Tariff war: Impact on Bangladesh and South Asia

The tariff boom in the tariff regime during the Trump administration rang alarm bells in trading networks all over the world. By imposing a 25% tariff on Canadian and Mexican goods and an additional 10% tariff on Chinese goods, America has rekindled fears of a global trade war. 

In its immediate impact, target nations will suffer, but its spillover impact will most likely fall on emerging economies in South Asia, such as Bangladesh. In this article, an analysis of its likely impact on the economy and in what manner these could redefine South Asia's trading dynamics is discussed.

US tariff policy: A double-edged sword

The tariff the Trump Administration has levied on major trading partners like Canada, Mexico, and China is a sign of the times, protecting American industries and reining in America's trade deficit. However, such protectionism has many inadvertent worldwide consequences. 

For one, tariffs imposed on Chinese goods have thrown off-kilter value chains all over the world because China is a key producer and exporter of intermediate goods used in worldwide value chains. 

Similarly, tariffs imposed on Canadian and Mexican goods, such as steel and aluminium, have soured long-standing trading relations, and retaliatory actions have followed. Interestingly, the US restricted tariffs for Canadian oil and gas imports to 10%, even when imposing tariffs at a level higher for other goods. America's reliance on Canadian sources of energy, with price inflation in America's electricity having already begun, was reflected in such a move.

According to the US Energy Information Administration (EIA), in 2023, the average price of electricity increased by 4.3% due to increased cost of production and value chain disruption. The current trends in the US price of electricity and energy imports are given in the line graph below.

A mixed bag for Bangladesh

Bangladesh is a strong player in the RMG, or ready-made garment, of the international economy, and therefore, the country will suffer from certain gains in the US-China trade war. 

Whereas tariffs for Chinese goods helped Bangladesh to grab a greater share of America's apparel market on one level, the shipments of RMG by Bangladesh to America rose by 10% in 2023, partially due to buyers routing orders out of China to less expensive destinations.

Meanwhile, increased costs of raw materials, including synthetics and cotton, with value chains disrupted, could chip in and erode Bangladesh's competitive advantage. 

In case America introduces tariffs for additional nations, demand for goods in general could dip, impacting Bangladesh's economy, whose base is in exports. Bangladesh's over-dependence on remittance inflows in America and Europe raises such a danger, with a downturn in such economies having a chance to slow down such inflows.

South Asia: Navigating the trade war fallout

The broader South Asia region, with some of the fastest-growing economies in the world, is not exempt from the tariff standoff with America. India, for instance, will not be shipping its steel, aluminium, and cloth to America.

India's retaliatory tariffs for America's goods, including agricultural produce, have added a level of complexity in terms of its bilateral trading relations, too. Similarly, Pakistan's textile exports, a backbone of its economy, will suffer in case demand falters worldwide.

However, a region can also gain from the changing trends of the world. As the multinational companies attempt to move their supply chains out of China, Vietnam, India, and Bangladesh become alternative destinations for them. For one thing, foreign direct investment in Vietnam had an improvement with companies shifting factories outside China.

South Asian countries can capitalise on such a move with upgraded infrastructure, eased regulations, and upgraded processes in terms of trading.

In conclusion, the tariff standoff with America brings into the limelight the interconnectivity of the economy in the world. Bangladesh and South Asia have both a challenge and an opportunity to reposition in a changing scenario in international trading relations. 

With proactive policies and strengthening of region-to-region relations, such economies can weather out the storm and become even stronger economies in the long run. As the world witnesses a developing trade war, South Asia's adaptability and its capacity for bouncing back will be under scrutiny.

Md Toufique Hossain is a digital finance certification, alumnus of The Fletcher School of Law and Diplomacy, Tufts University USA, and Economics Columnist and Development Activist in WAVE Foundation

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