What can Bangladesh expect from US buyers in the post-MFA world?

The importance of the American lobby can be seen clearly from the early days of T&C trade negotiations. In 1973, after muscling in to produce the pre-cursors to the MFA, the US proposed to negotiate the MFA under GATT, in order to win the support of their T&C industries for the 1974 Trade Act. The MFA was intended to provide "temporary" protection to the domestic T&C producers in developed countries as well as to give time to the developing exporting countries to make "orderly" arrangements to enter the developed country markets. Under the Uruguay Round, MFA IV was subsumed under the WTO's Agreement on Textiles and Clothing (ATC) and is set to be phased out completely on January 1, 2005.

The key responses of exporting countries have included full quota utilisation, quality upgrading, increased value addition, product diversification, market diversification, foreign direct investment, overseas subcontracting, quota hopping, quota rent manipulation, and the development of backwards linkage industries. Most of these impacts can be identified in Bangladesh, in some degree or the other.

Trade liberalisation under the ATC has been difficult, given the grudging changes made by the importers, who often cited the vulnerability of their domestic T&C industry, as the reason for keeping doors closed. However, whether they want it or not, the MFA phase out is going to happen. The strategy taken by US and EU buyers after the phase-out is crucial for the Bangladeshi RMG sector. The buyers' strategy will be influenced by impacts on their domestic markets. So what can we expect?

The impacts of the phase-out on the US buyers are hard to predict, since so much of the liberalisation has been left until the last minute. According to the US International Trade Commission (ITC 2004), after the MFA is phased out, China is supposed to be the supplier of choice for most US large apparel companies and retailers, however, it is tempered by the uncertainty of the use of the textile specific safeguard provisions contained in China's WTO accession protocol. US importers plan to continue trade relations with other countries, to minimise risks of sourcing from only China. India is the most favoured alternative to China's competitive advantage, which is a very strong position. Pakistan and Bangladesh are expected to offer their competitive advantages in producing basic items such as knitted tops and woven cotton shirts. Countries under the Preferential Trade Agreements (PTAs) such as Caribbean Basic Economic Recovery Act (CBERA) would be a major source of RMG supply, especially if Central American trade agreement is reached, allowing regional (e.g. Mexican) or third country (e.g. Asian) fabrics. Among the ASEAN countries, Vietnam (not subject to WTO rules, since it is a non-member) and Indonesia (although politically risky for the US) are considered alternatives to China and India.

Longstanding trade relationships between individual firms and US importers will play a major role, as well as the efficiency, flexibility and experience. A large number of countries will become "second tier" suppliers of RMG to the US to meet the needs left out by "first tier" suppliers. For example, Mexico and CBERA countries will remain favoured due to their geographical proximity to the US markets.

At the policy level, not everybody shares enthusiasm for trade liberalisation, and this will affect buyer inclinations. The US Department of Commerce is very active in representing the interests of US industry abroad. In order to ensure that the US RMG industry has the opportunity to adjust to ATC, the US Congressional Textile Caucus has opposed efforts by foreign textile suppliers to accelerate quota integration. They have continued their efforts to gain reciprocal market access into developing country RMG markets and rejected numerous trade concession requests. They have initiated a safeguard mechanism to protect against surge of Chinese products after 2005. They have used the "developing country export competitiveness clause" to eliminate India's export subsidies. Aggressive expansion of RMG exports from the US is being sought through identifying subsidies that may be improperly provided to foreign RMG exporters and provision of Trade Adjustment Assistance to domestic apparel industry.

So how will buyers behave? A number of factors are determined by the US ITC 2004 report as likely to determine new patterns of trade by the US retailers after the ATC. These factors will also determine locations and sourcing decisions.

US buyers are likely to concentrate on four or five countries that are politically and financially stable. Future sourcing will depend most importantly on which countries offer best facilities and logistical advantages. Subsidies and tax credits that work in favour of the US retailers, free trade zones, real exchange rates, etc. are all important factors. Good human rights records, minimum wages, no child labour, and good working conditions will also be counted. The US buyers are concerned about the safety of their own personnel and their shipment, including compliance with the local laws and with international health and labour issues.

On average it takes about 28 days to ship products from Bangladesh and Sri Lanka to the US, while from Mexico or Canada it takes only 2 days. RMG suppliers who are geographically closer to the US markets enjoy the ability to ship orders quickly and US firms will favour these suppliers. Reliable delivery and short lead times are crucial here. The port facilities in the supplying countries also have to be highly efficient.

RMG suppliers that are not under quota restriction and/or benefit from PTAs are valued over the quota-heavy producers of China and some Asian countries. However, post MFA these preferred suppliers will have more competition from China and Asian countries. The competitiveness of these countries will depend on the "rules of origin" and accompanying customs regulations that enable the implementation of the preferential trade policies.

Low labour costs and industrial upgrading helped the early RMG firms move rapidly from basic product manufacturing to brand name manufacturing. Previously East Asian suppliers fulfilled these criteria. India and China are likely to be the clear favourites in this case. Reputation for quality service and on-time delivery, existing business networks (supply chain linkages, good relationships with US customers), flexibility and variety in products, and lead-time flexibility are important factors. These factors will make or break post-MFA RMG firms. Availability of cheap skilled labour, compensation rates, and the availability of qualified managers and middle management will provide important competitive advantage.

Sourcing high quality and cost competitive raw materials from local or regional sources greatly shortens RMG suppliers' lead times. As US buyers rationalise and consolidate their purchasing behaviour after MFA, the degree of higher value added will be an important factor. Vertical integration of firms will become the desired structure.

On the level of the US retailing firms, the importance that they assign to these factors will depend on its corporate philosophy, import volume, product mix, risk tolerance, and existing relationships with suppliers. At the country levels, these factors include business climate, infrastructure, proximity, preferential access issues, and availability of low cost skilled workers. At the level of the RMG suppliers, these factors include cost and availability of labour, cost and quality of raw materials, and the efficiency and flexibility to meet changing retailer demands.

Given these demands and expectations of US buyers from their RMG suppliers after MFA phase-out, it is not difficult to ascertain what the Bangladeshi RMG industry has to do to take advantage of the capabilities it already has. It is also not difficult to identify the gaps that still need to be addressed, and that is a topic best discussed separately. Bangladeshi firms have to overcome their passive marketing strategies and diversify into making higher value added specialised products. The RMG firms must meet non-tariff hurdles such as labour standards, social accountability, and environmental clearance requirements. Suffice to say that the government has a major role to play here. Together, they must overcome the image of Bangladesh as good for supplying only cheaper items with low profits. Regional trade pacts and foreign trade agreements must be more aggressively pursued by the government on behalf of the RMG industry, since it is not prudent to depend on the US market to this extent, given the prevailing political climate.

Shahpar Selim, MPhil, Department of Geography and Environment, London School of Economics, is currently working on her PhD.