Exit China, enter Bangladesh: The battle for the world’s factory
Ahmad Tousif Jami and Zaheer Abbas, research associate, YPF.
Over the past 40 years, The People’s Republic of China built itself into the world’s factory. Can Bangladesh take its place in the coming years?
China’s immense manufacturing power has drawn a series of environmental and wage concerns around the globe. Its increasingly hawkish geopolitical posture has attracted countless critics and has been perceived as a threat worldwide. It has also sparred with the United States in the form of a trade war. Finally, it goes without saying — the Covid-19 pandemic caused a sizable loss of face for Beijing.
Countries worldwide are carrying out a China exit to take down the world’s largest factory, brick by brick. There is one question that remains — where will our manufacturing go? Alternatives worldwide are popping up day by day — India, Vietnam, Thailand — but what does Bangladesh have to offer?
Why invest in Bangladesh?
Bangladesh is the fastest growing economy in Asia (Source: Focus Economics) having a consistent annual GDP average growth of six percent for over a decade. This means, compared to other emerging markets, the GDP growth of Bangladesh has been outstanding.
Location-wise, the country is positioned on the border of South and Southeast Asia. Hence, it is close to other major markets in the region, i.e., India and China. The capital city Dhaka is the most significant economic center of Eastern South Asia. The geographical location next to the Bay of Bengal also unlocks convenient trading business opportunities within Asian and Middle Eastern Markets.
The young skilled workforce has worked as a significant factor in Bangladesh’s outstanding economic growth. Bangladesh is listed as an ideal destination for outsourcing by the European Commission. Bangladesh offers highly competitive labor costs. In Bangladesh, an RMG worker on average earns only 5300 BDT (near USD 63). In contrast, an RMG worker in China on average earns USD 347, which makes Bangladesh a much better alternative to land to invest in than China.
Bangladesh offers tax holidays, tax exemptions, simplified import of raw materials and machinery, and facilitates utility connections for favorable conditions for conducting business. Furthermore, the Bangladesh Economic Zone Authority (BEZA) has created a blueprint to establish 100 economic zones all across Bangladesh.
Bangladesh is a WTO (World Trade Organization) member country. Bangladesh currently enjoys many trade benefits upon various memberships and agreements. The EU-Bangladesh agreement provides the condition of duty-free exports. Bangladesh enjoys the South Asian Free Trade Area, the Asia-Pacific Trade Agreement, and more. Bangladesh has tariff-free trade access to many entities, including but not limited to the European Union, Canada, and Japan, and will continue to do so at least until 2026. Bangladesh’s FDI policy is the most open in South Asia, allowing a staggering 100% foreign with public exit policy. Bangladesh offers one of the most competitive energy pricing in its geographical region.
Bangladesh also has macroeconomic stability and offers an open and diversified economy. Even international giant companies like Honda (a Japanese motorcycle company), Samsung (a Korean tech Company) have created manufacturing factories in Bangladesh.
Challenges and the road ahead
Despite the strong pull-factors that Bangladesh offers for foreign investors, challenges persist. As a country that just qualified for LDC graduation and will make its exit in 2026, Bangladesh is still addressing and fixing the challenges.
Social unrest, political instability, and a high level of corruption tied together became a significant challenge for the country to address. Lack of transparency has amplified the problems since addressing and monitoring them became more difficult. Bangladesh is also vulnerable to natural disasters (cyclones, severe floods) that can potentially result in substantial income loss for investors. The economy is heavily contingent on the RMG sector (Ready Made Garments) and characterised by a weak per capita income.
In this regard, there are many changes that Bangladesh can implement. Digitisation can play an immense role in this: by providing practical, speedy digital services online, Bangladesh would cut through the bureaucratic process and corruption within the system. The country has already established digital public services through its a2i (Access to Information) programme. There is an opportunity to establish business services in the same way — ranging from registrations to complaints — as a way of ensuring “Access to Investment”. This, in turn, would make it easier for firms to shift to Bangladesh.
The government has already taken several steps to build countless infrastructure aimed at attracting investors — from ICT Parks to ports. From climate adaptation projects that could minimise the damage of natural disasters on investments to educational infrastructure that would improve the quality of Bangladeshi labour and enable them to specialise across a diverse set of industries, there is much potential to broaden the impact of infrastructure on the economy.
Finally, the government must aggressively pursue liberal economic ties with key players who are exiting China. Vietnam, for instance, has established a free trade agreement with the European Union, presenting itself as a solid alternative to China in the process and gaining unfettered access to one of the world’s biggest markets. Bangladesh graduating from its position as an LDC will lose the special market access it had enjoyed earlier. In short — digitisation, diversification, liberalisation — are the strategies that Bangladesh should consider.
Conclusion
The battle ahead for the world’s biggest factory is not an easy one. Bangladesh competes with some of the strongest manufacturers globally, from neighbouring India to rising Vietnam. Many believe that China’s manufacturing might not eclipse, and countries may share parts of the world’s manufacturing demand than its entirety in the way China has.
Regardless of the outcome, what the China exit does present is a chance for Bangladesh to strengthen itself. For a country that continues to strive for higher foreign investment and a stronger trade position, the China exit is an opportunity for Bangladesh to adopt best practices that will not only enable it to participate in this battle of the world’s largest factory — but nurture an economy that has much to learn and much to do in this decade.
The authors are research associates at Youth Policy Forum. Ahmad Tousif Jami is a recent High School graduate from Dhaka College and Zaheer Abbas is a current 12th grade student at the Mahindra United World College, India.
