Bangladesh has made phenomenal progress, transforming from a fragile socioeconomic setup at its independence in 1971 into a ‘development surprise.’ Since 2008–2009, the economy has grown at an average rate of 6.5%, as its (gross domestic product) surged from USD 102 billion to USD 454 billion in 2022–2023. In the same period, the country’s per capita income rose threefold, from USD 759 to USD 2,765. From over half of the country’s households living in poverty in the mid-1990s, incidence dropped to just 18.7% in 2022.

In 2015, the country transitioned from low-income to a lower-middle-income status according to the World Bank’s global economy classifications. Despite covid-19 disruptions in 2020, Bangladesh showcased resilience with solid GDP growth as many economies faced declines. Meanwhile, it secured the UN’s recommendation to graduate from the world’s poorest countries, often called least developed countries (LDCs), by November 2026.

Bangladesh’s story owes much to its thriving export sector. Its merchandise exports expanded rapidly from USD 14 billion in 2007–2008 to USD 55 billion in 2022–2023. This sector posted an average growth rate of nearly 10% during between fiscal years 2011 and 2023 – a period marked by the great global trade slowdown of 2016, the China–US trade war, the covid-19 pandemic of 2020 and the Russia–Ukraine conflict.

Strong exports

The clothing industry has been pivotal to Bangladesh’s success. The industry reinvented itself as manufacturing exports (especially readymade clothes) became dominant, moving away from the primary products of earlier decades. This was a striking development, as many countries failed to make this transformation. Through this transformation, Bangladesh generated massive job opportunities, particularly for women.

Bangladesh must maintain strong exports, alongside remittances, to safeguard itself against any balance of payments crises by preserving forex reserves. Exports enhance economic efficiency spurring productivity among firms facing global competition. They also have spillover effects, encouraging the adoption of innovative technologies. Historically, economies that have gone through rapid transformation have often done so through successful exporting.

Enhancing export competitiveness is ever-more important for Bangladesh because of its ‘LDC graduation,’ which may increase tariffs in major export markets.[1] Furthermore, LDC graduation will end export subsidies, limiting any policy support options. Bangladesh is transitioning, in the centre of which must lie an effective trade policy to promote export competitiveness.

Bangladesh is transitioning, in the centre of which must lie an effective trade policy to promote export competitiveness.

Expansion and diversification

Bangladesh’s export basket is not diversified. Lack of export diversification has been a longstanding challenge. The country’s success in readymade garment (RMG) exports has not been replicated in any other sector. In 2023, almost 85% of Bangladesh’s exports came from RMG. Non-RMG exports, starting from USD 1 billion in the early 1990s, reached just over USD 8 billion in 2023, with a compound annual growth rate of 7.6%. In the same period, RMG exports surged from USD 1 billion to USD 47 billion, marking growth of 14.6%.

Despite the success of garments, Bangladesh’s overall export volume – of just above USD 55 billion in 2023 – remains small against countries of comparable size. Vietnam, with 91 million people, exports USD 360 billion; Indonesia, with 218 million, exports USD 240 billion; and the Philippines, with 101 million, exports USD 79 billion. Meanwhile, much smaller southeast Asian countries like Malaysia and Singapore are extremely successful exporters.

For Bangladesh, a strategy of export diversification must be complemented by rapidly expanding exports. However, the country’s immediate fast export expansion will depend largely on the readymade garment sector.

Double concentration in export structure

Bangladesh’s exports are heavily concentrated in garment products, which rely excessively on cotton apparel. But globally, non-cotton products dominate the clothing market. About 60% of global clothes are non-cotton, contrasting with Bangladesh’s 70% cotton-based exports. Consumers are shifting towards man-made fibre (MMF) apparel because of features like moisture-wicking, wrinkle resistance and easy maintenance.

Environmental policies in major importing countries are pushing the textile industry towards sustainable fibres. Here, the MMFs have less ecological footprint. Bangladesh’s export promotion strategy should also focus on diversification within the garment sector. This current double concentration phenomenon should be deconcentrated by promoting non-garment exports and boosting non-cotton garment products.

Critical balance of domestic growth and export success

A booming domestic market has been a great success of the Bangladesh economy. However, this must not come at the expense of exports. Officially, Bangladesh pursues an export-led growth strategy. This means that the share of exports in GDP should rise. In contrast, the country’s export–GDP ratio has been on the decline – from 20% in 2011 to 13% in 2023.

One reason for Bangladesh’s subdued export orientation is trade policies that have favoured import-competing industries with high customs duties and trade taxes. This de facto policy makes the domestic market more appealing to investors than the global market. It directs investments towards domestically protected industries, ending in less competition. World Bank research shows nominal protection for local manufacturers in Bangladesh is 28% against 15% in India, 9.6% in Vietnam and 7.4% in China.

High protection levels disincentivise investors from any non-RMG exports. The textile and clothing industry faces a similar situation. However, Bangladeshi RMG firms have navigated the challenge effectively because they don’t deal with local market competition. Their unique market position is strengthened by the preferential tariff offered to least developed countries.[2]

Bangladesh’s disadvantages in exports are exacerbated by a deficiency in domestic market standards, which show a quality gap with international requirements. This hinders the competitiveness of domestic products for export. It also undermines the reputation of Bangladeshi non-RMG goods. This is a vicious cycle of export disinterest and international non-demand. For example, demand among global buyers for Bangladeshi leather goods is very limited owing to non-compliance with environmental standards.

To fuel the domestic market, many firms neglect global quality benchmarks. This limits their export readiness for markets like the EU, UK and US. A missed opportunity indeed. Bangladesh’s testing and certification capacities do not meet international standards, especially in agriculture, processed food, leather and fish.

Bangladesh’s testing and certification capacities do not meet international standards, especially in agriculture, processed food, leather and fish.

Bangladesh’s reliance on import taxes for its revenue base disincentivises export-oriented investment. This complicates policy efforts to rationalise the tariff structure. Trade taxes constitute about 30% of the government’s revenue. This was notably higher in early 2000s! Meanwhile, Bangladesh’s tax–GDP ratio, at around 8%, is one of the world’s lowest. Hence, there are parallel concerns about potential revenue loss from any tariff adjustments.

Time-befitting policies

Bangladeshi policy-makers have identified the right policies to address the country’s export competitiveness problems. For instance, the government adopted the National Tariff Policy in 2023, with a clear emphasis on tariff rationalisation. This explicitly mentions reducing ‘anti-export bias’ in trade policy. The policy would also downsize tariffs to benefit Bangladeshi consumers. The policy specifies guidelines so that all types of exporters can procure raw materials duty-free.

Time-effective implementation of the National Tariff Policy is critical. Tariff rationalisation should be prioritised along with domestic resource mobilisation, to reduce reliance on import revenues. Bangladesh’s tax agency, the National Board of Revenue, is developing a medium- and long-term revenue strategy (MLTRS) to enhance revenue collection over the next six years. Successful execution of the MLTRS will be essential for strengthening domestic resource mobilisation.

A bustling container yard at the main port, powering global exports, Chattogram port, southeastern coast of Bangladesh, 27 November 2021 | Photo by Mahmud Hossain Opu.

Bangladesh should weigh the effects of tariff rationalisation, which positively impacts GDP and exports. Reducing tariffs could stimulate domestic manufacturing, leading to increased revenue from local sources. Notably, tariff rationalisation does not mean the end of protection for local industries. It is, rather, a pragmatic approach to find the right level of protection.

For Bangladesh, prudent exchange rate management to support exporters will be critical for export success in the future – when many existing tariff benefits will disappear. Between 2011 and 2021, the real effective exchange rate became overvalued by nearly 60%, with the Bangladeshi taka’s bilateral real exchange rate appreciating by 30% relative to the Chinese renminbi, 25% to the Indian rupee and 29% to the Vietnamese dong. This shows how difficult it has been for Bangladeshi exporters to compete in the global market.

Bangladesh is now moving towards an exchange rate regime aligned with market forces. This would lead to a competitive exchange rate to prevent the taka’s appreciation. It should benefit non-RMG exporters who, sensitive to price competitiveness, can then get a foothold in global markets.

Attracting foreign direct investment can act as a catalyst for export expansion. Non-RMG firms in Bangladesh have struggled to connect with foreign markets, largely because of limited exposure to trade networks. This situation is often linked to weak FDI inflows. Between 2000 and 2022, Bangladesh recorded low FDI inflows of 0.95% of GDP in comparison with 1.66% for India, 1.96% for China, 2.99% for Malaysia, 5.45% for Vietnam and 10% for Cambodia.

Boosting export competitiveness

Bangladesh is reaping the largest benefit from LDC-related trade preferences. This is why its LDC graduation is the talk of the town. Currently, more than 70% of Bangladeshi exports enjoy duty-free schemes. As things stand, the country’s LDC graduation would lead to a tariff rise on RMG exports from currently 0% to 17% in Canada, 11.6% in the EU, 22.7% in India and 9.0% in Japan. Loss of tariff preferences will surely affect exports.

LDC graduation does not mean the end of trade preferences. Bangladesh must proactively seek protracted trade preferences to support its exporters. For instance, the UK, under its Developing Countries Trading Scheme, will continue to provide tariff-free market access for much of Bangladesh’s exports. The members of the World Trade Organization (WTO) have also taken a decision urging the current Generalised System of Preferences (GSP) donor countries to extend their trade preferences to graduates.

The EU has deferred the adoption of its proposed GSP regulations, which presents a valuable opportunity for Bangladesh. If the EU relaxes its safeguard measures, allowing Bangladesh’s apparel sector duty-free market access, the benefits could be substantial.[3]

Retaining duty-free access in China and India will significantly benefit Bangladeshi exporters. Post-LDC graduation, Maldives continued to enjoy benefits in India under a special South Asian Free Trade Agreement provision. Similarly, China extended preferential treatment to Samoa after its graduation. These precedents suggest Bangladesh should actively seek similar preferences with both countries.

As Bangladesh is a member of the WTO, its policies are harmonised with WTO-upheld measures. Devising WTO-consistent export incentives is crucial for Bangladesh because export subsidies will phase out after LDC graduation. There are other strategies to support exports that can be compatible with WTO regulations. Bangladesh can learn from other countries that have formulated such support measures.

Bangladesh must pursue a dual-track strategy to deal with its cotton apparel dominance while expanding manmade fibre (MMF) apparel production. Bangladesh is the second-largest cotton apparel exporter, but the overreliance on cotton exposes it to risks of fluctuations in cotton production, shifting consumer preferences and evolving environmental standards.

Bangladesh must pursue a dual-track strategy to deal with its cotton apparel dominance while expanding manmade fibre apparel production.

Diversifying into MMF products is a critical strategy for long-term RMG export growth. MMF-based textile plants need massive investments. To support this, Bangladesh should establish a low-cost strategic investment fund. Countries like China, India and Vietnam are investing massively in MMF, and Bangladesh should not stay behind this race.

To enhance export competitiveness, reducing the high cost of doing business is extremely important. Challenges like weak logistics, inefficient customs and inadequate infrastructure extend lead times and raise costs, hampering competitiveness. Additionally, developing skills relevant to the export sector can support firms.

Compliance should be part of Bangladesh’s export development strategy. The compliance regime will be a major factor in growing export businesses. Unfavourable working conditions and labour issues attract widespread global attention. Global brands avoid the factories that cannot adhere to acceptable standards.

End remarks

Bangladesh has come a long way developing a solid socioeconomic base for economic prosperity. It should focus on building trade competitiveness to sustain prosperity. This comes with the need to navigate the challenging terrain of the global trade regime. Bangladesh is now at a critical juncture to transform these challenges into opportunities for its exporters. It is in this context that a reinvigorated approach, to unleash the country’s export potential, is needed in its trade and investment policies.

 

[1] Studies indicate that Bangladesh may face export declines owing to higher tariffs after LDC graduation in 2026. These include a United Nations Conference on Trade and Development exercise showing a 5.5–7.5% reduction in exports and a World Trade Organization estimate of a potential 14% decline. Higher tariffs could have significant impacts on Bangladesh’s export competitiveness.

[2] While major Organisation for Economic Co-operation and Development countries impose an average industrial goods tariff of 2–6.5%, apparel imports face higher tariffs, such as 16.2% in Canada, 11.5% in the EU and UK, 12.5% in South Korea, 22% in India and 9% in Japan. Consequently, LDC-specific duty-free preferences give Bangladesh a competitive edge in apparel exports.

[3] Bangladesh accounts for 50% of all EU GSP-covered apparel imports. Under the proposed EU GSP for 2024–2034, Bangladesh’s RMG exports won’t qualify for duty-free access, given their large share in the EU market. Exceeding the 6.5% threshold of EU imports and 37% of EU GSP apparel imports triggers EU safeguard measures, making Bangladesh ineligible for duty-free access.

 

Photo ©️ Mahmud Hossain Opu

 

Mohammad A. Razzaque is Chair of the Research and Policy Integration for Development. He is an economist. He is also a Director of the Policy Research Institute. He was a Senior Fellow for International Trade and Globalisation at the London School of Business and Management and Head of International Trade Policy at the Commonwealth Secretariat. His areas of expertise include trade performance, trade negotiations, export competitiveness, regionalism, economic growth, labour economics and social protection. He obtained his doctoral studies in economics at the University of Sussex.