US Tariff Policy Changes: Impact on Bangladesh's RMG Sector and Possible Solutions
Impact of the Revised U.S. Tariff Policy on Bangladesh’s RMG Sector
Pressure on Competitive Position
The United States' revised tariff policy is exerting significant pressure on Bangladesh’s competitive standing in the global RMG market. Previously, Bangladeshi apparel faced an average tariff of 15.62%, which has now surged to 37%. For instance, assuming the FOB price of a t-shirt is $10. With a 37% tariff, the additional cost amounts to $3.70. Adding a transportation cost of $2, the total cost reaches $15.70. Applying a 30% margin ($4.71), the final price in the U.S. market stands at $20.41.
While this still remains slightly competitive compared to India ($20.62, 26% tariff), China ($23.50, 34% tariff), Vietnam ($24.43, 46% tariff), and Cambodia ($22.95, 49% tariff), the substantial tariff hike reduces Bangladesh’s price advantage. Consequently, U.S. buyers may opt for suppliers from India or other competing nations, posing a threat to Bangladesh’s market share.
| Country | FOB Price ($) | Tariff (%) | Tariff Amount ($) | Transport Cost ($) | Total Cost ($) | Margin (30%) ($) | Final Price ($) |
|---|---|---|---|---|---|---|---|
| Bangladesh | 10.00 | 37 | 3.70 | 2.00 | 15.70 | 4.71 | 20.41 |
| China | 12.00 | 34 | 4.08 | 2.00 | 18.08 | 5.42 | 23.50 |
| India | 11.00 | 26 | 2.86 | 2.00 | 15.86 | 4.76 | 20.62 |
| Vietnam | 11.50 | 46 | 5.29 | 2.00 | 18.79 | 5.64 | 24.43 |
| Cambodia | 10.50 | 49 | 5.15 | 2.00 | 17.65 | 5.30 | 22.95 |
Risk to Exports and Employment
The tariff hike raises concerns over potential export decline. Studies indicate that a 1% increase in tariffs can lead to a 0.5% to 1.2% reduction in exports. Given the 21.38% tariff increase (from 15.62% to 37%), Bangladesh’s RMG exports to the U.S. could drop by 10-25%, amounting to a potential revenue loss of $0.84 to $2.1 billion from the current $8.4 billion annual exports.
This decline poses a direct threat to 4.2 million workers, 80% of whom are women. A significant contraction in exports could lead to factory closures, putting millions at risk of unemployment, exacerbating social and economic vulnerabilities.
Broader Economic Implications
The RMG sector is Bangladesh’s primary source of foreign exchange earnings, and any decline in export revenue will have ripple effects across the economy. Reduced earnings will directly impact government revenue, public sector investments in education and healthcare, and overall economic stability. Addressing these challenges is crucial to safeguarding both the industry and the broader economy from long-term disruptions.
Impact of Tariff Increases on China, Vietnam, and Cambodia
Rising Costs and Declining Competitiveness
The U.S. reciprocal tariff policy has significantly increased production costs for key competitor countries. In China, with a 34% tariff, a T-shirt (FOB $12) now sells for $23.50 in the U.S. market. The country’s high labor costs ($400–$600 per month), combined with elevated tariffs, are diminishing its competitive edge.
Similarly, Vietnam faces a 46% tariff, raising the price of a T-shirt (FOB $11.50) to $24.43. Meanwhile, Cambodia, with a 49% tariff, sells a T-shirt (FOB $10.50) for $22.95. These high tariffs make these countries less cost-effective compared to alternatives.
Shifting Investor Focus to Bangladesh
With rising costs in China, Vietnam, and Cambodia, global investors are seeking alternative manufacturing destinations. If Bangladesh reduces tariffs on U.S. imports and is able to renegotiate with the U.S. lowers its tariff to 26%, Bangladesh could emerge as a more attractive hub due to its low labour costs ($65–$100 per month) and relatively favourable tariff structure.
This shift could drive greater foreign investment, enhance production capacity, and strengthen Bangladesh’s position as a leading RMG exporter in the global market.
Potential Tariff Reduction and Its Benefits
Enhanced Price Competitiveness in the U.S. Market
If Bangladesh reduces tariffs on U.S. imports from 74% to 52%, the U.S. may reciprocate by lowering Bangladesh’s RMG tariff to 26%. Under this scenario, a T-shirt with a $10 FOB price would retail at $18.98 in the U.S. market.
Additionally, if cotton prices decline (saving $0.11 per T-shirt), the FOB price could drop to $9.89, bringing the final price down to $18.80. This would give Bangladesh a $1.82 price advantage over India ($20.62 per T-shirt), strengthening its competitive position in the U.S. market.
Advantages in Other Global Markets
A lower cotton price would also benefit exports to the European Union (EU), where Bangladesh enjoys duty-free access. With a FOB price of $9.89, a T-shirt would retail for $15.46 in the EU market. Given that the EU accounts for 50-60% of Bangladesh’s RMG exports, this cost advantage would reinforce Bangladesh’s edge over India and Vietnam.
Similar benefits would extend to other key markets such as Canada and Japan, further diversifying Bangladesh’s export reach.
Impact on Other Imported Goods
A tariff reduction wouldn’t just benefit RMG but also lower import costs for key inputs like machinery, chemicals, fuel, and food products.
- Machinery: A $10,000 equipment purchase would see costs drop from $17,400 to $15,200, saving $2,200.
- Fuel: A $100,000 fuel import would see costs fall from $174,000 to $152,000, saving $22,000.
These reductions would help cut production costs and increase industrial efficiency, benefiting multiple sectors of the economy.
Revenue Loss vs. Cost Savings
Reducing tariffs from 74% to 52% on $2.5 billion in U.S. imports would lead to a $550 million revenue loss. However, savings on cotton, machinery, and fuel would amount to $473 million, offsetting much of the immediate impact.
In the short term, the net loss would be $77 million, but the anticipated $2.45 billion increase in exports would more than compensate for this loss over time. In the long run, these trade adjustments would drive greater economic benefits, surpassing the initial revenue decline.
Potential Strategies for Overcoming Tariff Challenges
1. Negotiating Tariff Reductions
Bangladesh must engage in bilateral negotiations with the U.S. to lower its import tariff to 52% or below. A reduction in U.S. tariffs to 26% would significantly enhance price competitiveness and attract foreign investment in the RMG sector.
2. Attracting Foreign Investment
Bangladesh can position itself as a preferred manufacturing hub by offering Special Economic Zones (SEZs) and tax incentives to investors relocating from China and Vietnam. The country’s low labor costs and potential tariff reductions provide a distinct competitive advantage.
3. Diversifying Export Markets
Expanding focus beyond the U.S. to markets such as the EU, Canada, Japan, and emerging regions like the Middle East and Africa can reduce dependency on a single destination. With duty-free access to the EU until 2026, Bangladesh can leverage this trade advantage to strengthen its global position.
4. Enhancing Production Efficiency
Lower costs of cotton, machinery, and fuel should be utilized to modernize production through automation and worker training. Increased efficiency will further reduce production expenses and enhance overall competitiveness.
5. Improving Product Quality
To remain competitive against India and China, Bangladesh must focus on producing higher-value garments. Strengthening product quality will ensure sustained demand and long-term buyer confidence.
6. Promoting Local Cotton Production
Reducing dependence on imported raw materials by expanding domestic cotton production can **lower FOB costs over time, strengthening Bangladesh’s position in international markets.
7. Strengthening Infrastructure
Investment in power, gas, and transportation networks will help eliminate production bottlenecks** and create a more attractive business environment for local and foreign investors.
Turning Tariff Challenges into Opportunities for Bangladesh’s RMG Sector
The revised U.S. tariff policy presents challenges for Bangladesh’s RMG sector, but tariff reduction prospects, higher tariffs on competitors, and lower import costs can turn this into an opportunity. If tariffs are lowered to 26%, the price of a Bangladeshi T-shirt in the U.S. would drop to $18.80, making it more competitive than India and strengthening Bangladesh’s position in the remaining 80% of global markets.
Rising costs in China, Vietnam, and Cambodia will drive investors to explore Bangladesh as an alternative manufacturing hub. While short-term revenue loss due to tariff adjustments might create financial pressure, increased exports and long-term economic gains will compensate for it.
To maximize these advantages, Bangladesh must take swift action by negotiating tariff reductions, enhancing production efficiency, diversifying markets, and attracting foreign investment. With strategic planning and timely initiatives, Bangladesh can reinforce the competitiveness and sustainability of its RMG industry in the face of global trade shifts.
Upvoted! Thank you for supporting witness @jswit.