RMG exporters to shoulder EU tariffs in post duty-free era

Bangladeshi apparel exporters are likely to absorb much of the future EU tariffs by cutting their own prices once duty-free access ends, according to a new study that warns of pressure on profits and long-term competitiveness.

If the EU imposes a 10 percent tariff on Bangladeshi garments after the end of trade preferences, exporters will need to cut their pre-tariff export prices by about 4 percent to remain competitive, according to the study on tariff and exchange rate pass-through in apparel exports to the EU. Tariff pass-through refers to the extent to which exporters transfer new tariffs to buyers in their selling price.

This means that nearly 40 percent of the tariff cost would be absorbed by exporters themselves, rather than being fully passed on to European buyers or consumers.

The study, presented at an event in Dhaka organised by the Research and Policy Integration for Development (RAPID) in collaboration with the International Growth Centre (IGC), examines how exporters are likely to respond to higher tariffs and exchange rate movements after Bangladesh graduates from least developed country (LDC) status in 2026.

Duty-free and quota-free access to the EU under the Everything But Arms (EBA) scheme is set to end in 2029, following a transition period.

Once preferences expire, apparel exports, more than 90 percent of which consist of low-value garments, could face Most Favoured Nation (MFN) tariffs of about 12 percent.

Using a counterfactual pricing model based on comparator exporting countries, the researchers find that tariff pass-through is likely to be incomplete in such a scenario.

Instead of transferring higher tariffs to buyers, exporters are expected to lower their own prices to protect market share in the EU, a strategy that may help sustain export volumes in the short term but would significantly compress profit margins.

The study cautions that prolonged price absorption could weaken firms' capacity to invest, upgrade technology and move into higher-value segments.

The research also suggests that exchange rate depreciation will provide only partial relief after preference erosion.

"About half of changes in the exchange rate are passed through to export prices, suggesting that currency depreciation alone cannot neutralise the impact of higher tariffs," said Md Deen Islam, research director of the RAPID, while presenting the keynote paper.

This is particularly relevant as Bangladesh has moved toward a more market-based exchange rate regime since mid-2024, increasing volatility for exporters.

Despite recent nominal depreciation of the taka, Bangladesh experienced a prolonged period of real exchange rate appreciation between 2012 and 2022, making its exports progressively more expensive relative to competitors such as China, Vietnam and Cambodia, said Islam.

Combined with rising tariffs, this trend has further squeezed exporters who already compete primarily on price.

The study identifies significant variation across product categories, with woven garments emerging as more vulnerable than knitwear.

At the event, Munir Chowdhury, national trade expert of the Bangladesh Regional Connectivity Project-1 under the commerce ministry, said non-tariff barriers can often be more restrictive than tariffs, underscoring the need for early preparation.

He warned that growing requirements related to human rights, labour standards and environmental, social and governance (ESG) compliance could increasingly shape the future sustainability of Bangladesh's export markets.

Echoing the same, Badrun Nessa Ahmed, senior research fellow at BIDS, said Bangladesh's competitiveness in the EU market depends not just on price but also on compliance, standards, logistics, and branding.

She noted that Bangladesh has 4-5 years before full preference erosion, giving time for policy and firm-level adjustments. Some larger firms are already investing in innovation, automation, and market diversification.

Ahmed stressed that the apparel sector must shift from low-priced products to higher-value segments, as preferential access cannot last indefinitely, and LDC graduation is inevitable.