IMPACT OF BREXIT ON THE APPAREL INDUSTRY OF BANGLADESH: A PARTIAL EQUILIBRIUM ANALYSIS

Abstract
The current article makes an attempt to analyze the probable fallout from Britain’s exit (Brexit) from the European Union (EU) on the apparel industry of Bangladesh. There is widespread apprehension that repercussion of Brexit on the country’s most important export sector would be profound because of its close trade links with the UK and EU. Applying partial equilibrium analysis, this paper finds that ‘Hard Brexit’ outcome would create significant negative impact on Bangladesh’s apparel export. It identifies that in the postBexit regime the apparel exports of Bangladesh to EU and UK will suffer as demand for this product might decrease in these regions. This reduction in turn will also likely to reduce the total production of the sector. The article further argues that these changes have direct consequences for the employment of female workers who are literally the lifeline of the apparel industry of the country.

Introduction:
Britain’s official decision to leave European Union (EU), known as Brexit (an abbreviation for “British exit”), on 29 March 2017 has become an event of considerable importance and controversy. Comes into effect, Brexit would be a complex process as it calls for undoing of 43 years of treaties and agreements covering thousands of different subjects. Brexit is further complicated by the fact that it has never been done before, and negotiators will, to some extent, be making it up as they go along. For instance, the negotiation needs to settle several entwined issues either simultaneously or separately, including disentangling British laws from EU and setting up a new deal governing the terms of trade between the EU and the United Kingdom (UK). This disengagement on the part of the UK, in an interconnected world, has created an air of uncertainty not only about the future of one of the most successful regional blocs but also about the condition of economies around the world having economic ties with the EU and the UK. The uncertainty, in post-Brexit era, has been mostly encircled around trade because Brexit negotiations would probably change the existing tariff lines, rules of origin and GSP (generalized system of preference) facilities for EU and UK.
As such, a wave of negative impacts could well affect the economies of UK, EU and beyond.
Against this backdrop, the purpose of current paper is to analyze the possible impact of Brexit on Bangladesh’s apparel industry – nation’s most important export revenue source. The UK and EU are the two largest export destinations for Bangladeshi apparel. Hence, post-Brexit changes in the EU and UK could impact the apparel sector of the country. Resorting to partial equilibrium analysis, the current paper makes an attempt to estimate the likely affect of Brexit on the apparel industry of Bangladesh. It would seek to identify how Bangladesh’s apparel exports, employment and some other sectors linked with this industry do fare against Brexit.

Brexit and its Probable Impacts on UK and EU Economy:

Economic integration has become an integral part of the modern day economy. The process enables countries to expand their economic reach beyond the domestic arena. However, UK’s decision to quit the EU might trigger some changes in the economies around the world.This disintegration may also have ramifications for small and developing trade partner such as Bangladesh
The association of UK with European integration dates back to 1970 when the nation entered into the European Economic Community (EEC). Even though, UK is arguably the least integrated of the EU members till now.2 Britain joined EU because this membership was viewed as a way to arrest the relative decline of its economy during 1970s.3
In fact, most of the estimates show that Britain’s EU membership has delivered a net economic benefit.4 For instance, a 2014 estimate suggested an overall net economic gain was amounted to roughly 4%‐5% of GDP per annum.5 This magnitude remains a reasonable and conservative judgment of the most likely economic impact of the UK’s EU membership, as most of the studies failed or poorly analyzed some crucial aspects of EU membership, such as the impact of single market on productivity & competitiveness, participation in global value chains and the regulatory burden.6 Thus, there is some degree of uncertainty over this judgment: the benefit may be smaller, but it could also be considerably larger. However, the “reduced form” empirical studies suggest that these omitted factors could be strongly positive overall.
Trade between the UK and the EU27 is large and of a similar order of magnitude as transatlantic trade (between the EU and the US).8Currently, the trade in both goods and services between the UK and EU27 is very substantial: €306 billion of exports by the EU27 to the UK opposed to €184 billion of imports.9 In terms of share of GDP, the EU27’s exports to the UK amount to 2.5% of GDP, whereas the UK’s exports to the EU27 are 7.5% of its GDP.
For services the amounts are also large: €94 billion EU 27 exports to the UK against €122 billion of imports, and thus a surplus for the UK. For both goods and services, the degrees of dependence on the UK market are much higher for the smaller EU member implies that they have close ties with the UK. Foreign direct investment (FDI) is very large on both sides. The EU27’s stock of FDI in the UK is estimated at €985 billion, or 8.3% of its GDP, while the latter’s investment in the former is €683 billion, which is roughly 26% of GDP.
However, the decision to leave EU by UK is likely to hurt economic growth in the region.
This decision would lead to an overwhelming uncertainty because UK has to negotiate with many of EU institutions. This might slowdown investments, thereby would lead to create fewer jobs, lower pay and higher unemployment rate. Especially for UK, the absence of seamless access to European markets implies less exports and FDI. Additionally, consumers and employers reacting to “doom and gloom” news about Brexit’s potential fallout alone may contribute to an economic slowdown as companies hire fewer people and consumers spend less.
A majority of studies’ finding is that Brexit will inflict losses on both sides. All studies agree that the losses will be considerably large for the UK than for the EU27. Only in very pessimistic scenarios would the losses for the EU27 reach a significant size. Most of the studies predicted that ‘Hard Brexit’ would lead to 1% real GDP reduction for EU 27 countries. As regards the EU budget, the UK’s withdrawal is likely to leave a deficit of about €9 billion annually.
On the other hand, for, UK Brexit would likely to cause the GDP to fall by 1% to 3 % annually in the short run. The impacts get even worse when the studies take into account the dynamic effects of a reduction in cross-border trade activities: less trade implies less pressure from international competition. Hence, companies need little or no incentive to improve their productivity through investments and innovation. And a lower increase in productivity, in turn, reduces the long-term economic growth. These studies found a long-term drop of real GDP ranging from 2% (“soft exit”) to 14% (“isolation of the UK”) in 2025.

Brexit, Bangladesh, EU and UK Economic Relation: 

Bangladesh has been maintaining strong economic cooperation with the European
community. The foundation of this cooperation was formed by the signing of agreement between EU and Bangladesh on 16 November 1976. The links further solidified in 2001 with the signing of trade cooperation agreement. The agreement stressed on the development of two-way trade between the parties in accordance with the World Trade Organization (WTO) protocol, and it also specified to assist Bangladesh in diversifying its productive potential. Over the years, the EU has been provided Bangladesh duty free access to its market under the “Everything But Arms (EBA)” initiative. Besides, Bangladesh is also receiving preferential treatment under EU General System of Preference(GSP) and General System of Preference Plus (GSP + ) scheme At present, the EU is the Bangladesh’s largest trading partner, accounting for around 12% of Bangladesh’s total trade. In terms of revenue, over 55.5% of Bangladesh’s export earnings are sourced from the EU. In 2016, Bangladesh exports were consisted of 1% of total imports of EU. Over the period of 2012 to 2016, Bangladesh’s exports to EU were growing at 13.3 % annually. In 2016, the major export items to EU consist of textile and textile articles (under HS chapter XI), accounted 93.6% of total export value to EU. Apart from this, commodities such as frozen food, agro-products, footwear, leather products and bicycles have grown in importance in recent years. On the other hand, EU exports to Bangladesh are dominated by machinery and transport equipment.

The UK is Bangladesh’s second largest export destination in Europe, and overall the third largest after the US and Germany. In 2016-17, Bangladesh exported USD 3.8 billion worth of products to UK, of which 92.5% exports were generated from Ready Made Garments (RMG) sector.23 The other exportable items to UK are frozen food, leather and leather product, footwear, raw jute, jute goods, and bicycle. Besides, UK is the second largest source of remittances for Bangladesh.
Currently, a few studies have assessed the impact of Brexit on Bangladesh economy.
Most of the studies mentioned that the impact will be felt by Bangladesh economy through the devaluation of UK pound. The studies also identified that it would become a major concern for Bangladesh to retain duty-free trade privilege for its goods to the UK market. It is predicted that due to Brexit entire EU as well as the UK would face an economic crisis. As a result, people would buy less and the UK and EU’s exporting partners would feel the heat. Apart from exports to the UK, remittances from UK and the European country may come under strain as an impact of Brexit.
However, currently there is no literature available that estimated the magnitudes of impact on Bangladesh economy; rather, most of the present literature discusses the probable channels through which the Bangladesh economy can be affected. In the following sections of this paper, we present an analysis of probable trade impact, with special attention to apparel sector, on Bangladesh economy in the aftermath of Brexit. Our analysis quantifies the probable impact on Bangladesh economy. In the end, we discuss about the policy implication for such impact and recommend what possible options can be taken to adapt in post-brexit world.
Nevertheless, it is worth looking at the profile of Bangladesh’s apparel export.

Apparel Export of Bangladesh: A Brief Profile:

The development strategy of Bangladesh underwent a significant change in the early 1990s. After experimenting with domestic demand based import substitution strategy for nearly two decades; the country finally opted for a more open market-based economy where the private sector would take the lead role in the development of the economy. Meaningful trade liberalization reforms were introduced with slashed tariff rates, reduced tariff slabs and largely eliminated quantitative restrictions. Exports were encouraged through various measures. As a result the trade ratio increased steadily.

When emerged as an independent country, Bangladesh was a relatively closed economy with the trade ratio at less than one-seventh. Since then merchandise exports and imports of Bangladesh have increased greatly in quantity and variety. In the early years, the country’s exports comprised mostly of raw jute and a few jute good items. These accounted for about nine tenths of the total export revenue of US$377 million during 1972-73.By the end of the 1970s this ratio fell to about three-quarters of the total export revenue of US$761 million.
The export composition changed dramatically since then; readymade garments (RMG) comprising knitwear and woven apparel products (HS61 and HS62) emerged as the principle export items of the country, while jute exports stalled. The country achieved remarkable success in export expansion, mainly because of the stellar performance of the RMG industry. The total merchandise export exceeded US$ 30 billion by 2015-16, which was shipped to about 200 countries and custom territories around the world (see figure:1). The export earnings of the  country are now equivalent to 18 percent of GDP suggesting considerable and growing importance of the export sector in the national economy.

The importance of RMG in the country’s export basket has increased steadily. From its
humble beginning in the late seventies, the RMG sector now accounts for more than three quarters (79.1 percent) of the total exports of the country. Thus, during the last three decades Bangladesh has moved from an excessive dependence on jute products to RMG products in its export trade. Although Bangladesh sells its products to numerous countries, only two markets account for most of the export earnings. It earned 57 percent of the total export revenue from the European Union market and 17 percent from the US market in 2016. Canada of late has become a significant export destination and provided market for 3.2 percent of the total export. Turkey accounted for another 3 percent of the total export of Bangladesh.
The USA is the single largest importing country of Bangladeshi products with Germany and UK are the second and the third largest respectively. Japan, India, China, Australia, South Korea and Brazil are considered as the future major destinations of Bangladeshi exports although the current export volume to these countries is small relative to that to the EU and the USA. The market for the principal export item of Bangladesh, readymade garments, is even more concentrated. The country exports about 60 percent of its exported apparel items to the EU countries and 24 percent to the USA. Canada has emerged as a significant importer of apparels from Bangladesh since it granted duty-free access to the least developed countries (LDC) in January 2003. This North American nation accounts 5 percent of the RMG export of Bangladesh. Thus, the North American and the European market together provide outlet for about 90 percent of the RMG export of Bangladesh. The growth in the total RMG export of Bangladesh will thus depend to a large extent on the pattern and growth of RMG demand in these countries in short to medium term.

Compared with its competitors, Bangladesh is the third largest exporter of apparel, after China and Hong Kong SAR, China. Global apparel exports exceeded US$355 billion in 2011. The top 10 exporting countries commanded more than 80 percent of total export value, with the top three countries alone capturing 53 percent of global apparel exports. China led the rankings with US$143.2 billion or 40.3 percent of world exports, followed distantly by Hong Kong SAR, China (US$23.2 billion or 6.5 percent) and Bangladesh (US$21.8 billion or 6.1 percent) in 2011.Although the top 10 exporters were evenly split in number between Asia and Europe, Asian exporting nations comprised 75 percent of the export value of the top 10 countries.

The Harmonized System Codes (HS code) for garments and textile are dispersed across
chapters 39, 42, 50 to 65, 70, and 84. Among them, about 97 percent of Bangladesh’s garment and textile export fall under chapters 61-63.

 According to Bangladesh’s Export Promotion Bureau (EPB) data, exports of woven wear
stood at US$ 13.9 billion and knitwear were US$ 12.76 billion in FY2015. The total apparel exports were US$ 28.3 billion in FY2015, an increase of 93 percent from US$14.85 billion in FY2010. The share of apparel in Bangladesh’s total exports ranged from 74 to 82 percent during FY2000 to FY2015. This trend has been relatively stagnant for the last 4 years at around 80%.

 

The Fallout from Brexit on Bangladesh’s Apparel Sector: Quantifying the Impacts
by Partial Equilibrium Analysis: 

In order to analyze the impact of Brexit on Bangladesh’s garments industry, we derived the top 10 export products of Bangladesh using 2015 data from Comtrade database. We find all the top 10 products are from HS code 61 and 62. The top product is the HS610910 T-shirt, consisted 20% of total Bangladesh export in 2015. The second category is the HS 620342 with 18% of the total export share. Later, we estimated the weighted average price of Bangladesh apparel export, which is US$9.68 per quantity unit. Subsequently, using the same database, we have derived the top 10 apparel export products and weighted average price for EU-27, UK and US markets. We have taken the US market into consideration for it is the second largest destination for Bangladeshi apparel.

  For EU-27, we find the top 10 export apparel products of Bangladesh are quite different than the country’s top 10 export products (see, table 3). However, the top 3 products are same. These products are HS610910 (consisted 26% of total Bangladesh export in EU-27 for 2015), HS 620342 (consisted 14% of total Bangladesh export in EU-27 for 2015), and HS 620462 (consisted 8% of total Bangladesh export in EU-27 for 2015). And, the estimated weighted average price for EU-27 market is US$ 9 per quantity unit.

 For UK, the top 3 export products of Bangladesh are also same as EU-27 with a few differences between the rest of the items (see table 4).Here the share of HS610910 is 20% of total Bangladesh export to UK, while the shares for HS 620342 and HS 620462 are 15% and 8% respectively. The weighted average price in this case has been estimated as US$ 10.5 per quantity unit.

 The top 10 apparel products of Bangladesh are quite different than EU-27 and UK (see table 5). However, the top export product in US market HS 620342 appears at the second top categories for EU-27 and UK market. The third category HS 620462 is same across the all the three countries: EU-27, UK, and US. The top 3 products in the US market HS 620342 ( 29% of total Bangladesh export to US in 2015), HS620520 ( 11% of total Bangladesh export to US in 2015), and HS 620462 ( 10% of total Bangladesh export to US in 2015). And, the estimated weighted average price for US market is US$ 9.55 per quantity unit.

 Framework for Impact Estimation of Brexit : 

An essential aspect of export trade is that the demand for a country’s exports depends on the import propensities of the people of other nations. Such propensities are known to be influenced by their economic growth. Thus the impact of Brexit would trickle down to Bangladesh economy through its affect on the regional income: GDP. If there were any negative impact from ‘Hard Brexit’ it would lead to reduction in GDP, which is currently predicted by most studies.51 As the EU-27 and UK moved in the negative growth zone, their imports plummeted. Consequently exports of the trading partner countries also plummeted.
In our estimation, we consider the scenario that pessimistic outcome from Brexit negotiation would lead to one percent GDP reduction for EU-27 and 9% GDP reduction for UK. As relevant to pessimistic scenario, we assume that UK’s withdrawal has the potential to fundamentally change the EU and European integration. On the one hand, a withdrawal could tip the EU towards protectionism, thereby exacerbates the existing divisions. This could lead to tariff escalation. Furthermore, once the UK leaves the EU, it would no longer depend on the former for crucial decisions. In such case, the trade privilege may be reduced, as there would be no partner to oppose the decisions. Given that Bangladesh would not able to make any meaningful negotiations within the 2019, it would face revoke of duty free and quota free (DFQF) access in the UK market. This would be equivalent to impose of 20% advalorem tariff.

We use the partial equilibrium model to capture the Brexit related shock in Bangladesh apparel industry. First, we consider the impact of possible income shock from our likely scenario on Bangladesh apparel export in EU-27 and UK export market. Then, we traced the impact of imposing possible tariff on UK apparel import for Bangladeshi product. In second step, we attempt to reveal how these income shocks and tariff imposition could affect the Bangladesh apparel sector. In the end, we see how the overall changes within Bangladesh apparel sector would alter its apparel export to US.

 Brexit related income shock in EU-27 and UK would impose a shift in demand for Bangladesh exports in these markets. We need to know the  income elasticity of import demand for apparels to estimate the magnitude of these demand shifts. Several studies have measured income elasticity of demand for UK. Hooper et.al. estimated trade elasticity’s for the G-7 countries. They estimated both long run and short run income elasticity for import demand. They found that for UK the long run income elasticity of import demand is 2.2 and short run is 1. Their estimate for long run income elasticity for other three EU member country is lower than the UK income elasticity. For instance, for Germany it is 1.5, for Italy 1.4 and Franc 1.6. Their short run elasticity for these three countries is equal to UK’s income elasticity. More recently, in 2013 Lui estimated long run income elasticity of import demand by product for country groups. In their study they found for cloth and footwear products the UK’s income elasticity of demand for BRIC and Middle Income Asia group are 0.77 and 0.5 respectively. We use the BRIC estimate for our estimation purpose because two of its members namely, China and India are competitor to Bangladesh apparel export in EU and UK market, and their export comprises the same categories of product that Bangladesh export. We use this income elasticity both for UK and EU-27 markets, considering the fact that UK is the second largest importer of Bangladesh apparels within the current EU market.

In addition to these income shocks, in UK market revoking DFQF access and imposition of 20% tariff would lead to an excess supply of Bangladesh apparel in UK export market. Collectively all of these shocks will result in a reduction in Bangladesh’s apparel production. To estimate this change we use the total apparel export of Bangladesh as an approximation because due to the lack of daata availability and institution it is difficult to obtain actual domestic production for domestic consumption. Hence, our estimate is underestimating the actual change in apparel production of Bangladesh. We also need to know several parameters to estimate the changes within this frame work. We need to use thhe supply elasticity and price elasticity of Bangladesh apparel for UK market, and overall for the nation’s apparel sector. In addition, to measure the adjustment process in US market we require the price elasticcity of Bangladesh apparel export in US market.

 The ultimate adjustment process of these shocks will be ended by altering current Bangladesh exports in US market. The Bangladesh exports in US market will receive a lower price because Brexit related income shocks and tariff imposition will dampen overall demand for Bangladesh apparel sector. This decrease in demand will decrease the price for overall sector. This price reduction in turn would increase the apparel export of Bangladesh to US: its second largest market. As a consequence of changing environment, lots of existing producer will then try to produce for the US market instead of UK and EU- 27 market; hence there will be a simultaneous supply shift of Bangladesh apparel in US market.

Results :

Impact of Income Shocks: 

We use the income elasticity of demand to get the magnitude of demand shift in EU-27 and UK market . For our scenario, the one percent reduction in EU-27 GDP will cause the damand for Bangladeshi apparel to decrease by 0.77% in EU-27 and as a result, apparel price in this market would reduced by 0.33%. And the estimated export loss of Bangladesh apparel from this depression demand and price would be equivalent to US$112 million.

Using the same method, for our scenario of 9 percent GDP reduction in UK, we
estimated that it would instigate a 6.9% reduction in apparel demand in UK export market,

which would result in a 3.5% decrease in price, and the resulted export loss of Bangladesh has been estimated asUS$235 million.

Impact of Imposition of tariff by UK: 

Revoke of duty free and quota free status by UK will impose 20% extra advalorem tariffs duty on Bangladesh export price. Using arc method, we find this imposition will increase the apparel export price for Bangladesh by 18%. The estimation further reports that it would lead to a decrese in Babgladesh’s export worth of US$ 115 million.

Next , we estimated the collective impact of these shocks on Bangladesh apparel sector. We found that leftward shifts of Bangladesh export demand in these two markets along with price shock would invoke a dampen demand in overall Bangladesh apparel sector and it would result in a leftward shift of demand for the industry. The estimation shows it would cause a 1% decrease in price, and total production of Bangladesh export.

The resulted decrease in price in Bangladesh apparel sector will change the export price of Bangladesh apparel in USmarket. As a result, quantity of export of apparel might rise in that market. The estimation suggests that such export gain would be equivalent to US$22 million. Thus, the net loss for Bangladesh apparel export from Hard Brexit would be US$434 million.

Impact on Employment: 

It is well documented that the growth of the garment and textile industry in Bangladesh has helped raise incomes of low-skilled people living in poverty, especially in creating job opportunities for women. Hence, the loss incurred due to Brexit might impact employment in apparel sector adversely.

We estimate the possible impact on job sector by using three different ways. First, we use worker per export as job multiplier to estimate the job loss from the resulted decrease in export. Second, we apply the percentage increase in output to total industry employment. Third, we utilise the findings of World Bank study conducted on the South Asian apparel sector.

In the first case, we use the data from Bangladesh Garments Manufacturers and Exporters Association (BGMEA) on to its member. From this data we estimate the export per worker, and use that as job multiplier. According to BGMEA, under its enlisted 4328 member factories total 4.2 million workers were employed in 2016. Dividing the 2016 total apparel export amount by this total number of workers, we obtain US$6825 of export per worker. Using this amount as job multiplier, we estimated the resulting US$ 432 million export loss from Brexit would lead to 63589 job loss within the Bangladesh apparel industry. Considering the fact that more than 80% workers in this industry are women, it 50871 female will likely to displace from the labor force as an effect of Brexit in Bangladesh.

 In our second alternative case, we apply the percentage increase in output to total industry employment as proportional. We use the total apparel export of Bangladesh as proxy to the total apparel production because data for production for domestic market was not available. So, our estimation of production decrease may have underestimated the real production level. We calculated that Brexit–led decrease in demand and imposition of higher tariff will cause 1 percent fall in apparel production implying a 1 percent decrease in employment from a base of 4.2 million. It costs 42000 jobs of which 33600 will be female.

In case of the third alternative, the World Bank study found that 1 percent increase in apparel output is associated with a 0.3–0.4 percent increase in employment in Bangladesh, Pakistan, and Sri Lanka. Using this fact, 16800 garment workers will lose their jobs. This result implies that among these casualties 13440 workers would be women.

Impact on Other Related Sectors : 

Growth of RMG sector has given rise to a whole new set of linkage industries and facilitated expansion of many service sector activities. The RMG industry not only propelled the growth of spinning, weaving, dyeing and finishing industries, production of accessories and spare parts, but also rendered large externalities by contributing to other economic activities in areas such as banking, insurance, real estate, packaging, hotels and tourism, recycling, consumer goods utility services and transportation. RMG sector has overwhelmingly high backward linkage with textile sector providing fabrics, yarn and other ancillaries. It has important backward linkage with utilities such as electricity, gas, and machinery and spare parts supplying.

From the above table, it is evident that the economic turnover in sectors related to apparel sector is more than US$ 1.2 billion. The related sectors are big enough and well depended on the performance of apparel sector. Furthermore, many of these sectors are also providing employment to unskilled workers. Thus, any magnitude of negative effect on apparel sector is likely to be transmitted to these related sectors.

Conclusion and Recommendation :

The findings of this study show that Brexit will cause negative effect on Bangladesh’s apparel sector. The probable reduction of real income in EU region, and revoke of DFQF status in UK will cause the import demand for Bangladesh apparel products to shrink by US$432 million. In addition, this reduction will invoke 1 percent price decrease for Bangladesh apparel product in world market. This negative effect, also reveals, will directly displace substantial number of workers from employment from this sector. Using three different methods, we estimate the job losses will be ranged from 17 thousand to 63 thousand. These employment cut will be exacerbated more by considering the fact that more than 50 thousand among the displaced workers would be female.

Against this backdrop, the current paper has come up with a set of recommendations for Bangladesh government and apparel sector: 

a)Bangladesh Government and BGMEA should finalize an interim action plan to tackle the negative impact of Brexit on apparel sector with an easy accessible emergency fund for the exporters in order to cope with the transition period;

b)Government and BGMEA should arrange programs and funds to facilitate the workers that might lose job due to hard-Brexit.

c)Bangladesh should immediately start negotiating the post-Brexit trade relations with UK and EU-27 to ensure the continuation of DFQF access to the UK market.

d)Bangladesh should approach the EU and UK to increase the official development assistance, especially to arrange a specific fund for adopting the Brexit incurred losses, and to support the ongoing reforms in Bangladesh apparel sector. 

Aritical by: Tareq Muhammad Shamsul Arefin & Ishtiaque Selim.

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