Key To Face 35% Tariff Challenge

Bangladesh faces higher tariff in the US market, Negotiations is on to reach a deal perfect.

Bangladesh has been given a revised tariff of 35% in the US market. 2% reduction is nothing compared to what its competitors face now: Vietnam 20% and Indonesia 32%. Luckily, Bangladesh still has room for negotiations till August 1. If both parties agree on terms and conditions ,this tariff may be farther lowered. Protecting this $8 billion market is crucial for Bangladesh. Otherwise, any shrink to market share will cast shadow over the current account balance.

Now it is not clear whether the total tariff to the US market is 35% or 50%. But I think the total tariff is 35%. Previously Bangladesh paid around 15% taxes to the US on exports.(But I think Bangladesh even paid more than that in earlier years). And Bangladesh maybe the only country in the South and Southeast Asia that pays a higher tax than other countries. Given the total tariff is 35%, it means Bangladesh has to depreciate its currency by 20% to retain its prevailing market.

There are many other ways to lower the production cost apart from depreciation. Introducing new technology is costly and requires investment and time. Another way is to provide extended credit (say for 5/7 years) to invest in new technology or to cope up the challenges emanating from the new tariff rate. However, depreciation is itself an incentive to the exporter.

Now the question is can Bangladesh afford a 20% depreciation? The latest BBS inflation data put a question mark on its credibility. Food prices and cost of living index did not register such a decline that translated into a 8.78% inflation rate. It maybe a deliberate move to lower the policy rate to get credit from banks that are still suffering from piling up of huge credit. If oil price is low and overall macroeconomic management such as tighter fiscal policy is maintained, then 20% or 15% depreciation may not pose serious inflationary risk.

A policy mix like extended credit , cheap electricity, introduction of new technology and depreciation could be the key. It will help us to chart the course to get rid of difficult situation if 35% tariff indeed stays forever.

Bangladesh still faces lots of hurdle in Chinese market with over $28 billion trade deficit. There is hardly any chance that the country will become an $8 billion export market in the next 4/5 years. The Chinese ambassador said to open China's market for Bangladeshi workers. But its labor market is not so open for allies like Cambodia, Vietnam , Laos,Myanmar ,Pakistan and other African countries. Why will it be an exception for Bangladesh? China could easily buy Bangladeshi knit items where Bangladesh has huge value addition. So far it shows less interest in it.

Pakistan itself is suffering from huge macroeconomic crisis. Chinese banks owe huge money to Pakistan. I watched a news report on NDTV two years ago that shows protesting Chinese workers protest over due pay in front of a bank that put itself into trouble after lending Pakistan money following govt's instruction. So it is the Chinese interest that led to the picture session of this Sino-Pak-Bangladesh formation which has very little materialistic reason to take off. Apart from Bangladesh, both the economies are command and control economy where govt decisions hardly reflect market reality. Interestingly, with both the countries Bangladesh sustains huge trade deficits. Is it the case that Bangladesh will suffer economic hardship where the two will continue to enjoy trade surplus? Economic reality should dictate over any political or strategic consideration.

There is another pitch from Chinese investors for more Chinese investments in the infrastructure sector. Pakistan has yet to reap the benefits from Gwadar investment and sustains macroeconomic crisis. We should remember it before accepting fresh Chinese investment in infrastructure project.

Retaining the US market and maintaining good relations with the West should be priority focus area of our international relations. If the West leaves us, China ,Russia and others will not be that cooperative with us.

On the flip side of this higher 35% tariff , there is something good too! It will thwart any move from other countries and vested quarter that will try to reexport items using made-in-Bangladesh tag.

There maybe some unease for one year but it will be okay if we go for 20% depreciation amid 35% tariff. We endure the pain of pass through effect from 40% depreciation for two years. Our sufferings may be prolonged for one more year. But we have to do it for the sake of the economy if the last round of talks yield no improvement.