IN 2017, China, the European Union, Bangladesh and Vietnam were the world’s top four apparel exporters. They together accounted for 75.8 per cent of the world’s market — growing from 74.3 per cent a year earlier and a substantial increase from 68.3 per cent in 2007. Globalisation has transformed China into the ‘world’s factory.’ Eighteen years ago, developed and newly industrialised countries moved their labour-intensive, low-tech industries to China. It is the world’s largest exporter of apparels with shipment worth $158.4 billion in 2018.
China is now moving towards advanced technology and higher wage for workers. In addition, the mounting compliances, social insurance commitment, stringent environmental checks and other pressures are steadily increasing the production cost. The recent US-China trade war and sanctions over Chinese goods is another reason of a prompt re-location of factories from China to other countries.
The onset of the trade war prompted a growing number of foreign companies to leave China and to move to Southeast Asia. China is losing its competitive edge. Although foreign businesses started leaving China years ago because of soaring costs, the trade war greatly accelerated the process.
Foreign companies and even the Chinese ones can use industrial automation as a strategy to offset high labour costs for some of the products, but low-tech and labour-intensive industries, such as the apparel industry, rely heavily on skilled labour. Low-tech and labour-intensive industries are not complicated to set up and workers are easy to train, making it feasible for a foreign company to move production to another country. These factors have pushed a large number of foreign enterprises to move out of China.
The head of global research at Standard Chartered points out that according to a survey by South China Manufacturing Centre in 2015, 11 per cent of the factories in southern China reportedly planned to move to ASEAN countries as well as India and Bangladesh to avoid increasing costs. The fact that these countries have a free-trade agreement with China under the fold of the Association of Southeast Asian Nations is an added advantage. According to a survey by the American Chamber of Commerce in China, 35 per cent of the companies operating in China have moved or have considered moving their production bases to other countries, including Southeast Asia.
According to a report published in September 2018 by Japanese financial newspaper Nihon Keizai Shimbun, many Chinese factories are transferring their assembly lines abroad to avoid the high tariffs imposed by the United States. Taiwanese factories in China that manufacture shoes for Nike, Adidas, Under Armour and other brands have moved their production lines to Southeast Asia and India. Chinese manufacturing companies, whose products range from bicycles, tyres, plastics to textiles are also moving out of China. Kerry Logistics Network Ltd, Asia’s largest shipping and logistics company based in Hong Kong, is now moving its production lines from China to Malaysia, Vietnam, Myanmar and even Laos. An increased number of manufacturing companies have set up their production lines in Indonesia, the Philippines and Malaysia. These three Southeast Asian countries have one thing in common — they are close to Australia.
It is true that Bangladesh has many competitors in the region. Still, the country appears to gain from the trade conflict between the US and China. The chief economist of the Asian Development Bank, Yasuyuki Sawada, calculates that the gain could be 0.19 per cent of the GDP or $0.4 billion as China’s exports will decline after the US tariff measures and there will be relocations of productions.
With one of the lowest minimum wages in Asia, Bangladesh is an apparent choice for apparel importers looking for lower production costs. Bangladesh is the world’s second-largest apparel exporter, with a 6.4 per cent share. Vietnam comes third with 5.8 per cent. Wages in Vietnam are less than a half of wages in big Chinese cities such as Shanghai and Guangzhou.
The expected gain will, however, not be automatic as Bangladesh will need to compete with others, because other Asian countries will naturally try to draw benefit of the trade war situation between the United States and China. As China is expected to slow down and other countries can replace China’s exports by expanding their own with better logistics and other services along with the free-trade agreement, China facilitates investment and sourcing raw materials. ASEAN countries and India have free-trade agreements with the European Union and the United States, facilitating duty-free export to the largest buyers of apparel products.
The ASEAN countries also have limited low-cost and unskilled worker suitable for apparel factories but Bangladesh has readily available cheap labour. The investors are now focusing on shifting their factories to Myanmar and Bangladesh. Some Chinese apparel companies want to set up factories under joint ventures in Bangladesh as they see the country as a competitive destination for plant relocation amidst the raging US-China trade war and the rising cost in the world’s second largest economy.
American apparel buyers are also diversifying suppliers out of China. US-bound apparel exports from Bangladesh saw a substantial growth in the current financial year. In July-September 2019, export earnings grew by 14 per cent. According to an industry association, Vietnam’s apparel and textile exports climbed by 16 per cent to a record $36 billion in 2018 and accounts for more than 10 per cent of Vietnam’s total export earnings.
The reasons for the change include the lack of a skilled labour in Chinese textile and apparel industry, the rising cost of production, shifting focus of industrial investment to the information technology sector and over-investment in Vietnam and Cambodia where labour costs are lower. Chinese textile and apparel industry owners have invested heavily in neighbouring Vietnam and Cambodia in the past two decades. Labour costs are a major consideration for any labour-intensive product such as footwear and apparel. The cost of rending industrial land on a long-term lease in a Vietnamese industrial park in 2018 increased to $90 per square metre (10.76 square feet) from $60 to $70 in 2017. And the monthly rent for existing factory buildings in industrial parks near Ho Chi Minh City has risen to $4 per square metre from $3 in 2018. In comparison, production cost is still low in Bangladesh as wages of workers is below $100.
China is now also trying to shift the low-cost, labour-intensive sunset industries to Myanmar and Bangladesh. The Chinese are thinking of establishing manufacturing plants in Bangladesh with potential partners although they expressed concern about higher lead time, poor infrastructure, corruption, etc in the Bangladesh apparel sector. So far, Bangladesh has not allowed foreign investments in basic apparels, limiting their presence to high-end and value-added textile and apparel items.
Minimum wage in Bangladesh is half of India’s and less than a third of China or Indonesia’s. Cambodia, Pakistan and Vietnam are other apparel exporters taking advantage of extremely low labour costs. The ‘low-cost workers’ failed to attract reasonable foreign direct investments. Myanmar is now Bangladesh’s new competitor in the apparel sector.
Taking the advantages that ASEAN members and India are also under considerations of Chinese investments, Bangladesh should sign free-trade agreements with the United States and the European Union to attract free-trade agreements from China and other countries to make them more competitive for end buyers. The so-called fear of loss of revenue because of free-trade agreement is a wrong, obsolete and abandoned theory in the present context of a globalised market. The strategy to advertise the ‘low-wage worker’ has already failed to attract foreign direct investments. Bangladesh should also reform rules and policies to reduce bureaucratic obstacles and must reduce corruption to attract overseas investments.
MS Siddiqui is a legal economist.
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