Adapting to new realities: Bangladesh prepares to graduate from Least Developed Country status amid geoeconomic disruptions

Background: Disruptions confronting Bangladesh’s development

After five decades as one the world's least developed countries (LDCs) according to official UN criteria, Bangladesh is set to graduate from the category in November 2026. This is a significant development milestone for a country that started out as war-devastated, prone to floods and cyclones, and socio-economically fragile. Since gaining independence in 1971, Bangladesh has been regarded as a test case for development, transforming through sustained growth and achieving remarkable progress in various social and human development indicators, including health, demographics, and gender equality: It secured one of the fastest Human Development Index (HDI) progress scores in the world over the period 1990–2021. Propelled by apparel exports and migrant workers’ remittances (respectively, around $50 billion and $25 billion in annual receipts), the economy transformed from predominantly aid-dependent to one where international trade is a significant driver of economic transformation.

Yet, the prospect of LDC graduation comes with significant uncertainties and challenges. As an LDC, Bangladesh has long benefited from duty-free access to the markets of major importing countries—although not the United States—and from flexibilities regarding WTO rules, for example regarding intellectual property obligations and protected policy space allowing export subsidies. Graduation will thus result in the discontinuation of privileges that underpinned its development take-off. Furthermore, this loss of LDC-specific benefits is unfolding at a time when the foundations of liberal global trade regimes and the rules-based multilateral trading system are being redrawn in an increasingly geopolitically charged context. The heightened uncertainty was triggered initially by the US-China trade war but is now affecting most countries directly, as the US is introducing reciprocal tariffs to address its bilateral trade deficits and dismantling its flagship development aid programme.

The confluence of these two disruptive forces, namely LDC graduation and geoeconomic competition, raises a compounded challenge to Bangladesh’s development path. The result is a form of policy compression: the need to implement difficult domestic reforms just as the global environment becomes less conducive to trade, investment, and concessional development finance. What is at stake is not merely a recalibration of trade or industrial policy, but a deeper strategic reset that must take into account the obsolescence of past models, forcing difficult trade-offs involving available options and geopolitical alignment.

Bangladesh’s current development approach needs upgrading

Almost three-quarters of Bangladesh’s exports benefit from LDC-specific one-way trade preferences, giving it a significant competitiveness boost. No other LDC relies so heavily on such preferential market access. This global trade and development regime facilitated an entry point for Bangladesh’s garment exports and eventually enabled the country to become one of the leading international suppliers in that sector. First, from 1974 the Multi Fibre Arrangement (MFA) imposed restrictions on clothing exports from established producing countries, incentivizing firms from newly industrialized Asian economies to relocate production to countries such as Bangladesh that had unused quota space, transferring technical know-how and global market access.

This gave rise to a generation of “born to export” apparel-producing firms that entered global markets without first building a domestic base, capitalizing on low labour costs and the labour-intensive nature of apparel production. Additionally, as major importing countries have historically maintained much higher tariffs on apparel than on most other industrial goods, the duty-free access granted to LDCs gave them a substantial competitive edge within that sector.

This tariff asymmetry fuelled rapid growth in Bangladesh’s apparel exports but also contributed to a significant concentration, with garments currently accounting for 85 percent of the country’s exports. Domestically, government policies also supported exporters, offering incentives that were disproportionately targeted towards the apparel industry.

The success of its garment export sector belies the fact that Bangladesh has maintained one of the most protectionist trade policy regimes in the world, characterized by high import tariffs and associated duties. This policy stance has favoured domestic, import-competing sectors by insulating them from external competition. In turn, this has discouraged investment in export-oriented activities by ensuring more lucrative returns from domestic markets. Furthermore, export markets demand high product and compliance standards, while standards in the domestic market are weaker, accentuating the incentive structure favouring import substitution. The textile and garment industry circumvents these anti-export barriers by exclusively targeting export markets and benefiting from generous trade preferences.

While the apparel-led export expansion is widely recognised as an economic success for Bangladesh, the declining relative share of exports within the gross domestic product, from about 18 percent in 2011 to 12 percent in 2024, indicates that other sectors are starting to thrive. The average annual double-digit growth in manufacturing over the past decade has been more than just a garment story: the domestic economy has experienced rapid growth in many sectors from pharmaceuticals to furniture, ceramics to cement, footwear to fertiliser, handbags to handicrafts, or plastic items to processed food. Yet, the growth of these sectors is not reflected in the ever-growing export basket, which remains garment-concentrated.

As Bangladesh embarks upon its LDC graduation this dual economic structure, with exports reliant on trade preferences and imports shielded by protective policies while both rely on low wages and weak compliance, may have reached its limits given that exports remain relatively small and highly concentrated in apparel. The country’s Smooth Transition Strategy (STS) for graduating from LDC status, adopted in February 2025, calls for breaking away from this preference-driven, tariff-protection-dependent, low-wage-based, and weak-compliance-centric production approach to shift towards what is being dubbed as “high-road” economic development. Such a new approach aims to promote competitiveness driven by productivity, innovation, improved labour standards, and enhanced environmental compliance. This transformative development agenda that Bangladesh now aims to pursue includes such measures as: trade liberalization to deal with anti-export bias and promote export diversification; improvement in compliance requirements; investing in skills development; and improving domestic resource mobilization. It also aims to ensure macroeconomic stability in the face of the sustained inflationary pressures and weaknesses in foreign reserves that resulted from policy mismanagement and misgovernance by the previous regime, which was ousted in July 2024 through a student-cum-mass uprising.

The weakening foundations of the trade-led and international development models

The upgradation of the development model as envisaged in the STS, already a tall order, is further challenged by rapidly shifting global trade and production systems shaped by geopolitics. After LDC graduation, Bangladesh needs a rules-based and predictable multilateral trading system such as once promised by the World Trade Organization but which is now under existential threat. After the failure to conclude the Doha Round, ironically dubbed the Development Round, the WTO’s appellate system has remained dysfunctional, undermining its dispute resolution function and allowing geo-economic tools to proliferate unchecked.

In this weakened multilateral landscape, the world’s richest countries are becoming increasingly protectionist. Restrictive measures put in place by the G20 group of wealthy countries covered more than $2 trillion worth of trade in 2024, nearly 13 percent of the group’s total imports, according to a joint report by the Organisation for Economic Co-operation and Development, the WTO and the UN Trade and Development organization. Also, there is now a dangerous trend of applying “national security concerns” so widely as to geoeconomically fragment the global economy, with dire consequences for international development. Such geoeconomic fragmentation, driven by rising tensions and increased trade costs, significantly reduces trade and income, with median per-capita income losses 80 percent higher in Asian emerging market and developing economies (EMDEs) and 120 percent higher in African EMDEs compared to advanced economies, according to research by the International Monetary Fund.

Geoeconomically motivated supply chain reconfigurations, such as reshoring, onshoring, nearshoring, and friendly-shoring, are generating heightened uncertainty, without consideration for the interests of capacity-constrained developing countries. As Bangladesh badly needs foreign investment for integrating into global supply chains, the sources of such investment could jeopardize trade prospects and bilateral relations. China, given its ambitious Belt and Road Initiative, has become the world’s largest foreign investor in developing countries. Bangladesh urgently requires substantial investment in infrastructure and industries to stimulate export capacity and employment generation, particularly given the imminent challenges posed by its LDC graduation. While Chinese investment represents a compelling prospect in this regard, it may also entail complex diplomatic considerations, potentially unsettling strategic relationships with key partners, notably India and the US, which seriously scrutinise and actively aim to contain China's growing economic and political influence.

Securing concessional development finance for low- and lower-middle-income developing countries is also becoming increasingly difficult. Although in principle LDC graduation should not in itself cause a reduced inflow of overseas development assistance, geopolitical developments are undermining international development efforts. The US has now discontinued its development aid programme, and increased defence spending commitments by many other developed countries are drawing resources away from international development assistance. When the Sustainable Development Goals (SDGs) were adopted in 2015, the global community aimed to mitigate an investment shortfall of $2.5 trillion annually, which has risen to $4 trillion per annum, with the UN warning that without urgent actions and increased investment, global efforts to achieve the SDGs by the deadline of 2030 will fail.

As Bangladesh sets out to address its own deep-rooted anti-export biases and to foster economic competitiveness, the prevailing global environment presents a contradictory and challenging backdrop. The resurgence of protectionist measures by some of the world’s leading economies, such as tariff escalations, restrictive trade practices, and broadening use of security-related exemptions, tend to embolden domestic protectionist lobbies within Bangladesh. These groups seize upon global precedents to justify continued high tariff barriers and regulatory protections, arguing that a liberalized trade regime risks exposing domestic industries to heightened volatility and unfair competition in an increasingly fragmented and unpredictable global market. Such dynamics complicate the political economy of reform, significantly raising the stakes for policymakers who must navigate between the imperative of structural economic upgrading and the powerful vested interests resistant to liberalization.

US reciprocal tariffs and the retreat of multilateralism

With LDC graduation fast approaching, Bangladesh’s ambition to pursue a trade-led development model is being starkly tested by the advent of US reciprocal tariffs: a sharp reminder that the multilateral trade order, once a shield for weaker economies, is now rapidly coming apart. For the past three decades, multilateral trade rules offered countries like Bangladesh a protective framework, sparing them the need to negotiate bilaterally with far more powerful economies. Even regional and bilateral trade agreements were aligned with the discipline of multilateral standards. However, the recent US so-called reciprocal tariffs have effectively dismantled that shield, forcing weaker economies into direct negotiations. Lacking any significant economic leverage, Bangladesh finds it challenging to assert its interests effectively, rendering it susceptible to unfavourable terms that could compromise its developmental objectives. First and foremost, the asymmetries are staggering: Madagascar faces a 47-percent tariff over a bilateral deficit of less than $0.7 million; Lesotho, 50 percent for a $0.3 billion deficit; and Bangladesh, 37 percent for a $6.2 billion deficit. Meanwhile, Vietnam’s $125-billion deficit draws a 46-percent tariff, India’s $46-billion deficit incurs 27 percent, and the EU’s $161-billion deficit is met with only 20 percent. Furthermore, the disparity in negotiating power is further exacerbated when weaker countries must compete with more advanced developing or transition economies, like India and Vietnam, that possess diversified exports and more substantial geopolitical influence. Countries with broader economic bases can offer more attractive concessions or alternative trade benefits to negotiating partners, thereby securing greater concessions, which then can help outcompete weaker developing countries. For Bangladesh, this dynamic presents a formidable challenge.

Non-rules-based bilateral negotiations can initiate a “race to the bottom,” where countries dilute standards or offer disproportionate concessions in a bid to secure or preserve access to dominant markets. context access to trade opportunities begins to resemble a zero-sum game where gains for one country are secured at the direct expense of others, particularly those with limited bargaining power. For a country such as Bangladesh, entering into such precarious negotiations without sufficient leverage not only threatens its economic resilience but also raises pressing questions about the fairness, balance, and long-term sustainability of the emerging trade landscape. Yet, in this dangerous game non-participation is not a viable option, as strong domestic pressures persist to safeguard export market access, protect jobs in key sectors such as garments, and attract foreign investment.

It is worth pointing out that Bangladesh, having spent the past five decades as an LDC, has had preferential market access under WTO rules without offering reciprocal concessions, meaning that building a strong trade negotiation capacity was never a priority. This context renders Bangladesh’s situation all the more precarious as it leaves the LDC group, with its consequent need to pursue negotiated trade arrangements while facing the geoeconomic manoeuvring of more powerful actors.

Recasting the development model for post-LDC Bangladesh in a fragmented global order

Bangladesh stands on the threshold of graduating from LDC status amid tectonic shifts in the architecture of global trade and development, facing a fragmented and uncertain external environment. For a country that has long relied on preferential access, low wage costs, weak compliance, and a narrowly concentrated export structure, replicating past strategies is not a viable option for future development.

In the above backdrop, the national Smooth Transition Strategy (STS) for LDC graduation correctly identifies the need to shift towards a “high-road development model” anchored in productivity, innovation, compliance, and competitiveness. But such aspirations now face stronger headwinds than ever before: As the geopolitical competition intensifies, global rules change, power asymmetries grow sharper, the risks of exclusion, marginalization, or disadvantageous bargaining outcomes loom large. While external shocks are unavoidable, the internal policy choices remain squarely within Bangladesh’s control, especially those involving trade liberalization, macroeconomic stabilization, standards enhancement, and institutional upgrading. Furthermore, Bangladesh’s development efforts cannot be sustained without stronger domestic resource mobilization. The post-LDC transition can be regarded as a timely opportunity to make meaningful progress in this regard, not only to ensure fiscal space for development but also to address rising income and wealth inequalities that threaten social cohesion. Trade liberalization, similarly, must be approached not as a concession to the strategic ambitions of others, but as a necessary reform to enhance Bangladesh’s own export responsiveness and reduce its dangerous over-reliance on a single sector, namely garments, that remains vulnerable to demand shocks, supply-side bottlenecks, compliance scrutiny, and shifting sourcing strategies of global brands and retailers. Moreover, many of the STS-recommended reforms, especially those targeting quality upgrading and regulatory compliance, are not merely about gaining market access abroad; they are just as vital for protecting domestic consumers, improving labour conditions, and safeguarding the physical environment, all objectives that resonate with the broader public interest and sustainable development.

In an increasingly geopolitically driven global economy, the importance of building robust trade negotiation capacity and pursuing effective economic diplomacy cannot be overstated. Bangladesh will have to navigate a complex landscape shaped not only by global geopolitical competition but also by intensifying regional rivalries, particularly between China and India, both of whom are deeply invested in shaping the economic trajectory of South Asia. Managing these dynamics while safeguarding national interests will require strategic foresight, diplomatic agility, and institutional strength that go well beyond the traditional remit of trade ministries and demand a broader strategic and whole-of-government coordination.

In this evolving and tumultuous era, development cannot be delinked from geopolitics, nor can industrial transformation be imagined without strategic economic statecraft. Bangladesh must therefore approach its post-graduation development journey not as a continuation of past successes, but as a reimagining of its economic model under profoundly different global conditions. The task ahead is not only to withstand the external pressures but to convert them into opportunities where possible. This will require policy ambition, political resolve, and above all, solid preparations to act before the window for strategic adaptation begins to close.