GSP suspension - overcoming the challenge

Source: Rashed Sumon

Under generalized system of preferences (GSP) US grants LDCs and some developing countries to export their products to US markets duty free or at preferential duty on certain terms and conditions. GSP eligibility is conditioned on the status of economic development of the exporting country. For example, it must be an LDC or a developing country whose per capita income is relatively low. Developed countries are not eligible for GSP privileges. The beneficiary country must also meet other conditions imposed by US government. According to USTR, a country can be eligible for GSP  provided it has a market economy, is not a member of OPEC,  is not involved directly or indirectly in terrorism, has succeeded  in maintaining  good trade relations with US, comply with US property laws including those related to patents and copyrights and upholds internationally recognised workers' rights.  US particularly emphasizes the last condition. A country is eligible for GSP if it demonstrates, among other things, a genuine commitment to workers' rights, including right to form trade unions and bargain collectively, and acceptable working conditions related to wages, work hours, fire safety, safety of buildings in which workers work and working environment are free from health hazards. An LDC, if it is not a terrorist country, is automatically eligible for GSP privileges but all its products do not qualify for duty-free access. GSP privileges are subject to suspension or cancellation if a beneficiary country fails to comply with the eligibility requirements.
Bangladesh as an LDC is a beneficiary of US GSP program but all its exports are not.  Bangladeshi products such as tobacco, plastic bags and articles, golf equipment, sleeping bags, bone china and porcelain kitchen/tableware, hand loomed woven cotton carpets and other textile floor coverings, headgear of particular types, etc. are eligible to enter duty-free in US markets. Although US GSP program covers many products of Bangladesh, its major export, namely, RMG which constitutes more than 95% of its total exports to US markets does not qualify for duty-free access because RMG is in the sensitive (negative) list of US government. Therefore, Bangladesh pays duty at an average rate of 15.3% when it exports RMG to US. In 2012, Bangladesh paid $746 million as duty to US government for exporting little over $5 billion worth of RMG products.
Suspension of GSP by US
US has recently suspended GSP privileges for Bangladesh due to its flagrant violation of workers' rights that caused death of many workers in RMG factories.   However, suspension can be reinstated provided Bangladesh government and vendors meet all the conditions US government wants them to meet. The total value of all the products other than RMG exported to US from Bangladesh is insignificant. Therefore, GSP suspension, as some people argue, does not appear to be something to worry about. But they are wrong. It is a serious matter; its “collateral damages” will hit Bangladesh hard. RMG exports from Bangladesh enjoy GSP privileges in EU, Canada, Japan and several other markets. If it fails to meet the conditions stated in the USTR sponsored 15-point Bangladesh Action Plan 2013, it will send a bad signal to EU and other countries. Consequently, the latter may cancel the GSP privileges for export of RMG from Bangladesh. If it happens, it will be a disaster for Bangladesh.
The crisis has been caused by a combination of factors like non-compliant behavior of some factory owners and unintended results of constructing factory buildings without proper approval. There are buildings whose designs are structurally fragile and many of their walls and roofs are cracked; therefore prone to collapses. In some buildings electrical wirings are so poorly done that they are prone to short-circuit resulting in fire. In many buildings fire escapes and fire-fighting equipment are not usable. The  garment industry history records many labour unrests protesting unacceptable working conditions,  fire accidents, stampedes, building collapses, etc. leading to deaths of many workers. Frequently, workers are exploited in various manners.
In the past, the buyers and US government expressed their displeasure because factory owners did not take adequate measures to recognize the workers' rights; they were non-compliant on other grounds also. On November 24, 2012, the devastating Tazreen Fashion fire killed 112 workers and injured many who needed treatment for a long time. More than one year has passed, the compensation for the dead and injured workers have not yet been settled fully. Official investigations revealed that the disaster occurred due to negligence and carelessness of the owners. Within a few months, the “Rana Plaza”, a nine-story building complex in which five garment factories were housed collapsed and 1132 workers got killed under the debris. Thousands got injured, many maimed and unfit for reemployment in a garment factory for life. In both cases the negligence and law-breaking behavior of the factory owners were the major causes.  The “Rana Plaza” disaster quickly drew the attention of the world. To appease the pressure groups and US consumers,  President Obama suspended GSP privileges for Bangladesh on June 27, 2013.     

Source: Palash Khan

Robert Menendez, an influential US Senator, who recommended the GSP suspension, expressed US reactions to RMG industry disasters in Bangladesh by saying, “we have a responsibility and an opportunity to bring about changes in Bangladesh's garment industry…. The world woke up to the horror caused by unsafe working conditions in Bangladesh.   We owe it to the victims and four million garment workers in Bangladesh who produce a lot of the clothes we wear, to maintain pressure until Bangladeshi workers are given the rights they deserve and the tools they need to protect themselves''. By this, Senator Menendez refers to well functioning trade unions, and he wants to see strong trade unions in Bangladesh.
Factory Inspection
Bangladesh Action Plan includes factory inspection. Taking remedial measures based on the recommendations of inspectors is an important condition on which the withdrawal of suspension is greatly dependent. Big US retailers buy garments from Bangladeshi vendors. They thought that many factory buildings might have similar defects, namely, big cracks, weak structures,  flawed electrical works, etc. as “Rana Plaza” and Tazreen Fashion had. They wanted to avoid repetition of the past disasters. Therefore, they decided to inspect 2500 factories they buy merchandises from. US buyers formed a consortium of 22 retailers called “The Alliance for Bangladesh Workers' Safety”. This consortium will inspect a total of 600 factories. It is already carrying out the planned inspection with the help of BGMEA, vendors, ILO, US Embassy in Dhaka, government of Bangladesh, BUET and private consultants. This is one of two groups engaged in implementing the Bangladesh Action Plan.
Presence of buyers from EU is stronger in Bangladesh because it is the largest markets for Bangladeshi garments. Trade Commission of EU took US suspension seriously. EU buyers also got concerned and found it necessary to inspect the factories they buy garments from. They formed a separate 87 member consortium called “Accord on Fire and Building Safety in Bangladesh”. Accord has decided to inspect 1500 factories. Accord's inspection is also progressing well in cooperation with Alliance, government of Bangladesh, vendors, BGMEA, and other stakeholders. Government of Bangladesh is also inspecting another 500 factories.
 RMG exports from Bangladesh to EU markets enjoy duty-free status but not in US markets. Not having duty-free status in US market does not make US markets less important for Bangladesh. Both US and EU markets are important. Our immediate challenge is how to retain our leadership in both these markets. It is to be noted that because EU has not suspended our GSP privileges, it does not mean it will not suspend that in future. Both US and EU are watching how sincerely and effectively Bangladesh is implementing Bangladesh Action Plan 2013. According to Alliance, “The safety record of Bangladesh factories is unacceptable and requires the collective effort of vendors, Bangladesh Government, buyers, workers and international organizations”. This signals a challenge which is how to convince Accord that Bangladesh does not deserve cancellation of GSP privileges. Given the progress of the inspections, I expect Bangladesh will overcome this challenge.
A major challenge is yet to come. If at the end of inspection, a number of factory buildings are found unsafe and needed to be replaced by new buildings, then it will be a great challenge for the industry. To mobilize required financial resources will be a tough job. Beside, a large number of workers will be temporarily unemployed. To arrange alternative employment for them or to rehabilitate them will be another gigantic task.
It is good that Bangladesh has already demonstrated, to a significant extent, its ability to mobilize a huge amount of financial resources from local philanthropists, banks and other business organizations for Rana Plaza Victims Compensation Fund created by the government. The government put its own contribution to this Fund and distributed the available fund among the victims. By this time, 4 global retailers, along with manufacturers and labour groups had agreed to set up a $40 million compensation fund for victims of Rana Plaza (NewAge, dated 25-12-2013, p-B-1). All the four retailers who committed to donate are from EU. Surprisingly, Wal-Mart, the largest buyer, refused to donate on technical grounds. But there is no reason for feeling discouraged. By looking at the history of the RMG industry, I believe that the Bangladeshi entrepreneurs and government will be able to overcome the challenges.  In this case, BGMEA with the help of government can mobilize loans from the banking sector at reduced rates and on easy terms. The government can possibly arrange grants from donor agencies.
For Bangladesh the situation has become more sensitive after another fire accident occurred on 9th October,2013 at Aswad Garment factory causing 7 deaths. Another devastating fire burnt to ashes Standard Group--one of the top 15 garment factories of the country. This was perhaps a case of arson and sabotage. Such fire that destroys large factories interrupts the supply chain and makes the buyers worried. Retailers might suspect that fire-fighting system was not usable when fire broke, and both the industrial police and state police failed to perform their duties. Consequently, such accidents may delay the withdrawal of the suspension.
 The challenge of wages is complicated, but it has been recently overcome. Among the RMG exporting countries, Bangladesh pays the lowest wages. Workers and labour leaders had been fighting  for higher and decent wages for quite sometimes. After prolong negotiations, the minimum wages have been increased and fixed at Tk.5,300 per month for 7th grade (lowest) effective from December 1, 2013. In US dollar the minimum wage has been increased from $39 to $68. This gross amount includes basic pay of Tk. 3000 plus other allowances, viz., house rent, medical allowance, transport allowance and food subsidy. The pay package includes an annual increment of 5% of the basic pay. The pay and allowances for workers in other higher grades will be adjusted and increased proportionately. It is a decent increase given the socio-economic conditions of Bangladesh. To most stake holders the new pay package is acceptable. Another good thing about the new pay structure is that with this pay package RMG workers at the lowest levels will come out of the globally defined poverty line in terms of earnings. (Ref. ICE Today/Business Times, December 2013, p-28).
The wage hike will increase production cost. But it is unlikely to reduce profit margins low enough to throw factory owners out of business. Minimum wage of the lowest grade workers at EPZs is $70. If they can survive, factory owners outside EPZs can also survive with normal profit.
 Since the minimum wage problems have been solved, the job of ensuring workplace safety has become easier to accomplish. Fair wages tend to establish workers' other rights. Ways and means of establishing workers' other rights can be defined in concrete terms when the outcome of Alliance-Accord factory inspections is available.
Senator Menendez has reservations about the functioning of trade unions in Bangladesh. Union leaders exploit both the owners and workers. They work more for personal benefits than they do for the workers. Bangladesh needs to create honest and dedicated union leaders who will work for the workers and industry. I believe it will be able to meet this challenge.
Prolonged political crisis has created additional problems for RMG industry. Hartals and blockades caused by political unrests delay shipments and deliveries of RMG. The retailers delay payments; resultantly, factory owners face liquidity problems. These may delay implementation of the new wage plans which may in turn delay withdrawal of suspension. Only time will reveal which is the more serious problem---GSP suspension or political crisis.
Conclusions
The industry which grew rapidly, by exporting close to $20 billion worth of RMG has become the life line of Bangladesh economy and stands as the economic security of Bangladesh. It employs more than 4 million workers 78% of whom are female. It is the largest foreign exchange earner of Bangladesh and second largest supplier of apparels in the US market after China. According to ILO, Bangladesh accounted for 4.8% of the global apparel exports in 2011 compared to only 0.6% in 1990. Bangladesh should therefore protect its leading position as supplier of apparel products in the global markets including EU market. For this, Bangladesh's immediate task is to apply all its efforts to meet the conditions stated in the USTR sponsored Bangladesh Action Plan 2013 to regain the suspended GSP privileges. The Tazreen and Rana Plaza tragedies have shocked the entire world and tarnished the image of Bangladesh very badly. The US government, American consumers, US retailers, EU retailers and their Trade Commission have joined together to force Bangladesh to be compliant in all respects.  Accord--the platform of EU buyers is working with Alliance--the platform of US buyers, to help Bangladesh complete the factory inspection. Bangladesh must finish this job first. It need not try at this point to get duty-free access for RMG into US market. In the past, BGMEA spent a huge amount of money in hiring US lobbyists to get duty-free access for RMG without success. The hope for getting duty free access for RMG into US market that one possibly finds in the resolutions of TICFA, a recently signed bilateral agreement between US and Bangladesh and WTO 9th Ministerial Conference held in Bali is unsubstantiated. It is going to be a long shot. One should recall that duty free privilege was promised also in the Hong Kong Ministerial Conference in 2005. But Bangladesh did not get it.
Bangladesh cannot afford to see its most important industry decaying due to GSP suspension. It does not have any choice but succeeding in overcoming the challenges for getting the suspension reinstated.

The writer is Professor Emeritus, BRAC University, and Former Vice Chancellor, North South University, Dhaka.