What Happened
- The US-Bangladesh reciprocal trade agreement signed in February 2026 sets a 19% tariff on Bangladeshi goods, with a zero-duty quota for textiles and clothing manufactured using US-origin materials (cotton and man-made fibres).
- Indian exporters are concerned because while India faces an 18% US tariff (numerically lower), it lacks any zero-duty mechanism for textiles — effectively giving Bangladesh a superior deal in the crucial garments segment.
- The agreement requires Bangladesh to provide significant preferential market access for US industrial and agricultural goods including chemicals, medical devices, machinery, motor vehicles, ICT equipment, energy products, dairy, beef, poultry, soy products, and tree nuts.
- The deal was concluded after nine months of negotiations between Dhaka and Washington, reflecting US strategic interest in strengthening ties with Bangladesh.
- Indian textile stocks saw a sell-off following the announcement, reflecting market concerns about competitive erosion.
Static Topic Bridges
Reciprocal Tariffs and Trade Diversion Effects
Reciprocal tariffs are tariff rates applied on a country-by-country basis, calibrated to match or offset the tariff and non-tariff barriers that the partner country imposes. The US introduced country-specific "reciprocal tariffs" in 2025-26 as a departure from the Most Favoured Nation (MFN) principle of the WTO, which requires uniform tariff treatment for all WTO members.
- MFN principle (GATT Article I): Requires WTO members to accord the same tariff treatment to all other members, with exceptions for Free Trade Agreements (GATT Article XXIV) and developing country preferences (Enabling Clause)
- US reciprocal tariffs: India at 18%, Bangladesh at 19%, China at higher rates, EU at varying rates — each calibrated to the bilateral trade relationship
- Trade diversion occurs when a preferential arrangement redirects trade from a more efficient producer to a less efficient one benefiting from lower tariffs — the Bangladesh zero-duty quota may divert US textile imports away from India
- Trade creation vs trade diversion concepts originated from Jacob Viner's customs union theory (1950)
- WTO dispute settlement could potentially be invoked against country-specific reciprocal tariffs as violating MFN, though the US may invoke national security exceptions (GATT Article XXI)
Connection to this news: Bangladesh's zero-duty textile quota creates a classic trade diversion scenario — US buyers may shift sourcing from Indian manufacturers (facing 18% tariff) to Bangladeshi ones (facing 0% for qualifying goods), even where India may be the more competitive producer.
Bangladesh's Ready-Made Garments (RMG) Sector and India's Competition
Bangladesh is the world's second-largest garment exporter after China, with RMG constituting approximately 85% of its total export earnings. The sector employs over 4 million workers, predominantly women, and has been the backbone of Bangladesh's economic transformation from one of the least developed countries to a lower-middle-income economy.
- Bangladesh RMG exports (2023-24): approximately $47 billion; India's textile and apparel exports: approximately $35-37 billion
- Bangladesh's competitive advantages: lower labour costs (minimum wage approximately $113/month vs India's $175-200/month in comparable segments), established buyer relationships, economies of scale in basic garments
- India's competitive advantages: diversified textile value chain (from fibre to fashion), strong in cotton textiles, technical textiles, and home textiles; more diversified export basket
- Bangladesh benefits from EU Everything But Arms (EBA) duty-free access (under review); India does not qualify as it is not an LDC
- Post-Rana Plaza (2013), Bangladesh improved factory safety through the Accord on Fire and Building Safety (now the International Accord); India faces similar scrutiny on labour standards
- India exports significant raw materials (cotton yarn, fabric) to Bangladesh, which processes them into finished garments — creating a partially complementary relationship
Connection to this news: The zero-duty quota for US-material-based textiles incentivises Bangladesh to substitute Indian cotton yarn with American cotton, potentially disrupting the existing complementary trade relationship where India supplies upstream inputs and Bangladesh exports finished garments.
Preferential Trade Arrangements and India's FTA Strategy
India's approach to Free Trade Agreements and preferential trade has evolved significantly. Having been cautious about FTAs for decades (citing concerns about trade deficits with FTA partners like ASEAN and South Korea), India has recently accelerated bilateral trade agreements while remaining outside mega-regional agreements like RCEP.
- India exited RCEP (Regional Comprehensive Economic Partnership) negotiations in November 2019, citing concerns about cheap Chinese imports
- Recent FTAs: India-UAE CEPA (effective May 2022), India-Australia ECTA (effective December 2022)
- Ongoing FTA negotiations: India-EU, India-UK, India-GCC, India-Peru
- India-US: No FTA exists; the February 2026 interim deal is the first formal trade framework
- India's average MFN tariff: approximately 14% (among the highest in G20), which has been a repeated US complaint
- India lost US GSP benefits (zero-duty access for approximately 2,000 product lines) in June 2019; not yet restored
Connection to this news: The US-Bangladesh deal highlights the cost of India's absence from a comprehensive trade agreement with the US — Bangladesh has secured a targeted advantage in textiles through its deal, while India's broader trade framework with the US remains at the interim stage.
Key Facts & Data
- US tariff on Bangladesh: 19% reciprocal + zero-duty quota for US-material textiles
- US tariff on India: 18% reciprocal with no zero-duty textile mechanism
- Bangladesh RMG exports: approximately $47 billion (2023-24); approximately 85% of total exports
- India's textile exports: approximately $35-37 billion (FY 2024-25)
- India's cotton yarn exports to Bangladesh: $1.47 billion (FY 2024-25)
- Bangladesh minimum garment wage: approximately $113/month
- India exited RCEP: November 2019
- India-UAE CEPA: effective May 2022; India-Australia ECTA: effective December 2022
- India removed from US GSP: June 2019