9FEBRUARY, 2025ASIAMANUFACTURINGREVIEW.COMSERVICE SECTOR GROWS AS BANGLADESH MEETS DECLINE IN MANUFACTURINGKOREAN MANUFACTURING INVESTMENTS THREATENED BY U.S. TARIFFS ON MEXICAN IMPORTSBangladesh has undergone a significant transformation in its economy over the past decade, where manufacturing has decreased while the services sector has seen an increase. As per the Economic Census 2024, the share of manufacturing has dwindled to just 8.77% of the total economic units of the country from 11.54% in 2013.On the other hand, services constitute 91.23% of economic establishments. This is a deviation from the trend of development followed by other countries, which typically experience industrialization before the growth model becomes service-led.The decline in manufacturing is viewed as an indicator of structural weaknesses and an incoherent policy, with deficiencies in investment in the sector and an increasingly import-dependent economy. Analysts fear that this premature deindustrialization could undermine Bangladesh's long-term economic resilience. Manufacturing has become crucial to hiring, productivity, and export growth in the economy.While growth in the service sector is indeed significant, it remains lower than the losses incurred due to the decline in the manufacturing sector. From 2003 through 2013, the total number of manufacturing units more than doubled, and within the last ten years of growth, the increases have been relatively slight. In 2024, 15% more manufacturing units compared to 2013 were recorded, marking an industrial stagnation.The decline of the manufacturing sector has arrested job creation to a level that is of serious concern in the face of 2 million young unemployed people entering the labor market annually. Experts opine that the service sector, as retail-based and dependent on manufactured goods, will not absorb the increasing number of youth in any manner.The main limitations to manufacturing development are poor infrastructures, crises in energy production, and unsound revenue collection policies. Due to high prices of land and development costs as well as the hassle of getting a gas connection or other necessary inputs, many intending investors are forced away. Thereby, numerous businesses are adopting services and trade sectors. The U.S. is preparing to impose a 25 percent tariff on imports from Mexico on February 4, a development that is putting Korean companies under increasing pressure. The executive order was issued by U.S. President of Donald Trump through an announcement. This has been part of a larger strategy aimed at redressing trade imbalances and geopolitical tensions between both nations, especially with China. The move has resulted in panic in the global supply chain, where Korean firms have major investments in Mexico.As of June last year, 525 Korean companies had investment records in Mexico, with 84 percent focusing on manufacturing sectors such as automobiles, parts, and home appliances. According to the Export-Import Bank of Korea, Korea's direct investment in Mexico surged 60.1 percent from January to September last year, setting a record at $1.207 billion (approximately 1.76 trillion won). That fits into the near-shoring strategy, wherein companies move the production closer to the U.S. to circumvent risks posed by U.S.-China trade tensions.The Korea Institute for Industrial Economics and Trade has analyzed that such tariffs could decrease exports of automobiles to the U.S. by at least 7.7 percent to a maximum of 13.6 percent. Lee Hang-gu, President of the Korea Automotive Technology Institute, expressed concern, stating, "To increase sales with tariffs in place, significant discounts are necessary," and "companies exporting finished vehicles to the U.S. will eventually face fierce competition, leading to reduced profitability."Samsung and LG are especially sensitive. Samsung has a Tijuana plant for producing TVs, and Queretaro facilities for making fridge and washing machine. LG produces TVs at its Reynosa facility and makes refrigerators and ovens in Monterrey. Both companies do have some level of production capability in the United States, but a big percentage of their television supply to the United States emanates from Mexico, thus falling directly under the impact of this tariff increase.The broader economic implications for Korea are substantial. The Korea Institute for International Economic Policy projects that if the U.S. imposes universal tariffs on major countries, Korea's exports could decrease significantly. The potential for exchange rate fluctuations adds another layer of complexity, with Choi Jin-ho, an analyst at Woori Bank, noting that "depending on the intensity of Trump's policies, the won-dollar exchange rates could break through the 1,470 to 1,480 won range again."
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