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Liability vs. profit

Gabriel Dominguez
July 3, 2013

The US announced it would cut trade benefits for Bangladesh in the wake of deadly factory incidents. Economist Jagdish Bhagwati examines the reasons behind this move and how it might affect the country's exports.

Workers with machines sew t-shirts at a textile factory (Viyellatex) in Tongi, an outlying district of Dhaka in Bangladesch. (23.06.2011) Photo: Tim Brakemeier dpa pixel
Image: picture-alliance/dpa

DW: The US government recently stated it was removing duty-free trade privileges which had been accorded to the South Asian nation under the Generalized System of Preferences (GSP) program, citing dangerous conditions for workers after more than 1,100 people were killed when a factory building collapsed in April. Why has the US administration taken this step?

Jagdish Bhagwati: The Obama administration is deeply indebted to labor unions, especially to their federation AFL-CIO. They, in turn, are fearful of competition from poor countries. They believe that trade with poor countries such as like Bangladesh will produce paupers in the rich countries. So, it is only with the greatest reluctance they allowed Bangladesh garments to come into the US on preferential terms under the GSP program and even then it was a partial exemption, not full. These unions now see in the safety outrage their chance to use GSP to unionize the Bangladeshi workers, thereby raising wages and hence prices and reducing effective competition for themselves.

Jagdish Bhagwati, Professor, Columbia University, USA listens during the session 'Revitalizing Global Trade' at the Annual Meeting 2011 of the World Economic Forum in Davos, Switzerland, January 28, 2011. World Economic Forum (Photo: picture alliance/Photoshot)
Bhagwati says rising wages and prices will reduce foreign demand for Bangladeshi garmentsImage: picture alliance/Photoshot

How might this affect Bangladeshi workers?

The raising of wages and prices will only reduce foreign demand for Bangladeshi garments, hurting the very workers that the US labor lobbies pretend to want to help. At the same time, remember that Chinese labor profited because the enormous export expansion raised the demand for labor and hence wages and improved working conditions.

The exercise of GSP muscle against Bangladesh to reward competing producers in the US and to appease the domestic unions is exactly what one would expect from such schemes. GSP programs are not binding on the giver; they are a bakshish which can be withdrawn at the giver's whim.

Their withdrawal has occasionally been used in fact by the US as a way to compel hesitant, small developing countries to join Free Trade Agreements with the US, which are primarily of benefit to the US, but are always dressed up in US propaganda as benefiting developing countries.

How long might the suspension last?

The US is under no obligation whatsoever to restore GSP benefits. The suspension can go on indefinitely. In the meantime, there is real danger also that foreign buyers, including retail brands such as Wal-Mart and Disney, will move on to other locations. Garments are a very competitive industry with very low profit margins, though many NGOs and Western unions seem to think otherwise.

Hasn't the Obama administration taken into account the pledges made by the Bangladeshi government to improve factory safety and protect workers' rights?

The Bangladeshis have no votes to offer for the next US election, so their pledges carry little weight. On the other hand, the governance in Bangladesh is so pathetic, and the ability to monitor and punish the local managers and owners of the factories that make the garments for retail brands is so problematic, that only "apparent" conformity to the US demands will be at hand, at best.

If the US turns its back on Bangladesh, what are its alternatives in terms of textile production?

Even if retail brands agree to accept liability, even though the violations occur in factories owned and managed by Bangladeshis, they face the prospect of losing their reputation because of actions and inactions of the Bangladeshi owners and managers.

Since the retail brands risk losing their reputation when fires break out through no fault of their own, you can be sure that they will gradually move on to other locations. Disney has already announced that they will move to India. Those who stay will also steadily diminish their purchases and move on, less dramatically than Disney.

Might other countries, in particular within the EU, follow the US example and also cut trade privileges with Bangladesh?

This is entirely possible. The labor unions in the EU are as keen to protect their jobs as the American unions. In these matters, lobbies work on the principle of "monkey see, monkey do."

What should Western governments then do to advance safety but at the same time to avoid harming Bangladeshis?

The only answer is to have aid agencies like USAID provide the assistance to the Bangladeshi government, not in terms of cash, but in the form of safety experts who know exactly how and why management has to be concerned with safety.

Jagdish Bhagwati is senior fellow for international economics at the Council on Foreign Relations and University Professor of Economics, Law, and International Affairs at Columbia University.

Interview conducted by Gabriel Dominguez