Published:  01:19 AM, 03 October 2022

Confronting Bangladesh's Post LDC Shocks: A Priority to FTA

Confronting Bangladesh's Post LDC Shocks: A Priority to FTA
Dola Das

In recent years, there is a significant increase in bilateral Free Trade Agreements (FTAs) signed by developing and developed countries to enhance and maintain market access. Bangladesh will graduate from the status of Least Developed Countries to Developing Country status by 2026. As one of the largest economies to undergo such a radical shift, the country is due to face a series of significant adversities throughout the post-LDC graduation period. According to the United Nations Conference on Trade and Development (UNCTAD), after graduating from the LDC category, the country is about to lose worth US$5.73 billion, covering 14.28 percent of annual export earnings, because of its severe dependency on markets with high preferential tariff margins on textiles and clothing exports. More focus on signing FTAs with potential countries and enhancing the connection with regional blocks can be an effective step to counter the competitive pressures once the country exits from the LDC status.

As per the Export Processing Bureau (EPB) data, Bangladesh's major export destinations are India, the USA, Canada, Japan, Australia, South Korea, Russia, Turkey, the EU, the UK, and UAE, which account for 91.31 percent of the total export of the country in the FY2020-2021. Bangladesh enjoys special duty-free trade benefits in seven major export countries- India, China, Canada, Japan, Australia, South Korea, and Russia accounts for 17 percent of Bangladesh's total exports, which will expire after the LDC graduation status.

According to an inter-ministerial sub-committee, under the Ministry of Commerce, the government is prioritizing FTA over Preferential Trade Agreements (PTA) to overcome the imminent shocks and hurdles after graduation, as PTAs will no longer bring any significant benefits to trade sectors. PTA basically focuses on reducing tariffs whereas FTA emphasizes the elimination of tariffs altogether. As Bangladesh may not enjoy any duty-free-quota-free (DFQF) facilities when it will exit the LDC category, the government is trying to sign FTA with all important trading countries for Bangladesh on a priority basis.

Currently, Bangladesh is a part of only one regional effective free trade agreement under SAFTA. According to Asian Development Bank report, there are only 14 FTAs are either in negotiation or proposed which are completed and effective.

Bangladesh has close trading ties with India and China. Bangladesh exported $1.27 billion worth of goods to India in FY 2020-2021, while it was $600 million to China (EPB data). From the recent visit of the PM of Bangladesh to India, it is clear that the two countries are interested in signing the Comprehensive Economic Partnership Agreement (CEPA) which will help Bangladesh to face the post-LDC challenges. Besides, Bangladesh's export to China is growing more than in the previous years. China is also interested in signing FTAwith Bangladesh so that the country can surmount all its after-graduation challenges.

According to Exim Trade Data, though 18.33 percent of Bangladesh's export trade has been done with the USA in 2021, the government has not taken any strong initiative in signing FTA with the USA because Bangladesh is not a beneficiary of the US GSP facilities. However, this process needs to start eventually. Besides the USA, Canada can be a potential FTA destination for Bangladesh as it accounts for more than $1 billion (3.05%) of Bangladesh's total yearly export.

Bangladesh has listed seven countries on a priority basis- Canada, Japan, India, China, Korea, Malaysia, and Singapore as its potential FTA partners in the action plan announced by the Commerce Ministry. The government has already approached South Korea and Japan. South Korea and Bangladesh have close trade relations. About 95 percent of Bangladeshi products get a duty-free quota-free market access facility to South Korea under the LDC scheme. Besides, South Korea is one of the largest FDI providers in Bangladesh. About 150 South Korean companies are currently operating in Bangladesh, and bilateral trade between the two countries rose to roughly $1.525 billion in 2021, said Dr. A K Abdul Momen, the Foreign Minister of the Government of Bangladesh. A survey conducted by the Japan Chamber of Commerce and Industry (JBCCI) found that about 85 percent of firms wanted to sign a bilateral FTA between Bangladesh and Japan.

FTAs with different regional blocks are equally important. With the loss of duty-free quota-free access to the EU market, there is a prediction of an 8-10 percent fall in its gross export revenue. According to the EU EBA scheme, however, Bangladesh will be eligible to continue GSP facilities in the EU for three years after graduation. It will enjoy similar preferential treatment for the three-year extended period in the UK and UAE till 2029. There are some regional blocks such as Regional Comprehensive Economic Partnership (RCEP), Association of Southeast Asian Nations (ASEAN), Eurasian Economic Union (EAEU), Gulf Cooperation Council (GCC), and African Continental Free Trade Area (AfCFTA), which Bangladesh should consider to negotiate for signing FTA with a particular focus on ASEAN and RCEP blocks.

There are also consequences of FTAs. According to NBR, Tk. 77,150 crore of tariff revenue came from imported goods in FY2020. Most of the tariff was from India and China. So after signing FTAs with these two countries, Bangladesh may face a considerable loss in earning revenue from these two countries. The average tariff of Bangladesh may decline by 1-2 percent if the country signs FTA with the ASEAN block. But, according to a senior commerce ministry official, it will not be a big obstacle for Bangladesh as the government is now focusing on direct tax collection.

The government committee has given importance to negotiating 'new generation FTAs' which include not only goods but also services, labour, investment, and government procurement with developing and developed countries. Because the main export product is the apparel sector which mainly attracts developed countries. For enhancing the export of Bangladesh to possible developing countries new generation FTA, with the diversification of export products in all potential sectors is very crucial. Because this is the only way to retain DFQF facilities after graduation.

Recently, according to a document of the commerce ministry, Bangladesh has been shifting to Regional Trade Agreement (RTA) policy by updating the existing FTA policy according to the changing domestic and global trade.

But signing FTAs is not an easy process. It requires long-term negotiations, mutual interest and strong regional-trade diplomacy. So far, Bangladesh has yet to make significant progress on FTA policymaking. The process is almost limited to select strategies and plans. It's high time for Bangladesh to take vigorous and proactive steps to negotiate FTAs with large trading partners and major regional blocks for the extension of DFQF, GSP, and all other support measures. Improvement in product variation, trade strategy and other things related to this are also very important.  By doing so, Bangladesh will be able to make sustainable graduation and make a positive balance in the competitive global trade sector.

Dola Das is a Research Intern at Center for Governance Studies.

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