Forrest Cookson, PhD
Mr. Trump’s tariff policies have introduced great confusion in the market for ready-made garments (RMG) creating great uncertainty as to how trade will take place in the next few years. The garment industry is going through three different transitions other than the trump tariffs: 1. The resistance by the United states for imports of garments from China has grown steadily resulting in the need for sourcing of garments to the more significant amount of the American market from countries other than China. 2. Changes in technology are rapidly increasing the degree of automation and reducing the labor inputs required. 3. There is much emphasis the EU and in the United States on environmental issues such as water conservation and reduced energy consumption. It is on top of all of these factors that the Trump tariffs are creating great uncertainty as to how this market will evolve.
Bangladesh consequently faces major problems in remaining competitive and growing its exports of RMG products to the USA. Everyone realizes that these considerable threats to the competitiveness of the Bangladesh product. We begin with a brief review of what has taken place: Bangladesh exported garments worth $7.4 billion in 2024 and $ 2.2 billion during the first quarter of 2025. Exports of garments have grown strongly since 2016. Tariff levels ranged from 11% to 18% over most garment products. On April 2, 2025, the United States raised tariffs by an additional 37% leading to tariffs of 50%. Tariffs were raised to different levels for each country thus violating the central concept of international trade, the most favored nation principle. Subsequently the American government deferred thee imposition of these higher tariffs for 90 days that is until early July. This gave a period of 90 days when governments could discuss with the United States the level of these tariffs and what might be done to lower them. Two countries seemed to have successfully negotiated changes. First the UK who reached an agreement that the tariff level would be 10% levied by the United States on imports from the United Kingdom. However, there is a higher tariff of 25% on automobiles and automobile spare parts. Also, a special tariff on steel and aluminum. Not all aspects of the agreement between the two nations were completed so one could say that the UK agreement with the United states has not yet reached its final form. The second agreement was between the United States and China. That agreement, valid for 90 days, reduced Chinese tariffs on US goods to 10% and American tariffs on Chinese goods to 30% The US Secretary of the Treasury also stated that countries might begin to receive a final tariff level within the next two weeks. There is just tremendous confusion brought about by the United States, probably deliberately. There is no clarity yet as to the level of tariffs that the United States is imposing on other countries nor is it completely clear that there is going to be violation of the M F N condition. How this will be resolved is not known. Mr. Trump seems to be jumping from one thing to another with no clear purpose or reason.
It is impossible to predict where Bangladesh is going to end up here in the second part of this paper we will discuss what the government is proposing to do in answer to the American increase in tariff but there is no real way to understand where this might end. We can ask what is in Mr. Trump’s mind in this wild unstructured announcement and change in tariff levels for different countries. We can begin with the realization that Mister Trump believes that the United States is being exploited by countries like Bangladesh that run a high trade surplus. In Bangladesh the high tariffs that are imposed on imports certainly cause a reduction in what might otherwise be a substantial import bill. Mr. Trump’s desire to bring the US trade balance close to zero is one thing; the attempt to balance trade with every country is another. The idea of trying to have a sharply reduced and almost zero current account deficit between the United States and many other countries each being separate makes no economic sense whatsoever. That does not seem to deter Mr. Trump who continues to peddle this nonsense about setting tariff rates with the objective of closing the trade gap between the United States and the rest of the world. Trump has taken advantage of this move to force countries to negotiate on trade issues and perhaps other issues almost every country is concerned about preserving their trade with the United States. Only a few countries do not run a large surplus with the United states. A second reason that is sometimes raised as an explanation of the motivation for implementing these wacky tariff levels Is that it should encourage American and foreign companies to invest more in the United states under the protection of these very high tariff rates.
Mr. Trump seems to want to bring industry back to the United States as it was 40 years ago. There was a significant shift of many industries out of the United States to countries where labor costs were lower. This is a natural progression of the economic development of the world economy. Such shifts result in allocation of Labor and capital in a fairly efficient way compared to the all-too-common setting tariffs for political purposes or to protect an industry which doesn’t really need protection or should not be protected. A great deal of the poverty in South Asia arises from the strong tendency to maintain high tariff rates to protect domestic industries from foreign competition. This is the opposite of what one should attempt to do to develop and enforce a sound trade policy. In order to achieve this objective, it will be necessary to maintain the high protective tariffs for a long time meaning that if this is an important consideration the United States will not be interested in lowering these April’s 2 tariffs. Mr. Trump does not have a carefully worked out plan on trade policy, he is jumping from one thing to another with the vague idea that reducing the trade deficit will be good for the United States. There are many wild stories going around that this disruption of international trade is a carefully thought-out plot by Trump to somehow increase the power of the United States over the rest of the world The third reason sometimes given for the high tariffs is to increase government revenue. In Mr. Trump’s mind is the idea that by increasing revenues earned from taxing imports it is possible to reduce the Income taxes that are the main source of government revenue. However very simple arithmetic indicates that this is a ridiculous proposition and no significant impact on income taxes will be achieved by high tariffs. At the end of the 19th century tariffs were an important part of government revenue much more important than now. But it was illegal in the United states to levy income taxes until the 18th amendment to the constitution made that possible. Besides the US Government was very small relative to the size of the economy.
These three reasons for levying high tariff rates on imports from all other countries are not based on careful analysis of what is necessary to achieve the purported objectives. The objectives themselves are all foolish and inappropriate for the American economy. The United States should run a large deficit on its trade account and accept the fact that people will hold the dollars that cover the difference between the trade levels. So long as the dollar is the key dominant currency in international trade and investment then there will be a strong demand by financial systems and companies all over the world to hold dollars. A strong dollar tends to decrease American exports and increase imports into the United States. Mr. Trump talks about having a strong dollar and reducing the trade deficit. These are incompatible ideas and economic nonsense to pursue them together. The last reason that is given for the high tariffs is quite different. It suggests that the United States will now confront other countries with the demand that they reduce their economic relations with China and in return for such reduction the US will lower the tariffs. It is easy to see that some people in the United States government who are focused on the differences in view of China and the United States would see here an opportunity to cause difficulty for China but in the event Mr. Trump’s effort to raise tariffs to very high levels for countries other than China has blown back in his face. The United States appears to be in long term conflict with China and seeks apparently to try to reduce Chinese economic influence around the world. This of course is economic and political nonsense and precisely the wrong way to deal with China. All that Mister Trump is doing is reducing the role of the United States in the international economy and leaving the leadership of world trade to the Chinese. It really makes no sense whatsoever for the United ‘States to take such actions, nevertheless this is what is happening. An ill-informed Americzn President is attempting to carry out policies that make no sense and none of his staff seems prepared to try to change his mind. In this explosion of irrational behavior, it is difficult. to formulate a satisfactory response.
The implementation of regimes of high tariffs will reduce international trade and reduce or slow down growth of world GDP. The low tariff world that has been in place leads to appropriate allocations of capital to different countries and maximizes world output. Any interference in the free flow of goods and services reduces the total output and allocates labor and capital improperly. The high tariffs will then reduce incomes in the advanced economies and reduce the demand for clothing. This income effect hits all countries and results from the dramatic change in tariff levels that the United States announced. As the magnitude of the tariff are changing everyday it is difficult to understand how large this income effect might be.
The tariffs different for each country suggest that the landed price for different garments will be different. How the buyer would deal with this is uncertain. What these different tariff levels mean for competition among countries supplying garments to the American market is again impossible to determine as there is as of now no final level of tariffs that has been established. It is likely that there will be little difference in the tariff levels for different countries with no particular advantage to anyone. What we do know is that the management of these tariff changes by the United states is creating vast uncertainties as to what prices will be and what one should order for the future markets. If the tariff rate were to rise to 50% for Bangladesh garments and this is similar to the impact on other supplying countries’ then the question becomes help customers in the retail stores in America will react to these much higher prices for clothes. We would expect a shift away from clothes to other items desired by the consumer. This price effect operating really only in the American market could be quite severe.
The price to the consumer is the landed price which reflects the price of production, the cost of transportation and the tariff. The American buyer will add his mark up landed price which will be the price at which he sells to the retail stores. The buyer has some freedom to adjust the markup to establish his offer to the retail stores. The buyer may well be prepared to reduce his markup to make the garments more attractive to the retailer. The retailer in turn has to determine his mark up on the price at which he purchased the garments from the buyer. These markups to the retail level are usually very high, well above 50% With the imposition of high tariffs buyers will pressure the Bangladesh maker to reduce his price, it is unlikely that the transporter will reduce his prices. let us say a typical item cost 100 landed before the tariff with the 50% tariff this becomes 150 before the increase in tariff the markup by the buyer would be 25% and the markup by the retailer 75% hence more than doubling the landed cost. If we take the current 15% tariff, then the item has a landed price of115; the price at the retalil level is 252. If you increase the tariff to 50 then the retail price becomes 328, an increase of 30%. If the Bangladesh manufacturer reduces the price 2%, the buyer reduces his market up to 21% and the retailer to 68%, then the price is 300 an increase of 20%. The 37% would have a major impact on earnings but would not be too hurt as far as prices go.
It is impossible to predict how the competition will develop. Bangladesh can be cooperative and attempt to increase imports from the United States. But unless one is prepared to give up the MFN rule there is only very limited prospect for increased imports from the USA. Cotton is the most promising but there are many complications to make American cotton competitive. India and China are cheaper suppliers of most things. Goodwill can be earned by improving protection of Property rights and passing the Labor Law as promised.
The best policy for Bangladesh is to focus on non-US markets, to work with the US buyers to try to stay competitive, and to broaden the range of garments to produce. Everyone should stay calm about the tariff position and concentrate on the real issues of improving productivity. The Government has a responsibility to improve the gas and electricity supply, shorten the clearance times at customs, and improve the use of the Chattogram highway.
I expect that the US Government will settle for a tariff level of 20% and insist on better IPR efforts and improved labor rights. That is not too bad, only slightly above the current tariff levels. The Government would be well advised to expand the Biman fleet through a deal with Boeing, shift military procurement more to the USA and finally explore the prospects for purchasing 5 nuclear power plants from the United States.
To build the RMG sector one must turn away from financing that is never repaid; from not investing in automation; from expecting the Government to bail out the industry when troubles strike. A more positive approach is needed. There is an unwillingness to train Bangladesh technicians to take over the jobs now carried out by Sri Lankans and Indians. There is certainly considerable Indian money invested in the sector. That must be declared, and the finances of the enterprise be made transparent. An effort should be made to switch financing to the capital market that would finance air conditioning, automation, and establishment of the health care and education of the workers’ children.
If more serious trouble develops with the United States everyone should stay calm. It is likely that the Democrats will take control of the House of Representatives, and the Congress will reclaim the right to set tariff rates reversing the chaos.
At the beginning of the article three major changes in the industry were noted. These are far more important than the nonsense Trump had introduced to the world.
The shift of the Chinese out of the garment sector continues to present opportunities for increased Bangladesh production. One should welcome joint ventures with Chinese manufacturers who will bring market access and knowledge and improved technologies. A detailed investigation of the ways and means to accomplish such a shift must be undertaken.
The second point dealt with the automation. It is remarkable that there are not closer research efforts between US and Bangladesh scientists. The Government is waiting for someone to fund this type of arrangement. It is the duty of the Government to use its own resources to accelerate automation. AI will change the industry in the next five years in ways that we cannot now imagine or believe possible. Either Bangladesh will take up the challenge or lose its current leading position. If this path is not taken their will be wails of disaster and failure as the industry shrinks.
It is surprising that so little attention is paid to these issues. Along with the equipment and the automation comes the training. New methods are developed to improve training. These must be learned and used.
The third revolution in the industry is in the environmental demands. We know what the demands will focus on reduced energy consumption, careful treatment and recycling of water, treatment of chemicals and safety.
We are fascinated with the Trump tariff show but the real challenges are in the three points noted above.
