Implications of U.S. Reciprocal Tariffs & LDC Graduation: Concerns and Options for Bangladesh

Abstract

Bangladesh stands at a critical juncture in its economic history. Scheduled to graduate from the United Nations list of Least Developed Countries (LDCs) in 2026, the country simultaneously faces the imposition of U.S. reciprocal tariffs that threaten to erode the preferential trade access upon which its export economy has long depended. This article examines the dual pressures arising from LDC graduation and U.S. reciprocal tariff policy, assesses Bangladesh’s structural and institutional preparedness, and analyzes the relevant international legal frameworks governing special and differentiated treatment. Drawing on recent policy briefs, WTO reports, and economic research, the article identifies key vulnerabilities in Bangladesh’s trade model and offers strategic recommendations for navigating this complex transitional period.

I. Introduction

The world of trade has undergone significant shifts in recent years, particularly for Least Developed Countries (LDCs) like Bangladesh. Bangladesh is scheduled to graduate from LDC status in 2026, which presents both an opportunity and an imminent challenge. The likelihood of losing favorable trade conditions — primarily from the European Union and the United States — introduces new variables that could undermine its robust export-oriented economy, especially in the readymade garment (RMG) industry.

The United States’ policy of reciprocal tariffs compounds these difficulties considerably. By raising duties on goods originating from nations with rising export surpluses, including Bangladesh, this policy risks undoing years of progress in trade relations. The significance of this issue cannot be overstated: Bangladesh’s economy is deeply dependent on its trade advantages, many of which are likely to be affected by the simultaneous pressures of LDC graduation and punitive tariffs.

The current trade framework, which has shielded Bangladesh as an LDC, is now being reassessed. The changes on the horizon will have long-term effects on the country’s foreign trade policy and its relationships with major trading partners. Bangladesh has historically relied on the Generalized System of Preferences (GSP); however, global trade norms are shifting toward a more reciprocal approach, and Bangladesh is finding it increasingly difficult to remain competitive in global markets as these favored arrangements gradually fade away.

II. Contemporary Circumstances and Key Characteristics of the Challenge

Bangladesh’s readymade garment (RMG) exports and its broader manufacturing base have long benefited from major markets granting it LDC status, permitting it to export goods without paying duties or facing quotas. The World Trade Organization (WTO) assessment on the effects of LDC graduation on trade affirms that Bangladesh is at an extremely elevated risk of losing its trade preferences shortly after graduation.[1]

Within the same period, the U.S. has signaled that it will increase tariffs on Bangladeshi exports by 35–37% beginning in 2025, which could cause significant challenges for the country’s export performance.[2] Bangladesh is consequently navigating a “double transition” — the erosion of trade preferences following graduation combined with the imposition of punitive duties in a significant export market.[3] Policy analysis warns that Bangladesh’s clothing industry stands to forfeit substantial export revenue if both reciprocal tariff exposure and LDC graduation unfold simultaneously.

III. Structural Deficiencies in Bangladesh’s Preparedness

Several flaws in Bangladesh’s trade policy and institutional framework render the situation even more dire.

1. Excessive Dependence on Preferential Access: Research indicates that approximately three-quarters of Bangladesh’s exports benefit from LDC-specific trade preferences — a far greater proportion compared to other LDCs.[4] This demonstrates that the country has not been able to maintain export competitiveness without preferential arrangements.

2. Lack of Export Diversification: Since the garment sector provides in excess of 80% of exports, any tariff shock in that sector carries a disproportionately large impact on overall export performance.[5]

3. Limited Negotiating Capacity: The Business Standard reports that the Bangladeshi government failed to incorporate private-sector voices and lobbyists into its negotiations with the U.S., significantly weakening its bargaining position.[6]

4. Insufficient Institutional Transition Planning: Although Bangladesh has established committees to facilitate a “smooth transition,” research demonstrates that persistent challenges remain in making SMEs more competitive, strengthening value chains, and preparing for the eventual end of LDC support measures.

5. Vulnerability to External Policy Shifts: The U.S. reciprocal tariff framework does not account for LDC designation. Bangladesh’s assumption that it would receive special treatment by virtue of its LDC status appears misplaced — a reminder that unilateral trade policy is not bound by the same multilateral courtesies as treaty-based frameworks.

IV. Legal Interpretation: International Law, Treaties, and Key Provisions

LDCs obtain special and differential treatment (SDT) under the WTO framework. [Author’s Note for Fact-Check: The article originally cited Article 11 of the General Agreement on Tariffs and Trade (GATT) as the source for the SDT language providing that LDCs “shall be required only to undertake commitments to the extent consistent with their individual development situation.” However, GATT Article XI addresses quantitative restrictions, not SDT commitments. This SDT language is more accurately found in various WTO Ministerial Decisions and the Marrakesh Agreement framework. The citation in footnote 7 should be verified and corrected prior to publication.][7] Following graduation, such flexibilities cease to exist. Consequently, Bangladesh must begin earning rights as a “developing country” and be accorded normal Most-Favoured-Nation (MFN) treatment by its trading partners.

The U.S. system of reciprocal tariffs raises concerns about non-discrimination obligations. The U.S. is not required by treaty to provide unilateral advantages; however, the arbitrary application of elevated tariffs may implicate the WTO’s most-favoured-nation (MFN) principle under GATT Article I.[8] The reciprocal tariff is, however, primarily an act of unilateral U.S. domestic law, arguably beyond the direct purview of WTO adjudication. The WTO’s Trade Impacts of LDC Graduation report confirms that LDCs that graduate may face higher tariffs and lose certain flexibilities with rules of origin.[9]

Accordingly, Bangladesh’s legal claim to special tariff-free access is not assured after graduation, and U.S. tariff increases, while punitive in their effect, are not per se unlawful under WTO law, given the wide legislative discretion accorded to the U.S. under its own domestic trade legislation. Bangladesh’s apparent misreading of LDC designation as conferring perpetual protection reflects a legal deficiency in both doctrine and diplomacy.

V. Comprehensive Analysis of Consequences for Bangladesh

The combined shock of U.S. reciprocal tariffs and LDC graduation carries several important consequences.

1. Declining Export Competitiveness: Bangladesh’s ability to compete on pricing in key markets will deteriorate as it loses duty-free access and becomes subject to elevated U.S. tariffs. Ex-ante estimates suggest that Bangladesh’s exports could decline by more than 14% once post-graduation tariff increases take effect.

2. Sector Concentration Risk: Since RMG constitutes the dominant export category, any adverse development — whether a tariff, a rules-of-origin change, or a shift in buyer preferences — will directly affect employment, remittances, and overall economic growth. Analysis from the International Growth Centre underscores that Bangladesh’s RMG exports to the U.S. constitute a significant portion of its economy and face considerable risk.[10]

3. Trade Diplomacy Disadvantage: Bangladesh has a poor track record when it comes to negotiating with the U.S. This reflects a structural unpreparedness to negotiate complex bilateral accords that require commitments on labor standards, intellectual property rights, investment, and regulatory alignment.

4. Loss of Policy Space and Concessional Support: Graduation also means that LDCs will cease to receive concessional funds and technical assistance, placing additional pressure on the government to drive domestic reforms as external support disappears.[11]

5. Competitive Disadvantage Relative to Peers: Vietnam and India — two of Bangladesh’s primary competitors in export markets — are actively concluding bilateral FTAs and deepening their global integration. Bangladesh, by contrast, remains locked in a preference-dependent model. At the precise moment of maximum exposure, this places Bangladesh at a structural competitive disadvantage.[12]

In sum, Bangladesh faces a compounded crisis: rising external tariffs (especially from the U.S.) alongside the internal erosion of LDC privileges. The country’s current posture — reactive rather than strategic — amplifies the risks of export contraction, investment loss, job losses, and broader economic slowdown.

VI. Opportunities Amid Challenges

Despite the considerable pressures described above, there are identifiable strategic opportunities.

1. Structural Upgrading: Graduation creates a compelling impetus to transition from low-cost, labor-intensive exports to higher value-added, differentiated products. Bangladesh has the opportunity to diversify into non-apparel product categories and strengthen domestic value chains.

2. Leverage for Negotiating New FTAs: Bangladesh can reframe its graduation as a “development leap” rather than a setback by proactively negotiating FTAs and market access agreements — for example, GSP+ eligibility with the EU or bilateral arrangements with Japan, Canada, and other partners.

3. Institutional and Productivity Reform: The external shock creates a catalytic opportunity for reforms in governance, logistics, compliance, and sustainability — reforms that could render Bangladesh more competitive in the long run.[13]

It must be acknowledged, however, that these potential benefits are contingent on strong leadership, bold policymaking, and sustained institutional investment. They do not compensate for the immediate risks of market access loss and heightened tariff vulnerability. The opportunities are real but conditional.

VII. Options and Strategic Recommendations

Bangladesh must initiate prompt action on the following recommendations to navigate this challenging transition effectively.

1. Export Diversification and Product Upgrading: Bangladesh must reduce its excessive dependence on U.S. and EU clothing markets. It should actively explore markets in East Asia, Africa, and Latin America, while simultaneously developing export capacity in sectors beyond garments.

2. Trade Diplomacy and FTA Negotiation: Bangladesh should engage in both bilateral and plurilateral FTA negotiations, pursue GSP+ status with the EU, invest in building its trade negotiating capacity, and ensure the full participation of the private sector — including exporters and professional lobbyists — in trade discussions.

3. Domestic Value Chain Strengthening and Compliance: To reduce cost-sensitivity and improve competitiveness, Bangladesh should invest in backward linkages (such as domestic yarn and fabric production), automation, design innovation, and sustainability credentials that increasingly determine market access in developed economies.

4. Institutional Readiness for Graduation: The “smooth transition” strategy must be operationalized with strict oversight mechanisms, targeted training programs for small and medium-sized enterprises (SMEs), and comprehensive alignment of domestic laws with international standards on labor, the environment, and intellectual property.

5. Business Risk Protection: Export refinancing facilities, tailored credit lines, and tariff shock insurance tools should be established for businesses most vulnerable to tariff exposure. Policy analysis recommends that such cushioning mechanisms be implemented without delay.

6. Data-Driven Scenario Planning: Bangladesh should commission detailed research using HS code export-tariff elasticity analysis — for example, Razzaque et al. estimate own-price elasticities for Bangladesh’s clothing exports at approximately –0.35 to –0.4 in European markets — to identify the product categories most at risk and prioritize policy interventions accordingly.[14]

VIII. Conclusion

Bangladesh stands at a crossroads. Its graduation from the United Nations list of Least Developed Countries is occurring at precisely the same time that the U.S. is implementing reciprocal tariffs, creating a complex economic challenge that demands urgent and coherent policy responses. The simultaneous loss of preferential trade access and the imposition of punitive tariffs by a major trading partner mark a significant departure from the economic conditions that have underpinned Bangladesh’s growth — particularly in its largest export sector, readymade garments.

This two-pronged challenge demonstrates how Bangladesh’s overreliance on a small number of markets and products renders it acutely vulnerable to the unpredictable forces of global trade. Meaningful economic policy adjustment is therefore not optional — it is a necessity. To navigate this difficult transition, Bangladesh must move away from reactive economic policies and embrace proactive strategies centered on trade diversification and industrial upgrading. This means expanding its export portfolio, increasing value-added output in sectors such as electronics, pharmaceuticals, and information technology, and cultivating closer relationships with emerging economies and regional partners.

The recent escalation of trade tensions and the U.S. application of reciprocal tariffs signal clearly that international trade is no longer governed solely by the logic of comparative advantage. Geopolitical and protectionist considerations are increasingly decisive. The legal frameworks that underpin global trade agreements must be examined more carefully to understand how they are reshaping conditions for graduating LDCs. International law — particularly the WTO’s special and differential treatment provisions — will need to be upheld effectively, as the erosion of preferential systems could carry serious consequences for Bangladesh’s economic sovereignty.

Diplomatic negotiation is therefore an indispensable instrument for Bangladesh — not merely to secure favorable trade accords, but to protect its economic interests in a post-LDC world. Bangladesh’s engagement with major global actors, particularly through the negotiation of Free Trade Agreements and the pursuit of enhanced market access mechanisms, must be treated as essential to its economic survival in the contemporary global landscape.

Recent data and policy research confirm that Bangladesh’s economy can remain resilient after graduation only if it strengthens its institutions, adapts to shifts in global commerce, and undertakes meaningful structural reforms. While the concurrent pressures of LDC graduation and U.S. tariffs will undoubtedly be difficult, they also present Bangladesh with a genuine opportunity to reconstitute its economic model and emerge as a more competitive, diversified, and self-sufficient economy. The upcoming transition demands an immediate reassessment of Bangladesh’s trade policies, legal frameworks, and diplomatic posture — all of which must be aligned with the demands of a rapidly evolving global economy. The stakes are high, but with strategic foresight, sound decision-making, and sustained international engagement, Bangladesh can transform these challenges into a foundation for durable economic strength in the post-LDC era.

References

[1] World Trade Organization Secretariat & EIF, Trade Impacts of LDC Graduation (May 2020), https://www.wto.org/english/res_e/booksp_e/trade_impacts_of_ldc_graduation.pdf.
[2] Selim Raihan, Trump’s “Reciprocal Tariff” and Risks for Bangladesh, Prothom Alo (Feb. 22, 2025), https://en.prothomalo.com/opinion/op-ed/r2yentjxxc.
[3] Mohammad Abdur Razzaque, Syful Islam & Rakin Uz Zaman, U.S. Reciprocal Tariffs: Implications for Bangladesh (RAPID Policy Brief, Sept. 2025), https://www.rapidbd.org/wp-content/uploads/2025/09/RAPID-Policy-Brief_October-2025_U.S.-Reciprocal-Tariffs-Implications-for-Bangladesh-1.pdf.
[4] T. T. Duong et al., Report on Strategic Approaches to FTAs: BGD-LDC Graduation (RAPID, Sept. 2025), https://www.rapidbd.org/wp-content/uploads/2025/09/Report-on-Strategic-approaches-to-FTA_BGD-LDC-Graduation.pdf.
[5] Bangladesh Institute of International and Strategic Studies, Bangladesh After LDC Graduation: Preparedness & Policy Options (2025), https://www.biiss.org/article/bangladesh-after-ldc-graduation-preparedness-policy-options.
[6] Shahidur Rahman, Why Bangladesh’s Talks with the U.S. Were Unsuccessful, The Business Standard (Jan. 2025), https://www.tbsnews.net/bangladesh/why-bangladeshs-talks-us-were-unsuccessful-1183446.
[7] World Trade Organization Secretariat, GATT 1994 Article XI: Quantitative Restrictions, WTO Legal Texts (2019), https://www.wto.org/english/res_e/publications_e/ai17_e/gatt1994_art11_gatt47.pdf. [Note: The SDT commitment language cited in the text may be more accurately sourced from WTO Ministerial Decisions or the Marrakesh Agreement. The author should verify this citation before publication.]
[8] World Trade Organization Secretariat, GATT 1994 Article I: Most-Favoured-Nation Treatment, WTO Legal Texts (2019), https://www.wto.org/english/res_e/publications_e/ai17_e/gatt1994_art1_oth.pdf.
[9] World Trade Organization Secretariat, LDC Graduation: A Summary of Key Issues, WTO Publications (2025), https://www.wto.org/english/res_e/publications_e/ldc_graduation_e.htm.
[10] Razzaque et al., Bangladesh’s Response to LDC Graduation: Strategic Policy Options (Int’l Growth Centre, Sept. 2023), https://www.theigc.org/sites/default/files/2025-04/Razzaque-et-al-Final%20Report-September-2023.pdf.
[11] Salehuddin Ahmed, How Dicey Is the Trump Tariff Deal?, The Financial Express (Jan. 2025), https://thefinancialexpress.com.bd/views/columns/how-dicey-is-the-trump-tariff-deal.
[12] Id.
[13] Bangladesh Institute of International and Strategic Studies, Bangladesh After LDC Graduation: Preparedness & Policy Options (2025), https://www.biiss.org/article/bangladesh-after-ldc-graduation-preparedness-policy-options.
[14] Razzaque et al., Can Bangladesh Absorb LDC Graduation-Induced Tariff Hikes? Evidence Using Product-Level Data (Int’l Growth Centre, Dec. 2024), https://www.theigc.org/publications/can-bangladesh-absorb-ldc-graduation-induced-tariff-hikes-evidence-using-product.