Tuesday, 13 December 2011
Bangladesh should lose its duty free concessions
Bangladesh's garment makers have formed a cartel that's keeping foreign garment makers out because foreign businesses pay their workers too much. And European taxpayers are forking out at least €1.4 billion to encourage them.
Bangladesh is currently the country the world's garment buyers want to buy from. With abundant cheap labour and duty free access to the EU and Japan, most of the time it's the cheapest place on earth to make clothes in. The best place to do that is in one of its Export Processing Zones (EPZ). But they're close to full – and the Bangladesh government requires foreign investors to become members of either the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) or the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) to export garments made outside the EPZs.
Only the BGMEA and BKMEA will no longer accept foreign members. Why? In the words of BKMEA President Salim Osman "foreign investors might create workers' unrest because of the mismatch in wages and benefits that the local and foreign units offer to their respective workers." Foreign investors, in other words, pay more than the peanuts Osman does. Probably give them the odd day or two holiday, or make sure they're fed properly. And he's determined to keep meddling foreigners out.
Now Osman's words ought to be made compulsory reading, of course, for fatheaded activists yammering on about "evil multinational corporations". Bangladesh certainly isn't the only country where foreign factory owners offer substantially better employment terms than local ones do. It's just the only country where local factory owners are stupid enough to admit the fact publicly. And it's the only country where they're allowed to freeze out companies who might pay workers a decent wage.
All of which is bad enough – but the BKMEA and BGMEA are able to do all this only because EU and Japanese taxpayers don't just subsidise them, but have just changed their rules – to the detriment of Bangladeshi spinning and weaving workers – to make it easier for them. The EU imported €11.7 billion of clothing from Bangladesh in 2010, and would have received €1.4 bn if Bangladeshi clothes were subject to the same import duty as most other countries. They aren't: indeed Europe and Japan changed their rules this year to allow clothes made in Bangladesh from Chinese yarns or fabric to be duty free. Bangladeshi spinners and weavers – not to mention their workers – were up in arms, of course, as their factories were closed and their workers lost their jobs. But the perfectly reasonable argument went that there were a lot more jobs in garment assembly than in spinning or weaving, so the boom in garment making would easily outweigh the damage to spinning or weaving.
It never crossed anyone's mind that Bangladesh would refuse to allow foreign owners to invest in their investment-desperate country.
And something so absurd didn't cross the mind of India's Prime Minister in October, when he relaxed Indian import duty on Bangladeshi clothes. Quite the opposite: the moment he announced the decision his office was swamped with Indian protests from people assuming Indian factories would immediately switch investment to Bangladesh. For the very good reason that dozens of Indian garment companies were saying they were getting on the next plane to Dhaka to do just that. The BKMEA and BGMEA's reaction to this boom in interest was to repeat, yet again that they didn't want new factories and they certainly weren't going to let any foreigner build one.
Right now the Bangladeshis' intransigence is winning. Just two new garment making companies have been created this year, according to the country's official Business Registrar. Letters of Credit to import textile equipment into Bangladesh were 25% lower in the July-October quarter than a year earlier. We can find not a single example of an Indian or Pakistani manufacturer in the past two years moving to Bangladesh. The job losses in spinning and weaving stemming from the European and Japanese rule changes have all happened: we struggle to find the consequential gains in apparel assembly jobs.
Rich countries give poorer countries trade concessions to help them develop their economies – but that works properly only if other countries don't get the concession. The growth in Bangladeshi garment sales isn't coming at the expense of European or Japanese jobs: it's coming at the expense of countries (like China, Vietnam or Indonesia) that don't shut their doors to garment companies prepared to pay a decent wage. And no-one dreamt for a moment that a government would hand a group of producers the right to decide who's allowed to produce. Or that, as Osman seems to believe, producers would be allowed to keep competitors out for paying a wage their workers might be able to live on.
Banning foreign investment in an industry destroys the purpose of giving trade concessions. Sooner or later, Europe's and Japan's voters will find out how their subsidies are being misused and will force the withdrawal of import concessions from Bangladesh. There's a very easy way for the Bangladeshi government to avoid this: remove the power it's given the BKMEA and BGMEA to decide who's allowed to compete with their members.