Bangladesh is set to leave the list of LDCs by 2026. After graduating from LDC, it will lose various facilities obtained as a least developed country. Losing these facilities will have a negative impact on foreign trade.
Bangladesh is trying to effectively cope with this emerging situation by expanding foreign trade. Free trade agreements with individual trade partners and regional blocks may pave the path to a sustainable solution. Several regional free trade agreements have been signed, yet their performance was inadequate. Therefore, Bangladesh is heading towards several bilateral free trade agreements.
If we cannot ensure our domestic products' duty-free access to the overseas market, we will lag behind when confronting future challenges amid the growing competition.
Bangladesh's Participation in Free Trade Agreements
As a member of the World Trade Organization and a least developed country, Bangladesh has duty-free and quota-free access to 38 developed countries under unilateral facilities. Through the facility, Bangladesh gets duty-free export access to these markets without offering any duty-free facility in return. Once it loses LDC status, it loses all this access. UNCTAD estimates that Bangladesh will lose $5 billion a year -- more than 14% of exports -- once it “graduates.”
Apart from these unilateral facilities, Bangladesh has signed several regional free trade agreements and preferential trade agreements.
Bangladesh is a member of the “South Asia Free Trade Area” or SAFTA, which is its only active free trade agreement. As a free trade agreement among SAARC countries, it came into effect on January 1, 2006, under which South Asian countries agreed to provide duty-free facilities on exports of goods except for a few items listed as sensitive. SAFTA couldn't contribute to the growth of regional trade as expected.
Since 1997, Bangladesh has been a member of the Bay of Bengal Initiative for Multi-Sectoral Economic Cooperation or BIMSTEC. Though the economic framework of BIMSTEC was adopted in 2004 with the aim of establishing free trade between South and Southeast Asia, it's yet to be implemented. After activating the initiative, member countries will get duty-free benefits for all products excluding 10% of them.
Besides, Bangladesh is active in several preferential trade agreements (PTA). The “Asia Pacific Trade Agreement” (APTA) is the oldest and most effective trade agreement among them. The other two preferential agreements are the Trade Preferential Agreement between OIC States “TPS-OIC” and the “D-8 Preferential Trade Agreement.”
Prospects and Future of Free Trade Agreements
Most products are imported from Bangladesh's major trading partners -- China and India. Under two free and preferential trade agreements, Bangladesh can trade the majority of its goods free of duty with these two countries. In addition, since 2022, China has been providing duty-free facilities for 98% of Bangladeshi products. Though Bangladesh's export has increased in these countries due to the duty cut, import from these countries also increased.
Studies show that the APTA and SAFTA agreements have had little impact on regional trade growth except with China and India. As a result, Bangladesh's trade deficit with them has increased. The deficit with China and India reached $17.82 billion and $11.70 billion, respectively, in FY 2021-22. Since 2017, the imposition of anti-dumping duty on jute products, one of the major exports to India, has negatively affected exports.
In the fiscal year 2021-22, the highest trade deficit in the history of the country stood at $33.24 billion. American and European markets play a significant role in equilibrating the huge trade deficit as major export destinations of Bangladeshi products. On the contrary, the number of imports from them is negligible. As a result, bilateral or multilateral free trade agreements with these countries will make Bangladesh a major beneficiary.
Since Vietnam completed the FTA agreement with the European Union to ensure duty-free trade facilities, it can export goods to European countries free of duty after 2026. Vietnam is the main competitor of manufactured garments, Bangladesh's main export product to these countries. The newly imposed 9% duty on Bangladeshi products will increase the demand for Vietnamese products. It is estimated that if any new agreement will not be inked, exports to Europe will decrease by 22%. Thus, Bangladesh has no choice but to enter into a free trade agreement.
As the existing regional free trade agreements have not been effective in practice, Bangladesh is negotiating to sign bilateral free trade agreements. An FTA wing was opened under the Ministry of Commerce in 2010 for the purpose of concluding free trade agreements, which scrutinize the feasibility of the agreement before entering into a free trade agreement with any country. The Ministry of Commerce said that there will be such agreements with at least 15 countries by 2024.
Currently, Bangladesh is negotiating FTAs with 17 countries including Nepal, Bhutan, Malaysia, Vietnam, and India. But although many of these agreements are in the final stages of negotiations, no bilateral FTA has been finalized so far except a PTA with Bhutan.
The Prime Minister of Bangladesh agreed on the free trade agreement with the Prime Minister of Cambodia on the sidelines of the latest UN General Assembly meeting. If the agreement is signed, it will be the first FTA for Bangladesh. Signing a free trade agreement with Cambodia will increase Bangladesh's pharmaceutical exports there. There is also a lot of potential open for Bangladesh to invest in Cambodia's agricultural sector.
In the fiscal year 2021-22, 81% of Bangladesh's export earnings came from RMG exports. On the other hand, Bangladesh's close competitor in the RMG sector, Vietnam, has diversified its export market without depending on the RMG industries. They already signed free trade agreements with 14 countries which will boost their exports.
If we can accelerate free trade agreements with the countries where there are potential markets for Bangladeshi products, it will contribute to the diversification of our trade. The construction of 100 special economic zones across important places of the country is progressing rapidly. Many countries have strived to invest in these zones. Hence, FTAs are crucial for diversifying the export sector and attracting foreign investment (FDI) in promising sectors.
The challenges
The main challenge of a free trade agreement is that both parties have to make concessions on duties. According to the rules of the World Trade Organization, 90% of the goods and almost all services of the respective countries should be free of duty. As a result, Bangladesh will lose revenue from this sector.
For instance, Bangladesh imposed a 100% duty on imports of steel products, which Bangladesh will lose after signing a free trade agreement. The revenue concessions could lead to intensifying the trade deficit. Therefore, the National Board of Revenue has objected to FTAs with countries where imports exceed exports.
However, the ultimate aim of a free trade agreement is not only to ensure duty-free benefits, but also to enhance investment and trade facilitation through trade liberalization. Apart from tariff reduction, the elimination of other non-tariff barriers and increased regional connectivity are among the goals of FTAs. The benefits of free trade cannot be reaped without their full implementation.
Moreover, the lack of port and transport infrastructure has a negative impact on import-export and foreign investment. Shortage of skilled human resources and manpower is also one of the obstacles in making free trade effective.
In order to increase competitiveness in the international market, the focus should be on simplifying and harmonizing formalities and procedures, reducing tariffs and duties, developing human resources and infrastructure, and above all, the development of trade and investment environments. At the same time, entrepreneurs must also have a cooperative attitude in order to take advantage of the free trade agreements.
Abdullah Sadi is a researcher on South Asia's political economy and international politics.
