FB   
 
Powered bysps
        Society for Policy Studies
 
 

 
Trade policy: World racing ahead, Bangladesh standing still
Posted:Dec 14, 2015
 
Print
Share
  
increase Font size decrease Font size
 
By Sharjil Haque
 
Bangladesh's remarkable success in exports needs no new recognition. Sustained comparative advantage in low-skilled labour intensive production served as the cornerstone for consistent double-digit growth rate and second spot in the global RMG industry. Today, this one advantage is suppressing underlying fragilities in Bangladesh's trade policy. But as trade policy falls behind global trends, Bangladesh's export-led growth model could face severe challenges going forward.
 
In the early 1990s, Bangladesh embarked on wide-ranging reforms in trade strategy which included reductions in tariffs and quantitative restrictions. Over the years, the pace of such trade liberalisation slowed and fell behind relative to many developing economies. According to the World Bank, the country still has one of the least liberal trade policies due to high tariffs, supplementary and regulatory duties. Controversies regarding trade liberalisation notwithstanding, a large number of studies show strong association between lower trade protection and economic prosperity. It is this text-book motivation that has led other developing economies to liberalise trade much faster than Bangladesh.
 
Data from the National Board of Revenue shows that the tariff rate for final goods in Bangladesh is 25 percent. Considering regulatory and supplementary duty on top of that, average protection is much higher. Such high levels of tariff eventually gets passed on to domestic consumers, suggesting lower consumption (in the absence of substitutes) for a given level of income. Trade protection also creates an anti-export bias while reducing efficiency and competitiveness of domestic firms. It can be argued that Bangladesh's comparative advantage in low-skilled labour-intensive production can be capitalised in other manufacturing sectors as well. Subjecting these sectors to high tariffs is essentially holding back underlying export potential. The fact that the share of non-RMG products in Bangladesh's export basket is waning, is a direct manifestation of high tariff regime. Continuation of this restrictive trade policy will certainly impede export diversification – a major target in the 7th Five-year Plan – and ultimately have implications for growth.
 
The issue of export diversification has received a lot of attention in Bangladesh. Yet, the focus has largely been on final goods, which already account for more than 95 percent of total exports. Focusing on final products is in contrast to the rising global trend of exporting intermediate goods. A recent study by the United Nations Conference on Trade and Development showed that world trade in intermediate goods increased more than primary, capital and consumer goods since 2008. Concurrently, developing economies increased their share in world export of intermediate goods from 40 to almost 50 percent. This shift towards trade in intermediate goods was fuelled by fragmentation of production processes across different countries, leading to increased participation in global value chains (GVC). Several studies argue that integrating into GVCs accelerates productivity, foreign investment, job creation, technological progress and skill acquisition.
 
Bangladesh's concentration in basic RMG exports makes the country a low value-added GVC participator. Despite a massive base of small and medium enterprises (SMEs), Bangladesh has shown little inclination towards exporting higher value-added intermediate goods. It is also true that without stronger infrastructure, lower tariffs, greater availability of Special Economic Zones and the necessary technical knowledge, Bangladesh may not be able to join this growing global trend. The fact that 75 percent of East Asia's trade is now in intermediate goods, underscores the need for Bangladesh to re-orient trade policy towards this direction. As global trade in intermediate goods expands further, Bangladesh's ability to generate high economic growth - by exporting final goods only - could face strong obstacles.
 
One final area Bangladesh is rapidly falling behind is participation in free trade or regional trade agreements. At present, Bangladesh is only part of the South Asia Free Trade Agreement and Asia Pacific Trade Agreement. None of these trading blocs has generated trade growth that one associates with the likes of North American Free Trade Agreement (NAFTA) or European Union. It is disconcerting that Bangladesh has no involvement in any of the recent/ongoing major trade-agreements like the Trans-Pacific Partnership (TTP) and Regional Comprehensive Economic Partnership (RCEP). This is not to imply that Bangladesh can easily join free trade blocs. Dramatic turnarounds are required in tariff regimes and below-average labour and environmental standards if Bangladesh wants to join such trade arrangements.
 
In this context, the biggest risk for Bangladesh is eventually losing second-place in the global RMG industry to Vietnam, which is part of these mega trading blocs. With the onset of TPP, Vietnam's exports will enter the US duty-free, compared to Bangladesh's 15.6 percent (duty). In addition, Bangladesh's competitive advantage in European markets (due to GSP) is under serious threat following Vietnam's recent free trade deal with the European Union. It is also worth mentioning that when Bangladesh finally graduates from its LDC status and loses its existing preferential access to major markets, export growth will face strong barriers. Unless Bangladesh enters similar free trade agreements, these vulnerabilities - which seem less threatening today - will reduce export-led growth in the future.
 
There is little doubt that export performance will remain, at least for the next 10-15 years, Bangladesh's best bet to beat the 6-percent trap. The transformative 7-8 percent growth target may remain just an ambition if trade policy in Bangladesh does not catch up with global trends.
 
(The writer works as a Macroeconomic Analyst for an organisation in Washington D.C. He is a Fellow at the Asian Center for Development in Dhaka.  Email: shaque4@jhu.edu)
 
The Daily Star, December 14, 2015
 
 
 
 
Print
Share
  
increase Font size decrease Font size
 

Disclaimer: South Asia Monitor does not accept responsibility for the views or ideology expressed in any article, signed or unsigned, which appears on its site. What it does accept is responsibility for giving it a chance to appear and enter the public discourse.
Comments (Total Comments 0) Post Comments Post Comment
Review
 
 
 
 
spotlight image Indonesia’s President Joko Widodo has confirmed his presence for the occasion. In an exclusive interview with INDIA REVIEW & ANALYSIS, Indonesia’s Ambassador to India, Sidharto R.Suryodipuro, reminded Nilova Roy Chaudhury that the first Chief Guest for India’s Republic Day celebrations, in 1950, w
 
read-more
The words of Ho Chi Minh  “Nothing is more precious than independence and liberty” rang true for the people of the erstwhile East Pakistan when, with increasing brutality, the West Pakistani oppression spread across the land, writes Anwar A Khan from Dhaka
 
read-more
In a significant boost to New Delhi's Act East Policy, India and Japan set up the Act East Forum on Tuesday as agreed during Japanese Prime Minister Shinzo Abe's visit to India this year for the annual bilateral meeting that would help to focus and catalyse development in India's Northeast.
 
read-more
  United States Secretary of State Rex Tillerson reiterated on Friday Washington's warning that “all options are on the table” to meet North Korea's nuclear threat while offering to keep the lines of communication with Pyongyang open.
 
read-more
The 15th trilateral meeting of the foreign ministers of Russia, India and China concluded in New Delhi on Monday with many nuanced takeaways embedded in the joint statement of 46 paragraphs. Reiterating that the forum “is not directed against any other country”, the statement underlined the importance of the establishment o
 
read-more
The first thing that one sees when a flight approaches New Delhi is thick smog that envelopes the city and its lack of greenery.  In almost all other major cities of India lack of greenery is the most obvious sight that one sees when approaching it by air.
 
read-more

Pakistan has agreed to allow the rupee to depreciate after holding talks with the International Mone­tary Fund (IMF) on the country's economy.

 
read-more

Two major global changes in the past year; the ‘Brexit’ referendum and the advent of Donald Trump, writes Sandeep Kaur Bhatia

 
read-more

It is also imperative for India to explore other regions for markets. Its trade deficit with Latin America has been narrowing. Also, its trade with Mexico, Colombia and Guatemala has increased, ...

 
read-more
Column-image

Over the last 25 years, India's explosive economic growth has vaulted it into the ranks of the world's emerging major powers. Long plagued by endemic poverty, until the 1990s the Indian economy was also hamstrung by a burdensome regulat...

 
Column-image

Title: A Ticket to Syria; Author: Shirish Thorat; Publisher: Bloomsbury India: Pages: 254; Price: Rs 399

 
Column-image

Gorichen, a majestic peak in the Eastern Himalayas at an altitude of 22,500 feet, is the highest in Arunachal Pradesh. Beautiful to look at and providing a fantastic view from the top, it is extremely tough climb for mountaineers.

 
Column-image

It is often conjectured if the reason for long-standing conflicts and insurgencies, in the developing world, especially South Asia, is not only other powers fishing in troubled waters but also the keenness of arms industries, mostly Western, to...

 
Column-image

Title: The People Next Door -The Curious History of India-Pakistan Relations; Author: T.C.A. Raghavan; Publisher: HarperCollins ; Pages: 361; Price: Rs 699