Bangladesh must engage with US policymakers for tariff reduction

Highlights:

• US imposes high tariffs; Bangladesh faces 37% on exports
• RMG sector hit hard; 80% of exports at serious risk
• Other exports like leather and medicine also face potential decline
• Bangladesh must boost efficiency, diversify products and markets
• Urgent need for FTAs and tariff structure review before LDC graduation

The announcement of reciprocal tariffs by the US government on its trade partners has shocked the world. Countries having trade surpluses with the USA will face high tariff rates, while a 10% baseline tax will be imposed on imports. Bangladesh will face a 37% tariff on its exports to the US market.

The USA is the single largest destination country for Bangladeshi ready-made garments (RMG) exports. Bangladesh has been paying a 15% export duty on RMG to enter the US market. With higher tariffs the RMG exports will face challenges as export costs will rise. This will increase the import cost for US buyers. As a result, RMG import orders from US buyers could decline as they would look for cheaper sources.

Since RMG exports contribute more than 80% of Bangladesh's export income, its decline will impact the country's economy negatively. This will dampen the prospect of the economy's ability to bounce back from a vulnerable situation left by the previous government. Exports and remittances have been the two silver linings of the recent economic recovery. Hence, a sudden blow to exports due to heightened tariffs in the US market poses significant shocks to the economy.

Beyond apparels, Bangladesh also exports leather products and medicine which will face similar challenges. Though a relatively low share, their exports have been increasing. These exports could also experience a reduction. The protectionist trade regime is apprehended to result in a global economic slowdown. Hence, the overall demand for exports could be reduced.

In the face of high tariffs, it is also likely that the US brands and buyers will absorb some part of the increased tariff, and the rest will have to be borne by the Bangladeshi exporters as the US buyers would not want to lose their customers due to high prices. Bangladesh exports mainly low-end and basic RMG products, for which there is a large customer group within the low and middle-income range. If prices go up, these consumers will reduce their clothing purchases, which the US brands and buyers would not want to happen. If this is the case, then apparel exports may not face a drastic reduction immediately. This does not, however, rule out the urgency of Bangladesh's preparations to uphold its exports.

Therefore, to absorb the increased cost due to higher tariffs and maintain its export share in the US market, the competitiveness of Bangladesh's export sector has to be enhanced through efficiency and higher productivity. Besides, Bangladesh must diversify its export products and markets to face the challenges of higher tariffs. The objective of the World Trade Organization (WTO) has been to "reduce, or as appropriate eliminate tariffs". Unfortunately, rule-based trading within the multilateral trading system has continued to be undermined by powerful countries over the years. Therefore, WTO member countries have resorted to free trade agreements. Bangladesh should negotiate Free Trade Agreements (FTA) with its trading partners and prepare for such a move without delay. A thorough review of its tariff structures is equally important. This is more so as the country will graduate from the Least Developed Country (LDC) status in November 2026. Following LDC graduation, Bangladesh will not enjoy non-reciprocity of tariff measures with its trading partners.

Mitigation of potential risks due to US trade tariffs should be the utmost priority of Bangladesh.  A thorough assessment of the implications of tariffs should be made by the Ministry of Commerce and the National Board of Revenue (NBR). Bangladesh's policymakers should immediately engage with US trade officials and diplomats to get relief from such high tariffs.