Export Market Diversification of Bangladesh's RMG Sector

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Export Market Diversification of Bangladesh’s RMG Sector

In the last decades the labor-intensive textiles and clothing sector (T&C) has been one of
the fastest growing segments of world trade. T&Cs are among the first manufactured
products from an industrializing economy but their significance decreases as workers’
wages increase. As a result, T&C trade relations are dynamic: countries like Japan,
Korea, Hong Kong, Malaysia and Taiwan were highly competitive in this sector, but now
Bangladesh, China, India, Indonesia, Pakistan and Vietnam have taken over due to low
labour costs. Several studies argue that even China is losing its comparative advantage in
the sector.

In this context, an important precondition for a sustained growth of Bangladesh’s


clothing sector will be its ability to respond to the changes in global T&C supply and
demand. In recognition of this, PROGRESS, a joint project of the Bangladesh Ministry of
Commerce and the German Federal Ministry for Economic Cooperation and
Development (BMZ) implemented by the Deutsche Gesellschaft für Technische
Zusammenarbeit (GTZ) GmbH, has undertaken to support the export market
diversification of Bangladesh’s RMG sector.

Why diversify?
Several cross country studies have shown that greater diversification is correlated with
more rapid growth of per capita income1. Diversification makes countries less vulnerable
to trade shocks by stabilizing their export revenues. It also has spillover effects in the
economy - it creates learning opportunities that lead to new forms of comparative
advantage.

Countries diversify by increasing the number of trade partners they have (breadth), and/or
by exporting new products to old markets (depth). While deepening relationships with
existing markets is key for export growth, geographical diversification is found to be of
great significance for low income countries such as Bangladesh – for example the East
Asian Tigers achieved well over 300% gains in this area between 1974 and 2003. More
recent analysis suggests that the opportunities for many countries to further exploit
geographical diversification are enormous2.

Why Bangladesh’s RMG sector


Bangladesh’s US$9 billion RMG industry is export-driven and already the major source
of national foreign exchange earnings. PROGRESS is aiming to help improve its access
to new markets mainly because the sector under-utilizes existing export opportunities. As
shown in Table 1, Bangladesh’s RMG is over-dependent on a limited number of markets
in North America and Europe. Exports to the rest of the world are negligible and
increasing at a very slow pace.

Moreover, Bangladesh’ RMG depends on a limited number of export products.


According to ITC indicators measuring the export performance of the clothing sector in

1
Lederman and Maloney, 2007; Hesse, 2007; Gylfason 2004; de Ferranti et al. 2002.
2
Besedes, T. and T. Prusa (2006) “The Role of Extensive and Intensive Margins and Export Growth.”

1
184 countries, Bangladesh lags behind major competitors such as China and Viet Nam in
terms of product diversification. According to ITC’s relative unit value indicator, apparel
exports from Bangladesh are also below the world average unit value, which reflects the
dominance of low quality apparel exports from the country3.

TABLE 1
61: Articles of apparel, accessories, knit or crochet 62: Articles of apparel, accessories, not knit or
crochet
Year No of Export share % No of Export share % Year
trade trade
partners EU25 USA Canada World* partners EU25 USA Canada World*

2004 100 77.8 13.9 3.5 4.8 99 53.5 37.1 5.2 4.1 2004
2005 106 75.6 15.6 4.3 4.5 99 45.9 44.9 4.7 4.5 2005
2006 108 75.9 14.7 4.1 5.3 102 46.9 43.9 4.1 5.1 2006
2007 101 75.4 14.7 3.8 6.1 98 45.2 44.2 4.2 6.4 2007
*More than 70 countries.

In today’s severe global economic downturn, such commodity and market dependence
increases the country’s vulnerability to industry-specific external shocks. Furthermore,
PROGRESS’ support to diversification has implications beyond the RMG sector: it is
expected that the accumulated market knowledge will facilitate future entry of new
products and players and will create employment opportunities for the poor.

The way forward


In 2007 Bangladesh’s share in world RMG exports was 3.46% for knitted apparel and
3.05% for woven articles4. The dynamic nature of the global T&C trade flows opens up
potential for Bangladesh to expand its export market margin.

However, differences in current market penetration call for different diversification


strategies. Here we outline two main scenarios, the one associated with established
markets like Canada and the one related to new market opportunities such as Japan.

The case of Canada: Imports from Bangladesh to Canada have achieved a spectacular
growth since Canada’s elimination of duties and quotas in 2003 on most apparel made in
LDCs. With USD$527.7 million worth of RMG exports to Canada (2008), Bangladesh is
currently its second largest garment supplier after China. Bangladesh’s share in Canada’s
total imports of knitted and woven apparel is more than 6%.

Bangladesh-Canada’s is a stable trade relationship and Bangladesh has achieved a


relatively good market penetration. In this case deepening of the trade relationships will
be achieved by product diversification (higher value RMG and non-RMG) and better
adjustment to Canadian market demand. More importantly, improved RMG export
performance will require some combination of productivity improvements (to lower

3
With reference point or world average relative unit value 1, Bangladesh exports at 0.8, China at 1.2, India
at 1.4 and Italy at 2.5.
4
ITC Statistics for International Business Development.

2
costs) and quality improvements (to differentiate products). This is an important route to
higher growth – for instance, China is found to export advanced high-productivity
products that are normally associated with countries that have per capita incomes three
times higher than it5.

In this context, PROGRESS works with the leading industry associations in various
demonstration projects to help their members enhance productivity and efficiency. A
pilot industrial engineering project including ten RMG factories achieved productivity
gains between 20 and 35%. Another one introducing ‘Lean Production’ found that in
monetary terms, the US$3 cost of RMG manufacturing contains up to US$2.40 related to
waste. The associations are now rolling out the initiatives to their member factories.

The case of Japan: As mentioned above, the ability of Bangladesh’s RMG sector to
establish and deepen export relationships beyond the EU and North America needs to be
improved. With knitted and woven apparel imports worth US$22,598 million (2007),
Japan is the fourth largest clothing importer in the world. RMG imports originating from
Bangladesh are tariff-free, yet Bangladesh’s share of Japan’s imports in 2007 is only
0.07% for knitted apparel and 0.2% for woven clothing. The scope for deepening of the
trade relationship and for product diversification is significant, as shown on Figure 1.

This trend is confirmed by data about Bangladesh’ export penetration in other top non-
EU non-North American importers of RMG globally (see table 2). Moreover,
Bangladesh’s RMG needs to be able to respond to the enormous changes in the structure
of world demand as incomes in large emerging countries such as Brazil, China, and India
grow at fast rates.

5
Rodrik, D. (2006) “What’s So Special about China’s Exports.” Working Paper 11947. Cambridge, MA.

3
TABLE 2
Product category 61: knitted apparel Product category 62: woven apparel
Country Ranking/ Total BD share, Country Ranking/w Total BD share,
world imports in % and orld imports in %
imports 2007, US$ level of imports 2007, US$
in 2007 million protection million
Japan 4 10,760  0,07 Japan 4 11,840  0,2
Switzerlan 14 1,950  2,5 Switzerlan 12 2,840  1,4
d d
Australia 16 1,640  0,5 Republic 13 2,820  0,3
of Korea
Singapore 18 1,350  1,9 Australia 17 1,730  0,3
Republic 20 1,270  0,08 Russian 19 1,660  1,3
of Korea Federation
 - duty tariff 0 - 5%;  - duty tariff 6 - 10%;  - duty tariff 16 - 20%

Bangladesh’s weak performance in new market penetration is related to insufficient


knowledge about consumer preferences, business opportunities, quality and technical
requirements in foreign markets. RMG exporters with relatively low productivity and a
low profit margin are unable to survive if they have inadequate information about the
costs of exporting a product to a particular market.

Moreover, firms in developing economies tend to underinvest in market research,


because it can benefit their competitors6. This is the reason why PROGRESS supports
main private and public service providers to regularly generate, update, and disseminate
relevant information about new markets with export potential.

To help correct information asymmetries in a sustainable manner, PROGRESS is


enhancing the capacity of the research cells of BKMEA and BGMEA, and the Export
Promotion Bureau under the Ministry of Commerce. They in turn will support export
market diversification of the RMG industry in Bangladesh. Markets we currently focus
on include Japan, Brazil, Argentina, Mexico, South Africa, China and India.

Export promotion activities such as country image building and marketing also have a
strong impact on exports – it has been suggested that the effect calculated of an additional
US$1 of export promotion agencies budget in developing countries is around US$60 of
additional exports7. PROGRESS therefore works to enable associations, chambers and
government agencies to provide marketing services to the industry, including
development of advertising and promotional materials, export guides, matchmaking,
strategic communication, marketing plans, and event management.

6

Hausmann, R., and D. Rodrik (2003), “Economic development as self discovery,” Journal of
Development Economics, 72.
7
Lederman, D., Olarreaga, M. and Payton, L. ((2006) “Export Promotion Agencies: What Works and What
Doesn't”. World Bank Policy Research Working Paper.

4
However, sustainable and rapid export growth in low-income countries tends to be
hampered by both market and government failures. Diversification thus requires suitable
backbone services, working export support institutions, and a conducive business regime.
That is the reason why PROGRESS also supports the development of a coherent and
unified Apparel and Textile Trade Strategy. As current efforts in this area still lack
adequate coordination, the program facilitates stakeholder dialogue and discussion. The
public sector along with leading industry associations and civil society actors will
contribute to the formulation of the strategy.

For more information about PROGRESS, please visit www.gtz-progress.org.

By Juliana Stoyanova, PROGRESS

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