Five Asian countries—Bangladesh, Cambodia, Lao People’s Democratic Republic, Myanmar and Nepal—graduating from the least developed countries (LDCs) category will need to take measures to bolster the textile and clothing (T&C) sector as they graduate from this category, particularly in response to the economic impact of COVID-19.
The T&C sector is a major industry and will be significantly impacted by graduation, says a joint report by the World Trade Organization (WTO) and three UN bodies titled The Textile and Clothing Sector in Asian Graduating Least Developed Countries: Challenges and Ways Forward.
Important extracts
Unilateral trade preferences granted by many developed and several developing countries–including duty-free quota-free market access and more liberal rules of origin (RoO) requirements–are considered to be the most prominent LDC-specific international support measures (ISMs). T&C products have traditionally been subject to higher tariffs in many countries. Consequently, LDCs’ T&C exports enjoy some of the highest preferential margins available. While LDCs generally lack manufacturing capacity, preference-driven trade in T&C products has acted as a catalyst for Asian graduating LDCs to break into manufacturing activities.
After graduation, LDCs will lose LDC-specific trade preferences. This could result in considerable changes to their tariff preferences and RoO requirements, especially in the absence of alternative trade arrangements such as Generalized System of Preferences (GSP) facilities for non-LDC countries and bilateral/ regional free trade agreements (FTAs). The provisions available for graduated countries can vary depending on their participation in relevant FTAs and/or ability to satisfy any qualification criteria for preferences.
How things are expected to change: GSP regulations
- Tariff preferences available for T&C exports from non-LDCs or graduated LDCs in most preference-granting countries are significantly lower than those granted through LDC-specific schemes, unless there are bilateral or regional trade arrangements in place, including FTAs.
- In the specific case of the European Union, graduating countries have the option to apply to the European Union’s Special Incentive Arrangement for Sustainable Development and Good Governance, Generalized Scheme of Preferences Plus (GSP+), upon graduation.
- As per the proposed European Union GSP 2024–34, Bangladesh is found to be the only Asian graduating LDC whose T&C exports could potentially be subject to the European Union’s safeguard measures, resulting in their removal from GSP+ preferences
- Post-Brexit, the United Kingdom has applied its own GSP scheme since the beginning of 2021, maintaining LDC preferences comparable to those in the European Union. The United Kingdom GSP incorporates three schemes: the Least Developed Countries Framework (similar to the European Union’s Everything But Arms programme), the Enhanced Framework (similar to GSP+), and the General Framework (equivalent to Standard GSP).
- In the Chinese market, T&C exporters from Cambodia, Lao PDR and Myanmar will continue enjoying significant trade preferences through the ASEAN-China FTA and the Regional Comprehensive Economic Partnership (RCEP) and to the Indian market through the ASEAN-India FTA.
- Preferential access to the Japanese market for duty-free treatment of T&C products for the targeted LDCs largely depends on their membership to the Association of South- East Asian Nations (ASEAN). Bangladesh and Nepal will be subject to the GSP or MFN rate in their exports to Japan, as they are not part of ASEAN and therefore do not benefit from the ASEAN-Japan Comprehensive Economic Partnership Agreement (CEPA).
- Bangladesh will have to forgo both India’s and China’s LDC schemes, which currently cover more than 97 per cent of tariff lines, including those of textile and clothing items.
- Graduating LDC exporters are not expected to be impacted in the United States by their change of LDC status. This is because the United States’ preferential treatment is based on the country’s own list of GSP-eligible beneficiaries and T&C items from Asian LDCs are excluded from GSP facilities.
- While graduation will cause preferential regimes to change, most Asian graduating T&C exporting LDCs seem to have alternative preferential arrangements in place, including free trade agreements, to avoid any major tariff hikes on their exports to the most important market destinations.
How things are expected to change: RoO changes
- Graduation from LDC status will also mean graduating countries face stricter RoO to qualify for trade preferences under the GSP or regional trading arrangements, particularly for their clothing exports. Since the graduating Asian LDCs mostly operate at the CMT level, adding higher domestic value-added content in meeting stricter RoO post-graduation will be a major challenge.
- Reversing the European Union’s RoO provisions for graduating LDCs could result in limited preference utilisation. LDCs’ clothing exports have been the main beneficiaries of RoO simplification, particularly in trade with the European Union and Canada.
- As most clothing items are not included in Canadian GSP for non-LDC developing countries, graduating LDCs will be subject to MFN tariffs, in which case complying with RoO should not be a major concern.
Scenarios expected to arise
- Bangladesh’s overwhelming dependence on T&C exports bound for markets with high preferential tariff margins means the potential impact of its LDC graduation is likely to be much greater than that of other graduating LDCs. As tariff hikes reduce its competitiveness, an ex-ante analysis using a partial equilibrium model suggests graduating Asian LDCs could experience loss of exports ranging from as much as 14.3 per cent for Bangladesh to just 1.45 per cent for Lao PDR.
- As Asian graduating LDCs seem to have become stuck in the low-value manufacturing segments of T&C global value chains, the loss of trade preference would put serious pressure on their competitiveness and export prospects. As Asia has become a global centre for textiles and clothing production, LDC-related duty-free schemes and preferential trade agreements have facilitated the connection to international and regional T&C production networks.
- High value-added activities such as design, marketing and retail are undertaken by global big brands or importers in developed countries.
