The Pulse

Is Bangladesh Winning in the US-China Trade War?

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The Pulse

Is Bangladesh Winning in the US-China Trade War?

The implications for Bangladesh of the trade war are significant, if Dhaka can seize opportunities and avoid the pitfalls ahead.

Is Bangladesh Winning in the US-China Trade War?

In this April 19, 2018 photo, trainees at a garment factory work at Snowtex garment factory in Dhamrai, near Dhaka, Bangladesh.

Credit: AP Photo/A.M. Ahad

As the U.S.-China trade war intensified, pundits on both sides of the Pacific and elsewhere are calculating: Who is the real winner? Indeed, it is not China or the United States, but countries like Bangladesh, Vietnam, and Chile that could benefit from the widening trade dispute between the world’s two biggest economies. The impending effect of the trade war on supply chain dynamics and investment patterns could help these countries emerge as potential winners of the conflict.

For Bangladesh, China and the United States have been long-time, stable trade partners. The volume and values of trade are very significant with both countries. However, the nature of trade with both countries is different. Bangladesh’s top import partner is China, with Bangladesh importing over $15 billion in Chinese goods, as of 2017. Meanwhile, the United States is the second largest destination for Bangladesh’s exports, taking in more than $5.8 billion in 2017 (Germany was the largest destination at just over $6 billion).

As the Asian Development Bank’s Chief Economist Yasuyuki Sawada argued, Bangladesh’s exports can be expected to “increase by $400 million” amid the trade war.

The garment sector, which accounts for 80 percent of Bangladesh’s total exports, is expected to benefit the most. As the trade war escalates, American retailers are placing more work orders in Bangladesh in an effort to offset increasing tariffs on goods manufactured in China. According to the Bangladesh Foreign Trade Institute, Bangladesh enjoyed a 6.46 percent growth in market share in the U.S. market during the first three quarters of 2018.

In 2012, a report by McKinsey forecasted that as ready-made garments from China declined, Bangladesh would be the next hot spot, and the market would triple in value by 2020, up from $15 billion in 2010. Even though this forecast was about China’s gradual phase out from labor-intensive industries to higher value-added, high-tech, capital-intensive manufacturing sector it seems that trade war is accelerating the growth of Bangladesh to achieve just that.

To avoid higher tariffs, factories are relocating from China to elsewhere in Asia. Bangladesh has more competitive advantages than its competitors such as Cambodia and Vietnam. Due to the presence of strong unions, setting up factories in Cambodia is more challenging. Moreover, in contrast to the 160 million Bangladeshis, Cambodia has a population of just 16 million, which gives Bangladesh a competitive edge in this labor-intensive industry. Due to higher wages and production costs, Vietnam also looks less attractive to investors. The minimum wage in Bangladesh is currently $95 per month, which is almost half the $182 per month it is in Cambodia and $180 per month in Hanoi and Ho Chi Minh City.

Bangladesh can also benefit by increasing imports from the United States. According to the U.S. Farm Bureau, soybean exports to China declined by 97 percent after China’s tariffs on U.S. soybeans came into effect. At the moment, Bangladesh imports 2 million tons of crude vegetable oil, of which 30 percent or 600,000 tons is soybeans. Currently, 98 percent of those soybeans comes from Argentina, Paraguay, and Brazil. If the country can redirect its supply chain from Latin America to the United States, it may have the potential to supply oil to consumers at cheaper prices without sacrificing profits in the long run.

Moreover, being the 51st largest trading partner of the United States, Bangladesh enjoys a $4 billion trade surplus. One of U.S. President Donald Trump’s hobby horses is going after trade surplus countries. By importing soybeans from the United States, Bangladesh can benefit both by getting goods at a cheaper rate and reducing the trade deficit; this may ultimately contribute to stronger bilateral relations. Furthermore, Bangladesh and other low-income countries in South Asia face U.S. duties of 15.2 percent of the total value of exports, which has a possibility to ease if the United States wants to increase imports from these countries to minimize its gap from China.

The majority of Bangladesh’s steel demands come from importing scrap iron from United States and its domestic shipbreaking industry. However, the U.S. imposed a 25 percent tariff on all steel imports in March 2018, in efforts to revitalize its declining steel industry. This action led U.S. suppliers of scrap iron to store their reserves in anticipation of higher tariffs. Consequently, Bangladesh has seen a significant rise in the price of rods, an important product required for its many infrastructure projects.

In 2017, Bangladesh scrapped 25 percent of the ships dismantled worldwide. In light of growing development projects, the country might craft an industrial policy to develop its shipbreaking yards, hoping to sourcing a greater amount of cheaper steel domestically, which is already providing more than half of the country’s steel supply.

On the purview of a trade war, although Chinese policymakers are seeking to tighten capital flows in hopes of preventing a depreciation of the yuan, China’s increasing involvement in various projects in Bangladesh may mean constraints will not be as effective. Additionally, Bangladesh has seen an increase in FDI from China higher than forecasted, through factory relocations, especially in the growing export processing zones (EPZs).

Furthermore, as a member of Belt and Road Initiative (BRI), it is more meaningful for China to increase investment in Bangladesh in those sectors which are affected in China by the trade war. Beijing’s support of Bangladesh was evident in the 27 agreements for investments and loans signed by the two countries – in the amount of $24 billion – when President Xi Jinping visited in 2016. Net FDI from China into Bangladesh exploded after Xi’s visit. It increased to $506 million in the 2017-18 financial year, up from only $68.5 million in 2016-17, according to the Bangladeshi newspaper The Financial Express.

Putting all this together, it appears that the trade war between the United States and China opened for Bangladesh a window of opportunity. However, whether the country can reap the benefits will depend on a host of factors. Bangladesh is struggling with crumbling infrastructure, weak rule of law, and a poor business environment. Many observers have also been alarmed at the Bangladeshi government’s excessive and reckless borrowing from China and worry it may put the country in a longer-term debt trap, like other countries.

It is therefore critical for Bangladesh to work on a favorable policy regime to seize new opportunities as they come, and to provide enabling conditions for more foreign direct investment—while also avoiding unintended risks and consequences.

Anu Anwar is an Affiliate Scholar at East-West Center, and a Fellow at the Pacific Forum Young Leaders Program, Hawaii, United States.