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Bangladesh exports face emerging challenges in EU


Published: Sunday, Apr 30, 2017


Posted : 30 Apr, 2017 00:00:00



Bangladesh exports face emerging challenges in EU

Muhammad Mahmood

Some dark clouds have recently appeared on the horizon of Bangladesh-European Union (EU) trade relations raising serious concerns regarding future prospects of Bangladesh exports to the EU - the largest export market for Bangladesh. The source of the concern  it appears, according to the Financial Express (March 24, 2017), relates to the EU's compliance requirements imposed  on  Bangladesh to demonstrate that the country is taking concrete and lasting measures to ensure its commitment to, and the implementation of, agreed  labour rights which, according to their view, have further worsened.  The EU further indicated that failure to satisfactorily address labour rights including the freedom of association (i.e.  right to form trade unions)  will result in the forfeiture of the Generalised System of Preferences (GSP) facilities (enhanced privileges under Everything but Arms (EBA) for the least developed countries or LDCs) that have been accorded to Bangladesh.

Bangladesh now enjoys duty free export of ready made garments ( RMG) which is the major export  to the EU. It may be noted that the USA already withdrew its GSP facilities for Bangladesh in 2013 on the same issue of labour rights including workplace health and safety issues following the Rana Plaza disaster that left 1134 workers dead.  While RMG exports from Bangladesh never enjoyed GSP facilities in the USA, yet it remains a major destination for the product accounting for 20 per cent of total RMG exports valued at US$5624.9 million in 2015-16. However, the withdrawal of the GSP has affected export of other goods to the USA affecting almost 10 per cent of total exports to that country.  RMG exports to the USA accounted for 90.4 per cent of total exports during the same year.

According to the Directorate-General for Trade of the European Commission, the EU is Bangladesh's main trading partner accounting for 29.3 per cent of Bangladesh's total trade in 2015 and absorbing 46.7 per cent of its exports. In 2016, Bangladesh was the EU's 33rd largest trading partner in goods accounting for 0.5 per cent of EU trade. The EU imports from Bangladesh are dominated by textiles and clothing accounting for 93.8 per cent of total imports from Bangladesh in the same year.  Between 2006 and 2016, the EU imports from Bangladesh more than trebled. Therefore, the continuance of GSP facilities for Bangladesh to maintain its market share in the EU remains very crucial. To get a clear understanding of the contentions of the EU vis a vis Bangladesh, a brief  description of the key principles underlying the multilateral trading system  as well as the policy regime of the EU in conducting its external economic relations, is appropriate.

The central obligation of the World Trade Organization (WTO)  is based on the commitment given by member countries to lower trade barriers, by reducing tariffs and conforming to rules-based trade.  There are a number of facets  to this commitment how this can be achieved but the most  important of them is that members are required to  commit themselves to "reciprocal and mutually advantageous arrangements directed to the substantial reduction in tariffs and other barriers to trade''. Article 1 contains what is referred to as the most favoured nation (MFN) principle which is the central obligation of the General Agreement on Tariffs and Trade (GATT) now carried over to the WTO. The MFN obligation requires that if one WTO member country e.g.  Bangladesh grants a tariff concession or reduction to another WTO member country, e.g. to India, it must grant the same concession extending identical terms to all other WTO member countries. There are exceptions to this commitment to which will be alluded shortly.

The automatic granting of MFN to all other WTO member countries is known as unconditional MFN. The benefits flowing from unconditional MFN received by non-reciprocating third parties can be viewed as a free rider benefit. However, when  the process occurs between a number of countries simultaneously , the result is an acceleration in reduction of trade barriers on a global scale. Unconditional MFN is consistent with the concept of multilateralism underlying the WTO objective to ensure trade concessions are shared by all WTO members.

However, as a mechanism designed to accelerate trade liberalisation using a process that confers equal right to all WTO members, the broad application of the MFN principle does not guarantee equal benefits will flow to all WTO member countries. Therefore, in order to provide and accommodate for specific circumstances where MFN principle can be overridden, a number of exceptions exist, of which the most important one is the GSP.

The GSP  was designed to boost export earnings,  promote industrialization, and accelerate the economic growth of less developed countries by providing them preferential access to markets of industrialised developed countries. Under the GSP, developed industrialised countries offer non-reciprocal tariff concessions to various imports from developing countries (a preferential rate) while continuing to apply full tariff against imports from other industrialised developed countries (the general rate). The preferential rate is intended to act as a competitive advantage extended only to developing countries in order to assist them in accelerating their economic development. The point to note is that under the WTO Agreement granting of GSP is not mandatory but left to the discretion of developed country governments as to the coverage of products and processes involved (e.g. rules of origin), thus making the system 'conditional'.

It is generally argued that a liberal trade regime will help promote increased international transactions resulting from efficiency gains on the supply side. The country will therefore trade on the basis of its comparative advantage which is consistent with the WTO objective of promoting open competitive trade and also implicit in the WTO principles. This will have favourable impact on output and employment. For a country like Bangladesh comparative advantage ( based on lower labour costs) is crucial to trade relations with the rest of the world and plays a major role in promoting its economic growth and employment generation. In this regard the GSP is of utmost importance to Bangladesh.

The RMG industry remains pivotal to Bangladesh's export performance accounting for 82 per cent ($28 billion) of a total export of $34 billion in fiscal year (FY) 2015-16.  The EU is the largest export market for RMG accounting for  61.1 per cent  of RMG exports  valued at  US$17153.4 million in FY 2015-16.

Taken as a single entity the EU represents the world's largest economy accounting for 16 per cent of global trade. While EU is a member of the WTO as an economic entity but  its 28 (soon to be 27) member countries are also WTO members in their own right. The EU is a single customs union with a single trade policy and tariff. The European Commission (EC), the executive arm of the EU, represents all EU member countries at almost all WTO meetings. Import tariffs applied to goods imported into the EU are ad valorem tariffs (calculated as a percentage of the product's value). The average tariff rate  on the MFN basis for manufactured products  now stands at 4.05 per cent. However, average tariff on textile and apparel approaches 12%.

The European Commission's  (EC) current  concerns relating to labour standards  in Bangladesh and  alleged failure to fulfil those requirements raises apprehension of suspension  or even withdrawal of EBA facility. According to EU sources, labour right and freedom of association issues in the RMG sector has become a big issue and this has come to a point where an EBA investigation is imminent. Given the importance of the EU as an export market, this will definitely have serious negative impact on RMG exports to the EU with adverse economic consequences on the Bangladesh economy.  While the issue of labour standards is a non-trade issue, the EU appears to have integrated it into conducting its external economic relations or more precisely turned it into a trade issue.

The EU clearly states that one of its main tools to promote human rights (of which labour standards are an integral part) in the Third World countries is the Generalised System of Preferences (GSP), granting certain developing countries preferential trade access to the EU market. The scheme includes explicit human rights' conditionality, providing that preferences can be withdrawn in case of massive and systematic violations of core human rights' and labour right norms. International labour standards are also legal instruments setting out basic principles and rights under the auspices of the International Labour Organisation (ILO) of which Bangladesh is a signatory.

According to an ILO report, the unregulated nature of the industry has resulted in poor working conditions in the RMG industry in Bangladesh and resulted in some of the worst industrial disasters on record. It also mentions that Bangladeshi garment sector workers earn some of the lowest wages (US$39 per month) in the region.  Overall the report paints a rather very sorry picture of the working conditions and remunerations in the industry. Such a report definitely influences the EU's decision to invoke its human rights conditionality with respect to  GSP facilities accorded to Bangladesh.

It must be borne in mind that the WTO agreements do not deal with labour standards but some developed countries want to change that to bring in international coherence and to improve working conditions in developing countries. What these countries are asking for is to use trade actions to impose similar labour standards  in developed and developing countries.  No wonder developing countries argue that the campaign  to bring in labour standards into WTO is a bid by developed countries to undermine the comparative advantage of lower wage trading nations. In effect they consider it as a disguised form of protectionism by developed countries. Though masquerading  in terms of  championing  human rights, it is well known that trade union movements in developed countries  are at the forefront of campaigning for this action primarily to safeguard  the jobs of their union members in those industries where they  are rapidly losing their competitive advantage to lower wage exporting countries. Not be ignored, it is also a fact that human right abuses do occur, especially in relation to labour rights in developing countries.

But there is a clear consensus among all WTO members on the core internationally recognised labour standards such as freedom of association, no forced or child labour, no discrimination (including gender discrimination at work). This calls for Bangladesh, both as a member of the WTO and the ILO, to remain pro-active in improving working conditions not only of  RMG workers but also of  workers in all sectors of the economy. The episodes of industrial tragedies that  have happened in the recent past causing  many deaths and other casualties along with  simmering industrial unrests across the country have signalled to Bangladesh external watchers its failure to be effective in significantly improving working conditions. The fact is that Bangladesh is reactively responding now to pressure generated by the EU (and others) to address the industrial relations issues when it should have been pro-active right from the beginning.

However, the freedom of association (formation of trade unions) issue remains a very problematic one in the country. In the Bangladesh context, the record of trade unions in securing worker rights has been mixed, partly because of leadership deficiencies. In the circumstances, some employer organisations and their leadership  often find it convenient to strike a private bargain with trade union leaders rather than to undertake collective bargaining. This is why it is crucial for the state to take a pro-active role in safeguarding the interests of working people.  Given the frequent calls globally for safeguarding labour rights and improving working conditions, the time is ripe for strengthening the effectiveness of trade unions to represent, advocate and deliver services to their members under a clean and honest leadership where industrial disputes can be resolved in a tripartite forum consisting of the government, employers and trade unions and, if necessary, with observer/s from the ILO.

The bottom line is that exports and millions of jobs in Bangladesh are at stake. It does not serve the interest of the EU to throw Bangladeshi workers under the bus. Therefore the best way forward is for all parties in this affair - the EU, government of Bangladesh, worker representatives, exporter associations, and international agencies such as the ILO - to cooperate and chart out a path that is least disruptive but a win-win for all parties in this rapidly evolving scenario. Given the gravity of the situation that should not be hard to find.

(Dr. Mahmood is a Senior Fellow of Policy Research Institute and can be reached at Muhammad. mahmood47@gmail.com.)