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Dhaka Tribune

Cheesy wars and trade connectivity

Update : 01 Dec 2013, 06:40 PM

Warrnambool is a sleepy seaside town on the southern coast of Australia known for whale-watching, where thousands of visitors flock every summer to watch humpback whales. That was until a few weeks ago when Warrnambool made financial news headlines.

Warrnambool is home to a mid-sized dairy company named Warrnambool Cheese and Butter (WCB). Recently, one of Australia’s largest dairy producers, Bega, made a takeover bid for WCB. This triggered a spectacular global bidding war over WCB, drawing in some of the biggest dairy exporters in the world. Suddenly, you had bankers in Sydney describing a milk company as a “once-in-a-generation” asset. You know something is churning when bankers start talking in those terms.

The reasons behind this bidding war can be attributed to Asia’s impressive re-emergence as an economic power bloc. Continued economic growth and development has boosted middle class incomes and has led to a “dining” boom, with higher demand for food products such as high quality Australian cheese and butter.

This narrative is also relevant in the Bangladeshi context, even as we lag behind the likes of China and Indonesia. As our economy grows and incomes rise, our demand for better quality food will also increase, especially if serious food safety concerns persist over use of formalin, or we keep coming across headlines about lead contamination in Pran’s products.

The growing Asian demand for food has important ramifications on a number of fronts, but none more so than for trade negotiators. Trade officials have been negotiating the WTO Doha Round for more than 10 years with no end in sight. It is rather amusing to think that the world economy recovered from the worst global recession since the Second World War faster than trade negotiators could put pen to paper.

The rather unflattering comparison underlines a broader point.

The reality is that the Doha Round hardly matters anymore; at least as far as emerging Asia is concerned including Bangladesh. This is because consumer preferences and the market activities of producers are evolving faster than government policymakers can write trade rules.

To be fair to the WTO, the Doha Round if and when it is completed will make some contributions to growth and development in Least Developed Countries (LDCs) in Africa and other places. But that matters little to us because the Bangladesh economy now functions more like a developing economy than a typical LDC.

The important question facing us, as we continue our transition to a mid-sized developing economy, is what should Bangladesh’s trade policy look like in the years to come?

There are of course many ways to answer this question, and some answers are more complex than others. Let me present a view of what Bangladesh’s trade policy should not be about.

For starters, our trade policy thinking should not be based on an “oh we’re poor, help us out” mindset. Nothing signifies this better than the current discourse on the US GSP issue.

When the US withdrew its GSP facility there was much hue and cry, however limited. The argument essentially was since our RMG exports to the US don’t attract GSP concessions, US GSP withdrawal does not matter as much. The big catch is the EU. We have to make sure we keep the Europeans happy because if they cancel GSP concessions we are definitely in trouble. We will lose business to Cambodia or some other LDC.

Well, no, that’s not exactly how it works!

First of all, if we are successfully exporting $5bn worth of RMG to the US without any GSP concessions, it is hard to believe that “some other LDC” will steal our lunch money in the European market.

The point to note here is that just because RMG exports to the EU spiked after GSP concessions does not necessarily mean they will plummet if those concessions are withdrawn. Our competitive advantage in RMG does not solely rely on trade policy concessions provided by others. We have real comparative advantages in terms of cost and other factors that cannot be easily nullified by policy measures.

Secondly, the EU’s GSP concessions our RMG exporters are benefiting from, apply only to LDCs, and we are currently classified as one. At some point down the road, maybe in five years or so, according to some estimates, we will “officially” no longer be regarded as an LDC. We will eventually graduate into a “middle income” economy like China, India and others. When that happens, the EU will undoubtedly withdraw the concessions we enjoy today as an LDC.

So, are the doomsday forecasters suggesting that our RMG industry will suffer when we become a middle income country?

The answer is probably not. Had that been the case, McKinsey, one of the top business consultancy firms in the world, would not have come out and forecast that Bangladesh’s RMG exports will triple by 2020.

And we need not look far into the past to find similar examples of apocalyptic forecasts that never materialised. Remember all the fear-mongering about MFA withdrawal in 2004 and concerns about how it will impact our RMG exports.

The end of the MFA-era turned out to be a boon for us; it was the point when the RMG industry really took off. It can be argued that once the stigma of Bangladesh being a poor country that desperately needs export quotas and other concessions was removed, clothing companies in the West started to take us seriously. They started regarding Bangladesh as a major player in the RMG market with the capacity and the expertise to deliver more.

That brings me back to my original point. This obsession we have of playing the “poor card” and constantly demanding trade concessions from the US, EU or the WTO is a waste of time.

Our policymakers would do well to understand how markets, especially East Asian markets, are opening up and establishing high-value regional and global supply chains. They would do well to figure out how we can open up and integrate ourselves better to those supply chains.

That will require some obvious steps, such as reducing trade-distorting tariff and non-tariff barriers. For example, Bangladesh recently exchanged lists of sensitive goods with other SAARC economies under the SAFTA agreement. We had 993 goods on that list, meaning we wanted 993 products or industries to be protected by trade barriers. Our list was the second-longest after Nepal, which had 1,036 goods on their list. India’s list had 695 goods.

What a confusing set of statistics!

Can you think of 993 things that we must not import from India or Sri Lanka? Why does that list have 993 goods, and not 900?

One can only imagine the kind of lobbying and even corruption that must have occurred for an industry to have their products protected. That is the likeliest case, not just in Bangladesh but in other countries too.

Governments are generally pretty bad at picking national winners or favouring one industry over another. That is because the policies and processes governments use to select national winners get captured by special interest groups, and absolutely no good comes of that.

This rule of thumb also applies to trade negotiations that unduly focus on the trade partner, as opposed to the actual contents of the agreement. Trade deals, bilateral or multilateral, should be about reaching mutually beneficial agreements that are blind on the question of who the trading partner is. Trade policy should not be about bilateral tit-for-tat negotiations and much less so about advancing strategic foreign policy or political interests. We are guilty on all these fronts.

Case in point the Government’s position on transit with India. The Government should not have linked the transit issue to the Teesta water treaty. It is simply bad trade policy!

I understand that linking the two issues might have been a face-saving measure or something the Government did to manage the politics of dealing with India, but it was against our economic interests.

Here is my reasoning.

Transit is expected to be economically beneficial for us. The Teesta treaty will also be beneficial because we will get more water. If we are expecting to benefit on both accounts, how does holding up both issues and delivering nothing help us?

There are about 50 common rivers that flow between India and Bangladesh. By linking Teesta with transit, the Government has made the grave error of setting a precedent whereby realising our natural and irrevocable right to Himalayan waters is now going to be subject to tit-for-tat negotiations with India on completely unrelated issues.

Big mistake! We will have to pay a very high cost for this egregious policy error unless we change course quickly.

One area where it makes more sense to link transit negotiations with other issues is trade and investment. After all, transit is a component of our broader trade and investment relationship with India.

Our next Government will have to deal with this issue again, possibly with a Narendra Modi-led, centre-right Government in India. And all indications are that Modi’s Government is going to be more reformist than the current Congress Government. This might present an opportunity for us to cut a deal with a more effective and reliable Indian Government capable of delivering on its word.

I hope our next Government says to India “Let’s cut a broad and comprehensive trade and investment deal.” Transit will be a part of that, along with low tariff and non-tariff barriers, no negative lists, free investment flows and quotas for free movement of Indian and Bangladeshi traders etc.

Our governing principle should be let’s play the game, and not the player. That applies to both India and other trade partners.

It means not being scared of dealing with India and making bad policy mistakes in the process. It also means not constantly pretending to be poor when dealing with Western countries and asking for concessions all the time.  

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