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Case Study No. 3

case study 3

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102 views3 pages

Case Study No. 3

case study 3

Uploaded by

LenggaiLenggai
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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THE RISE OF BANGLADESH’S TEXTILE TRADE

Case Study 3

Bangladesh, one of the world’s poorest countries, has long depended heavily upon
exports of textile products to generate income, employment, and economic growth.
Most of these exports are low-cost finished garments sold to mass-market retailers
in the West, such as Walmart. 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 rich markets such as United states and the European Union.
On January 1, 2005, however, that system was scrapped in favour of one that was
based on free trade principles. From then on, exporters in Bangladesh would have
to compete for business against producers from other nations such as China and
Indonesia. Many analysts predicted the quick collapse of Bangladesh’s textile
industry. 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 of textiles continued to grow,


even as the rest of the world plunged into an economic crisis in 2008. Bangladesh’s
exports of garments rose to $10.7 billion in 2008, up from $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-cost producers and this is allowing the country to
grow its share of world markets. As a deep economic recession took hold in
developed nations during 2008-2009, big importers such as Walmart increased their
purchases of low-cost garments from Bangladesh to better serve their customers,
who were looking for low prices. Li & Fung, a Hong Kong company that handles
sourcing and apparel manufacturing, stated its production in Bangladesh jumped
percent in 2009, while production in China, its biggest supplier, slid 5 percent.

Bangladesh’s advantage is based on a number of factors. First, labor costs are low,
in part due to low hourly wage rates and in part due to investments by textile
manufacturers in in productivity-boosting technology during the past decade.
Today, wage rates in the textile industry in Bangladesh are about $50 to $60 a
month, less than half the minimum wage in China. While this pay rate 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 of employment for
some 3 million people, 85 percent of whom are women with few alternative
employment opportunities.

Another source of advantage for Bangladesh is that it has a vibrant network of


supporting industries that supply inputs to its garment manufacturers. Some three-
quarters of all inputs are made locally. This saves garment manufacturers transport
and storage cost, import duties, and the long lead times that come with the
imported woven fabrics used to make shirts and trousers. In other words, the local
supporting industries help to boost the productivity of Bangladesh’s garment
manufacturers, giving them a cost advantage that goes beyond low wage rates.

Bangladesh also has the advantage of not being China! Many importers in the West
have grown cautious about becoming too dependent upon China for imports of
specific goods for fear that if there was disruption, economic or other, their supply
chains would be decimated unless they had an alternative source of supply. Thus,
Bangladesh has benefited from the trend by Western importers to diversify their
supply sources. Although China remains the world’s largest exporter of garments,
with exports of $120 billion in 2008, wage rates are rising quite fast, suggesting the
trend to shift textile production away from China may continue. Bangladesh,
however, does have some negatives, most notable are the constant disruptions in
electricity because the government has underinvested in power generation and
distribution infrastructure. Roads and ports are also inferior to those found in China.

Case Questions:

1. Why was the shift to a free trade regime in the textile industry good for
Bangladesh?
Answer:
The shift to a free trade regime in the textile industry was good for
Bangladesh because it allowed the country to become one of the world's lowest-
cost producers of textile products. This shift led to increased exports, higher
incomes, employment, and economic growth in Bangladesh. The free trade regime
created room for competition with other industrial giants, enabling Bangladesh to
sell its products at a relatively low cost and capture the market.
Furthermore, because the government did not interfere with trade,
Bangladesh was able to take use of its comparative advantage in low labor costs to
sell its goods at a low cost and earn substantial profits.

2. Who benefits when retailers in the United States source textiles from low-wage
countries such as Bangladesh? Who might lose? Do the gains outweigh the losses?
Answer:
The consumers benefit as the cost of the products are lower in the United
States. The producers also benefit because they are making money from selling
their textiles to the United States. The people of the low-wage country also benefit
as they are receiving a living wage, respective to their country, and they are able to
find a job that otherwise would not be there. Textile producers in the United States
or other higher-wage countries lose as the manufacturing is being done elsewhere.
The gains outweigh the losses because the consumers and low-wage producers are
better off with the outsourcing the production of textiles. Only the high-wage
producers of textiles will be worse off, which is a lesser impact than that from
outsourcing textile production.

3. What international trade theory, or theories, best explain the rise of Bangladesh
as a textile exporting powerhouse?
Answer:
The international trade theory that best explains the rise of Bangladesh as a
textile exporting powerhouse is the theory of absolute advantage and theory of
comparative advantage.

The theory of Absolute Advantage states that Bangladesh has an unmatched


advantage over other countries in the production of textile items due to its capacity
to utilize scarce resources and advanced technologies. This theory suggests that
Bangladesh's textile industry has an absolute advantage in production efficiency,
enabling it to produce goods at a lower cost and sell them at competitive prices.
The theory of Comparative Advantage: Bangladesh's capacity to manufacture and
market textile goods at comparatively low costs stems from its inexpensive labor
force. Bangladesh is able to increase its market share in the global textile industry
as a result.

4. How secure is Bangladesh’s textile industry from foreign competition? What


factors could ultimately lead to a decline?
Answer:
The security of Bangladesh's textile industry from foreign competition is relatively
high due to several factors, primarily its low wage rates and investments in the
industry. However, there are potential factors that could ultimately lead to a decline
in the industry's security:

 Increasing rivalry: Bangladesh may experience a rise in rivalry as other


nations develop their manufacturing capacities and level up their efforts in
the textile sector, which might have an effect on its market share and
profitability.
 Economic instability: The textile sector may be impacted by changes in
demand, manufacturing costs, and export prospects as a result of economic
instability in Bangladesh or around the world.
 Technological Advancements: Bangladesh's competitiveness and
efficiency may be hampered by its textile industry's failure to adopt new
machinery and technologies, leaving it open to attack from competitors with
more sophisticated technological capabilities.
 Trade regulations: Bangladesh's textile exports and market access may be
impacted by changes in international trade agreements, tariffs, or
regulations, which could have an effect on the stability and growth of the
sector.
 Labor Issues: Workplace disputes, strikes, or issues pertaining to pay and
working conditions have the potential to impede productivity and harm the
competitiveness and image of the sector.

Submitted by:

Florissa Isabel F. Citacion


MBA Student

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