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.
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: firstname.lastname@example.org)
The Daily Star, December 14, 2015