The Rise of Bangladesh’s Textile Trade

Rayyan Anees| International Business – Harvard Summer School’13

This presentation intends to discuss the meaning, need and the types of trade in context to Bangladesh’s rise as a textile manufacturing powerhouse.

What is Trade?

The action of buying and selling goods and services. – Oxford Dictionary

Generally takes place in a market where there is a demand for the goods and services being offered.

Also known as commerce or a financial transaction.

Bilateral v/s Multilateral

Why do nations trade with each other?

When a country does not have the capacity, on its own, to satisfy its needs and wants.

Classic example: Saudi Oil v/s American Wheat!

Barter

Mercantilism

Free Trade (Absolute v/s Comparative Advantage)

National Competitive Advantage

Bangladesh founded in 1971 by Sheikh Mujibur Rehman

The new government believed in socialism and hence nationalized all industries.

Some facts about Bangladesh…..Population of 150.5 million as of July 2011

Labor force of 75.42 million

31% of the general population below the poverty line

Unemployment < 5%

GDP growth 6.1% in 2012

GDP per capita $2000 in 2012

Inflation @ 8.69% (2011-2012)

One of the most densely populated countries on Earth!

Bangladesh’s Economy – A Timeline

1971 – All industries nationalized

1975 – Government encouraged private sector participation

1980s – Economic progress + privatization of state owned enterprises

2013 – Forex reserves surpassed US$13 billion

Texti

le

Sect

or Public

Sector

Handloom

Private Sector

Growth in Bangladesh’s Ready Made Garment Industry (US$ Billions)

2006 2007 2008 2012$0.00

$5.00

$10.00

$15.00

$20.00

Textile Exports

Textile Exports

Factors that benefit Bangladesh’s Textile Industry Abundance of cheap labor – 3.6 million employed in the textile industry with a

minimum wage of $60 per month.

Abundance and access to natural resources like water.

Preferential treatment by the US & EU – No import duties or tariffs.

Many international retailers wishing to diversify their supply base primarily due to the rising labor costs in China and otherwise, prefer Bangladesh.

Government is very liberal in terms of granting work permits.

Tax free import of raw materials and machinery.

No restrictions on the repatriation of profits and investment.

Challenges apparent Growing discontent amongst workers, a fact that has repeatedly been signified by

protests.

A significant portion of the 3 billion yards in fabric required annually to sustain the textile industry is imported from countries like India, China, Taiwan, Hong Kong, Thailand and Singapore.

Local spinning mills produce low quality yarn.

With over 5000 textile manufacturing units operating in the country, Bangladesh has failed to comply with international labor safety standards.

This compliance failure is evident by the recent tragic events that killed over a thousand workers in one particular factory.

Textiles and RMGs account for 80% of the export and employ 45% of industrial workforce.

Compliance Issues

• On April 24 2013 a factory building collapsed and killed over 1100 workers.

• The factory is owned by a politician who is related to “Awami League” the ruling party.

• The building was built using inferior building materials and signifies the lack of regulatory compliance on part of the government.

• Earlier in November 2012 a factory fire killed 112 workers.

• Failure can be traced to lack of institutional development.

• Obama administration has announced to revoke the trade privileges currently enjoyed by Bangladesh.

Theories and types of Trade

The Barter System

The oldest form of trade known to man. Goods are exchanged in return for other goods and/or services. Was common before the advent of paper currency.

Mercantilism

This idea developed in England in the mid 16th century when gold and silver were used as the medium of exchange.

The basic idea is to promote exports and restrict imports in order to amass gold and silver in order to increase the national wealth.

The English mercantilist writer Thomas Mun saw no virtue in trade and advocated government tariffs and quotas on imports and subsidies on exports.

Mercantilism is criticized for being a “zero sum game” where one nation’s gain results in other nation’s loss.

China is considered to be following a Neo-mercantilist path by amassing economic & political power through trade surpluses.

FREE TRADE

Absolute Advantage According to Adam Smith, countries

should specialize in production of goods in which they have an absolute advantage.

A country should never produce goods that it can buy at a lower cost from other countries.

Comparative Advantage David Ricardo argues that the potential

world production is greater with unrestricted free trade as opposed to restricted trade.

It reinforces the absolute advantage theory.

The Heckscher-Ohlin theory argues that competitive advantage arises from national factor endowments.

Raises purchasing power and leads to consumer surplus.

Critique on free trade

When low cost goods are imported from other countries it results in loss of employment in the local manufacturing industry.

Paul Samuelson argues that the lower cost for the US consumer might not be enough to outweigh the wage loss.

Samuelson also fears that by the virtue of free trade, poor economies would be able to employ resources efficiently and eventually in the long run, have an educated workforce that may drive an inward migration to the United States – burdening the economy.

A lot of this critique is both subjective and ambiguous.

Some analysts have dismissed Samuelson’s fears by counter-arguing that the idea of India and China educating 300 million people such that they take over all jobs is far fetched.

National Competitive Advantage:Porter’s Diamond

Factor Endowments

Supporting Industries

Firm strategy, structure & rivalry

Demand Conditions

Summary• Bangladesh went on the path to

becoming a socialist economy after independence.

• Early economic crises made the government encourage private enterprise and privatization.

• Transformation towards free market and an environment conducive for business saw an increase in trade and FDI that has resulted in 16 million people being rescued from below the poverty line in the last decade.

• Today Bangladesh is still a mixed economy however it believes in free market principles.