What does Bangladesh Gain from the US-China Trade War?

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Anu Anwar 31 July 2019

As the U.S.-China trade war intensifies, pundits on both sides of the Pacific and elsewhere are wondering–who is the real winner? Interestingly, it is not China or the United States, but countries like Bangladesh, Vietnam, and Chile that may reap the most benefits from a widening trade dispute between the world’s two biggest economies. The impending effect of the trade war on supply chains dynamics and investment patterns could help Bangladesh emerge as a potential winner from the conflict.

Apparel Industry on the Lead

China and the United States have been stable trade partners to Bangladesh for decades. The volume and value of trade Bangladesh has with both countries is significant. However, the nature of trade with both countries is different. Bangladesh’s top import partner is China, with Bangladesh importing over $15 billion in Chinese goods, as of 2017. Meanwhile, the United States is the second largest destination for Bangladesh’s exports, taking in more than $5.8 billion in 2017 (Germany was the largest destination at just over $6 billion).

The changes in the geopolitical relationship between the United States and China through this trade war has alarmed many countries that have trade stakes with these two nations – though this raises hope for Bangladesh. As Asia Development Bank’s Chief Economist Yasuyuki Sawada argues, Bangladesh’s merchandise exports will go up an additional USD $400 million and its gross domestic product (GDP) by 0.19 percent in the next couple years if the current international trade war involving the United States and China exacerbates.

The garment sector is expected to reap the most benefits, as it accounts for 80 percent of Bangladesh’s total exports. As the trade war escalated thus far, the country’s garment industry observed significant growth as American retailers are placing more work orders with Bangladesh in order to offset increasing tariffs. According to the Office of Textile and Apparel (OTEXA), Bangladesh enjoys a 6.46 percent growth in share in the United States’ market during the first three quarters of 2018.

In 2012, a report by McKinsey forecasted that as ready-made garments from China declined, Bangladesh would become the next hotspot for textile manufacturing, and the Bangladeshi market would triple in value by 2020 – up from USD $15 billion in 2010. This forecast  entails China’s gradual phase out from labor-intensive industries to a higher value-added, high-tech, capital-intensive manufacturing sector and a greater Bangladeshi stake in labor-intensive industries such as the textile industry.

As factories are relocating from China to elsewhere in Asia to avoid higher tariffs, Bangladesh is comparatively more attractive than its competitor countries such as Cambodia and Vietnam as a destination for relocation. This is largely due to the presence of strong unions in countries like Cambodia, which makes setting up factories in the country more challenging these days. Moreover, in contrast to 160 million Bangladeshis, Cambodia has just a population of just 16 million. Bangladesh’s abundance of labor gives it a competitive edge in this labor-intensive industry. Due to higher wage and production costs, Vietnam also looks less attractive to foreign investment. The minimum wage in Bangladesh is currently USD $95 per month, which is almost half of USD $182 per month in Cambodia and USD $180 per month in Hanoi and Ho Chi Minh City.

Potential Benefit from the US

Unlike Chinese foreign direct investment (FDI), Bangladesh can also benefit by increasing imports from the United States. According to the U.S. Farm Bureau, soy bean exports to China have declined by 97 percent, after China’s tariffs on American soybeans came into effect. Currently, Bangladesh imports 2 million tons of crude vegetable oil, of which 30 percent or 600,000 tons is soy bean, 98 percent of those soybean comes from Argentina, Paraguay, and Brazil. If the country can redirect its supply chain from Latin America to the United States, it may have the potential to supply oil to consumers at cheaper prices without sacrificing profits in the long-run.

As the 51st largest trading partner of the United States, Bangladesh enjoys a USD $4 billion trade surplus. As President Trump is taking a hard stance on countries with which the United States has a trade deficit, Bangladesh can strategically benefit by importing soy bean from the United States. Doing so will not only get Bangladesh a cheap rate for the imported goods, but it will also reduce the trade deficit, which may ultimately contribute to stronger bilateral relations. Bangladesh and other low-income countries in South Asia currently face U.S. duties of 15.2 percent on the total value of exports. If Bangladesh strategically imports soy beans from America, the Trump administration might see fit to ease these duties on imports from South Asian countries like Bangladesh in order to minimize its trade deficit with China.

The demand for steel in Bangladesh comes from its domestic shipbreaking industry; most of this steel is imported from the United States. However, the United States imposed a 25 percent tariff on all steel imports in March 2018 in an effort to revitalize its declining steel industry. This action led the U.S. suppliers of scrap iron to store their reserves in anticipation of higher tariffs. Consequently, Bangladesh has seen a significant rise in the price of steel rods, an important product required for its many infrastructure projects.

In 2017, Bangladesh dismantled 25 percent of the world’s ships, and shipbreaking is considered a possible growth industrial sector for the country. In light of growing development projects, the country might craft an industrial policy to develop its shipbreaking yards, hoping to source a greater amount of cheaper steel domestically, which is already providing more than half of the country’s steel supply.

Looking Forward

Although Chinese policymakers are seeking to tighten the capital flow in hopes to prevent a depreciation of the yuan, China’s increasing involvement in various projects of Bangladesh may mean these constraints will not be as effective in the case of Bangladesh. Additionally, Bangladesh sees an increase in foreign direct investment (FDI) from China to be higher than forecasted through factory relocations, especially in the growing export processing zones (EPZs) as the trade war increases the costs of doing business in China.

Furthermore, since Bangladesh is a member of the Belt and Road Initiative (BRI), it is more meaningful for China to increase the investment in sectors of Bangladesh that are affected in China by the trade war. Beijing’s support of Bangladesh was evident in the 27 agreements for investments and loans signed by the two countries – amount of USD $24 billion – when President Xi Jinping visited in 2016. Net FDI from China into Bangladesh exploded after Xi’s visit. It increased to USD $506 million in the 2017-18 financial year, which was only USD $68.5 million in 2016-17, according to the Bangladeshi newspaper The Financial Express.

Putting all these together, it clearly appears that the unwarranted trade war between the United States and China opens a sudden window of opportunity for Bangladesh. However, whether the country can reap those benefits will depend on a host of factors. Bangladesh is struggling with a crumbling infrastructure, a weak rule of law regime, and a poor business environment. Many observers are also alarmed that Bangladesh’s government excessive and reckless borrowing from Chinese credits may put the country in a longer-term debt trap, like other countries case. It is therefore critical for Bangladesh to work on a favorable policy regime to seize new opportunities as they come by, and to provide enabling conditions for more foreign direct investments—all by avoiding unintended risks and consequences.