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Negotiating CEPAs: the challenges ahead

The Daily Star - 25 April 2021

Negotiating CEPAs: the challenges ahead
By Mustafizur Rahman

In recent times, the discussion on Comprehensive Economic Partnerships Agreements (CEPAs) has gained considerable traction in Bangladesh. Policymakers and trade officials have mooted the idea of signing CEPAs with a number of Bangladesh’s trading partners. The issue of CEPA has gained renewed attention particularly also in view of the visit of the Indian prime minister to Bangladesh when this came up for discussion at the highest level. The Communique which was issued following the visit stated: "Recognising the immense potential of bilateral economic and commercial ties, both sides emphasised on expeditious conclusion of the ongoing joint study on the prospects of entering into a CEPA".

It needs to be kept in mind that a distinctive feature of a CEPA is that by definition it goes beyond trade in goods, to cover such areas as trade in services, transport and connectivity linkages, logistics, trade facilitation, investment and also areas of standardisation and harmonisation of policies including in labour and environment related areas and mutual recognition of certification and sanitary-phytosanitary standards (quarantine and biosecurity measures). However, it is not essential that a CEPA needs to deal with all the relevant issues at one go or to the fullest extent. Nonetheless, CEPAs generally include a road map, to be implemented over a time-bound period, with appropriate pacing, phasing and sequencing. For example, some CEPAs envisage a gradual deepening of economic relationship through graduation from free-trade arrangement to customs union to common market to economic union, under a time table.

Bangladesh is among only a few countries which is yet to sign a bilateral free trade agreement (BFTA) or a CEPA with a trading partner. Only recently, in December 2020, a Bilateral Preferential Trade Agreement (BPTA) was signed with Bhutan. However, Bhutan is a small trading partner of Bangladesh, with bilateral trade not exceeding USD 50 million (or about one-twentieth of one percent of Bangladesh’s annual global trade in recent years). As would be appreciated, negotiating CEPAs is going to be a much more challenging task, more so if this is with major trading partners such as India, second most important after China with a bilateral trade of about USD 9 billion (about nine percent of Bangladesh’s global trade).

It needs to be kept in mind in this connection that, till now, Bangladesh’s partnerships were primarily founded on principles of non-reciprocity, thanks to its status as a least developed country (LDC). Preferential market access under the various WTO Agreements, as also, on bilateral basis. Mention may be made here of, for example, the duty-free access offered by India to SAARC LDCs under the South Asia Free Trade Agreement (SAFTA) which is being enjoyed by Bangladesh on the basis of non-reciprocity. However, the future is going to be different. Bangladesh’s graduation from the LDC group will have important implications for any BFTA or CEPA negotiation because of its status as a soon-to-be developing country. In anticipation of this, Bangladesh will need to design appropriate strategies and approaches for undertaking BFTA and CEPA type negotiations. Adequate preparation will be required to identify areas of offensive interests, and defensive interests. The offer lists and request lists will need to be carefully prepared; the trade-offs will have to be decided in an informed manner. The exercise to be undertaken in this backdrop will need to be backed up by appropriate evidence and sound analysis.

A major issue that will come up in the course of CEPA negotiations, with India or any other partner for that matter, will involve preparation of offer and request lists associated with preferential market access. However, these should not necessarily be negotiated on the basis of full reciprocity. Experience of agreements of this type bears out that when the partners are at different levels of economic development, the coverage and speed of tariff reduction and trade liberalisation plan tend to be built on a two-track modality. For example, one recalls that when the Common Effective Preferential Tariff (CEPT) was being negotiated as part of the ASEAN-FTA, there was a separate track for Cambodia, Myanmar, Lao PDR and Vietnam (CMLV), the relatively weaker members of the ASEAN. It may be noted that while the first three countries were LDCs, Vietnam was a non-LDC developing country but perceived at the time to be a relatively weak economy. In the context of many BFTAs and CEPAs it is a widely accepted practice to embed the principle of less thanfullreciprocity if the partners are at different levels of economic development. It will thus be justified if Bangladesh argues for a two-track liberalisation plan in CEPA negotiations with any prospective major economy including India.

In the context of BFTA or CEPA type negotiations, partners are generally required to prepare three lists as far as market access is concerned: (a) list of items for immediate duty-free access; (b) list of items for phased duty-free access and (c) list of sensitive items which are to be excluded from preferential treatment, at least for the time being. In designing such lists, revenue (loss) implications and implications for domestic import-substituting industries will need to be considered. For example, given the pattern of Bangladesh’s trade with India (import and export trade ratio being about 8:1), Bangladesh will need to take cognisance of the revenue implications of almost a billion dollar worth which is annually collected at the import stage. Thus, revenue loss will be a key concern for Bangladesh. On the other hand, interests of consumers of final goods, and intermediate inputs-importing domestic producers, investors and export-oriented entrepreneurs, who will stand to benefit from tariff reduction, will also need to be considered. A cautionary note, however, should be sounded here. Implications for employment creation, trade creation, trade deflection and trade diversion and the potentials of revenue generation down the line need to be carefully assessed.

Attendant concerns could and does often tend to lead to highly restrained and conservative approach to such negotiations undermining the very purpose of the CEPAs. It is in consideration of this that a broader, medium term perspective with implications, challenges and potential opportunities of deepening partnership ought to guide strategic stance of partners. Of special importance in this connection will be to look at CEPAs from the perspective of realisation of opportunities of triangulation of trade, transport and investment. This will be particularly relevant in view of a CEPA with India in collaboration with which Bangladesh is at present implementing a number of initiatives to deepen economic partnership, in areas of trade, transport, investment, energy, trade facilitation and logistics connectivities. The prospects of attracting investment from India and transforming transport corridors into economic corridors must be put at the centre of deepening bilateral ties with India through CEPA type of cooperation. The idea should be to develop production networks and value chains that draw on comparative advantages of partners. Also, mutual recognition agreements will need to be part of such a CEPA so that many of the usual irritants that arise because of lack of standardisation and harmonisation of sanitary and phytosanitary measures can be avoided. An institutional arrangement for dispute resolution should also be put in place. In this regard, the experience of Indo-Sri Lanka CEPA (and the subsequent Economic and Technology Cooperation Agreement-ETCA) and the recently signed Regional Comprehensive Economic Partnership Agreement (RCEP) that include the ASEAN 10 plus China, Australia, New Zealand, Japan and South Korea should be studied closely to draw necessary insights.

It needs to be emphasised that a CEPA will call for wide-ranging consultation with industries, business, workers, experts and professionals and other key stakeholders both for understanding the perspectives of important domestic constituencies and also to ensure buy-in of government proposals on the part of major non-state constituencies.

Bangladesh’s graduation from the LDC group, scheduled to be effective from 2026, would imply that it will lose most of the preferential market access treatment at that point or thereabout (in the EU, in three years following this timeline). There will be a need to strategies in anticipation of this going forward. CEPAs should be seen as one of the key strategic options in addressing the attendant adverse implications for trade and economy of Bangladesh.

In view of the challenging task of negotiating BFTAs and CEPAs, policymakers should seriously consider setting up, on an urgent basis, a Negotiating Cell, similar to the WTO Cell in the Ministry of Commerce. Any CEPA type of negotiation will be highly complex and call for appropriate and careful preparation. Such a Cell must be adequately resourced and endowed with the required human resources and professionals. One must remember the old adage that in CEPA type of discussions countries get not what they deserve but what they negotiate.

 source: The Daily Star