Bangladesh expects to graduate from the United Nations' list of Least Developed Countries in 2026, on account of stellar performance in three metrics (income per capita, human capital levels, and economic and environmental resilience).
The event has been looked upon largely favorably in mainstream news media for easy to understand reasons.
However, it is worth considering whether the much-lauded graduation is in fact cause for celebration.
The benefits of LDC graduation are broadly a matter of perception whereas its costs and challenges are tangible and measurable.
Don't get me wrong, as a student of behavioral economics, I acknowledge that there exists an innate value in becoming a newly minted developing country and that there will be knock-on benefits..
For instance, our passport may be better received, our economy may be considered more robust, and our government may be considered more efficient.
There are no mechanisms in place whereby LDC graduates can claim concrete or certain benefits, whereas there are intricate ones in place to enforce the costs.
Furthermore, the United Nations' Committee for Development Policy, responsible for assessing and aiding LDCs, does not have a long enough history to glean what quantifiable benefits follow graduation other than a change in mere labeling.
Only six countries have graduated so far: Botswana, Cabo Verde, Maldives, Samoa, Equatorial Guinea, and Vanuatu. But their economies, trade volumes and export destinations are not comparable to Bangladesh's, which is an outlier among LDCs in that it is the largest as well as the only one with a private manufacturing sector large enough to exploit the trade-related benefits that LDCs enjoy (called International Support Measures).
In short, Bangladesh must approach its graduation with more trepidation than celebration.
Impact on trade
Bangladesh's top exports are readymade garments, jute, fish, footwear, and leather products.
The industries responsible drove the nation's impressive growth since the 1990s through their contributions to export earnings, investment, human capital development, job creation, and tax revenues.
Unfortunately, two-thirds of the country's exports enjoy tariff-free access to major trading partners that is conditional on the UN's LDC label; access that will be lost upon graduation.
Among the country's top export destinations (EU, US, Japan, Canada, India, China, and Australia), only the US refuses Bangladesh some degree of preferential market access.
According to the UN, newly applicable tariffs on Bangladeshi exports after 2026 will lead to a 14.28% reduction in annual export earnings (some $5.73 billion).
The biggest potential casualty is the country's textile and clothing sector – the second largest in the world after China – responsible for 4 million jobs, 80% of total exports, and 11% of GDP.
It is ironic that LDC-graduation may cripple the very sectors that made graduation possible.
The stakes are high. The government must ensure that the nation is well prepared to face the loss of preferential market access by compensating with bilateral or regional trade agreements.
This pursuit will severely test the country's economic diplomacy, for multiple trading partners must be convinced of the virtue in penning trade agreements within a short time frame.
The EU
Negotiations with the EU deserve special attention, as it accounts for nearly 62% of our exports.
Currently, Bangladesh enjoys duty-free and quota-free (DFQF) access to the EU under their Everything But Arms provision for LDCs.
Upon graduation, it will fall either under EU's standard GSP (carrying average tariffs of 8-9%) or GSP+ (providing duty free access and a continuation of the status quo). Access to GSP+ is conditional on a country satisfying three criteria:
- Import share criterion: Each country benefiting from GSP+ must account for less than 7.5% of all GSP+ exports to the EU
- Diversification criterion: Each country's top seven exported products must exceed 75% of its exports to the EU
- Sustainable development criterion: Each country must implement 27 international agreements on human rights, labour rights, environmental protection, climate change, and governance
As it stands, Bangladesh satisfies the diversification criterion, has ratified 26 of the 27 international agreements, but fails the import share criterion.
As such, admission to the GSP+ scheme is contingent on the EU relaxing its own conditions – an objective that will surely test Bangladesh's negotiating prowess.
Bilateral trade agreements
Pursuing Free Trade Agreements (FTAs) or Preferred Trade Agreements (PTAs) is the country's best available strategy.
Under such agreements, nations agree to loosen trade restrictions with the hope that doing so will create a more predictable and favorable trading and investing environment.
PTAs differ from FTAs in that they grant preferential access to only a selected list of exports whereas FTAs typically eradicate tariffs on most products.
That being said, PTAs can eventually lead to the much more desirable FTA.
Prime Minister Sheikh Hasina has repeatedly stressed the importance of trade negotiations and urged the responsible parties to deliver results. Negotiations are underway on multiple fronts, with varying degrees of progress. A few noteworthy cases:
Trade Agreement likely
- Japan: A feasibility study was launched in December 2022 and Commerce Minister Tipu Munshi considers a deal likely
- Singapore: Bangladesh signed a Memorandum of Cooperation in November 2022 to begin negotiating an FTA
- Thailand: Qualitative study has been launched
- Indonesia: Agreement on a Preferential Trade Agreement (a diluted version of an FTA that grants preferential access to only select products) is expected
- Nepal: a PTA is expected
- Sri Lanka: Though negotiations for the proposed PTA is yet to be held, a deal is likely this year
Trade Agreement unlikely
- South Korea: According to the Bangladesh mission in South Korea, there is some reluctance to grant preferential treatment to Bangladeshi exports
Negotiations underway
- China: Discussions over an FTA started in 2021
- India: Talks are being held for a Comprehensive Economic Partnership Agreement (CEPA), covering reduced restrictions on trade and investment
The government should be lauded for its energetic pursuit of bilateral trade agreements; each new agreement will increase the probability of larger trading partners following suit. But there is much work ahead, given the uncertainty involving preferential access to the EU, Canada, and Australia; owing to their predominance in driving our export earnings, successful agreements with smaller trading partners might be insufficient to stave economic stagnation post 2026.
It is curious that a seemingly benevolent world trade system designed to protect poorer nations includes automatic implications that make further growth significantly difficult.
The system encourages low and middle-income countries to focus national efforts in creating those goods that are in demand in the developed world and later requires them to negotiate for continued trade access from a necessarily weak bargaining position.
Unfortunately for the developing world, the rules that govern international trade were put in place before they possessed the capacity to lobby for their cause and as such their path to prosperity is riddled with challenges that did not burden developed nations.
Samiul Karim is a freelance contributor