4.1.3 Limitations of the Theory of Comparative Advantage (HL) Notes

Bangladesh’s Comparative Advantage in Garment Exports

Introduction

Bangladesh has emerged as one of the world’s largest exporters of garments, capitalizing on its comparative advantage in low labor costs and an abundant workforce. This success story highlights both the strengths and limitations of the theory of comparative advantage in real-world trade.

1. The Advantages of Bangladesh’s Comparative Advantage in Garment Exports

1.1 Economic Growth and Employment

• The Ready-Made Garment (RMG) sector contributes over 80% of Bangladesh’s total export earnings.
• In 2022, the country exported $45.7 billion worth of garments, making it the second-largest garment exporter globally, after China.
• The industry has been a key driver of GDP growth, with Bangladesh's GDP increasing from \$115 billion in 2010 to over \$460 billion in 2023.
• The sector has generated employment for approximately 4.4 million workers, 60-80% of whom are women, fostering economic empowerment.

1.2 Attracting Foreign Investment and Trade Relationships

• Major brands like H&M, Zara, and Gap have outsourced production to Bangladesh due to its cheap labor and low production costs.
• The European Union and the United States are major importers of Bangladeshi garments, with over 50% of exports going to the EU under the Generalized System of Preferences (GSP).

1.3 Lower Production Costs for Developed Nations

• Comparative advantage allows developed nations to access cheaper clothing, benefiting consumers through affordable fashion.
• Fast fashion brands have grown exponentially, increasing trade ties between Bangladesh and the West.

2. The Limitations and Challenges of Comparative Advantage in Bangladesh

While specialization in garment exports has fueled economic growth, it has also exposed structural weaknesses and risks in Bangladesh’s economy.

2.1 Overdependence on a Single Sector

• Vulnerability to External Shocks:
  • During the COVID-19 pandemic (2020), global demand for clothing plummeted, causing Bangladesh’s garment exports to decline by 18%, leading to mass layoffs and factory closures.
  • In 2013, the collapse of the Rana Plaza factory (killing over 1,100 workers) led to a temporary withdrawal of orders from Western brands, causing an industry-wide crisis.
• Competition from Other Countries:
  • Countries like Vietnam, India, and Ethiopia are emerging as strong competitors with better infrastructure and rising productivity.
  • Vietnam, in particular, has been gaining market share due to higher efficiency, better-skilled labor, and Free Trade Agreements (FTAs) with the EU and the US.

2.2 Weak Labor Rights and Exploitation

• Low Wages:
  • Despite being a major export hub, Bangladesh has one of the lowest minimum wages in the garment sector, at $75 per month (compared to Vietnam’s $190 and China’s $322).
  • Widespread worker protests have erupted over poor wages and unsafe conditions.
• Unsafe Working Conditions:
  • The Rana Plaza collapse (2013) highlighted severe safety violations.
  • After the tragedy, international brands formed initiatives like the Accord on Fire and Building Safety in Bangladesh, but implementation remains inconsistent.

2.3 Environmental Degradation

• Water Pollution and Waste:
  • The garment industry is one of the biggest polluters of Bangladesh’s rivers, with dyeing factories releasing toxic chemicals into water bodies like the Buriganga River.
  • A 2021 report found that textile production contributes to 20% of global industrial water pollution, with Bangladesh being a major contributor.
• Carbon Footprint:
  • Fast fashion brands increase overproduction, leading to textile waste and carbon emissions.
  • The sector contributes 6.8 million metric tons of CO₂ annually in Bangladesh.

3. The Broader Weaknesses of Comparative Advantage in Trade

While comparative advantage provides economic benefits, it has several flaws in practice:

3.1 Static vs. Dynamic Comparative Advantage

• Issue: The theory assumes that a country’s advantage remains unchanged, but in reality, economies evolve.
• Example:
  • South Korea shifted from a low-cost textile producer in the 1960s to a high-tech industrial powerhouse (Samsung, Hyundai) in the 2000s.
  • Bangladesh struggles to diversify into technology or high-value industries due to low investment in education and R&D.

3.2 Race to the Bottom in Labor and Environmental Standards

• Issue: To maintain cost advantages, countries often lower labor and environmental standards.
• Example:
  • In Bangladesh, companies resist wage hikes to stay competitive, trapping workers in poverty.
  • Many factories bypass environmental regulations to reduce costs, leading to long-term ecological damage.

3.3 Market Power and Unequal Gains from Trade

• Issue: Large multinational corporations (MNCs) dominate supply chains and exert downward pressure on wages and prices.
• Example:
  • Brands like Nike and H&M dictate supplier pricing, forcing factories to cut costs, often at the expense of workers and safety measures.

3.4 Lack of Technological Transfer

• Issue: The model does not account for knowledge spillovers or technological growth.
• Example:
  • Unlike China, which moved from low-cost manufacturing to high-tech production, Bangladesh remains stuck in low-margin production due to a lack of industrial upgrading.

Questions:

1. Explain the concept of comparative advantage and how it has contributed to Bangladesh’s position as a leading exporter of garments.
2. Identify two limitations of comparative advantage, as demonstrated by the case study on Bangladesh, and briefly describe their implications.
3. Using a diagram, illustrate and explain how the global demand for garments impacts Bangladesh’s export revenues.
4. Evaluate the effectiveness of relying on comparative advantage as a long-term strategy for economic growth in Bangladesh, given the external challenges highlighted in the case study.