Bangladesh to gain little from FTA with India : WB report
Sunday December 03 2006
If Bangladesh strikes a bilateral free trade deal with India, it would have limited window of opportunity to jack up its merchandise exports to the biggest South Asian economy, except those of apparel items. However, Bangladeshi (Financial Express) consumers stand to gain a "substantial" net welfare benefits from the Indo-Bangla free trade agreement (FTA) in terms of cheaper imports, thus far outweighing the government’s revenue losses, says a new World Bank report.
"Economic welfare" result ing from an FTA are treated as the sum of changes in the money value of consumers’ surplus, producers’ surplus and government revenues from tariffs.
But the report on "Studies on India-Bangladesh Trade: Trade policies and potential FTA" to be released today (Sunday) points out, economic implications of the bilateral FTA for Bangladesh will be "minimal", unless the country goes for multilateral import liberalisation to help avert trade distortion.
"The benefits from the Indo-Bangla FTA will be minimal, unless we can reduce tariffs on a multilateral basis," senior economist of the WB Zaidi Sattar said Saturday.
"Then the cost of trade diversion will be very high. It may keep out cheaper imports from East Asian nations, thereby eclipsing whatever benefits Bangladesh could derive from a bilateral FTA," Sattar, who co-authored the report, told the FE in an interview.
Based on the performance of Bangladesh’s existing industries, the Boston University-trained trade economist pointed out that the prospects for expanded exports to India, even under a free trade regime, appear to be "quite modest", although the most obvious opportunity would be in the apparel industry.
He said that the country would get some "niche market" in India, such as T-shirts, as the value addition of knitwear products account for 70 per cent to 80 per cent.
But there remains a number of risks associated with the free trade pact on the part of Bangladesh.
A "captive protected" market to Indian suppliers, trade losses for Bangladesh and the issue of farm subsidies cosseted to Indian rice, wheat and sugar producers are among the potential risks.
The associated risks raise a question as to why Bangladesh is reluctant to harness the potential of economic welfare gains from "a policy of multilateral import liberalisation", which could produce similar consumer surplus benefits, while avoiding the risks, the report noted.
The report has not reckoned the total economic benefits of the Indo-Bangla FTA.
But based on a few industry case studies, such as sugar, cement and tiers, the World Bank estimates the net welfare gains for Bangladesh from an FTA that includes sugar is estimated at $153 million, and for cement at $171 million.
The study, however, concluded that there’s no "compelling case" for Dhaka to pursue an FTA with India, based on the potential economic welfare benefits to both India and Bangladesh.
Excluding informal trade, the formal bilateral trade between Dhaka and Delhi stands at $1.8 billion a year, while the figures of illegal trade is also a whopping $1.0 billion.
For India, trade with Bangladesh is a miniscule slice of its total trade—just over one per cent since the mid-1990s, and currently about 3.0 per cent of its total exports and a small share of its total imports.
By contrast, India has now become the largest single source of its imports, about 15 per cent of the total, ahead of China and Singapore and accounts for about one tenth of its total trade.
In 2004, India’s officially recorded exports to Bangladesh were US$ 1.7 billion but its imports from its next-door neighbour were paltry $78 million.
Since 1996/97, Indian exports to Bangladesh have been growing at 9.1 per cent annually, just slightly above the general rate of growth of its total merchandise exports, but India’s imports from Bangladesh over the same period have increased on an average at only 3.0 per cent annually, compared to average growth of its total imports of 9.2 per cent.
Consequently, Bangladesh’s two-way trade deficit with India has been growing rapidly averaging 9.5 per cent a year.
However, the bilateral trade deficit narrowed for the first time in fiscal 2005/06, when Bangladesh’s exports rose to $242 million from $ 144 million in the year before, while India’s exports fell to $1.8 billion from $2.0 billion in the fiscal 2004/05.