Unpacking the impact of Trump's reciprocal tariff
When tariffs rise sharply on either side, importers and exporters pull back. Fewer goods cross borders, prices rise, consumers lose choice, producers lose markets, and global trade shrinks.
Highlights
- RAPID projects 14.3% US export loss
- Tariffs trigger both trade destruction and diversion
- US imports down 6.2%, Bangladeshi exporters absorb 12–14% tariff
- India, China divert exports to EU, eroding Bangladesh margins
- Bangladesh may gain $1.35–1.6B from diverted trade
The Research and Policy Integration for Development (RAPID) projected on 16 September that Bangladesh's exports to the US may contract by around 14.3%—equivalent to $1.25 billion—of which the hit to apparel could be $1.08 billion.
RAPID cautions that price pressures and competition spillovers could strain Bangladesh's export performance globally, adding to the loss of US export orders.
Regardless of what you think about the plausibility of their estimates, the warning is worth reckoning. Beneath the surface of the impact lie two competing forces: trade destruction, where exports shrink due to higher costs, and a more complicated dynamic of trade diversion, where Bangladesh may gain some and lose some globally.
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Trade destruction and trade diversion
Imagine two neighbours who used to swap mangoes and rice. Suddenly, they both, or one of them unilaterally, start charging a fee every time they trade. Eventually, they stop trading—not because they don't want to, but because it's no longer worth it.
When tariffs rise sharply on either side, importers and exporters pull back. Fewer goods cross borders, prices rise, consumers lose choice, producers lose markets, and global trade shrinks. This is pure loss. No one gains. The pie gets smaller.
That's not all that happens. Suppose a toll road between City A and City B becomes congested. Drivers start taking a longer but faster route through City C. City C didn't build a new road—it just became the faster option. The dexterity of seasoned Bangladeshi drivers in finding such options is exemplary. They do, however, create additional traffic on the longer routes, which the pre-existing users of these routes may not necessarily appreciate.
Trade similarly finds new routes. Reciprocal tariffs are higher on Indian garments but lower on Bangladeshi garments. American buyers who previously bought shirts and jeans from India now have an incentive to source from Bangladesh. Some countries lose demand (India, China), while others gain demand (Bangladesh, Pakistan). This diversion occurs from the US side, where buying houses source from countries with lower tariffs.
The other diversion is from the Indian side, where shirt exporters look for new destinations, such as the EU, where Bangladesh has a major competitive stake. Indian and Chinese capacity spillover into the EU. Their scale and aggressive pricing could erode Bangladesh's margin and market share, especially in segments where Indian exporters are easily substitutable. Bangladeshi firms losing US orders due to the 20% tariff can also redirect exports to alternative markets but perhaps not as easily as the Indians and Chinese firms may be doing in the EU.
Bangladesh's gains in the US and other markets are likely to be offset by a broader decline in global demand, driven by higher prices and shrinking profit margins, particularly in the EU. Taken together, the overall effect of trade diversion is likely to be muted, with trade destruction remaining the dominant outcome. This is RAPID's assessment.
Reality checks
The Budget Lab update, released on September 4, 2025, infers considerable trade destruction from a sharp rise in US consumer prices causing fall in US import volumes. Economic modeling from 2018 showed that a 1 percentage point increase in global tariffs could reduce trade volumes by 1.7% under a multilateral framework. The current US reciprocal regime is far more aggressive.
In May–June 2025, imports into the US fell by 6.2% as the full impact of 10% baseline tariffs took effect. In June 2025 alone, imports dropped 5.8% year-on-year, coinciding with the US effective tariff rate peaking at 21.1%. The average effective tariff rate declined to 17.4% in August, still a 100-year high. Import volumes continued to weaken. A steady decline from mid-2025 into early 2026 — roughly 5% contraction over 8 months—is currently projected.
If US import contraction is the main driver, the export decline for Bangladesh cannot exceed the overall rate of import decline in the US unless Bangladesh is disproportionately affected, say, because of excess tariff passthrough to consumer prices and excess price sensitivity of demand for Bangladeshi exports.
Tariff passthrough to consumer prices is softened by retail and export margin adjustments. Volume changes depend on the portion passed on to consumers. Retailers are wary of losing price-sensitive consumers, especially in grocery and apparel. According to a KPMG survey, 50% of retail executives reported gross margin declines of 1–5% due to tariffs. Anecdotal accounts from BGMEA and trade workshops suggest Bangladeshi exporters—especially in garments—could be absorbing 12–14 percentage points of the 20% tariff through lower FOB prices. These are well above the usual 50-50 sharing.
It is probably safe to conclude that the passthrough to consumers cannot exceed 10 percentage points. The price sensitivity of demand for Bangladeshi exports in US are indeed high. This means even small price hikes can hurt volumes considerably. Mind you, however, currently buyers have fewer lower-tariff alternatives. This has the effect of lowering the sensitivity of volume to prices.
There are also signs of Indian textiles, among others, shifting to the EU, FTA corridors, regional value chains and digital trade platforms. EU buyers are reportedly offering 25–30 cents less per unit to Bangladeshi exporters, citing oversupply and tariff spillover. Major retailers like H&M and Inditex are allegedly renegotiating prices downward implying losses to Bangladesh due to increased competition from trade diverted from US.
The above evidence on trade destruction and margin erosion could be counterbalanced by trade diversion and US recession.
Industry surveys from mid-2025 show that US buyers are re-evaluating sourcing from China and India. Apparel brands have reportedly shifted 5–8% of orders toward Bangladesh and Latin America. According to CEPR's latest simulations, direct US–China trade may collapse by over 40%, with apparel, electronics, and machinery hit hardest. India's exports to the US are projected to fall 25–30%, driven by the 50% tariff wall.
India could lose $2.5–3 billion in garment export earnings to the US. China's apparel losses could exceed $10 billion. That's $12.5–13 billion searching for a new home. Capturing 50% of India and 1% of China's diverted trade will add $1.35–1.6 billion to Bangladesh's garment exports—potentially within a few seasons. Anecdotally, Dhaka-based exporters report increased inquiries from US buyers seeking alternatives to Indian suppliers in knitwear, home textiles, and cotton basics.
There are forecasts of possible stagflation in the US. Should an economic slowdown take hold, it is likely that American consumers will gravitate toward more affordable brands, such as Walmart, much like their behavior during the 2008–09 recession. Notably, Bangladesh's export performance remained resilient even during the Covid-19 downturn, suggesting a degree of stability in the face of shifting consumer preferences.
Export loss not inevitable
Bangladesh is one of the few countries still gaining share in basic apparel. Year-on-year growth of RMG exports to US in July-August was 12.3%, EU 6.6% and Canada 13.7%. The Trump tariff is not the only significant development in world trade today. Depreciation of the US dollar is another major factor.
Most of Bangladesh's exports—even those outside the US—are invoiced in USD. The USD has depreciated by 6.2% through mid-September since April 1 (dollar index). When the dollar weakens against the currencies of non-dollar markets, buyers in those markets pay less in local currency for the same USD price. This can boost export volumes, especially in price-sensitive sectors like RMG, leather, and light engineering—potentially offsetting volume losses in the US market.
The uncertainty surrounding trade diversion makes it crucial for Bangladesh to quickly turn increased export volumes into lasting relationships. US buyers are shifting sourcing primarily to take advantage of tariff differences, rather than forging long-term partnerships. Bangladesh's current tariff edge could just be a short-lived opportunity unless actively secured. The depreciation of the US dollar allows Bangladeshi exporters to expand without having to renegotiate pricing.
As of today, the outlook for President Trump softening his tariff stance remains uncertain—especially with India, a pivotal partner open to negotiation, and China, a more entrenched rival. The diplomatic chessboard is still in play. Bangladesh wrapped up another negotiation round in mid-September, with the outcome yet to unfold.
The extent to which risks and opportunities materialize hinges on strategic policy decisions. Much like experienced navigators, we need to pursue paths that may present greater challenges but could yield substantial benefits now and in future. As competition intensifies with others vying for the same prospects, it becomes essential to safeguard Bangladesh's existing strengths and market position.
