The Financial Express

Pursuit of FTAs by Bangladesh and challenges ahead

| Updated: July 11, 2021 20:41:31

Pursuit of FTAs by Bangladesh and challenges ahead

Bangladesh is set to graduate from the LDC status in 2026. Recommendation made by the United Nations Committee for Development Policy (CDP) in February 2021 has already been endorsed by United Nations Economic and Social Council on 8 June 2021. The decision of graduation of Bangladesh will become effective five years after the UN General Assembly takes note of the recommendation in its current session. Thanks to the visionary and targeted policy of the present government, Bangladesh is in the rapid growth trajectory. As per CDP Triennial Review, GNI per Capita of Bangladesh has registered an increase from US$ 453 to US$ 1,827 during the period between 2009 and 2021. During the same period Human Asset Index has improved from 53.3 to 75.3, although economic vulnerability index has slightly deteriorated with an increase from 23.2 to 27.2 due to inclusion of environmental vulnerability. Bangladesh has also been upgraded to lower-middle income country from low-income country in 2015 as per World Bank's classification. It is undeniable that international support measures in forms of preferential market access and WTO's special and differential treatment for LDCs have significant contribution in this remarkable achievement.  In fact, among the least developed countries Bangladesh is the only country, which successfully utilises the ISM, especially the preferential market access granted by the development partners. According to the estimates of the WTO, 71 per cent of Bangladesh's global export entered into the markets of other countries enjoying DFQF market access granted for LDCs. Besides, Bangladesh also exports to India and other countries of regional groupings availing the preference granted by partner countries for LDCs. These facilities will cease to exist after 2026 when Bangladesh will graduate from LDCs, although DFQF market in the European Market under EU EBA initiatives will continue to exist till 2029. Loss of these facilities will exert pressure on competitiveness of Bangladeshi products in the world market. Naturally, Bangladesh has to take appropriate initiatives to mitigate these losses.

Since 2018, when Bangladesh first met graduation criteria, the government took a number of initiatives to face the challenges. Initiatives include submission by LDCs to the WTO for extension of DFQF market access for certain period, participation in public consultation for the review of the EU GSP scheme and conducting a number of feasibility studies of engaging in free trade area with some countries. The Finance Minister in his 2021-22 budget speech mentioned that Bangladesh has adopted the policy of executing Bilateral Free Trade Agreements (FTAs) and Preferential Trade Agreements (PTAs). Bangladesh signed a bilateral PTA with Bhutan on December 6, 2020 and similar initiatives have already been taken for signing agreements with 11 other countries. There is an initiative to conduct a joint feasibility study on the proposed Comprehensive Economic Partnership Agreement between Bangladesh and India.

In the twenty-first century, trade agreements go beyond preferential tariff treatment to focus on deeper integration issues. These agreements take shape of Comprehensive Economic Partnership Agreements, where issues are addressed outside the World Trade Organisation Agreements (WTO). Historically, Bangladesh is not aggressive on participation in regional trading arrangements. Starting from 1976 Bangladesh has signed 4 regional preferential trading arrangements, 1 bilateral preferential trade Agreement, 1 global preferential trading arrangement and 2 free trade area agreements (FTAs). O the two FTAs (SAFTA and BIMSTEC FTA), only SAFTA has come into force. Besides, extent of tariff liberalisation under these agreements including SAFTA and coverage of issues are very narrow and the impact on two-way trade with other participating countries is exceptionally low. Based on the experience that Bangladesh has in negotiating FTAs and the focus of modern FTAs, it is certain that Bangladesh has a long way to go for effectively negotiating FTAs. Towards this end, the country has to take preparation in the key areas. These are:

First, it is important to decide how the country foresees the extent of trade coverage. As regards the issues covered under WTO, i.e., trade in goods and trade in services, all border duties and restrictive restrictions must be eliminated on at least 90 per cent of trade in goods with partner countries and service must cover substantially all sectors, if it is established under Article XXIV of GATT 1994 and Article V of GATS as per requirement of those articles. Most importantly, Bangladesh may establish FTAs with developed countries only under those articles. There is an option to establish FTA with developing countries under Enabling Clause with less stringent requirement. However, FTAs signed by the developing countries in the twenty-first century are notified under article XXIV of GATT 1994. So, Bangladesh might not have any other option but to negotiate FTAs with 90 per cent trade coverage, which will be challenging if corrective measures are not taken before signing an FTA.

Second, Bangladesh has limited export products. Notably, apparel constitutes more than 80 per cent of country's total export. Moreover, apparel mainly is exported to developed countries and it is so since around 70 per cent of global import is captured by the developed countries. Therefore, if Bangladesh signs FTAs with the developed countries, the country may experience export benefit in retaining the markets in these countries-- since all developed countries except the United States grant DFQF market access in apparel to Bangladesh as an LDC. However, there are other challenges in signing FTAs with developed countries. On the other hand, it is nearly impossible to foresee any export benefit in signing FTAs with developing countries with this narrow export basket. Any assessment of impact of FTAs with developing countries will obviously show the minimal export benefit. Therefore, diversification of export products is a pre-requisite of engaging FTAs with any countries, especially developing countries. Diversification may require tariff and FDI policy reforms, massive programme for quality human resource development and investment in quality infrastructure.

Third, focus of modern FTAs has shifted dramatically from traditional emphasis on market access to other measures such as services, investment, competition policy, intellectual property rights, government procurement, state trading enterprises, labour, environment etc. While many developing countries are ready to go for FTAs with narrow coverage, developed countries demand wider coverage. Coverage of these areas will require undertaking obligations rather than creating new opportunities except in trade in services. Till now, Bangladesh is not exposed in these areas in international forums. Therefore, there is a need for comprehensive assessment of related policies, their compatibility with standards followed in other FTAs and status of liberalisation in these areas before entering into negotiations of FTAs, in order to assess how far Bangladesh may go in these areas.

Fourth, despite considerable trade liberalisation over 1990-2005, average customs duty in Bangladesh are among the highest in developing countries. While average customs duty in Bangladesh is around 15 per cent, average border tariff becomes twice if regulatory and supplementary duties are added. FTAs require elimination of all border taxes imposed solely on import. Accordingly, Bangladesh must eliminate customs duty along with supplementary and regulatory duties. This may result in decline in border tax revenue, if not compensated by increased import resulting from reduction of border taxes and expansion of economic activities. Moreover, gradual reduction of border taxes will also put competitive pressure on domestic industries, which are being protected through high tariff for a long time. Most importantly, elimination of border taxes only for FTA partner countries leads to high trade diversion, which has negative impact on consumer welfare. Therefore, if Bangladesh enters into FTAs with existing high tariff regime without reducing it prior to the date of entry into force, costs of FTA will likely be higher than the benefits of FTA. Tariff policy reform is now therefore, the call of the time, if Bangladesh wants to seriously consider entering into FTA.

Bangladesh is going to enter into an era of reciprocal treatment from an era of non-reciprocal treatment. This obviously puts enormous challenges on the economy. However, Bangladesh has evidence of meeting challenges successfully. When Bangladesh entered the global appatrel market, the government took a historic and bold decision to allow duty-free import of raw materials for export of apparel under bonded warehouse facilities being fully aware of the possibility of leakage in the domestic market. This policy yielded enormous benefit to the economy of the country by expanding our export, generating employment, especially for the women and most importantly empowering women. We all expect that the government, policy makers and the private entrepreneurs will certainly come up with initiatives to face the challenges and take appropriate decision to keep the pace of export through international trade cooperation.

Dr Mostofa Abid Khan is a trade specialst and former Member of Bangladesh Tariff and Trade Commissin.

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