Even 5% US tariff is too much for apparel: CPD

Even a 5 percent additional tariff on the Freight on Board (FOB) price will be difficult for Bangladesh's apparel industry to absorb, especially because it comes at a time of surging energy costs, rising interest rates, and global economic uncertainty, according to a study by the Centre for Policy Dialogue (CPD) published today.

The impact will be especially severe for small and medium-sized enterprises (SMEs), which operate on razor-thin margins, warned CPD in the study titled 'Trump Reciprocal Tariffs and Bangladesh: Implication and Response'.

The study, jointly conducted by Mustafizur Rahman, Anika Tasnim Arpita, and Tanbin Alam Chowdhury, comes just days before a 35 percent reciprocal tariff is scheduled to take effect on Bangladeshi goods entering the US from August 1.

The US is Bangladesh's single largest export destination, with 19 percent of total apparel exports heading to the US. Ninety percent of these exports consist of garments and other textiles. Bangladesh maintains a hefty trade surplus with America—one that has drawn attention in Washington as the US seeks to rebalance its trade relationships.

The CPD study notes that the issue is not merely a trade concern but a geopolitical manoeuvre. It argues that the tariffs reflect Washington's broader strategic calculus, including geo-economic and geo-strategic realignments in the Indo-Pacific.

"Bangladesh will need to navigate all these complex issues by considering its trade interests with the USA and also by taking into cognisance the implications of its response for the country's bilateral relationships with other countries, its own geo-strategic priorities, and also its multilateral obligations, particularly as a member of the World Trade Organization," reads the study.

The paper criticises the government for not contesting the non-disclosure clause in the US-proposed tariff framework and for failing to mobilise a negotiation team inclusive of relevant stakeholders.

The study observes that, in spite of the softening of the stance by US President Donald Trump—indicating the reduction of the reciprocal tariffs from the initial 37 percent—businesses are already experiencing disruption, global supply chains are being adversely affected, and orders are being delayed or held back.

"These are being felt by Bangladesh as well. Brands and buyers are asking Bangladesh's producers and exporters for discounts. This is particularly pertinent for the apparel sector of the country," it says.

The brands and buyers are likely to try to split the additional tariff between themselves and producers and suppliers, the study states, adding that the relative share is not known as yet.

The paper also notes that this comes as Bangladesh is trying to pivot towards man-made fibre (MMF) garments, a growing segment in the US market. However, with buyers likely to split the cost of tariffs with suppliers, it is unclear how much of the burden will fall on Bangladeshi firms.

Adding to the challenge, Western buyers are tightening requirements in areas of compliance such as the environment, improving labour standards, and reduction of carbon emissions. Local enterprises and entrepreneurs are having to face this while dealing with the challenges associated with the upcoming LDC graduation, particularly in view of market access to the European Union.

The broader macroeconomic implications are sobering.

Like other global rating agencies, the initial assessment by Moody's indicates growing concerns regarding the possible adverse implications of Trump tariffs on the Bangladesh economy. Alongside Vietnam and Thailand, the report observes, Bangladesh is envisaged to be particularly affected due to its economy's higher reliance on exports to the US compared to other economies in the region.

The report further alerts that Bangladesh's banks are among the most exposed in the Asia-Pacific region to the US tariff increases, primarily because of the country's high reliance on garment exports.

"The tariff shock could exacerbate existing problems faced by Bangladesh's banking system, such as poor asset quality and low capital buffers, making the sector more susceptible to credit stress," CPD notes, citing observations of the global rating agencies.

The CPD study recommends setting up a strong negotiating wing to undertake the complex negotiations that Bangladesh will be required to handle as part of its LDC graduation strategy.