The inevitable safeguard clause (quota) invoked to the Chinese exports by the USA and EU on certain so-called sensitive textile and clothing items can remain effective only up to the end of 2008. Some South Asian countries like Bangladesh performed very well in maintaining market share and even increasing it significantly in some specific items during 2005 and the first half of 2006.It is generally agreed that the safeguard measures on imports from China gave these countries some breathing space, before Chinese exports take a huge share of the market. There is, accordingly, a nervous feeling here in Bangladesh about the post-2008 trade regime. Is it going to be winner takes it all?

Early indications
The export of clothing or readymade garments (RMG) in the post-MFA period from Bangladesh experienced a steady growth dispelling fear of a negative impact of the quota withdrawal in USA and EU.

In the first 9 months (July 2005 to March 2006) of Bangladesh Fiscal Year 2005-06, the export of RMG accounts for 5.6 billion US dollar. It is 19.4% higher compared to the same period of the previous year. The growth is, however, more in the export of knit garments (30%), than that of woven garments (10%). Interestingly, the USA scenario is very straight forward; both woven and knit garments had a steady growth in 2005 and the first quarter of 2006.

But in EU, the knit export is doing far better than the woven export. However, even in EU, exports of some woven items have picked up momentum after first few months of 2005.

Impact of textile safeguard clause imposed on China
EU put quota restrictions on certain textile products imported from China in July 2005, effective until 2008. Among these, T-shirts, pullovers/sweaters and men's trousers are of interest to Bangladesh as these are her main export items. Import of shirts from China is not yet under quota restriction.

But export of shirts to EU from Bangladesh has already been declining since 2004. Nevertheless, there is a great surge of export of woven shirts to USA in 2005 and in the first quarter of 2006. Historically USA has been the main destination (more than 50% of the total) of the woven garments and EU the destination (about 70%) of knit garments. The quota free USA market opened new opportunities for export of knit garments and particularly for some of the very popular woven garments from Bangladesh. Presumably the loss of market in EU has been compensated by the new business in USA. Exports from Bangladesh, both knit and woven, increased substantially in the US market in the first few months of 2005, after the withdrawal of quota.

In USA the quota restrictions on Chinese imports include T-shirts, sweaters, cotton trousers and also woven shirts. These restrictions were imposed in the later part of 2005. The US - China Textile Agreement, effective from January 1, 2006 to December 2008 and the EU-China Textile Agreement of June 2005 certainly provided some opportunities to increase exports from Bangladesh to these two destinations, which take about 90% of the total RMG exports.

The present trend
Similar to the ominous predictions on post-MFA period, there is a growing concern that China will quickly eliminate all competition and Bangladesh will face a major export setback in 2008 onwards. The reality may not be entirely so simple. As mentioned earlier, some of the export items from Bangladesh have been doing good business even before quota restrictions were imposed on China.

Main export items like T-shirts, sweaters, trousers and shirts continued to do good business in EU and USA even before quota was imposed on China after 2005 and the trend prevails. But export of woven shirts in EU is declining. Nevertheless, after the end of the first year (2005) of quota free business, Bangladesh was no.2 in T-shirts, no. 4 in men's shirts of cotton, no. 4 in men's trouser of cotton, number 2 in sweaters and no. 3 in cotton denim exporter in EU. This shows Bangladesh has a very strong position in these items, which covers more than 80% of total Bangladesh RMG exports to EU.

Among the items mentioned above, no country other than China in Asia was ahead of Bangladesh except for men's cotton shirt. A Trade Policy Brief of Centre for Policy Dialogue (September 2005) also concluded that for export of items where Bangladesh has revealed comparative advantage in the EU, the threat of market displacement by China is not immediate.

Issue of preferential margin
Many eyes are now on the outcome of the WTO negotiations on reduction in tariffs under the Non-Agricultural Market Access (NAMA). If it succeeds, there may be substantial reduction in the tariff for textile and clothing products among other items. LDCs like Bangladesh had been struggling hard to get duty free access for all products into the market of developed countries.

EU has already given that access in 2001 under Everything But Arms (EBA). Even before that Bangladesh has been enjoying duty and quota free access for its RMG exports to EU. But the GSP utilization, possible only through adhering to the rules of origin, had been very low in RMG exports.

The situation started improving tremendously in the knit exports in the last few years owing to the growth of strong backward linkage in that sector. But GSP utilization remained very low in the woven items, especially for shirts. The utilization showed a steady growth in the exports of trousers, albeit not yet reaching half of the total trouser exports. The EU duty for the RMG items of interest to Bangladesh is 12 percent. This means, European buyers do not pay any duty for more than 80 percent of knit items bought from Bangladesh, but they pay full duty for about 75 percent of woven imports from Bangladesh. However, for some items like cotton trousers, the rate of GSP utilization (duty free entry) is much higher than the average utilization rate in woven items.

About 35 percent of total exports of woven items (shorts and trousers of cotton) have a utilization rate of 40 percent in 2004. This asymmetrical position of preferential treatment of Bangladeshi RMG exports to EU makes it difficult to assess the impact of tariff reduction under NAMA. One has to keep in mind that European buyers pay 9.6 percent duty for a shirt or a trouser (under GSP) when buying from India, Pakistan, Morocco, Tunisia or other GSP beneficiary countries. After withdrawal of GSP, products from China enter with full duty from 1 January 2006.

But, European buyers continued, even after 2004 (when Bangladesh lost its position being the only major exporter with quota free status in EU), to import most of the woven items paying the full duty. It is also very difficult to ascertain if the great knit business in EU is caused by better preferential access or duty free entry or is it due to buyers' satisfaction on other factors including sourcing all inputs from one country. Another CPD paper (September 2005) expressed concern over possible preference erosion under NAMA and concluded that tariff reductions under NAMA will have diverse impact for Bangladesh's export to the EU and the USA. One may wonder if competitiveness of Bangladeshi RMG is overwhelmingly dependent on duty free access.

Obviously a positive answer would indicate negative impact on Bangladeshi exports to EU, at least for knitted items. However, it is difficult to reach a conclusive position for such an apprehension, if not looked at the issue on item by item basis.

Improved market access
Many people expressed frustration on not getting duty free access of RMG in the US market. Bangladesh Garments Manufacturer and Exporters Association (BGMEA) had, following the Hong Kong Ministerial, made a calculation on the possible quantum jump of exports to USA, if duty free access is allowed there. However, this will clearly be dependent on the rules of origin set by USA for RMG and, of course, also for other non-textile products.

Any projection of future exports under preferential access should be based on the possible application of rules like the Canadian 25% value addition, processing criteria of EU (use of locally produced fabric) and existing rules for countries where USA has already allowed duty free access. A high expectation has also been placed on the revision of GSP rules of EU. The European Commission is still working on the issue and it is unlikely to be applied before 2007.

While the debate is going on between the warring sub-sectors (BGMEA and BTMA) about the prudence of relaxing the rules, the GSP utilization rate for RMG in EU has reached 66 percent is 2005 from a mere 20 percent in 1997. Assuming duty free access with easier rule gives a boost to the RMG exports, especially for some specific woven items, it would only act as a short term advantage, if tariff on textile products go down radically in near future.

Labour standards: Achilles' heel?
The recent violent incidents and the labour agitation in the RMG industries in Bangladesh show that the RMG sector has serious problems in its flanks. Problems related to possible negative impact of post-MFA trade regime, market access, infrastructure, backward linkage and certain government policies had for some time clouded the ever present issue of the labour standards. The thunderous exposure of that issue has come as a surprise to many and perhaps offered an opportunity to resolve problems by all stakeholders together.

The problem is not unique for Bangladesh. Few months ago Vietnam's export processing zones and industrial parks witnessed wildcat strikes protesting low pay and poor conditions. According to ILO, only 10 percent of workers in the export sector are represented by a trade union there. The Vietnamese government is trying its best to improve the situation. The message is loud and clear, without enforcing core labour standards, no country can expect to have a sustainable growth in the export sector. This is truer for a world where voices of grievance do not remain confined to their national boundary.

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.