The rise of bangladesh's textile trade case study answers

Bangladesh, one of the world's poorest countries, haslong depended heavily upon exports of textile productsto generate income, employment, and economic growth.Most of these exports are low-cost finished garmentssold to mass-market retailers in the West, such asWalmart. For decades, Bangladesh was able to take advantage of a quota system for textile exports that gave it,and other poor countries, preferential access to richmarkets such as the United States and the EuropeanUnion. On January 1, 2005, however, that system wasscrapped in favor of one that was based on free tradeprinciples. From then on, exporters in Bangladesh wouldhave to compete for business against producers fromother nations such as China and Indonesia. Many analysts predicted the quick collapse of Bangladesh's textileindustry. They predicted a sharp jump in unemployment, a decline in the country's balance of payments accounts, and a negative impact on economic growth.The collapse didn't happen. Bangladesh's exports oftextiles continued to grow, even as the rest of the worldplunged into an economic crisis in 2008. Bangladesh'sexports of garments rose to $10.7 billion in 2008, upfrom $9.3 billion in 2007 and $8.9 billion in 2006. Apparently, Bangladesh has an advantage in the production of textiles-it is one of the world's low-costproducers-and this is allowing the country to grow itsshare of world markets. As a deep economic recessiontook hold in developed nations during 2008-09, big importers such as Walmart increased their purchases oflow-cost garments from Bangladesh to better serve theircustomers, who were looking for low prices. Li & Fung, aHong Kong company that handles sourcing and apparelmanufacturing, stated its production in Bangladeshjumped percent in 2009, while production in China, itsbiggest supplier, slid 5 percent.Bangladesh's advantage is based on a number of factors. First, labor costs are low, in part due to low hourlywage rates and in part due to investments by textilemanufacturers in productivity-boosting technology during the past decade. Today, wage rates in the textile industry in Bangladesh are about $50 to $60 a month, lessthan half the minimum wage in China. While this payrate seems dismally low by Western standards, in a country where the gross national income per capita is only$470 a year, it is a living wage and a source ofemployment for some 3 million people, 85 percent ofwhom are women with few alternative employment opportunities.

Another source of advantage for Bangladesh is that ithas a vibrant network of supporting industries that supply inputs to its garment manufacturers. Some threequarters of all inputs are made locally. This savesgarment manufacturers transport and storage costs, import duties, and the long lead times that come with theimported woven fabrics used to make shirts and trousers.In other words, the local supporting industries help toboost the productivity of Bangladesh's garment manufacturers, giving them a cost advantage that goes beyondlow wage rates.

Bangladesh also has the advantage of not beingChina! Many importers in the West have grown cautious about becoming too dependent upon China forimports of specific goods for fear that if there was disruption, economic or other, their supply chains would bedecimated unless they had an alternative source of supply. Thus, Bangladesh has benefited from the trend byWestern importers to diversify their supply sources. Although China remains the world's largest exporter ofgarments, with exports of $120 billion in 2008, wagerates are rising quite fast, suggesting the trend to shifttextile production away from China may continue.Bangladesh, however, does have some negatives; mostnotable are the constant disruptions in electricitybecause the government has underinvested in powergeneration and distribution infrastructure. Roads andports are also inferior to those found in China.

Case Discussion Questions

1. Why was the shift to a free trade regime in thetextile industry good for Bangladesh?2. Who benefits when retailers in the United Statessource textiles from low-wage countries such asBangladesh? Who might lose? Do the gains outweigh the losses?3. What international trade theory, or theories, bestexplain the rise of Bangladesh as a textile exporting powerhouse?4. How secure is Bangladesh's textile industry fromforeign competition? What factors could ultimately lead to a decline?