented industries, other than the ready-made garment, to compete globally. These protectionist policies make it profitable for industries to focus on the domestic market rather than going for the export market, according to an Asian Development Bank (ADB) report published today (30 April).
The report "Expanding and Diversifying Exports in Bangladesh: Challenges and the Way Forward" says such policies negatively impact industries dependent on exports as they do not receive comparable support, a situation termed as "policy-induced anti-export bias."
As a result of this bias, the growth of local export-oriented industries has been moderate, making them less efficient and innovative, said the ADB report.
In Bangladesh, besides customs duties, additional taxes like regulatory duty and value-added tax are imposed mainly on imports, increasing protection for local industries and discouraging exports.
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On average, the total tariff incidence on imported goods in Bangladesh is estimated to be very high at 52%. This "anti-export bias" affects other industries and the textile and clothing industry targeting local markets.
"The excessive protectionism directed toward domestic sectors competing with imports leads to discrimination against the export sector," says the report.
"This occurs as resources and investments are disproportionately channelled toward industries shielded from foreign competition, making them less efficient and less innovative due to the lack of competitive pressure," it said.
Bangladesh mainly relies on clothing exports, which makes its export portfolio less diverse compared to other countries. Bangladesh also has higher import tariffs compared to many other countries. Despite this, Bangladesh has seen good economic growth, so there has been little push to reduce tariffs further.
Local market more lucrative than export
Talking with the TBS, Mohammad Abdur Razzaque, lead author of the report and economist (consultant) of the Asian Development Bank (ADB) Consultant, said, "We have found that the local market is protected by high tariffs on imports, which is why it has become more lucrative than the export market."
He also mentioned that after LDC graduation, the country has to rationalise the duty structure on imports.
Export diversification will remain very challenging if the government does not rationalise the tariff structure and other trade policies, he added.
Why local market more lucrative
Considering the existing incentive structure, potential investors are more inclined to invest in the domestic import-competing sector.
According to the ADB report, an investor in the footwear industry will get Tk9,562 for a pair of shoes worth $50 against its import-competitor in the local market whereas the same investor will get Tk6,250 for an exporting pair, including exporters' cash incentive benefits at 15% and other policy support valued at 10%.
"Given the large and rapidly expanding domestic market, this policy-induced bias strongly favours domestic production over competing in the global market by manufacturing high-quality products. At present, there is no comparable level of support in export policies to counterbalance this bias. Additionally, when trading expenses are high, the motivations for engaging in export activities diminish even further", the report reads.
Shamim Ahmed, president of the Bangladesh Plastic Goods Manufacturers and Exporters Association, told TBS, "We have long been advocating for government policy support similar to that provided to the RMG sector. With such assistance, we can diversify our export offerings and tap into new markets."
He highlighted that the export landscape has become highly competitive for other industries, unlike the initial stages of RMG expansion decades ago.
Moreover, he acknowledged the ADB report's observation that the local market has become increasingly lucrative due to high profitability. Despite this, he emphasised the importance of exploring foreign markets to enhance product quality and competitiveness.
He also expressed concerns that any abrupt changes in the tariff structure by the government could pose challenges for industries heavily reliant on imported raw materials, particularly in competing with imported finished goods.
Factors that contributed to Bangladesh's RMG success
The ADB report said, "The success of Bangladesh's RMG sector can be attributed to several distinctive factors. The global MFA [multi-fibre arrangement] regime was instrumental in shifting textile and clothing production to Bangladesh, creating a favourable environment for the RMG sector's growth."
Moreover, Bangladeshi RMG suppliers gained from high tariff preferences in developed countries, enhancing their market access.
The government also played a crucial role by providing targeted support through cash incentives, duty drawbacks, and bonded warehouse facilities specifically tailored for the RMG industry, says the report.
Coupled with Bangladesh's labour cost advantages, these measures spurred rapid expansion and scale economies in garments export production, leading to cost efficiencies and competitive pricing. Furthermore, even within the limited overall inflows, the RMG sector did receive some foreign direct investment (FDI), which brought in much-needed capital, technology, and expertise, which were crucial for the sector's development and integration into global supply chains, it said.
In contrast, non-RMG sectors in Bangladesh did not benefit from similar conditions. Moreover, the nature of products in the non-RMG sectors did not align with a "born-to-export" model, as they had more significant domestic market relevance compared to the specialised clothing items produced by the RMG sector, reads the ADB report.
These disparities in support, market access, and product nature made non-RMG sectors more susceptible to the anti-export bias inherent in national trade policies. While the RMG sector thrived under these specific and favourable conditions, non-RMG sectors faced greater challenges in entering and competing in the global market, it stated.
