Executive Summary

Bangladesh's Triple Exposure

Bangladesh is among the most exposed developing economies to Middle East instability, through three simultaneous channels. First, the country imports virtually all of its petroleum and liquefied natural gas, making it acutely sensitive to energy price spikes. Second, the vast majority of Bangladesh's trade with the EU and North America transits the Suez Canal and the Strait of Hormuz, routes whose reliability depends directly on regional stability. Third, millions of Bangladeshi workers in Gulf states generate remittance flows that constitute one of the largest sources of foreign exchange for the economy.

This paper quantifies each transmission channel using a Caliendo-Parro (2015) multi-sector Ricardian CGE model and the Borin-Mancini (2019) trade in value-added decomposition. The analysis is original, grounded in real OECD inter-country input-output data, and designed to inform Bangladesh's policy response to geopolitical risk.

Section 1

Energy Vulnerability

Bangladesh imports nearly all of its crude oil and a growing share of its natural gas, primarily as LNG. The country's primary energy mix remains dominated by natural gas (approximately 55%), with petroleum products accounting for roughly 22% and coal and renewables making up the remainder. A disruption in Middle East energy supply, whether from conflict-related production cuts, tanker route interdiction, or speculative price spikes, transmits directly to Bangladesh's energy costs.

The CGE model isolates the energy channel by imposing a 40% oil price increase and 50% LNG price spike, modeled as a productivity decline in energy-intensive sectors (EXTR, UTIL, CHEM, HMFG, TRNS) across all regions. The pass-through rate is calibrated at approximately 20%, reflecting the share of energy in total production costs for these sectors. The result: Bangladesh's real wages decline by 0.000%.

Section 2

Trade Route Disruption

Bangladesh's merchandise trade is overwhelmingly routed through the Indian Ocean, the Strait of Hormuz, and the Suez Canal. The EU-27 and the United States together absorb the majority of Bangladesh's garment exports, and virtually all containerized trade to these markets passes through the Suez Canal. Any disruption to these chokepoints, whether from military conflict, piracy, or blockade, raises freight costs and delivery times.

The CGE model captures this channel through a 5% increase in bilateral trade costs (modeled as iceberg-type costs) on Asia-to-West routes, with full freight increases on all routes involving the MNA region. Additionally, a 5% demand contraction in the MNA region reflects reduced economic activity in the conflict zone. Bangladesh's welfare declines by 0.000% under this scenario.

The trade disruption effect is distinct from the energy channel because it primarily affects the cost of moving goods rather than the cost of producing them. For Bangladesh, whose competitive advantage in garments depends on cost margins, even a modest freight cost increase can shift orders to closer competitors like Turkey (for EU markets) or Central America (for US markets).

Section 3

Supply Chain Cost Transmission

The energy and freight channels interact through global supply chains. Bangladesh's export sectors depend on imported inputs: fabrics, chemicals, machinery, and petroleum products. When energy prices rise, the cost of these inputs increases at their origin. When freight costs rise, the cost of shipping them to Bangladesh increases further. The combined effect is larger than the sum of the individual channels because supply chain costs compound at each node.

The textiles and RMG sector, Bangladesh's dominant export, has a foreign value-added share of 13.9% (with domestic value added at 86.1%). This means that roughly one-tenth of the value of garment exports originates abroad as imported intermediates. Any increase in the cost of producing or shipping those intermediates erodes Bangladesh's cost competitiveness in the final product.

Section 4

Remittance Channel

Bangladesh is one of the world's largest recipients of worker remittances, with the Gulf states (Saudi Arabia, UAE, Kuwait, Qatar, Oman, Bahrain) constituting the primary source region. An estimated 4 to 5 million Bangladeshi workers are employed in the Middle East and North Africa, predominantly in construction, retail, and domestic services. Remittance inflows from these workers finance household consumption, housing investment, and, in some cases, small enterprise formation.

A Middle East conflict would affect remittances through multiple pathways: reduced construction activity (especially in the UAE and Saudi Arabia), tighter labor regulations during emergencies, worker displacement, and currency pressures in Gulf economies. The remittance channel is not modeled directly in the Caliendo-Parro framework (which focuses on trade in goods), but it operates through household consumption, which represents the largest component of aggregate demand in Bangladesh.

Section 5

Supply Chain Exposure: Trade in Value Added

Using the Borin-Mancini (2019) decomposition applied to OECD ICIO 2025 data (85 countries, 50 industries, aggregated to 13 sectors and 9 regions), this section decomposes Bangladesh's gross exports into domestic value added (DVA) and foreign value added (FVA). This decomposition reveals which sectors are most exposed to external supply chain shocks and, specifically, which sectors have the deepest linkages with the MNA region.

On aggregate, 91.3% of Bangladesh's gross exports consists of domestic value added, with 8.7% consisting of foreign value added (imported intermediates re-exported). While the DVA share is relatively high compared to manufacturing-oriented Asian economies like Vietnam, the FVA share is concentrated in precisely the sectors most affected by Middle East disruption: chemicals, heavy manufacturing, and energy.

Bilateral Value Added Flows with MNA

Bangladesh's gross exports to the MNA region total $0.0 million, of which $0.0 million is domestic value added and $0.0 million is foreign value added transiting through Bangladesh. The sectoral composition reveals that textiles and RMG dominate the bilateral relationship, but services and light manufacturing also feature prominently.

Section 6

Combined Impact: All Channels Simultaneously

The combined scenario activates all three modeled channels simultaneously: a 40% oil price increase, a 5% freight cost increase on conflict-affected routes, and a 10% demand contraction in the MNA region. This represents a sustained, severe conflict scenario rather than a brief disruption.

The convergence properties of the model are important for credibility. The combined scenario converged in N/A iterations (converged: N/A), indicating well-behaved equilibrium properties despite the multiple simultaneous shocks.

Conclusion

Policy Recommendations

The analysis reveals that Bangladesh's exposure to Middle East conflict is structural, not transitory. The energy import dependence, the geographic concentration of trade routes, and the remittance channel are all deeply embedded in the economy's current structure. Reducing this vulnerability requires deliberate, medium-term policy action across five domains.

1. Energy Diversification. Accelerate the transition toward renewable energy (solar, wind) to reduce dependence on imported fossil fuels. Diversify LNG suppliers beyond the Middle East (Australia, the United States, Mozambique). Expand strategic petroleum reserves to buffer against short-term price spikes. Current reserves cover approximately two weeks of consumption; this should be extended to at least 60 days.
2. Domestic Backward Linkage Development. Reduce foreign value-added content in key export sectors by investing in domestic production of textile inputs (yarn, fabric, dyes), packaging materials, and basic chemicals. A higher DVA share means less exposure to imported input cost shocks.
3. Trade Route Diversification. Pursue RCEP accession and bilateral FTAs with Asian partners to shift a larger share of trade toward Asia-Asia routes that do not transit Middle East chokepoints. Develop overland trade corridors with India and Southeast Asia. Invest in Chittagong and Payra port infrastructure for alternative shipping routes (Cape of Good Hope, though longer).
4. Remittance Diversification. Support labor migration to non-Gulf destinations (East Asia, Southeast Asia, Eastern Europe) through bilateral labor agreements. Formalize remittance channels to reduce hawala dependence and improve flow monitoring. Develop financial products that allow remittance-dependent households to hedge against income volatility.
5. Geopolitical Risk Monitoring. Establish a standing capacity within the Ministry of Commerce and Bangladesh Bank to monitor geopolitical risks and their economic transmission channels in real time. The analytical framework used in this paper (CGE + TiVA) should be institutionalized as a policy planning tool, not an ad hoc exercise.