Policy Research Institute - PRI Bangladesh

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What explains the concern over GSP?


Published: Tuesday, Dec 23, 2014

There is considerable ongoing debate and discussion in Bangladesh regarding the suspension of trade benefits to Bangladesh from the US Generalised System of Preferences (GSP). On June 27, 2013 President Obama slapped the suspension to register the US concerns over poor working conditions and protection of worker rights in the readymade garments sector. While the Rana Plaza tragedy triggered this punitive action, problems with worker rights and safety issues were simmering for a while along with growing hostility of the American Federation of Labour and Congress of Industrial Organisations. A review of the debate and discussion in Bangladesh suggests there is considerable confusion and lack of clarity about the underlying issues including the relevance of GSP to Bangladesh trade and the related implications of the GSP suspension. In this article I will try to provide some clarity so that readers have a better basis to judge for themselves the politics and economics of the GSP suspension.

The GSP was instituted in January 1, 1976 by the US government as a means of promoting growth in the developing countries through preferential access of their exports to the USA.  The GSP provides for duty-free entry into the US for some 5,000 products of 122 countries. The value of GSP exports stood at around $20 billion in 2012. The largest beneficiaries are India, Thailand, Brazil and Indonesia in that order.

The GSP is not extended to garments owing to trade protection reasons for US manufacturers and the garment duty rates tend to be much higher than for most other products. In 2000, former US president Clinton initiated the Africa Growth and Opportunities Act (AGOA) as a special preferential trade programme for Sub-Saharan African countries. The AGOA extends the GSP privileges to a larger number of products including garments.

Bangladesh has gradually increased its exports to the USA. According to data from US sources, Bangladesh exports to the USA increased from $196 million in 1985 to $5.4 billion in 2013. In contrast to this, US exports to Bangladesh grew by $219 million to only $709 million over the same period. As a result, the trade balance grew from a negative $22 million to a surplus of $4.7 billion, which is the Bangladesh's largest country-specific trade surplus. The importance of US market for Bangladesh trade is obvious.

Despite this progress, Bangladesh is an insignificant player in the US market. Total imports of goods and services into the USA stood at $2,757 billion in 2013; so the share of Bangladesh is a mere 0.2 percent of total US imports. Even with a five-fold increase in Bangladesh exports, the share will be around 1 percent of total US imports. The five largest exporters to the USA in 2013 were: China ($440 billion); Canada ($331 billion); Mexico ($281 billion); Japan ($139 billion) and Germany ($115 billion). Clearly, there is tremendous scope for Bangladesh to expand its exports to the USA.  

What is the relevance of GSP in this task? Presently, Bangladesh exports a tiny $35 million under this facility. As a share of its total exports to the USA, it is less than 1 percent. So, virtually all Bangladesh exports to the USA are outside the GSP. The reason for this is that almost all Bangladesh exports to the USA comprise of garments, which are outside the GSP.  Bangladesh has lobbied extensively to get the AGOA benefits that include apparel products. However, the US has declined to do so, mainly because unlike Sub-Saharan Africa, Bangladesh is a big player in the US market for garments and therefore comes in conflict with the interests of domestic producers of garments.

But interestingly, despite the high customs duties on garments (15-16 percent as compared with average import duty of 9 percent on total imports), Bangladesh's garment exports to the USA have grown at an impressive pace of 13 percent per year over the 28 years between 1985 and 2013. Because of this, its market share has steadily improved and it is now the third largest supplier of imported garments in the USA after China and Vietnam.

A second aspect is the fact that the GSP facility needs to be renewed periodically through the approval of the US Congress. The validity of the GSP ended in June 30, 2013. It has not yet been extended. So, legally, the GSP does not exist anymore, although there are expectations that the US Congress will likely extend the duration. Therefore, until and unless GSP is formally extended, all imports have to pay the existing import duties. In the past, when there was a gap between extension and end of GSP, the Congress also approved retro-active implementation of GSP from the date it lapsed. Through this provision, duties collected on imports of GSP-entitled products for GSP beneficiaries were reimbursed by the US Treasury. However, this is not an automatic feature of GSP renewal and it has to be specifically authorised by the Congress. Given these two features of the GSP, a natural question is what explains the concern over GSP?  Let me first take the question of GSP renewal. If for some reason, the renewal of GSP as a trade facility is not approved by the Congress, then the issue becomes academic because suspension will have no meaning. However, as noted, the current expectations are that the GSP will be extended. In the event, the suspension of GSP to Bangladesh has both a signal value and a potential loss from the longer term perspective.  

The signal value has to do with the international image of Bangladesh. The suspension by itself is less significant than the underlying reason. While critics argue that the suspension is a conspiracy of the anti-Bangladesh lobby in the USA, the stated reason of unsatisfactory garment worker regulations and implementation is a substantial negative factor for Bangladesh. This concern has been expressed by many countries including the European Union and by domestic and international development experts. As a Bangladeshi citizen I am acutely aware of the many problems facing the safety and welfare of garment and other workers in Bangladesh. The Tazreen factory and Rana Plaza tragedies are simply a manifestation of those concerns and we should not need the USA or other countries to remind us of our obligations to the workers, who are our most valuable assets.

I had in the past written quite a bit about the social obligations of garment and other enterprises to protect the welfare of workers to make sustained long-term profits. There is a range of measures that needs to be taken including fair wages, safe work environment and social insurance including for accidents. The government's role is to ensure that the enabling environment for the protection of worker rights is adequate and that it is well implemented. Some encouraging steps have been taken in the past few months by both the factory owners and the government. This is most welcome. Yet, there is a way to go. From the government perspective, the speedy adoption and implementation of the draft National Social Security Strategy (NSSS) will be a hugely positive signal. The NSSS provides for legislative action to adopt a comprehensive social insurance policy funded by employers and workers as in developed countries that will modernise the employment practices in Bangladesh. It also provides for special incentives to protect the welfare of female workers based on their specific needs.

The protection of worker interest is not just a GSP issue. This is essential for modernising employment practices in Bangladesh in line with international good practices. The convergence of interests with the GSP is a win-win. The anti-Bangladesh lobby in the USA, if any, must be tackled in its own merits. That cannot be used to bury the worker protection issues under that rug.

Regarding the issue of why worry about GSP when Bangladesh virtually did not benefit from it over the past 37 years before suspension, the answer lies in understanding the potential of the US market for Bangladesh trade. If India, Brazil, Thailand and Indonesia can benefit substantially from GSP, there is no reason why Bangladesh cannot move more aggressively in catching a share of the pie. The inability to benefit from GSP is a reflection of domestic supply constraints in Bangladesh that have contributed to the undue dominance of only one product group (garments) in the export basket. The GSP benefits could be used as an incentive to spur domestic producers to pay attention to those products. A focused analysis of supply constraints in those areas could be done to inform policies.

Importantly, the vast untapped US and other global markets is a reminder that small exporters like Bangladesh face a virtually unlimited demand situation. The facts that Bangladesh was able to penetrate and increase its market share of garments in the USA despite fairly steep trade tariff but could not profit from the duty-free list of 5,000 products on the GSP also provides strong evidence that international market access in most instances is constrained by domestic competitiveness and capabilities and not necessarily by trade barriers. With the WTO rules and general tendency towards trade liberalisation, the global market access of developing economies to manufacturing products has greatly increased. The success of Korea, China and Malaysia is a prime example of this.

Looking forward, Bangladesh needs to develop strong policies to improve domestic competitiveness. With highly favourable endowment of labour, Bangladesh has a huge comparative advantage in labour-intensive manufacturing. Focusing on investment, infrastructure, land availability and labour skills is the main policy challenge. Apart from education and training, converting the labour to a productive and committed workforce will also require strong social policies to protect the welfare of the workers. This long-term development challenge, rather than access to GSP, provides the imperative for adopting appropriate employment policies for workers.         

The writer is vice chairman of Policy Research Institute of Bangladesh. He can be reached at sadiqahmed1952@gmail.com.