The External Threats of Textile Sector in Bangladesh

Sunday, May 20, 2012

The External Threats of Textile Sector in Bangladesh

create hurdles for Bangladesh to retain or improve its competitive edge. This hurdle can take numerous forms. Broadly, these are discussed in two categories:

(1) Phasing out of MFA and

(2) Other non-tariff barriers.

(1) Phasing Out of MFA

It seems that the phenomenal growth of RMG exports from Bangladesh has become a threat to its powerful competitors. Naturally, they (the competitors) are preparing to snatch away the markets from Bangladesh with aggressive business strategies. They will certainly take advantages of the new provisions included in the final Acts of Uruguay Round. One such provisions is the phasing out of the MFA.

Before we can answer the question whether the phasing out of MFA will be a threat to Bangladesh, we need to understand the origin and meaning of MFA (Multifibre Agreement). The GATT did not originally include textile and apparel industries in its principles of MFN (Most Favoured Nation). The Uruguay Round (UR) decided to integrate textile and RMG industries into GATT system. As is well known, GATT/WTO prohibits not only unjustified tariff barriers but all forms of non-tariff barriers including imposition. In sixties, while GATT principles prohibited discrimination between the trading partners, it allowed certain exceptions to GATT principles on the ground. Such an exception is MFA. The United States and several other developed countries argued that if the developing countries which enjoy comparative advantages in terms of labour costs are allowed to export RMG without any restrictions to the cost-disadvantaged developed countries, the textile and apparel industries in the latter countries will be injured. They strongly felt that the interest of the domestic textile and apparel industries of the USA and other developed countries where labour cost is very high must be protected in way which is recognised by the GATT. To achieve this goal, a special provision known as MFA was instituted. Under the MFA provisions, GATT allowed the USA and other importers of RMG to impose quota restrictions (use of trade restrictive quota is not permitted by GATT except in this case). The MFA has been in place since 1974. Later on when trade liberalisation policy started riding high, the arguments for phasing out the MFA were put foreword by those countries which were hurt by it (Siddiqi : 1995, Raffaeli : 1994). After gruelling debate, the final Uruguay Round negotiations envisaged the phasing out of MFA by the year 2005, within 10 years beginning July 1, 1995 (Goto : 1990).

The phasing out of MFA is a global issue. It has important implications for both developed (importers of RMG) and developing (exporters of RMG) countries. We should remember that the MFA has been providing a country like Bangladesh special and indirect through quota system in its export markets. One must recollect that it was the operation of MFA or quota restrictions which prompted countries like South Korea, Hong Kong, Singapore, India, Sri Lanka etc. to come to Bangladesh to taker the advantage of its non-quota status and cheap labour, and they for their own interest provided initial motivation and help to Bangladeshi entrepreneurs to acquire the position of a powerful supplier in the world market. With the phasing out of MFA the position of Bangladesh in the world markets will change.

After the year 2005, if MFA is really phased out, these countries, to be more specific, companies from these countries who have collaboration with our entrepreneurs, may not be our partners - in - progress due to the changed circumstances. Under the changed circumstances, all countries including those which are now under quota restrictions, will be on quota-free status. In fact they will probably emerge as our stronger competitors. This means that Bangladesh will have to compete with a larger number of established and powerful suppliers of ready-made garments, namely, China, Hong Kong, Singapore, Indonesia, Malaysia, India, Pakistan, Sri Lanka, Egypt, etc. in the world markets on the equal terms and of its own. In addition, Vietnam, Poland, Brazil, and small countries of Caribbean region are likely to emerge as new competitors (Quddus : 1996).

Some people fear that the RMG exports of Bangladesh may be driven out from the world market. But we believe that if Bangladesh can take certain measures, it should continue to do as well as it is now doing. To retain its competitive edge, it needs to:

i) make substantial development to labour productivity and managerial efficiency through the effective training efforts.

ii) look for new product development and diversification along with new venues of markets.

iii) make structural development to textile and RMG industries with appropriate backward and forward linkage.

(2) Other Non-Tariff Barriers

The final Acts of the Uruguay round (UR) negotiations expanded, integrated and strengthened the GATT principles of reducing / eliminating all forms of trade barriers with a view to increase world trade. It is easier to identify and remove trade restrictive tariff barriers because they take so many and such subtle forms that multilateral negotiators face more disagreement than agreement on their definitions. For example, customs evaluation procedures suitable in a particular country may be interpreted as deliberately created non-tariff barriers by its trading partners. Similarly, there is a scope for ad misinterpretations of subsidies given to exporters by the respective government. The child labour, environmental and human right issues are also susceptible to similar â€œmisinterpretations(Jonokontho : 1995).

Quota System

The quota system imposed by importing country is a great threat for garment industry. A garment exporting country cannot export more than quota in an importing country for the introduction of quota system. In 1983-84, only USA was the buyer of 70% exported garments out of the total export of garment and the growth of garment industry in that year was 300%. But after imposing quota system by USA in 1985, the garment industry faced a great difficulty. Many small garment manufacturing units were closed down and about 55000 garment workers lost their job. Many garment manufacturing units reduced their production and sold their licences to others. Now Britain, Germany, EC countries and Scandinavian countries have imposed quota for importing garments.

Competitor

Competition has become intense in the garment industry at present. Garment industry is emerging rapidly in Taiwan, Hong Kong, Singapore and Korea in Asia. Thailand, Malaysia, Indonesia, Philippines and Sri Lanka have found the garment industry more attractive to develop their economy from 70 decade. Vietnam has become a potential entrant in garment industry throughout the world.

Herkin Bill

Herkin Bill is a bill placed in the Congress by a Congressman named Herkin for imposing restriction on importing garment in the USA. The bill states that the garments are prohibited in USA market which are using child labour. This bill is a great threat to the garment industry in Bangladesh. Because the garment industry in Bangladesh is mainly based on low-cost child labour. If this low-cost child labour cannot be used in the garment industry of Bangladesh, the production cost of garment will increase. So, it will be very difficult for Bangladesh to compete in the international garments market.

Threat from Various Regional Organisation (Such as NAFTA, EEC, EFTA, etc.)

The trend of the modern world is regionalism to strengthen the economy of the member countries through co-operation. North American Free Trade Association has been signed recently and the main initiator of NAFTA is the USA, who is the main buyer of garment from Bangladesh. According to the treaty of NAFTA, USA will invest its domestic resources to develop their economy by using 60% of their own raw materials through utilising the low cost labour of Mexico. So, it is a potential threat to the garment industry of Bangladesh. On the other hand, EC countries have already declared a single currency for European Common Market called ECU (European Currency Unit) to protect the interest of the member countries through co-operation. This sort of protectionism is great threat to the garment industry of Bangladesh, because Germany, Britain, Denmark, Norway, Belgium, Italy, etc. are buyers of the garment of Bangladesh.

Scarcity of Raw Materials

There is no alternative of ample supply of raw materials in order to become self-sufficient in any industry. The raw materials of the garment industry of Bangladesh is foreign dependent. Bangladesh has to import raw materials of garments from abroad in order to process it in Bangladesh. About 70% of garment export income has to be spent for the raw materials. Moreover , the export and import policy of Bangladesh is very weak. So, the scarcity of raw materials for the garment industry in Bangladesh is a great threat.

Political Instability

Bangladesh is not a stable country politically. Political instability is a great threat for any industry of our country. Frequent strikes and hartals are great obstacles for the growth of any industry. The production cost increases and productivity decreases because of frequent hartals and strikes. Garment producers cannot keep their contract with buyers because of hartals and strikes. Hartals and strikes have become a common phenomenon of Bangladesh. There is a positive relationship between law and order situation of any country and export. If the law and order situation improves, the volume of export increases. Unfortunately, the political stability and law and order situation is not in favour of the export of our country and becoming a threat to our export trade day by day.

The Child Labour Issue

It is quite likely that by restructuring the industry and improving the productivity and managerial efficiency, Bangladesh will be able to compete in the international markets. But problem will arise if the importers apply subtle non-tariff barriers under the disguise of humanitarian and environmental arguments. For Bangladesh, the problem is not how to cope with the technical and cost reduction problems; the real problem is how to tackle the problem of such non-tariff barriers. As an example, one can cite the child labour issue. The much-talk about the â€œChild Labourâ€ issue can be an effective non-tariff barrier. The Harkinâ€™s Bill designed to prevent the abuse of child labour is a prima-facie based on humanitarian ground. But many people will contest the basic logic. The child labour issue should be looked at from three perspectives:

a. Human Rights

Abuse of child labour violates human rights. Therefore, we should not allow exploitation or abuse of child labour. But the problem is how to justify a general definition of child labour use. What is child abuse in rich industrialised countries like USA or Germany, may not be the same in Bangladesh, an economically and socially poor country. Some would argue that in the absence of alternative arrangements, barring 13 year olds from employment which is not equivalent to forced or bonded labour, may create social problems. The ECONOMIST in its October 1-7, 1994 issue published some evidence in support of the latter argument. To quote,Studies by ILO show that when third world governments banned child labour, children have usually been made worse-off. Earnings from labour may have been the only legal source of family income; a child stopped from working could be forced into begging or prostitution, or starvation. And if imports from these countries are banned, this will keep these countries poor longer; hardly a good way to advance worker. The massage disseminated by the ECONOMIST cannot be ignored.

b. Business Consideration

Replacement of some 12000 child labour now working in Bangladesh RMG factories by older and more experienced workers will increase the production cost. But given the wage structures in Bangladesh, it will not be an amount to be concerned about. Another cost is to be added. The stipend-support and schooling of the terminated children will cost the industry some money. If the total cost is shared by the industry, it is not likely to increase FOB price to a level which will make RMG less competitive in the world market.

c. Non-tariff Outlook

The possibility of using the child labour issue as an effective non-tariff barrier is the most serious concern for me. Those who oppose using child labour do so perhaps with very pious intention. With all their good intentions, they insist that none should buy apparel manufactured by child labour. But unfortunately, good intentional cannot be measured scientifically. Therefore, the argument that the developing countries exploit child labour, therefore, they should be denied access to rich countries markets may be constructed as a form of non-tariff barrier and in disguise a protectionist tool. In fact, a number of exporters who argue that the child labour issue is simply a play of the powerful competitors in disguise to create non-tariff barrier to the booming RMG exports from Bangladesh. Since they cannot beat Bangladesh cost-wise, they are misusing the humanitarian argument which prima facie cannot be challenged. It is interesting to note that they (those who are against child labour) do not talk about child labour in other industries. Is it because no other industry posses any threat to their industries? This question gives rise to misunderstanding.

But unfortunately, Bangladesh has been warned by its major buyers particularly USA to the effect that they have definite proof that many RMG factories in Bangladesh employ (exploit?) underaged children, therefore violet human rights. If this situation continues, they will stop buying from Bangladesh and Bangladesh is not in a position to say.We will do as we think right. If Bangladesh insists on saying this, it will demonstrate an inarticulate business diplomacy which will result in huge loss of RMG markets. This will bring sufferings to some one million workers of the RMG industry and at least 4 million members of their families. This sufferings will be caused due to the employment of some 10-12 thousand underaged children. We can tackle this problem in an amicable way if we use better diplomatic acumen. I personally believe that the Government of Bangladesh and BGMEA have shown this high quality diplomatic acumen by signing the MOU between ILO, UNICEF and BGMEA on July 4, 1995. Under this MOU some 2200 member factories of BGMEA were supposed to terminate all the underaged (younger than 14 years) workers by October 31, 1995 so that they are not blamed for child labour issue. As a result the USA and other importers will continue to buy from Bangladesh. But under the MOU, the BGMEA has to implement a pre-planned compensatory educational program for the terminated children. These terminated children will be educated and trained in schools jointly supported by the BGMEA, ILO, and UNICEF, for such time until they are 14 years old. This is a good move, provided it is implemented as planned. But I must point out BGMEA has perhaps promised more that it can deliver. According to MOU, all the underaged children were needed to be identified and then terminated by October 31, 1995. Understandably, termination is not a problem. But identification of underaged children in more than 2200 factories will take more time than available (two months). Another thorny problem is how to resolve the disagreement on the real age of a girl/boy if that arises between the BGMEA and ILO representatives who will jointly visit the factories. There is already disagreement on the estimated total number of child labour. BGMEA estimates it is about 10,000 whereas ILO estimates it to be at least 14,000! Twenty five teams started their survey on August 28, 1995.

Additional Barriers

Is the child labour issue the last problem of RMG of Bangladesh will face? Or the powerful competitors of Bangladesh will raise other issues, for example, environmental issues or minimum wages issues, apparently on humanitarian ground, but in reality with the hidden agenda of increasing the cost of production in Bangladesh to make its products less competitive? We are afraid, these issues may be raised in future (Sanaullah : 1996, Siddiqi : 1995, Ahmed, Abu : 1994).

There are many crude as well as subtle non-tariff barriers which retard free trade. It is to be noted that it is not Bangladesh itself which is the target, it is the relatively cheaper apparel which Bangladesh and other developing countries can produce and export. For example, Indian cotton skirts were banned from US markets on the ground that these skirts were inflammable which most Indian exporters thought was a form of non-tariff barrier. Many of these non-tariff barriers are concerned with environment as well. While environment can cover many aspects, let us take up the case of labour situation, their working conditions, wages, right to organise, etc.

The final act of the Uruguay Round (UR) does not specify any well defined provision which conditions international transactions on the environmental standards. The Uruguay Round barely touches on the environment. However, a committee on trade and environment has been set up and will be part of World Trade Organisation. There is a demand that the developing countries should improve environmental standards in return for access to rich-country markets. It is envisaged that not only workplace standards such as minimum wages, and safety standards, but also broad political rights such as freedom for association and the right to collective bargaining will have to be improved to an acceptable level. The UR recognises the need for standardised labour conditions on the ground of human rights. If the rich industrialised countries insist that wages, working conditions, health and safety standards, etc. in a country like Bangladesh are so poor, Bangladesh will certainly be in a disadvantaged position.

It is true that people in the rich industrialised world are naturally appalled by the â€œdeplorableâ€ working environment in the third world. While their sentiment is well-taken, it is difficult to find a solution acceptable to all.

A question looms large about the comparability of the environment. The rich countriesâ€™ perception of environmental concerns is different from that of the poor countries. Can we sensibly compare the environmental conditions which include the working conditions in factories in Bangladesh with that incomparable? We are not only economically poorer, we are different socially, culturally and politically. Therefore, our priorities, even on moral grounds, will be different from those of the rich countries.

Cheap labour is a natural factor endowment in Bangladesh. It would be nice and ideal to be able to pay handsome wages to the girls/women working in RMG factories of Bangladesh. But what is handsome wage in Bangladesh, may not seem handsome in Germany or in the USA. Given the price levels, per capita income and average living standard in Bangladesh, it is neither necessary nor economically / socially tenable to pay an hourly wage, say @ $5.00 in Bangladesh. If we pay these high wages to RMG workers, this will create social imbalance. Most of the domestically oriented industries will not be able to pay that high wages.

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Sunday, May 20, 2012