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The Financial Express

Evolution of trade policies of Bangladesh since 1972

| Updated: July 02, 2021 21:03:26


Evolution of trade policies of Bangladesh since 1972

Since independence Bangladesh has witnessed gradual changes in trade policies and policies directly or indirectly affecting trade, starting from widespread control on trade, exchange rate and investment to a more liberal trade regime in the recent years. After independence in 1971, Bangladesh continued to maintain a restrictive trade regime inherited from Pakistan with a new initiative of direct participation of the government in economic activities based on state control and ownership. No significant changes were observed in this policy until early 80s when Bangladesh initiated the first phase of trade liberalisation.  Since then, import substituting strategy based on state control and ownership has gradually been given way to a greater degree of market-directed and export-oriented industrialisation reliant on private entrepreneurship. During this period policies were adjusted to make the trade policies more liberal and predictable and at the same time to make the domestic industry competitive

TRADE POLICY INSTRUMENTS OF BANGLADESH: Since  independence, the main instruments for regulating foreign trade remain Imports and Exports (Control) Act 1950, Customs Act 1969 and Foreign Exchange Regulation Act 1947.  The Import Policy Order issued under the Imports and Exports (Control) Act 1950 regulates the condition of import and is legally enforceable. Provisions of other Acts having bearing on import status of any product are generally referred to in the import policy orders. However, Export Policy is merely a statement of intent without any legal enforceability.  Although Export Policy defines the export status of certain products, export restrictions are imposed through the Statutory Regulatory Orders (SRO) issued under the same Act. The Customs Act 1969 specifies the customs duty through its first schedule and other border taxes and charges such as regulatory, antidumping, countervailing and safeguard duties. Although import and export policies provide for overall guidelines, detailed rules and procedures for import for the purpose of exports, such as procedures for import under bonded warehouse, import for Export Processing Zones and duty draw back facilities are issued under Customs Act 1969.  Until 1982, sales tax was collected on domestic and import products under the Sales Tax Act 1951, which was replaced by the Sales Tax Ordinance 1982 with effect from July 1, 1982. This ordinance was later replaced by the VAT Act, 1991 replacing the sales tax by VAT. Along with VAT, Supplementary duty is also collected under this Act.  Both VAT and supplementary duty are collected on imported products. The VAT Act 1991 was placed by VAT and Supplementary Duty Act 2012 with effect from July 1, 2019.  The Foreign Exchange (Regulation) Act 1947, which among others, regulates the procedures foreign exchange transaction.

CHANGES IN IMPORT POLICY REGIME SINCE 1972: At the initial stage after independence Bangladesh faced serious challenges to rehabilitate the economy.  At this time, external sector faced low foreign exchange reserve, narrow export base and rising import prices.  As a result, the priority of the then government was to improve the balance of payment situation through excessive import control measures, high tariffs and rigid foreign exchange regime. This policy was supplemented by direct participation of the government in the economy through nationalisation.  On one hand, due to nationalisation of large industries, import of majority of raw material were done by the state enterprises and on the other hand, policy was undertaken to involve state owned Trading Corporation of Bangladesh (TCB) in importing essential goods and raw materials required by the private sector industries with view to attaining economy of scale through bulk import and conducting foreign trade under barter trade arrangement. Thus, the main objective of import policy regime was to involve state owned enterprises in import activities throughout the period between 1972 and 1975. During this period, the government issued six-monthly import policy order, which was based on import requirement and availability of foreign exchange.

With the departure from the socialistic approach towards economic development in 1975, the government started encouraging private sector involvement in import activities.  Import procedures were made easier through abolition of import licensing for commercial import on January 1, 1976 and for industrial import on July 1, 1983.  In 1978 the government started issuing annual import policy order to bring the predictability in import regime. Before 1985 efforts were made to liberalise the import regime through bringing some products in open general List.  Nevertheless, it was evident that even after departure from the socialistic approach, import policy continued to be formulated with view to restricting import to save foreign exchange.  It was only in the FY 1985-86 when there was a fundamental shift in formulation of import policy order.  Until 1985, Bangladesh maintained a positive list of items permissible for import, which was carried out from Pakistan period. In FY 1985-86 the government abandoned the positive list approach and adopted a negative list approach. Under the negative list approach, items not included in the negative list were freely importable, while items under the negative list were banned for import or restricted. Import policy orders maintain restrictions on two grounds: for trade reasons-- to protect local industries,  and for non-trade reasons-- to protect religious and public morals, health, security, environment, plant, animal and human health and life.  Since the adoption of negative list approach, successive governments have reduced the number of products in the negative list. As can be seen from Figure-1, import restrictions for trade reason have gradually been withdrawn after adoption of negative list. Alongside liberalising the import regime, the government brought the predictability in import regime by gradually increasing the tenure of import policy orders. As may be seen from table-1, the period has been gradually increased from 6 months to three years.

TARIFF REFORMS SINCE 1972: The policy of tariff reforms and rationalisation of tariff structures was initiated in the late 1980s and was further reinforced in the early 1990s.  With changes in import policy order, first attempt was made to rationalise tariff structure in 1985 through restructuring tariffs by maintaining hierarchy in tariffs according to the degree of processing.  Thereafter, the successive governments have maintained the momentum of trade liberalisation through reduction of tariffs. Tariff reduction process was accelerated in early 90s. The highest tariff rate was brought down from as high as 350 per cent in FY 1991-92 to 50 per cent in 1995-96 and then reduced to 40 per cent in FY 1998-99.  The maximum tariff was further reduced to 25 per cent in FY 2005-06. Since then, the maximum tariff has been kept at 25 per cent. The number of tariff slabs (including zero) has also come down from 24 in the 1980s to only 4 in FY 2005-06, although number of tariff slabs has increased in recent time for addressing concerns of some sectors. As a result of tariff reduction, average duty has drastically come down since 1991.  As may be seen from Table-3, reduction of tariffs has resulted in bringing down the un-weighted average tariff from 70.64 per cent in FY 1991-92 to only 16.39 per cent in FY 2005-06.  Thereafter, the pace of tariff reduction has become slow. During the period between FY 2005-06 and FY 2019-20 average tariff has declined only by nearly 2 percentage points. If regulatory and supplementary duties, which are solely levied on import, are added to tariff,  average import tariff will increase to some extent.  It is noteworthy that despite reduction of unweighted average tariff over the period, gap between un-weighted and import weighted average tariffs remains significant. Such a phenomena may be attributed to exemption of tariffs for certain sectors and tariff concessions granted under SAFTA and APTA, and to Bhutan.  

Over the period frequent changes were made in applying other duties and charges imposed on import. Licence and permit fee, which was levied on import since 1972 was abolished from July 1, 2000.  Sales tax imposed on import since 1972 was replaced by VAT after introduction of VAT Act in 1991, which is still in place. During the period between September 2004 and June 2019, commercial imports were subject to advance trade VAT. Later after enactment of VAT and Supplementary Duty Act, 2012, advance VAT has been  levied on all imports. During the period between 1997 and 2007, the government levied Infrastructure Development Surcharge solely on import to raise the revenue for infrastructure development. After implementation of GATT valuation system in 2000 as per commitment made in the WTO, the government abolished the tariff value system, which existed since 1972.  However, tariff value in the form of minimum import price was  reintroduced in 2015. Despite abolishing the regulatory duty in 1991, the provision for regulatory duty was introduced again in Customs Act in 2000.  In addition, supplementary duties are levied on imported goods. Since then, coverage of regulatory and supplementary duties has increased manifold and in FY 2020-21 almost half and quarter of total HS lines are subject to regulatory and supplementary duties respectively.

EVOLUTION OF EXPORT MEASURES SINCE 1972: Since independence, the successive governments have put emphasis on expansion and diversification of exports. Therefore, export policies are largely liberal allowing export of almost all products excluding some unprocessed and partially unprocessed products.  In the 80s minimum export price of jute was in place, which has been subsequently removed. The government also levied export duty on negligible items, such as is 15 per cent export duty on wet blue leather in 1993 and cotton waste, rice bran, building bricks and unwrought lead in recent years. Major focus of successive export policies since 1972 has been to promote export through improving tax neutralising schemes and providing various incentives. Table- 3 presents an overview of various export promotion measures introduced by the Government since 1972.

CONCLUDING REMARKS: Trade policies of Bangladesh has evolved over the last fifty years based on the needs arising from time to time. At the initial stage when foreign exchange reserve was the major concern, the trade policy was very rigid. Adoption of private sector-led growth policy, creation of the opportunity of exporting imported input-based products especially readymade garments and Bangladesh's engagement in various trade agreements led the government to open up the import regime through dismantling import restrictions and lowering import tariff and to adopt various export supporting measures. All these policy changes have resulted in positive outcome in respect of both export and import. During the period between 1972-73 and 2018-19,  export has increased from US$ 348 million to US$ 40,535 million, while import has increased from US$ 688 million to US$ 56,061 million.

Bangladesh is going to enter into a new phase soon, when it will graduate from its current LDCs status. This will necessitate a new shift in trade policy regime for enhancing productive capacity and competitiveness.

 

Dr Mostofa Abid Khan is a trade specialist and former Member of Bangladesh Trade and Tariff Commission.

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