Despite the success in garments exports, the overall export size in Bangladesh remains modest and is characterized by a staggering concentration. Among the Least Developed Countries (LDCs), Bangladesh is often regarded as an example of export-led growth and development. Over the past two decades, merchandise exports in Bangladesh grew from just $6.5billion in 2003 to $55.0 billion in 2023. This was mainly spearheaded by the apparel sector, which grew during the same period from just less than $5 billion to $47 billion.
However, when compared to countries outside the LDC group, export volume (both including and excluding services) in Bangladesh appears modest. Most Southeast Asian countries have demonstrated stronger export performance. Considering Bangladesh’s large population of 170 million, its current merchandise export volume of $55 billion is relatively small compared to other nations with similar population sizes. For instance, Viet Nam, with a population of 91 million, boasts a comparable export volume of over $360 billion; Indonesia, with 218 million people, exports $240 billion; and Thailand, with a population of 72 million, earns around $323 billion from exports. In addition, Southeast Asian countries with smaller population sizes like Malaysia and Singapore have equally achieved remarkable success as exporting nations.
Since the emergence of RMG in Bangladesh’s export sector in the 1980s, its relative importance has consistently increased, resulting in a reduction of the share of erstwhile traditional exports (such as raw jute and jute goods, tea, leather, frozen fish) from over three-quarters to approximately 10 per cent.
Even within the garments products, Bangladesh’s exports are heavily concentrated. Overall, the top 20 products at the Harmonized System (HS) 6-digit level collectively represent over 80 per cent of Bangladesh’s total exports, whereas for countries like the India, Malaysia, the People’s Republic of China (PRC), and VietNam, the corresponding figures range from 37 per cent to 59 per cent. Bangladesh’s top 100 products constitute over 90 per cent of its exports, contrasting with figures of 69 per cent for the PRC, 73 per cent for India, and 84 per cent for both Malaysia and Viet Nam. With RMG items prominently leading Bangladesh’s top 100 products, there is a significant export concentration, even within the clothing export sector. Bangladesh’s heavy reliance on a single export item leads to one of the least diversified export baskets among the global economies. Using the Hirschman-Herfindahl index based on disaggregated export data at the HS 6-digit level, it is found that Bangladesh’s export concentration is four times higher than the developing country average, surpassing even the average concentration seen in LDCs.
WHY EXPORTS IN BANGLADESH REMAIN SO HIGHLY CONCENTRATED: Numerous studies have discussed the challenges of export diversification in Bangladesh. There seems to be a broad consensus on the primary factors contributing to the country’s highly concentrated export structure. These factors have been extensively discussed in national documents like the 6th (2011–2015), 7th (2016–2020), and 8th Five-Year Plans (2021–2025), and the Perspective Plan 2021–2041, and in the Bangladesh Diagnostic Trade Integration Study 2016 and its subsequent update in 2023.
The challenges identified in these various sources fall into two main categories, i.e., the trade policy regime in Bangladesh discriminates against exports, and weak trade infrastructure and other unfavourable business-enabling factors undermine export competitiveness. Discussions on export diversification, however, often overlook the fact that Bangladesh’s predominant reliance on the garments sector has largely been shaped by international trade policies. Consequently, the set of general challenges, such as discriminatory trade policies hampering incentives for exports and the unfavourable business environment, have posed greater obstacles for the non-garments sector.
International Trade Policy Regime as a Primary Driver of Bangladesh’s Ready-Made Garments Exports. The establishment of the export-oriented garments industry in Bangladesh was the result of a unique global trade policy regime associated with the textile and clothing sector. Until 2004, trade in textiles and clothing was restricted in developed countries through the Multi-Fiber Arrangement (MFA) quota system. This system regulated imports by imposing quotas on countries, leading to a global dispersion of production and limiting exports from countries that could have otherwise achieved higher export volumes. The implementation of this “managed trade” regime opened export opportunities for countries not traditionally known as exporters of textiles and clothing. Numerous international business firms, especially those from newly industrialised economies in Asia, faced binding quota restrictions in their own countries and relocated a portion of their production and trade to less developed countries, including Bangladesh. The quota system offered a guaranteed market for these new suppliers, providing them with an opportunity to develop and acquire necessary production and marketing skills.
Another distinguishing feature of apparel markets has been the prevalence of high Most Favoured Nation (MFN) tariffs, inaddition to the earlier MFA quota regime. Although quotas were abolished in 2005, tariffs continued to be employed as a trade policy instrument, often used to provide trade preferences, either unilaterally through mechanisms like the Generalised System of Preferences (GSP) or through free trade agreements. While the average tariff on industrial goods in developed countries in the West varies between 3 per cent and 5 per cent, the corresponding figure for apparel is approximately 17 per cent in Canada, 12 per cent in the European Union (EU) and the United Kingdom (UK), 9 per cent in Japan, and 16 per cent in the United States (US). As an LDC, Bangladesh enjoys unilateral trade preferences in Canada, the UK, and the EU, with the US market being the only notable exception, not offering duty-free market access to Asian LDCs. This duty-free market access, in stark contrast to the high MFN tariffs, has endowed Bangladesh with a significant competitive edge.
In contrast, non-garments sectors have not experienced similar international trade dynamics. Tariffs on these sectors were much lower than those applied to textile and clothing exports. As a result, the duty-free market access available to Bangladesh did not provide a sufficient competitive advantage for these sectors. This partially explains why Bangladesh’s export basket has remained largely undiversified, heavily relying on the garments sector. The historical protectionism in developed countries’ apparel industries and specific global trade policies have played a crucial role in shaping Bangladesh’s current export profile.
Policy-Induced Anti-Export Bias. The limited dynamism of non-garments export sectors is partly due to the high protection of import-competing industries via tariffs and non-transparent para-tariffs, such as supplementary and regulatory duties. [Para-tariffs are extra fees at the border on things that come from other countries, just like tariffs. However, these fees are applied primarily to imports, providing protection to goods made locally. Some examples of para-tariffs include supplementary duties, regulatory duties, customs surcharges, other additional taxes and charges (e.g., tax on foreign exchange transactions), service charges, etc.] The excessive protectionism directed toward domestic sectors competing with imports leads to discrimination against the export sector. This occurs as resources and investments are disproportionately channeled toward industries shielded from foreign competition, resulting in their becoming less efficient and less innovative due to the lack of competitive pressure. High protection makes the domestic market more lucrative to investors relative to the global market. [When duty-free import of intermediate inputs is not possible, tariffs make exports less competitive. In Bangladesh, while exporters are generally allowed duty-free imports of intermediate inputs, for many non-garments sectors not able to make use of bonded warehouses, accessing such a facility can be quite cumbersome.] The consequent misallocation of resources affects the development and competitiveness of the export sector, for which similar protective measures are not possible and equivalent export support measures (e.g., subsidies) cannot be provided. These protectionist policies place the export sector at a disadvantage, hindering the country’s overall trade potential and its ability to integrate into the global market. This high protection given to the domestic sector thus gives rise to what is known as a policy-induced anti-export bias.
The applied tariff rate in Bangladesh has been higher than that in many other global economies. Despite this, Bangladesh has achieved remarkable economic growth, resulting in limited policy traction in tariff rationalisation aimed at further improving growth performance. Ideally, only customs duties would determine the nominal protection rate. However, in Bangladesh, additional taxes such as regulatory duty, supplementary duty, value-added tax, and advance income tax are imposed. Although these taxes are supposed to be trade-neutral, in practice, they are imposed mainly on imports, increasing the level of protection for import-substituting industries and dis-incentivising exports. Estimates suggest that the average nominal protection rate is 27 per cent, surpassing the average tariffs observed in low-income, middle-income, and high-income countries. When all different types of tariffs and other taxes are considered, the total tariff incidence on imported goods is estimated at a much higher level of 52 per cent, on average.
It is true that the policy-induced anti-export bias has also been prevalent in the textile and clothing industry targeting the local market. Therefore, one question is why the export-oriented RMG sector could overcome this problem but not others.
The success of Bangladesh’s RMG sector can be attributed to several distinctive factors. The global MFA regime was instrumental in shifting textile and clothing production to Bangladesh, creating a favourable environment for the RMG sector’s growth. Moreover, Bangladeshi RMG suppliers gained from high tariff preferences in developed countries, enhancing their market access. The government also played a crucial role by providing targeted support through cash incentives, duty drawbacks, and bonded warehouse facilities specifically tailored for the RMG industry. Coupled with Bangladesh’s labour cost advantages, these measures spurred rapid expansion and scale economies in garments export production, leading to cost efficiencies and competitive pricing. Furthermore, even within the limited overall inflows, the RMG sector did receive some foreign direct investment (FDI), which brought in much-needed capital, technology, and expertise, which were crucial for the sector’s development and integration into global supply chains.
In contrast, non-RMG sectors in Bangladesh did not benefit fromsimilar conditions. Moreover, the nature of products in the non-RMG sectors did not align with a “born-to-export” model, as they had more significant domestic market relevance compared to the specialized clothing items produced by the RMG sector. These disparities in support, market access, and product nature made non-RMG sectors more susceptible to the anti-export bias inherent in national trade policies. While the RMG sector thrived under these specific and favourable conditions, non-RMG sectors faced greater challenges in entering and competing in the globalmarket.
Weak Product Standards and Compliance in a Large Domestic Market Make Exporting Less Attractive. The impact of anti-export bias is exacerbated by the domestic market’s deficiency in standards and compliance enforcement. In the absence of robust domestic standards, local industries face a significant quality disparity compared to international markets. This gap often results in domestic products not meeting the stringent quality requirements of global markets, rendering them less competitive for export. Such a scenario discourages producers, particularly those with limited resources, from venturing into exports, as their products may not align with the higher standards expected internationally. This quality disparity not only hinders the immediate export potential but also affects the long-term reputation of the country’s ’products on the global stage, creating a cycle of reduced export inclination
The lack of domestic standards can lead to increased compliance costs for exporters who are forced to upgrade their products to meet international standards. This additional financial burden can be particularly daunting for smaller firms, further aggravating the anti-export bias. Simultaneously, the absence of stringent standards stifles innovation, as there is little incentive for domestic producers to improve and innovate beyond the minimal local requirements. Consequently, domestic industries may lag in technology and quality, further diminishing their appeal in the competitive global market. This situation not only reinforces the anti-export bias but also risks the long-term growth and sustainability of domestic industries in the global economy.
With Bangladesh’s relatively sizeable and fast-growing domestic market, many firms prefer targeting local sales, leading to overlooked international quality comparisons and ineffective local standards enforcement. Consequently, numerous firms are ill-prepared for exports, particularly to destinations like the EU, the UK, and the US, given their current product offerings.
Overall, Bangladesh’s product testing and certification infrastructure is inadequate, and its institutional mechanisms for enforcing standards are weak. This deficiency manifests in limited testing facilities and under-resourced certification bodies, hindering the ability to ensure product quality and safety effectively. The existing institutions tasked with standard enforcement lack both the technical capacity and the regulatory authority necessary to uphold high-quality standards consistently. This shortfall hinders the competitiveness of Bangladeshi products in the international market, where stringent quality standards are paramount.
Dependence on Import Tariffs for Revenue Generation. While the importance of trade taxes for government revenue has declined since the early 2000s, import duties still constitute about 30 per cent of Bangladesh’s domestic revenue. However, if only import duties are considered excluding the value-added tax (VAT), the revenue dependence on the import sectors is estimated at 14 per cent. Since tariff rationalisation does not call for VAT rate cuts, the perceived loss of revenue due to any downward adjustments in tariffs appears to be much higher. This reliance on import-based revenue complicates efforts to rationalize tariffs to reduce the bias against exports, as there are concerns about potential revenue losses. The situation is further complicated by the lobbying efforts of influential manufacturers and their associations against tariff rationalization and incentive structure adjustments. High protective import tariffs in the export sectors create a bias for manufacturers to focus on the domestic market rather than pursue international opportunities.
Bias in Export Incentives. The export incentives in Bangladesh have historically been, to a large extent, biased in favour of the RMG sector. In fact, many of those incentive schemes were designed to support the sector, including duty drawbacks on imported intermediate goods, bonded warehouse facilities for duty-free import of raw materials, cash compensation schemes for RMG exporters who opted for not using bonded warehouses and duty drawbacks facilities, duty-free imports of machinery for export-oriented firms, the ability for exporters to retain part of their earnings in foreign currencies, income tax rebates, an export credit guarantee scheme, and subsidized short-term capital support through a scheme called Export Development Fund. Although some of the incentives were open to all export sectors, they were predominantly utilized by the RMG sector. Garments exporters not using bonded warehouse facilities in the 1990s were given cash compensation to the tune of 25 per cent of free on-board value of their exports.
Cash assistance or direct export subsidies to RMG exporters were rationalised in the 2010s, and similar incentives for non-RMG sectors were enhanced with the objective of diversifying exports. However, the export response from non-RMG sectors has not improved, partly because of the much larger anti-export bias in the trade policy regime explained above. In other cases, incentives remained focused on the RMG sector. For instance, bonded warehouse facilities were not extended to all export sectors, non-RMG sectors continued to face higher corporate tax rates until fiscal year 2023, and non-RMG exporters had limited access to finance and various incentives, such as the support available under the Export Development Fund. Being a dominating sector, policy attention for the RMG sector has been more prominent.
Other Challenges Affecting General Export Competitiveness with Disproportionate Impact on Non-Garments Sectors: There are other challenges that affect the overall export competitiveness, but their impact is disproportionately more severe on the non-RMG sectors, which are characterised by a lower export base and are particularly vulnerable to the inefficiencies and high costs stemming from these issues. The non-RMG sectors, lacking the scale and integration into global markets that the RMG sector has achieved, find it more challenging to absorb or offset the high costs emanating from such issues as continuous real exchange rate appreciation, weak and inadequate trade infrastructure and logistics, and the relatively high cost of doing business.
Exchange Rate Management. In the early 2000s, Bangladesh moved from a fixed to a managed floating system of exchange rates. However, it soon failed to avoid prolonged periods of real appreciation. In the 2010s, with a combination of relatively higher inflation rates compared to many counterparts and lower nominal exchange rate adjustments against the United States dollar (devaluations), the real exchange rate of the taka significantly appreciated against that of the currencies of other countries, undermining Bangladesh’s external competitiveness. Between 2012 and 2022, the taka’s bilateral real exchange rate relative to the Chinese yuan and Indian rupees declined by about 30 per cent and by 25 per cent, respectively, against the Vietnamese dong. Therefore, in addition to the disincentive effects of large trade protection on exports, the persistent appreciation of Bangladesh’s real exchange rate undermined the country’s external competitiveness. It was only in response to recent balance of payments pressures— triggered by post-coronavirus disease (COVID-19) global turmoil arising from rising commodity prices, accumulated pent-up import demand during the pandemic, and supply chain shocks in food and fuel due to the Russian invasion of Ukraine—that Bangladesh Bank was compelled to undertake significant depreciation of the taka. Reform measures to improve the exchange rate management are currently underway.
Limited Foreign Direct Investment and Lack of Participation in Global Supply Chains. The limited inflow of FDI into Bangladesh has been a significant factor hindering export diversification. While FDI is essential for integrating local industries into global markets by providing capital, technology, management expertise, and international market access, Bangladesh has seen relatively low overall FDI inflows, with the garments sector attracting the bulk of this investment that has gone into export-oriented enterprises. This has allowed the garments sector to establish networks with international brands and retailers, effectively integrating it into global supply chains.
In stark contrast, non-garments sectors, lacking external investment, have had to rely on domestic resources and capabilities, which are often insufficient to meet the rigorous demands of global supply chains, such as high-quality standards, compliance, and production efficiency. As a result, non-garments sectors in Bangladesh remain largely on the periphery of global trade, missing opportunities for growth and development that come with active participation in international supply chains.
This challenge of weak FDI inflows is acknowledged in national planning documents, such as the 8th Five-Year Plan. Despite various reform measures, FDI inflow into Bangladesh has been modest, averaging around 1 per cent of GDP from 2000 to 2021. This figure is low compared to countries like Cambodia, India, the PRC, and Viet Nam, which have seen higher average FDI inflows
Weak and Inadequate Trade Infrastructure, Logistics, and High Cost of Doing Business. Bangladesh faces significant challenges in infrastructure and logistics that impede its export competitiveness. These challenges, frequently highlighted in the policy discourse, include a variety of infrastructure bottlenecks. Key areas of concern are energy supply shortages, inefficient port and customs procedures, limited industrial plots with all relevant facilities, port service inefficiencies, inadequate road and railway systems, and air freight and airport storage management issues.
The garments industry in Bangladesh has thrived despite weak and inadequate trade infrastructure, logistics, and infrastructural challenges, primarily due to several key factors. Firstly, the sector benefits from established global supply chains and strong international market connections developed over decades. These networks facilitate efficient production and distribution, compensating for domestic infrastructural limitations. Secondly, the garment sector, unlike others, received substantial focused investment, both domestically and from foreign sources. Thirdly, government policies and incentives have historically been geared more toward supporting the garment industry. Finally, the garment industry has developed a unique competitive advantage due to economies of scale in production and labour costs, which are among the lowest in the world. This cost advantage has made it possible to offset some of the inefficiencies caused by inadequate infrastructure and logistical issues. In contrast, other export sectors have not had the same level of targeted support, investment, and developed market connections. As a result, they have been more adversely affected by the infrastructural and logistical challenges in the country.
Additionally, the high costs associated with trade logistics further diminish the country’s competitive edge in exports. This is evident from Bangladesh’s ranking in the World Bank’s Logistics Performance Index for 2023, where it placed 87th out of 139countries, indicating substantial room for improvement. Compounding these logistical challenges is the significant shortage of skilled workers and specialized professionals in Bangladesh. This issue, critical for the country’s export-oriented firms, is highlighted in various studies and national development plans. The World Bank Enterprise Survey 2022 reveals that about 10 per cent of exporting firms in Bangladesh consider an inadequately educated workforce as a major hindrance, a percentage higher than in countries like India, Indonesia, Malaysia, and the Philippines. The skills deficit is also reflected in the frequent hiring of foreign workers for key roles, suggesting a gap in local semi-skilled and high-skilled labouravailability.
Dr Mohammad Abdur Razzaque is Economist (Consultant), South Asia Department (SARD), Asian Development Bank (ADB). Barun Kumar Dey is Senior Economics Officer, SARD,
ADB. Rabiul Islam Rabi Research Analyst (Consultant), SARD, ADB.
The piece is excerpted from ADB BRIEFS (No 293) tiled ‘Expanding and Diversifying Exports in Bangladesh: Challenges and the Way Forward.’ www.adb.org
