Benefits and rules of bondedmanufacturing are often discretionary. Bonded manufacturingis a form of temporary admission, which is equivalent tosuspended import duty. The term used varies from country tocountry: Special Bonded Warehouses (SBW) in Bangladesh,Export Only Units in India, Bonded Manufacturing Warehousesin Malaysia, etc. The rules under which they operate alsovary substantially from country to country and have changedover time. Bonded manufacturing status allows firms to bringimported goods into their warehouses without paying importduty, use the goods in their production, and export theoutput. The firms can usually also import machinery andreplacement parts and other supplies duty-free, and buy fromdomestic suppliers free of domestic excise, sales and othertaxes. The participating factories operate under thesupervision of Customs authorities, who check the import andexport containers going to and from the bonded factory, or,in some cases, rely on spot checks of the factory'sinventories. The benefits and rules are at the discretion ofthe governments. The success of the bonded warehousefacility is not equitable and inclusive in Bangladesh.Bangladesh’s customs bonded warehouse regime permitslicensed manufacturers to import duty-free parts andmaterials required for their export production purposes. Theregime is most heavily used by RMG producers and to a lesserextent by leather goods, footwear, and shipbuildingindustries. Enterprises can use the Special Bonded Warehouse(SBW) facility for importing all inputs duty-free along withimports of inputs under back-to-back LC (letters of credit),a facility to pay for imported inputs from export proceeds.This policy works to negate both the effect of relativelyhigh import tariffs and the difficulty in claiming dutydrawback on the export of duty-paid imported raw materials.It ensures competitive pricing by exporters for theirmanufactured goods as they compete in regional (and global)markets. However, these schemes allowing the duty-freeimport of inputs are not available equally to other sectorexporters, who must pay duties on imported inputs upfrontand rely on a dysfunctional duty drawback system thatinvolves transaction costs. Therefore, for non-RMG sectors,a tariff on imports becomes a tax on exports on two counts:(a) the higher cost of imported inputs and (b) the highertariff-induced profitability of Import Substitute Industriesthat divert resources away from exports.
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