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Bangladesh is now significantly linked with the global economy mainly through trade, remittance and investment. The country's trade value in goods reached US$141.24 billion in the last fiscal year (FY22), and the Gross Domestic Product (GDP) is estimated at $464.98 billion. Thus the trade-GDP ratio stood at around 30 per cent in the last fiscal year, while the average ratio was 27 per cent in the last five years. China is now the top trading partner of Bangladesh, followed by India and the United States (US), respectively. Again, the US is Bangladesh's top source of foreign direct investment (FDI).
Bangladesh-China bilateral trade stood at $20 billion in the last fiscal year, with the trade balance heavily tilted to China as Bangladesh imported goods worth $19.34 billion from the world's second-largest economy. At the same time, Bangladesh-India bilateral trade jumped to $15.68 billion in FY22 from $9.87 billion in FY21. However, as export to India is still much lower, around $1.98 billion against the import of $13.70 billion in the last fiscal year, Bangladesh faced a significant trade deficit with its next-door neighbour.
Total trade with China and India comprises one-fourth of Bangladesh's global trade, indicating its (Bangladesh's) vital link with these two major economies of the world. It is also predictable that trade with these countries will continue to rise in the near future creating a negative balance in bilateral trade for obvious reasons.
Though China has long offered extensive market access to Bangladeshi products, the country is yet to tap the potential. Currently, 97 per cent of Bangladeshi products are enjoying tariff-free access to Chinese market.
China initiated duty-free market access for the Least Developed Countries (LDCs) in 2010, and 24 countries were given this benefit initially. In 2015, Bangladesh partially benefited from it and 61 per cent of the country's exports were allowed to enjoy the zero-duty scheme. Five years later, China announced a tariff exemption for 97 per cent of Bangladeshi products from July 1, 2020. Thus, a total of 8,256 Bangladeshi products come under this zero-tariff treatment on the condition that 40 per cent local value addition is a must to avail of the benefit. Nevertheless, Bangladesh's exports to China showed mostly a downward trend after reaching a peak of $949.41 million in FY17. Exports to China fell to $600 million in FY20, mainly due to Covid-19, and in FY22, it stood at $683.43 million.
Bangladesh is doing better in the Indian market compared to China, no doubt. In the last 12 years, the annual average growth rate of export to India was around 20 per cent. And for China it is 15.40 per cent. Bangladesh's exports to India crossed the $1 billion mark in FY19 and reached nearly $2 billion in the last fiscal year. In the case of China, it is yet to touch the $1 billion mark.
Bangladesh is currently enjoying India's 'Duty-Free Tariff Preference (DFTP) Scheme, which was introduced in 2008 following the decision adopted at the Hong Kong Ministerial Conference (MC6) of the World Trade Organization (WTO). Currently, the DFTP Scheme extends tariff-free access to 98.2 per cent of India's total products. Moreover, under the South Asian Free Trade Agreement (SAFTA), Bangladesh also got some tariff benefits, although SAFTA is now on life support. In addition, enhanced marketing efforts by some Bangladeshi producers also help increase exports to India.
Trade facilitation measures taken by both countries also contributed to enhancing exports to India. Nevertheless, the problem regarding non-tariff barriers (NTBs) is still there. India has imposed anti-dumping duties and countervailing duties on some Bangladeshi exports. These have some negative impacts on Bangladesh's exports to India.
As trade with China and India grows, investment from these countries is also rising. In the last five years, the average annual FDI from India stood at $118 million, while the figure for China was $449 million. As Bangladesh is trying to attract more FDI and offers various incentives to foreign investors, more investment from India and China is also expected.
Another interesting development in recent years is an increased private credit from China. Statistics available with Bangladesh Bank showed that private commercial foreign borrowing from China has been increasing faster in recent years. As a result, the outstanding amount of Chinese credit was $422 million at the end of 2020, which jumped to $1745 million at the end of 2021. The amount further increased to $2232 million at the end of 2022.
What is clear from the above is that China has emerged as the top trading partner, an important source of FDI and a leading lender of Bangladesh. Again, China plays a vital role in the country's infrastructure development. Thus, Bangladesh's link with the Chinese economy has increased substantially.
Similarly, the link with the Indian economy has also grown stronger. One key difference is, however, that Bangladesh and India share a large common border. So, connectivity with India through land is extensive and will likely grow more. There is also a good amount of informal border trade. Bangladesh is also focusing on bigger energy cooperation with India.
Growing links with these two giant economies have several implications for the future of Bangladesh, especially in the current geopolitical situation. There are both benefits and risks. As the country is moving ahead to be graduated from the LDC status by 2026, the existing level of market accesses to these countries will decline in the post-graduation period. That's why there is a need for trade policy adjustment before graduation. Moreover, a long-term strategy is needed to tap the gains from the growing linkage.