The grand lesson of economics is that there s no such thing as a solution – there are only trade offs. Of course, such trade offs can be more or less palatable and which ones we choose to make will depend both upon what they are and the changing circumstances around them.
This all rather matters for Bangladesh. More than it does normally, to everyone, that is. For the trade offs in the ready made garment industry are changing and so Bangladesh is going to either lose its central place in the trade or needs to change certain things so as to lean those trade offs back in its favour.
As this newspaper reports several of the major retailers are cutting back on their orders from the East in order to prioritise production closer to the markets in Europe. For there's a trade off between the flat price of the goods at the factory gate and the delivery time.
Logically, everyone looks for the lowest price in a supplier. But prices are made up of more than just the number of $ or Tk on the invoice from said supplier. How much pre-payment must be sent, what's the delivery time that capital will be unavailable for, for example. This is true whether it's an actual pre-payment to buy raw materials or the provision of a letter of credit – that's still capital that must be put aside. Further, how responsive to changes in demand will that supplier be?
Then there's actual shipping time. Capital matters here as well. For example, Apple air freights its Chinese production of iPhones and the like. Sea freight is of course cheaper pre unit. But the goods are of such value that the depreciation plus interest on the capital is larger than the price difference between sea and air freight. It's actually cheaper, all costs considered, to air freight the electronic goods.
With garments that's unlikely to be true. But there is another problem in this field – predicting demand. No one, ever, quite knows which garment is going to be a hit. Certainly not today, when orders are going in for production runs next year, for garments that will be on sale next summer, or possibly even this time next year.
This is why there is still a European garment production industry. Basic and volume production runs are done in Bangladesh. But there are still factories in Northern Portugal and Spain. When an item becomes an unexpected success, stock run out, there's no point in trying to order from the other side of the world. It would take months if not a year to gain those extra items. But Iberian factories can have goods in the trucks on their two or three day journies to the shops within weeks.
So, the industry pays the trade offs by splitting production. Much to most chases the lowest ticket price in Bangladesh. Some chases that speed of production at that higher price. The trade off is dealt with by playing both sides of the issue that is.
What's changing now is that global shipping is terribly stretched. Delivery times have extended. The price of shipping a container has tripled and quadrupled as well. The trade offs have changed that is. In response the retailers are changing their tactics. They're placing larger orders in Europe and smaller in Bangladesh. The benefits of the lower headline prices are now being outweighed by the certainty of delivery time, the shortness of that delivery time and the costs of the transport.
This is simply how things work. Costs and benefits change at the margins therefore so does behaviour change at the margins.
This isn't, though, quite what manufacturers and workers in Bangladesh wish to hear. That they're victim to these international forces. Which is fair enough, of course, and it's also true that they're not entirely helpless victims. For things like shipping costs and delivery times are, partially at least, within the power of Bangladeshis.
Yes, true, the cost of a container to Europe is an external factor. But the weeks it takes to get anything through Chittagong are internal costs. Costs that could be removed by effectively modernising cargo handling at that port. Arguing that we might try to make Biman a cost effective and efficient freight carrier will produce much laughter but it's one of those things which is not theoretically impossible. There are things that can be done.
Making the internal to Bangladesh economy more efficient will again change those trade offs at those margins. Which will, again, change buyer, retailer, behaviour at that margin.
If freight costs and delays – driven entirely by global factors – are reducing the amount of business we get then our response is, should be, to reduce the costs and delays on freight that really are under our own control.
Tim Worstall is a senior fellow at the Adam Smith Institute in London
