How can Bangladesh make the best of UK’s new trading scheme?

Taking advantage of the DCTS, Bangladesh can increase and diversify its exports to the UK. Photo: TBS

The UK has announced the Developing Countries Trading Scheme (DCTS), a liberal Generalised System of Preference (GSP) scheme replacing the latter to benefit developing countries and boost trade relations with the UK. 

Launched in June this year, the scheme provides tariff concessions for developing countries exporting to the UK market. The UK's total merchandise import was $779.97 billion in 2022, and Bangladesh holds only 0.7% of this market. Now, with all the favourable provisions of DCTS, the question remains: How can Bangladesh effectively realise the benefits of this new scheme?

Bangladesh is the UK's 50th largest trading partner. Could we not become one of the 20 largest? Bangladesh exported 486 items to the UK in FY23 and is the third largest export destination for Bangladesh (9.56% of total exports in FY23), exporting $5.3 billion to the UK in FY23, EPB data shows. 

Our major exportable items are RMG (95%), home textiles, agro-processing and fish, footwear, bicycles, IT engineering and leather, etc. Taking advantage of the DCTS, Bangladesh can increase and diversify its exports to the UK.

As Bangladesh braces for its graduation from the least developed country (LDC) status in 2026 with a three-year grace period, it is considering how to scale up its trade with key markets like the UK. In DCTS, the UK offers three types of preferences: comprehensive, enhanced, and standard. 

Under the comprehensive preference, 46 LDCs will get zero tariff facilities on all products except arms and ammunition. Bangladesh will enjoy zero-duty tariff lines for its products as an LDC until its graduation. 

After graduation from LDC, Bangladesh may be entitled to an enhanced preference regime as it is an "economically vulnerable" country based on the absence of export diversification criteria. 

Furthermore, the DCTS will allow Bangladesh to access global supply chains for importing raw materials from 95 countries to export their final products to the UK duty-free under regional cumulation.

Bangladesh can also utilise the benefits of extended cumulation with UK-DCTS and UK-EPAs  (UK-Pacific economic partnership agreement with 95 countries). Cumulation with the UK, British Overseas Territories, EU, Norway, Switzerland, and group 2 countries (for intra-regional cumulation: SAARC countries except the Maldives and Afghanistan) — and in such a case, Bangladesh's tariff rates in the UK under EPA will apply. 

For such cumulation, the country must follow minimum processing rules to count as originating. For inter-regional cumulation, culminating with group 1 countries (Cambodia, Indonesia, Laos, Myanmar, and the Philippines — with Vietnam's FTA soon excluding it), a case-by-case application is needed.

DCTS is a bit more liberal than that of the EU GSP+. Under the EU's draft GSP proposal for 2024–34, Bangladesh's apparel products may face safeguard measures when the share of relevant products exceeds both 6% of total EU imports of those products as well as the product graduation threshold during that year. 

The DCTS does not include such safeguard provisions. Moreover, the EU requires ratification of human and labour rights conventions, climate change and the environment, and so on. At the same time, DCTS does not make ratification mandatory, though violations of those rights can lead to suspension of the benefits.

What key products should we aim to export more to the UK? Presently, apparel and clothing cover 95% of exports from Bangladesh to the UK. After graduation and the extended transition period, Bangladesh may face problems because of a double-stage transformation for the apparel sector, where local value addition has to be about 50%. Bangladesh can concentrate more on knitwear products, where it has 82% value addition. 

The UK imported around $14.02 billion in knitwear in 2022, out of which Bangladeshi exports made up only $3 billion. It can be increased to at least $5 billion. Knitwear manufacturers are now exploring more foreign investment from countries like China. 

However, enhancing production capacity with such investment will require addressing infrastructural bottlenecks like uninterrupted gas and electricity supply, less congestion on Dhaka-Chattogram road, and a more effective logistics network.

Beyond apparel, Bangladesh could explore potential products like home textiles, agro-products like raw and processed vegetables or spices, agro-processing, shrimp and fish, footwear, branded bicycles, IT engineering, leather goods, furniture, pharmaceuticals, plastic, optical and medical instruments, bicycles, batteries, cement, high-value toys, etc. 

Bangladesh once exported a 6,100-tonne high-speed multipurpose container ship to the UK — the first of its kind. The UK has diversified import demand for products such as pearl and precious metals, machinery and appliances, electrical machinery, minerals, organic chemicals, and so on, where Bangladesh has no footing so far.

In EU draft GSP 2024–34, Bangladesh's apparel products may face safeguard measures when the share of relevant products exceeds both 6% of the total EU import of those products and the product graduation threshold during that year. 

The DCTS does not include such safeguard provisions. The EU and US GSP allow extended cumulation on a case-by-case basis. Extended cumulation for LDCs: able to cumulate with all DCTS and UK EPA Cys( about 90 cys), while it is less in EU GSP (47%) and US GSP (35%), same for non-LDCs; in the case of DCTS, it is 75%, while 70% for non-LDCs. 

Size was included in the vulnerability criterion, but in the case of DCTS, size has been removed; only export diversification is the criterion for vulnerability. In the case of eligibility, 80% of eligible lines were zero-duty for extended preference and 85% for enhanced preference, which is now extended to 92%. 156 more tariff lines were added for lower or zero duty, and overall, 132 tariff lines will have zero-duty access; about 98% will have duty-free access.

Bangladesh needs to prepare to grab the opportunities and face the challenges under the DCTS arrangement. We do not have a free trade agreement with the UK as Vietnam does that grants it zero-duty market access. Bangladesh must comply with good governance, human and labour rights, climate change and the environment, free and fair trade, civil and political rights, etc. We will need to enhance our local value addition in the apparel sector, including greater use of locally produced fabrics and yarn. 

Better quality production and logistics need to be ensured for our products, including agro-goods and fish, traceability systems, technology, cold storage, quality testing, and packaging. The tariff system needs to be simplified and rationalised in a way so that critical raw materials and technology, such as raw materials for man-made fibre or solar power components, can be easily imported. Government incentives, like bonded warehouse facilities, should be streamlined and equitable across sectors. 

Longer-term financing is needed to import machinery to transform into man-made fibre. High-quality labs should be established to meet the needs of agro-food and agro-processed products. The government and development partners should work with sectors like the light engineering sector so that they can overcome environmental compliance challenges. 

Access to the UK market often requires a social audit certificate, such as a Business Social Compliance Audit (BSCI) or Supplier Ethical Data Exchange (Sedex), which may come up in a bigger way. Entrepreneurs need guidance and support for such social audits. 

The possibilities offered by DCTS are substantial, but they also pose some challenges. We need to strengthen our capacity and knowledge as well as develop a regulatory and institutional ecosystem to enable our businesses to make the most of the opportunities.

Ferdaus Ara Begum is the CEO of Business Initiative Leading Development (BUILD), a public-private dialogue platform that works for private sector development.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.