Duty-free benefit may bring in Chinese investments

Granting duty-free access to 5,161 additional Bangladeshi products to the Chinese market from July 1 is encouraging news for the country at this time of the coronavirus pandemic, according to analysts and business bodies in the country.

Now, 8,256 Bangladeshi products will be exempted from tariffs in the world's second largest economy, but Bangladesh is not yet sure whether its apparels would be allowed duty-free access to a market of 140 crore consumers. If its garments are not given easy access, experts say Bangladesh's benefits will be minimal.

Yet, Bangladesh has a chance to gain significantly from the move. How?

Rising wages and living costs in China and an ongoing trade war with the United States have opened up a window of opportunity for Bangladesh.

Products made in China have become expensive, and many factory owners are now looking for an alternative place where they can operate cost effectively and export to global markets with duty-free benefit.

The political will that directs Chinese investments overseas also looks favourable for Bangladesh.

Analysts say Bangladesh can benefit from this policy if it can respond appropriately to the Chinese offer.

"We will not benefit significantly from exports unless we deviate from our overdependence on apparels. But Bangladesh can gain significantly from Chinese investments," said Khandaker Golam Moazzem, research director at Centre for Policy Dialogue (CPD).

Under a new normal policy, China will shift its low-end products to countries that are cheaper for them and then they will re-export those products to China and other parts of the world with the duty-free benefit that Bangladesh enjoys, he said.

"But Bangladesh has to expedite work on the economic zone for Chinese companies. Also, Mirsarai can be developed fast to house Chinese factories," said Moazzem.

Paban Chowdhury, executive chairman of the Bangladesh Economic Zones Authority (Beza), said many Chinese companies are in talks with them for the last two years.

"A big Chinese chemical company has been allocated 100 acres of land at Mirsarai. Some others are in the pipeline," Chowdhury said.

On the development of the Chinese Economic and Industrial Zone at Anwara in Chattogram, he said the progress is not significant. "It is tough to speed up work in Bangladesh because of the various legal and bureaucratic tangles that are part of such projects," he noted.

In mid-June in 2017, the Beza and China Harbour Engineering Company signed an agreement for the development of the Chinese economic and industrial zone in Bangladesh on 781 acres of land at Anwara.

However, there are criticisms of Beza's handling of the economic zone developments across the country.

Shahed Alam, vice-president of Bangladesh China Chamber of Commerce and Industry, criticised Beza for taking a move to develop 100 economic zones at a time.

"We have been hearing this for the last several years, but there is little progress," said Alam. "Finish five zones, then take another five for development, and this is how you can boost the confidence of investors," he said.

Why factories from China may shift

China's competitive advantage of low-labour cost has evaporated over the years as the standard of living rose for its population.

Rising costs, cancellation of tax preferences for foreign companies, the ongoing trade war with the USA and the Covid-19 impact on the global supply chain have forced western companies to think about moving out of China and relocate to countries that have advantages on costs and market access.

The minimum wage in all major Chinese provinces, such as Beijing, Shanghai, Guangdong, Tianjin, Jiangsu and Zhejiang, have crossed $300 mark last year – three times higher than Bangladesh's present $100. The minimum wage in Vietnam is nearly $200 per month.

This is forcing some foreign manufacturers to either close their China plants or relocate to countries with lower costs. Sony Mobile has shut down its mobile phone factory in Beijing in March, while Samsung is reported to be ready to close its Huizhou plant.

According to reports in International media, China has recently taken a policy to shift low-cost production units away from China. The Asian giant has decided to upgrade its industries and move up the value-added chain.

With an increasing number of educated youths and fewer rural migrant workers, it has become harder for low value-added production units to operate there. Here lies Bangladesh's opportunity along with Vietnam, India, Indonesia and Myanmar.

Stringent rules of origin is a big barrier

The latest duty-free market access to China has come up with the condition of 40% value addition (rules of origin), meaning that Bangladesh has to add 40% value to a product's price if it wants to get duty-free benefit.

"It is very stringent. Bangladesh has a few items whose 40% value addition can be done locally," said Moazzem of CPD.

Currently, Bangladesh exports to China under the Asia-Pacific Trade Agreement (APTA) with 35% local value addition requirement.

Leaders of Bangladesh China Chamber of Commerce & Industry (BCCCI) also believe that fulfilling the condition of 40% domestic value addition is very tough.

"We are not sure about it. We will come to know about it on July 1," said Al Mamun Mridha, joint secretary general of the BCCCI.

Bangladesh-China trade

Trade between the two Asian economies has been rising rapidly for the past decade but the balance is heavily in China's favour.

Bangladesh exported goods worth $319 million to China in the fiscal year 2010-11, while China's exports to Bangladesh were $5.9 billion.

After nine years, in the fiscal year 2018-19, Bangladesh's exports increased to $831 million and China's export number stood at over $13.65 billion.

But the good thing is Bangladesh's exports to China have risen by 160% while the figure for China's is 131% between the period of 2010-11 and 2018-19 fiscal years.

It seemed duty-free benefits on some items under the APTA since January 2015 has helped Bangladesh boost its exports to China. Bangladesh's exports became almost double to over $800 million in the fiscal year 2015-16 from $458 million a year ago.

In the following year, Bangladesh's exports crossed a $900 million mark for the first time, but since then it has been declining and reached less than $700 million in the fiscal year 2017-18.

In the first eight months till February in the current fiscal year, Bangladesh exported $470 million worth of goods to China.

Bangladesh's main exports to China include leather and leather goods, shrimp, T-shirts, jeans, jute and jute goods and charcoal etc. Bangladesh imports basic raw materials, intermediate goods, chemicals and machinery from China for its apparel industry.