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FTAs top priority in Bangladesh’s post-LDC strategy

The Business Standard - 08 March 2022

FTAs top priority in Bangladesh’s post-LDC strategy

Bangladesh, in addition to negotiations at global and regional platforms, needs to gear up for signing free trade agreements (FTAs) with at least seven major trading partners before 2026 as part of an all-out strategy to overcome the immediate shocks after graduation from the least developed country (LDC) category, a government committee suggests.

It stresses the need for extensive groundwork for negotiating "new generation FTAs" that, in addition to goods, would include issues like trade in services, investment, labour, and government procurement to effectively engage with developing and developed countries with varied interests.

While negotiations are underway with the World Trade Organisation (WTO) and the European Union to get existing trade benefits extended beyond LDC graduation, Bangladesh sign FTAs with Canada, Japan, China, India, South Korea, Russia, and Australia before 2026, recommends the sub-committee on Preferential Market Access and Trade Agreement.

"Since the current focus of Bangladesh is retaining market access to major export destinations, the report initially focuses on Canada, Japan, China, India, Republic of Korea, Australia, and Russia for identification of possible FTA partners. Among these seven countries, only China and India have expressed their interests in initiating discussions on FTA and initiatives have been taken to conduct joint feasibility studies with both these countries prior to starting DTA negotiation," it has said in a draft strategy paper.

The sub-committee formed by the Prime Minister’s Office to advise on the ways for smooth transition after graduation from LDC has submitted its draft strategy paper to the commerce ministry which has sought opinion from various ministries by 13 March, ministry officials aware of it told The Business Standard.

According to data provided by the commerce ministry, 12 countries and regions, including the EU, account for 91.31% of Bangladesh’s total exports.

Of them, all but two countries – the US and the UAE – currently provide the Generalised System of Preferences, or GSP, to Bangladesh.

Bangladesh will continue to enjoy the GSP facility in the EU, Turkey, and the UK until 2029. In the last financial year, 56% of Bangladesh’s exports were made to these three markets.

But, the special duty-free trade facility in the remaining seven major export destinations – India, Japan, Canada, Australia, China, Russia, and South Korea – which account for 17% of Bangladesh’s total exports will expire once the country graduates to the group of developing nations in 2026.

FTAs, not PTAs

The inter-ministerial sub-committee, headed by the Ministry of Commerce, has attached utmost importance to signing FTAs with these seven countries to make sure the country continues to enjoy duty-free access to these markets even after the LDC graduation, officials concerned said.

The sub-committee also recommends inking FTAs with Singapore and Malaysia.

While giving much emphasis on FTAs, the sub-committee does not find preferential trading arrangements, or PTAs, beneficial and, therefore, advises the government "not to instantiate any further negotiations on PTA". Bangladesh is currently negotiating a PTA with Indonesia and Sri Lanka.

"Nowadays no country negotiates PTA because of the fact that PTA does not bring in any trade benefit," the committee says in its draft strategy paper.

Because the major destinations of Bangladesh’s exports are developed countries, reaching FTAs with developing countries – where import demand for Bangladesh major export product, RMG is very low – will yield minimum benefit in the country’s export trade, the committee says, adding that unless there is a major drive to diversify the export basket, FTAs with developing countries will not create any export opportunity.

It, however, suggests that Bangladesh may consider acceding to the China-led Regional Comprehensive Economic Partnership (RCEP) after proper assessment. For this purpose, a study may be conducted to examine three aspects: first, assessing the contents of the RCEP; secondly, assessing the extent of obligations that Bangladesh needs to undertake for acceding to the RCEP; and thirdly, assessing the cost and benefit to accession to the RCEP.

Nonetheless, the committee in its report has not mentioned anything about the signing of an FTA with the United States, the single-largest destination country for Bangladesh’s exports. At present, 18% of Bangladesh’s total export trades are done with the USA.

Earlier in various forums, including Ticfa, Dhaka proposed signing an FTA with Washington but did not get any positive response. As Bangladesh does not enjoy the GSP facility in the US, there is no risk of disruption in exports there following the LDC graduation.

Noor Md Mahbubul Haq, additional secretary (FTA) at the commerce ministry, told The Business Standard that initially feasibility studies are being done on signing FTAs with 26 countries and initiatives will be taken to sign FTA with some these countries on a priority basis.

Work is underway to formulate a comprehensive policy to make sure that the FTAs with all the trade partners are similar in nature.

The draft strategy paper says both China and India are the major sources of Bangladesh’s imports as these two countries cater for more than 40% of Bangladesh’s total imports.

The majority of import goods, sourced from these countries, are intermediate and capital goods.

Nevertheless, revenue collected from imports from China and India accounts for a significant portion of the country’s total tax revenue, amounting to Tk32,632 crore, which is 43.7% of total import stage revenue, in the last fiscal.

On one hand, a reduction in the landed cost of intermediate and capital goods through duty reduction under FTAs with China and India may accelerate economic activities in Bangladesh, on the other hand, such an arrangement will increase competitive pressure on domestic industry and lead to revenue loss from import.

Japan and South Korea are also among the top 10 import sources of Bangladesh and both countries are interested in investing in Bangladesh. If Bangladesh can attract investment from these technologically advanced countries through undertaking commitment in investment, Bangladesh is likely to benefit enormously.

Bangladesh has already approached Japan and South Korea to sign FTAs.

The draft strategy paper further says Canada is an important export destination of Bangladesh, accounting for more than $1 billion each year and the loss of Duty-Free Quota Free (DFQF) market access will put huge competitive pressure on Bangladesh’s export.

An FTA proposal from the Bangladesh side was sent to the relevant Canadian authorities and it is under scrutiny, according to a note sent by the Bangladesh High Commission in Canada.

Bangladesh has already approached the Eurasian Economic Commission, which includes Russia, to sign an FTA.

The committee says Singapore, one of the richest countries in Asia, has approached Bangladesh for having an FTA. The Bangladesh side already formed a working group to study the offer.

An FTA with Singapore might have a positive effect on technology transfer and investment from the island state and may also facilitate manpower export there.

The committee also considers Malaysia as a potential FTA partner. Bangladesh expressed interest in having an FTA with Malaysia in 2013, but no progress was made so far.

The draft Strategy Paper said, EU and UK currently extend DFQF market access available to graduated LDCs for three additional years after graduation. Since Turkey has a customs union arrangement on manufacturing products with the EU, the country will provide similar treatment to graduated LDCs.

Challenges ahead

New generation agreements on FTA require reduction of tariff on at least 90% of total bilateral trade within 10 years along with the elimination of duties and taxes other than tariff.

FTAs also require undertaking commitment in areas such as trade in services, investment, intellectual property rights, environment, competition policy, labour, Government procurement, and e-commerce depending on FTA partners.

The draft strategy paper says there are a number of challenges that Bangladesh is likely to face in the area of trade in goods while negotiating FTAs. This is because Bangladesh’s export is heavily concentrated on the apparel sector.

"Bangladesh may face challenges in negotiating FTAs with developing countries due to a lack of export product diversification and possible revenue loss. Besides, difficulties will arise in negotiating FTAs with developed countries when questions of commitment in other areas such as trade in services, investment, government procurement, labour, etc," the draft strategy paper warns.

The sub-committee warns that the WTO rules and agreements on subsidies, agriculture, trade in services as well as TRIMS and TRIPS, which have been temporarily waived for LDCs, will apply to Bangladesh immediately after its graduation. Complying with those rules will be challenging for Bangladesh.

"Graduation from the LDC category will eventually result in the loss of these spacial treatments," and the cumulative losses over the years could be huge unless coping policy measures are taken, the strategy paper pointed out.

Global parley

Against this backdrop, LDC group including Bangladesh are waiting for 12th WTO Ministerial Conference scheduled for 13 June to get a response to their submission for providing duty-free quota-free market (DFQF) access to graduated LDCs for additional 6-9 years after graduation.

The draft report of sub-committee says outcome from WTO negotiation remains uncertain due to varies interest groups within the LDCs. It identifies getting "all LDCs on the same page for the outcome" as a major challenge.

Opposition to the submission may also come from developing countries which compete with LDCs in the global market, it said.

Against the backdrop, the government should engage the private sector, exporter association in the negotiation process.

Bangladesh should be bilaterally engaged with all preference giving countries with other graduating LDCs to pursue for an outcome in the WTO.

Since the EU and the UK have policy to extend the DFQF treatment to LDCs for three years, Bangladesh may consult bilaterally with preference granting countries for extending DFQF market access, it advises.

Bangladesh may also gain from the EU GSP+ too, believes the sub-committee as it finds that the proposed new EU scheme aims to remove import share threshold.

Bangladesh needs to ratify 32 international conventions relating core human and labour rights, the climate, environment and good governance principles and faithfully implement those as these issues are set to come as obligations for Bangladesh to do trade with the rest of the world.

Therefore, the government should conduct a study on how to make progress towards meeting the emerging requirements, suggests the sub-committee, adding that it is important that Bangladesh immediately engage with the EU trade Commission and the EU parliament to keep the current provision of Article 29 of the existing GSP rules unchanged.

Currently, Bangladesh gets duty-free access to India under SAFTA and this facility will be lost when Bangladesh will graduate from LDC status. However, Article 12 of the agreement on SAFTA extends all current and future treatment for LDCs to Maldives.

If Bangladesh may convince all members of SAFTA to extend similar treatment to graduated LDCs, Bangladesh may retain the DFQF facility in India, the sub-committee believes.

"However, it is not certain whether such approach may yield any outcome as SAARC forum is ineffective at present," it observed.

At the commerce-secretary level meeting in Delhi on 24 February, Bangladesh’s commerce secretary Tapan Kanti Ghosh raised the issue of continuing duty-free access even after graduation. India side assured of examining the proposal.

 source: The Business Standard