Waiting for a relaxed rules of origin for GSP
There is a protracted debate on the issue of rules of origin of the EU's General System of Preferences (GSP) between the garments exporters and the fabric manufacturers of Bangladesh for and against the relaxation of rules respectively. Both submitted their respective positions to the relevant services of the European Commission. The crux of this issue is the degree to which exports are required to incorporate input which can be classified as originating in Bangladesh. The Commission is working on the simplification and relaxation of rules where appropriate. It is expected that once the rules are adopted there will be a transition phase to allow the beneficiary countries to prepare for the new system of GSP administration with a major role for the exporters in certifying the GSP Form A.

While the debate here continues on the merits of the relaxed rules, Bangladesh has increased its GSP utilization for its clothing exports to EU. About 90% of the exported knitted items are receiving GSP (duty free entry), while the woven items' share is about 40%. However, the utilization is more on cotton trousers (about 52%) and much less for shirts (about 25%). The growth of exports shows a very positive trend even in the post-MFA period. But some people worry about decline in exports after December 2008, when the quotas on China imposed by the EU and USA will be lifted.

Success amidst apprehension
There are two major apprehensions related to an export setback looming large in the minds of Bangladeshi RMG exporters. These are the likely preferential erosion following a drastic reduction of tariffs on textile products under NAMA negotiations in WTO. The second one is the end of the EU and US restrictions on certain textile exports from China after December 2008. The outcome of NAMA is not likely to have any impact on RMG export from Bangladesh in the near future as the DDA negotiations do not show any sign of early resolution. However, the EU/US restrictions on Chinese exports on textile items which are in direct competition with Bangladeshi products (woven shirts, woven trousers, t-shirts and sweaters/pullovers) will be removed soon. Here one may recollect that the restriction or the quota imposition on the Chinese textile products by the EU and USA happened after a few months of unrestricted business in these two markets. The quota was actually applied in the last quarter of 2005 - during the famous post-MFA trade regime. How did Bangladeshi clothing items (regarding which the Chinese were restricted later) fare during these several months of stiff competition? If we look at the performance of Bangladesh exports to the EU in certain categories, the ground for pessimism is hard to substantiate.

Clothing/RMG exports to the EU in 2006 (January-December) show that, among all exporters to the EU (extra-EU imports), Bangladesh's rank is number 2 in t-shirt, number 4 in men's cotton shirt, number 2 in men's cotton trousers, number 2 in men's denim trousers and number 2 in sweater/pullover. China's position is ahead of Bangladesh in woven shirts, sweaters and trousers. India is ahead of Bangladesh only (among these) in woven shirt. Bangladesh continued its growth in export even in 2006, the second year of post-MFA trade regime. It is interesting to note that Bangladesh has improved its position in the ranking in the EU for men's cotton trousers (2 from 4) and for men's denim trousers (2 from 3) in the period 2005 to 2006. It also maintained its rank in other items mentioned above.

Bangladesh's export of textile & clothing to the EU reached 4.6 billion euro in 2006, from 3.6 billion euro in 2005. The share of the EU market also increased from 5.16% in 2005 to 6.03%in 2006. Interestingly the share of textile & clothing in the total export to the EU remained static in the last 4 years which is close to 90%. The overwhelming dependence on RMG exports to the EU and USA remains a major concern for the country. There is also no immediate possibility to reduce that dependence. The only potential way out, in the long term, is probably through an export decision of hydro-carbon resources of Bangladesh.

It is very likely that the competitive edge of Bangladeshi shirts, trousers in the woven sector and t-shirts and sweaters in the knitted sector would continue even after 2008. One may argue that the lifting of quantitative restrictions on China may adversely affect Bangladesh exports. However, analysts should not forget that the size and economic features of China and India are not comparable with Bangladesh. Bangladesh would probably remain a major supplier of basic/cheap clothing items, despite an astronomical growth of export of its competitors. Some of these countries have much lesser production capacity than that of Bangladesh (Cambodia, Sri Lanka and Vietnam) and some would be more competitive with items Bangladesh does not export in bulk (China and India), simply stated, high-priced items.

Is there a silver lining?
There is a persistent nervousness among textile and clothing producers in Bangladesh about the future rules of origin for EU GSP. The apprehension of a loss of preferential margin under NAMA is also a ground reality. The RMG exporters are excited about a radical relaxation of rules in coming months allowing them to use imported fabric and be eligible for GSP. On the other hand, the local fabric producers are worried about the loss or shrinkage of market for their products as there will be no attraction to buy local fabric for getting a GSP certificate to export duty-free. However, there is always a possibility that a buyer may prefer to source the inputs of clothing from the place it is exported, depending on certain factors. This decision may be independent of the preferential margin Bangladesh enjoys. The fact that Bangladesh has succeeded in exporting to USA (both knit and woven) and EU (large number of woven products without GSP) in the post-MFA period, amply justifies the belief that the country has become a reliable (price may not be the only criterion) supplier, albeit, for some limited products. Bangladesh has increased its export of trousers to the EU in recent years with corresponding increase in the GSP utilization. Increased export of trousers could be owing to the increase in the use of local fabric or a better GSP utilization, both being linked. The same could be said about the knit exports to the EU. However it is difficult to explain the export of woven shirts in the quota free regime with only 25% GSP utilization in EU. The issue is equally enigmatic in the case of export (knit and woven) to the USA, where Bangladeshi products face high tariffs. Here one need to keep in mind that basic clothing items are not fashion sensitive, therefore, not greatly impeded by lead-time factor.

A great challenge ahead
In the near future the EU is likely to formalize and apply the revised rules of origin for its GSP. The rules are, of course, applicable for all eligible imports to EU under such preferential trade. The significant aspect of the revised rules, in addition to the simplification and possible relaxation, would be the new GSP administration. The exporters are envisaged to certify their exported products as fulfilling the GSP rules of origin. This would be a formidable challenge for the Bangladeshi exporters across the board, not for the RMG exporters only. This new regime, with a transition period to prepare, requires very good record keeping, extensive IT use and efficient accounting system on the part of the exporters. The job would be more difficult if a value addition criterion is finally adapted to judge a product's originating status, especially in the agriculture, textile and fisheries sector. So far the exporters left this job of GSP certification entirely to the competent authorities such as the Export Promotion Bureau.

Bangladesh is known for its low-priced RMG products. The low price is often associated with low wages. The issue of core labour standards has recently become a major cause of industrial dispute. The violence witnessed in May 2006 in some export industries of Bangladesh manifested the seriousness of the issue. The foreign buyers may not remain oblivious to the concerns of the consumers and civil society organizations for an indefinite period. A major setback caused by widespread labour unrest in the RMG sector in Bangladesh may very likely seize up the engine of success. Sustainability of all the positive indicators of RMG exports, accordingly, is largely dependent on the progress in the current efforts to improve labour standards. It is also dependent, with no less importance, on many other economic and non-economic factors beyond the control of the exporters themselves directly.

The writer works for Delegation of the European Commission to Bangladesh. Opinions expressed are personal and do not necessarily reflect the views of the European Commission.