Introduction
Global trade in apparels is expected to undergo important changes subsequent to the full de-restriction of quotas that took place on January 1, 2005 following the completion of the Multi-Fibre Arrangements (MFA) phase-out under the WTO Agreement on Textiles and Clothing (WTO-ATC). The phase-out of the MFA is expected to have major ramifications for trade in apparels worldwide and for Bangladesh, an important global exporter of apparels. Over the years, the Ready Made Garment (RMG) sector of Bangladesh has evolved into the most important export earning sector of the country. At present the sector accounts for a significant part of private sector investment, national employment and gross domestic output. However, with the completion of the phasing out of the MFA, and the consequent quota de-restriction, important changes are likely to take place in the global business environment in which Bangladesh's export-oriented (e-o) RMG sector had been operating until now. The paper focuses on four areas: the evolution of Bangladesh's e-o RMG sector and its current state of development; the changing global scenario in the context of MFA phase-out; Bangladesh RMG sector's experience in view of the first three stages of MFA phase-out; and coping strategies Bangladesh will need if it is to match and sustain the current performance of the apparels sector in the post-MFA world.

Bangladesh's Export-Oriented Apparels Sector
Origin
The quota regime under the MFA was a crucial factor in providing the initial stimuli to the emergence of the e-o RMG sector in Bangladesh and in sustaining its subsequent momentum over the last decade and half. The RMG record also does credit to Bangladeshi entrepreneurs who quickly learnt the art of the business from their quota-hopping partners from South Korea and Hong Kong. Current e-o RMG production is overwhelmingly a Bangladeshi-private sector dominated activity. Domestic policies including bonded warehouse facilities, duty drawback incentive, cash compensation scheme, and the facility of procuring raw materials -- mainly fabrics -- under back-to-back Letters of Credit (L/Cs) also played an important role in the growth of the sector. Thus a combination of global opportunities, private sector entrepreneurial spirit and favourable government policies had combined to stimulate the emergence and thriving of the e-o apparels sector in Bangladesh.

Supporting factors
In the course of the last decade, the growth of domestic supply capacities was instrumental in attracting major global buyers to Bangladesh who saw locational advantage in placing bulk orders for mass-produced apparels items. This helped Bangladesh emerge as a major player in the global apparels market. In 2003 Bangladesh's position as supplier of apparels was tenth in the U.S. market, and second in the EU market. Preferential market access in the EU under the EC Generalised System of Preferences (GSP) Scheme, which accorded Bangladesh -- as a Least Developed Country (LDC) -- zero-tariff and quota-free access, also provided Bangladeshi exporters of apparels crucial market access advantage. There was a relatively secured market access in the USA under the MFA quota regime, and duty-free, quota-free market access in the EU (while quotas were imposed on most of its competitors from developing countries). These provided Bangladesh an opportunity to translate its low wage-based comparative advantage in the production of apparels into revealed comparative advantage in the global market.

Export performance
Bangladesh's export of apparels rose from US$ 2.23 billion in FY1995 to US$ 5.69 billion in FY2004, registering an average robust growth of 10.2 per cent per annum. In FY2004, out of a total export of US$ 7.60 billion, US$ 5.67 billion or 74.8 per cent was contributed by the country's apparels sector (46.5 per cent from woven and 28.3 per cent from knitwear sub-sectors). In recent years, about 90 per cent of incremental export has been accounted for by export of apparels. The ratio between knitwear and woven apparels in total apparels export from Bangladesh changed from 18:82 in FY1995 to 38:62 in FY2004, underwritten by an increasingly strong market presence of knitwear in the European market; thanks to strong backward linkage in the knitwear sector, and preferential market access in the EU. Local value retention is also higher in the knitwear sector, about 60 per cent, compared to an average of 30 per cent for the woven sector. Together the net export earnings from apparels would be about US$ 3.0 billon.

Growing importance
The RMG sector's contribution to Bangladesh's balance of payments and foreign exchange reserves cannot be exaggerated. Bangladesh's RMG sector employs about 1.8 million workers in 3600 factories, which is about one-fourth of the number of employees engaged in the manufacturing sector. About 70 per cent of the workers in the RMG factories are women. A study undertaken by the Centre for Policy Dialogue (CPD), Dhaka, shows that the e-o RMG sector and related upstream and downstream activities are estimated to contribute an income of about US$ 5.0 billion; this was equivalent to about 9 per cent of Bangladesh's current GDP. Comparatively, over the same period Bangladesh's net disbursement of aid was to the tune of only about US$ 800 million. Hence, it is not difficult to understand why a scrutiny of the possible implications of the impending change in the global apparels trade regime in the context of the phase out of the MFA is of such critical importance to Bangladesh.

Post-MFA Scenario
Looming uncertainty
It is to be noted in this context that if the phase-out under the MFA had been evenly distributed, its possible implications would have been relatively clearer by now. However, because the quotas are back-loaded, most of the apparel categories presently under MFA quota were derestricted only at the last stage of the phase-out i.e., January 01, 2005. Consequently, for countries such as Bangladesh, for most of the quota categories exported by it at present, the de-restriction has begun only recently. In the EU, where Bangladesh has enjoyed quota-free market access, for most of these same categories of apparels, quotas will remain for its non-LDC competitors. Accordingly, in case of Bangladesh, as for many other countries, the thrust of the impact of MFA quota de-restriction was felt all at once, in January 2005. This is one of the major reasons behind the looming uncertainty in the context of the post-MFA global trading regime in apparels.

Global apparels market
The challenge of facing the MFA phase-out is being reinforced by a number of other important developments in the global apparels market. These are likely to amplify the challenges of quota de-restriction for countries such as Bangladesh.

China's accession to the WTO in November 2001, which allowed it to export apparels to the U.S., EU and other markets on Most Favoured Nation (MFN) basis, will have a major impact on global trade in apparels. This is particularly important for Bangladesh since China exports many apparels items in which Bangladesh has traditionally enjoyed strong market presence in the USA and the EU. New entrants to the global apparels market such as Vietnam, Cambodia and Lesotho are also expected to pose a formidable challenge to Bangladesh in some of its traditional markets of mass produced apparels.

The global trading regime in apparels is also changing very significantly: fashion seasons are becoming shorter and buyers are no longer ready to wait for 90-120 days after placing export orders. In the post-MFA period, ability to shorten the lead-time is likely to become crucial for being considered as a possible source by buyers. At present Bangladesh has a strong backward linkage in knit-segment of the e-o RMG sector, with 80 per cent of the knit-fabrics being sourced from local knitting units. However, in case of woven-segment, only 15 per cent of the fabrics required by the RMG industry can be met from local sources, with the rest (85 per cent) being imported from countries such as India, Pakistan, Hong Kong and Taiwan. A relatively longer lead-time is becoming an important constraining factor for Bangladesh in the context of quota phase-out since buyers will be free to import apparels from fabric-producing countries capable of supplying export orders on short notice. China, Pakistan and India are likely to take advantage of this situation.

The average price of apparels items is likely to fall considerably once the quota premium goes following quota-derestriction. Competitive pressure will lead to erosion of quota-premium and push prices down; the signs are already there in the global market. Consequently, Bangladeshi exporters will be forced to reduce their offer prices for apparel items.

A number of recent market access initiatives have provided preferential market access to many of Bangladesh's competitors, particularly in the U.S. market where Bangladesh does not enjoy duty-free access. Such initiatives include regional trading alliances such as NAFTA, bilateral FTAs and other preferential arrangements such as US-Vietnam trade agreement and, more particularly, non-reciprocal regional initiatives such as the AGOA, and the CBI. Mauritius and the Lesotho, which produce some mass produced items similar to Bangladesh's, have been able to take advantage of the preferential treatment under the AGOA, particularly due to the derogation in terms of the Rules of Origin (RoO).

Further lowering of the MFN tariffs under the ongoing negotiations on non-agricultural market access (NAMA) is likely to lead to a gradual erosion of the preferences margin accrued to countries such as Bangladesh under the various GSP schemes.

Because of e-commerce and introduction of IT in the apparels trade, the buyer-customer relationships and the nature of apparels business are undergoing important changes. In all likelihood the role of buying-houses, which have traditionally been a crucial part in apparels business in Bangladesh will be significantly diminished. In future apparels trade retailer-producer direct contact will be the norm of the day. As a result, producers will be expected to take more responsibility in terms of design and quality of the apparels products. Bangladesh's current buying-house intermediated apparels trade will also need to take into account this evolving buyer-producer relationship. Consequently, the role of forward linkage and direct marketing channels is also becoming very important for Bangladesh's competitive presence in the global market.

Pressure on RMG units to comply with various standards, including environmental standards, security concerns of importing countries, Social Accounting standards such as SA-8000, are also expected to increase significantly. While these are likely to push up the cost of production, their non-compliance will mean that buyers will be reluctant to place orders with those factories. Thus, compliance issues are likely to become important for Bangladesh's e-o RMG units, and this is likely to increase the cost of doing business in apparels.

The upshot of the above discussion is that there are other important factors at play, along with quota-derestriction. The impact of all these factors will come into play from the beginning of 2005, and gradually unfold over the subsequent months and years.

MFA Phase-Out: The Emerging Scenario
Early signals and major competitors
The major impact of MFA phase-out will be felt after the final phase-out in January 2005 and it is too early to make an assessment. However, the early signals stemming from the first three phase-outs are already becoming visible; and these signals are quite disquieting for Bangladesh. Bangladesh's export of apparels to the U.S. market has come down from US$ 1956 million to US$ 1629 million between FY2002 and FY2004. This drop down has also taken place in categories which have not been derestricted, substantiating the argument that, in the new trading regime in apparels, factors other than quota derestriction are also at play, including China's enhanced entry into the U.S. market, following quota derestriction. A recent study by the American Textile Manufacturing Institute (ATMI) shows that China's shipments of apparels categories that were removed from quota control has increased by an average of 794 per cent (in volume terms) since 2001. China's share in U.S. import of quota-derestricted items has gone up from 9 per cent to 65 per cent (as of March, 2005). The corresponding share for Bangladesh has also come down from 7 per cent to 2 per cent.

An ongoing study at CPD, which examines the impact of the MFA phase-out under the first three stages, provides an indication of the challenges for Bangladesh's apparels industry. In the third stage of the phase-out, in January 2002, out of the 31 quota categories for which there were quotas on Bangladesh's exports to the US market one quota category was derestricted i.e. category 847 (trousers, breeches and shorts). Bangladesh's export of this category fell from US $22.81 million in 2001 to $16.04 million in 2002, and to US$ 14.92 million in 2003 (by 29.7 per cent and 34.6 per cent respectively). China's export of this same category went up from $89.9 million to $559.9 million between 2001 and 2003. In 2001, prior to the third stage of the phase-out, Bangladesh had exported US$ 354.29 million worth of apparels to the US market in all categories which were integrated in the first three phases. In 2002 and 2003 export of these derestricted items fell to US$ 263.27 million and US $214.30 million (a decrease of 25.7 per cent and 39.5 per cent compared to 2001).

In view of the above, it is significant to note that China's export of category 239 (babies garments), which was derestricted in January 2002 (Bangladesh did not have any quota for this item), went up from US$ 120.70 million to US$ 867.33 million between 2001 and 2003 (an increase by 618.6 per cent). Bangladesh's exports of this item came down from US$ 96.82 million to US$ 66.48 million over the corresponding period (a decrease of 31.3 per cent). Similarly, in the case of another item, category 350/650 (robes, dressing gowns), China's exports rose exponentially from US$ 33.68 million to US $199.31 million (an increase of 491.9 per cent), while Bangladesh's exports came down from US$16.34 million to US $11.51 million (a decrease of 29.6 per cent). Thus, the China factor is becoming a critical variable, and its importance as a major apparel exporter is likely to increase manifold in the post-MFA period.

Bangladesh's relative strengths
Low wages have traditionally been a major strength of Bangladesh's labour-intensive apparels sector. The hourly wage rate in Bangladesh's apparels sector is lower than those in China and Sri Lanka (US$ 0.39 as compared to US$ 0.69 and US$ 0.48 respectively); however, wage rate of other competitors such as Pakistan and India are somewhat similar to Bangladesh's, being US$ 0.41 and US$ 0.38 respectively (USITC, 2004). As data shows, between 1997 and 2004 average price of Bangladesh's Knit-RMG has come down from US$ 27.72 per dozen to US$ 23.45 per dozen, a fall of 15.4 per cent; for Woven RMG average price has come down from US$ 41.87 to US$ 39.1, a fall of 6.6 per cent. In recent years, the growth in export earnings from apparels sector has been possible by expansion of export volume: volume-wise export of apparels has increased from 53.45 million dozens to 90.49 million dozens for woven RMG, and from 27.54 million dozens to 91.60 million dozens for knit-RMG between 1997 and 2004. Bangladesh's strength has traditionally been the capacity to supply mass produced apparels items such as T-shirts, basic cotton shirts, pullovers and jackets, sweaters, and basic women's wear. Falling prices under competitive pressure indicate that if Bangladesh is to sustain its market presence, it will need to substantially enhance productivity. It is unlikely that producers will be able to squeeze wages further. In this context, the government should support recent initiatives by some of Bangladesh's exporters to move upmarket to more value added products. A Fashion and Design Institute has been established to support the e-o apparels sector. The capacity of this institute and its linkage with the RMG industry need to be strengthened further.

Performance in the EU
Bangladesh's export to the EU has continued to rise sharply in recent years, notably after quota derestriction in the third stage in January 2002. Between FY2002 and FY2004 export to the EU has increased from US$ 2411.5 million to $3652 million (or by about 51 per cent). This growth was underwritten both by the growth of knitwear export to the EU which increased from US$ 1019.7 million in FY2002 to US$ 1780.6 million in FY2004, and woven apparels which registered a growth from US$ 1391.8 million to US$ 1871.2 million over the corresponding period. However, there is cause for concern in the EU market as well. Bangladesh's export of items for which quota was derestricted in the EU under the first three stages of MFA phase-out has indeed come down quite significantly since 2002. As CPD analysis bears out, Bangladesh's export to the EU, in the 17 quota categories which have been derestricted till now, has come down from US$ 204.2 million to US$ 124.3 million between 2001 and 2003, or by about 40 per cent. This ought to be of much concern to Bangladesh.

Strategies for Post-MFA Era
Need for investment
Bangladesh will need to take energetic steps to address the emerging challenges from the market place. There is an increasing sign of defensive restructuring within the Bangladesh's RMG sector. Data on import of textile and RMG machineries indicate that the larger apparel units are positioning themselves to access the opportunities emerging from a quota-free trade regime in apparels. However, the smaller factories, many of which have been working on a sub-contract basis until now, may not be able to survive under the new environment. This may lead to a situation where a smaller number of well-organised, technology-driven factories, benefiting from economies of scale, compliance assurance capacity and competitive strength, may come to dominate the country's apparels sector. This may lead to the exit of a large number of smaller firms, meaning large-scale lay-offs. Thus, while the overall export of apparels may not decrease significantly, at least in the near future, there may be disproportionately large-scale lay-offs. In view of such an outcome, some stakeholders have put forward the proposal of a Contingency Fund to be created with support from the government and entrepreneurs' association. This fund could be utilised for such activities as skill upgradation to enhance productivity, re-skilling of workers to enable them to search for alternative income generating opportunities, and for providing credit facilities to redundant workers. Consequently, establishment of strong backward linkage in spinning and weaving will assume critical importance for Bangladesh.

A CPD study shows that an investment of about US $5.0 billion will be required to put in place the required backward linkage industries: US $2.8 billion in spinning, US$ 1.2 billion in weaving and US$ 1.0 billion in dyeing finishing. A report on 'Post-MFA Development Strategy and Technical Assistance for the RMG Sector', prepared by Gherzi Textil Organisation, Switzerland, for the Ministry of Commerce (MOC), Bangladesh has come out with the proposal that to meet the challenges after 2004, it will need to set up 45 Spinning mills, 82 Weaving mills, 81 Knitting and Knit Processing mills, and 51 Woven Processing mills. This will require an investment of US$ 2.3 billion.

Strengthening backward linkage in textiles is crucial for Bangladesh in meeting the challenge of post-MFA regime. This is important not only to enhance the competitive strength of Bangladesh but also to reduce the lead-time. There are already signs of ongoing technological upgradation in Bangladesh's apparels industry. Over the past five years (FY2000-FY2004) about $800.0 million worth of machineries have been imported for e-o apparels and textile sectors of the country. However, technological upgradation is mainly concentrated in the so-called 'smart factories' which refer to the relatively and technologically larger and more advanced ones. There is a need for a comprehensive strategy to strengthen both backward linkage in apparels, and the state of technology in the apparels sector itself. Experts have suggested that the GOB should set up a Technology Upgradation Fund for the apparels/textile sectors to help promote adoption of new technology, facilitate process and product modification, support upward movement along the value chain, provide credit at favourable rates and encourage other productivity enhancing initiatives. China has been able to bring down price of apparels by about 44 per cent from US$ 6.23 per square metre to US$ 3.37 per square metre once quotas on apparels were removed in 2002. It will not be easy for Bangladesh to sustain such downward pressure on prices without significantly raising the productivity in the country's apparels sector.

Backward and forward linkages
Global trade in apparels has traditionally functioned under buyer-driven supply chains. However, there are growing signs that, while under the quota regime it was global buyers who had come to Bangladesh's producers, under a quota-free regime Bangladeshi producers will be required to go to the global buyers. Efficient marketing channels and direct contacts with buyers are likely to become crucial factors of market presence in a post-MFA world. Of no less importance will be the issue of substantially bringing down the lead-time. The days of 90 days lead-time will be over. Serious effort must be made to further strengthen backward linkages for producing fabrics, particularly for providing inputs to the export-oriented woven-RMG sector. At the same time, to reduce the lead-time setting up of central bonded warehouses, to begin with for fabrics that are not produced in Bangladesh, will need to be given serious consideration. Efficient infrastructure services and port facilities, reduced administrative hassles and a conducive investment environment will be necessary to bring down the cost of doing business in Bangladesh. Development of land ports with regional countries, and Bangladesh's seaports, where the average turnaround period is 5-6 days compared to 1-2 days in other ports in the region, must be given top priority if the lead-time is to be effectively reduced. Preferential margins under the various GSP schemes are set to suffer erosion as partner countries bring down their tariffs. In view of this, there should be renewed effort towards global zero-tariff access under LDC-friendly rules of origin (RoO).

GOB initiatives
The Post-MFA Implementation Team set up by the Government of Bangladesh has identified six core areas for training and skills upgradation: (i) Productivity Management, (ii) Quality Management, (iii) Compliance Norms, (iv) Merchandising, (v) Marketing, and (vi) Inventory Management. GOB estimates show that these activities will require an amount equivalent to $40.0 million. However, till now availability of funds for these activities has been very low. There is an urgent need to mobilise domestic resources and trade-related technical assistance (TRTA) from development partners in support of these programmes. The government has recently taken a number of steps to address the concerns of the e-o RMG industry of the country. These include reduced number of steps in terms of customs clearance from 56 to 12, has revised schedule of down payment for repayment of loan by RMG entrepreneurs and has eliminated tax on electively for the sector.

More focus on winning items
Analysis carried out at CPD to assess the export performance of categories, which have been derestricted under the first, second and third phase-outs of the MFA mandated under the ATC shows that even at the 10-digit level there are apparel items where Bangladesh continues to enjoy revealed comparative advantage in the global market. Bangladesh has been able to expand its exports of a number of such items after these were derestricted. For example, of the 46 quota categories derestricted in the second phase, Bangladesh exported apparels items in 26 categories. Under these quota categories, 112 apparel items at 10-digit level were exported by Bangladesh. Total earnings from exports of these items have risen from $86.4 million to $94.4 million between 1998 and 2002, with a number of items being able to make significant gains. Once imports of such items are derestricted, can expand export in these apparel items. Analysis of unit price levels bears evidence of Bangladesh's competitive strength in some major categories, primarily in such items as mass-produced shirts, men's wear, jackets, sweaters, etc. This competitive strength should allow Bangladeshi exporters of these particular items to expand their export. There is no place for complacency though. The present upsurge of export in some items, more precisely knitwear items, and more particularly, in the European Union, bears this out. It should be noted here that quotas are still in place on most of the categories where Bangladesh is demonstrating strong growth in the EU and Bangladesh's exporters taking advantage of the quota-free access to the EU market. Analysis shows that there are a number of apparel items where it will be extremely difficult to sustain the competitive pressure from suppliers in China, India, Vietnam, Mauritius, Turkey and some of the Caribbean countries once the quotas are gone.

China in the rear-view mirror
It is true that under China's WTO accession provisions, the U.S. may take recourse to safeguard measures against the surge of imports of apparels from China if this growth is perceived to have caused disruption and serious material