Apparel exports to EU may fall 27%

Bangladesh’s apparel exports to Europe might take a blow when the EU is expected to introduce a carbon border adjustment mechanism (CBAM), says a study.

“Bangladesh’s apparel exports could decline by 27 per cent to EU markets if CBAM is extended to cover textile, clothing and impose tariff,” said the study jointly carried out by the Research and Policy Integration for Development (RAPID) and Friedrich-Ebert-Stiftung (FES) Bangladesh.

The EU accounts for around 45 per cent of the country’s total apparel exports in the world markets.

The European Parliament’s legislative procedure is underway to enact CBAM by 2022 and recommends that businesses should be prepared for CBAM compliance starting from January 2023.

Once CBAM, a climate measure that prevents the risk of carbon leakage and supports the EU’s increased ambition on climate mitigation, while ensuring WTO compatibility, is implemented, the tariff on clothing products will be increased, leading to seriously affecting Bangladesh’s export competitiveness, said the study.

Releasing the report at an event in Dhaka on Sunday, RAPID Chairman Mohammad Abdur Razzaque said the EU is set to introduce CBAM, which in effect will make use of trade policy in an unprecedented manner to tackle carbon emissions and will be a game changer.

“Bangladesh will face a big challenge in exports if we can’t keep up with it. The EU’s CBAM will be followed by other major economies and Bangladesh should follow it for export competitiveness.”

According to the study, the implementation of the CBAM will coincide with Bangladesh’s LDC graduation timeline. Bangladesh is set to graduate in November 2026 and will lose EU’s

Everything but Arms (EBA) trade preferences in 2029.

It could be that if Bangladesh qualifies for GSP+ in the EU after graduation, its apparel export may not get any preference and thereby be subject to an MFN tariff of 12 per cent from the current 0 per cent under EBA. An additional carbon tax can hinder the export competitiveness of Bangladesh.

“If the coverage of CBAM is expanded to consider textile and apparel items, Bangladesh will face post-LDC tariff hikes and CBAM charges. This would result in double trouble for our exports,” said the report.

Estimates based on the Energy Environmental Version of GTAP (GTAP-E) model suggest that after Bangladesh’s LDC graduation if it pays MFN (Most Favoured Fashion) tariff for textile and clothing, if carbon price equals $90 per tonne carbon and if CBAM is extended to cover textile and clothing, Bangladesh’s apparel exports to the EU could decline by 27 per cent, it said.

Bangladesh NDC commitments and actions for reducing carbon emissions appear to be much less ambitious compared to other comparable countries.

Bangladesh major comparators have either already established or are in the process of developing carbon markets locally, it added.

China launched its carbon market in 2021; Vietnam and India are in the process of establishing their internal carbon market. Vietnam wants to formally launch its carbon market in 2028.

Bangladesh aims to introduce green taxation on the consumption of fossil fuels, but it is not clear yet how this will be implemented. “However, no progress has been made so far. Therefore, the CBAM can disproportionately affect Bangladesh relative to other comparators,” the report noted.

According to the report, the CBAM can alter the comparative advantage in favour of less carbon-intensive producers.

It is estimated that a carbon price of $28 per tonne of carbon on imports is equivalent to a 2 per cent import tariff. Initially, major export items of Bangladesh apparel, leather, footwear etc. were not included in CBAM. However, these are among the 63 sub sectors that are identified as sectors with a risk of carbon leakage. Thus, the EU might include these later on, said the report.

According to the EU Commission, the CBAM will initially apply only to a selected number of goods at a high risk of carbon leakage, cement, iron and steel, aluminium, fertilizers, and electricity and will be operational from January 2023.

During the transition period of 2023-25, importers will have to report emissions embedded in their goods without paying any financial compensation. From 2026 onwards, EU importers will have to pay for CBAM certificates. If non-EU exporters establish a carbon market, the corresponding cost will be deducted from total CBAM charges.

The supply chain laws in the EU and individual member states may affect businesses in the developing countries that supply to the EU, including Bangladesh, according to the report.