ADB says FTAs within a short period of time will not be feasible for Bangladesh

Given the urgency of the current economic situation, focusing on trade policy issues and improving export competitiveness should be a central part of Bangladesh's reform agenda, said the Asian Development Bank in its latest policy brief.

In the context of Bangladesh's upcoming LDC graduation in 2026 and the current economic challenges, there is a growing realisation that policy reforms to enhance export competitiveness might receive stronger domestic support than in the past, it said.

While national planning documents like the 6th, 7th, and 8th Five-Year Plans have recommended relevant reforms, these have not been adequately prioritised for implementation, according to the document.

This policy brief suggests several recommendations for promoting export diversification.

The policy brief, "Expanding and Diversifying Exports in Bangladesh: Challenges and the Way Forward", is authored by Mohammad Abdur Razzaque, an economist (Consultant), South Asia Department (SARD), ADB; Rabiul Islam Rabi, Research Analyst (Consultant) SARD, ADB; and Barun Kumar Dey, Senior Economics Officer, SARD, ADB.

Despite the success in garments exports, Bangladesh's overall export volume remains modest and suffers from a staggering concentration.

Recent unfavourable macroeconomic developments and the impending graduation from least developed country (LDC) status, underscore the importance of expanding and diversifying exports.

High tariff protection favouring import-competing sectors, coupled with weak domestic product standards and compliance, have created policy-induced disincentives for non-readymade garments exports.

With over 70% of Bangladesh's exports benefiting from LDC-specific trade preferences, graduation could impact export competitiveness.

Improving export competitiveness and achieving diversification will necessitate various actions, including tackling policy induced anti-export bias, enhancing product quality and standards, attracting

foreign direct investment to connect with global supply chains, conducting prudent  exchange rate management to promote external competitiveness, dealing with sector-specific supply-side constraints, and addressing the high business costs.

Proactively seeking trade preferences post-LDC graduation is also crucial for sustaining export competitiveness.

POLICY RECOMMENDATIONS 

• Tackling policy-induced export disincentives is crucial for export diversification. Bangladesh's protective measures, through high tariffs and para-tariffs, encourage a focus on the domestic market over exports, creating an anti-export bias.
• Tariff rationalisation is thus critical in dealing with this policy-induced bias. Lowering tariffs can stimulate domestic manufacturing, potentially balancing any revenue loss  from reduced import tariffs.
• Enhancing the export performance of non-RMG sectors requires eliminating discriminatory access to policy incentives. The bonded warehouse facilities, in particular, should be granted to all export sectors and units irrespective of whether they are 100% export-oriented or not. Many firms can serve both domestic and international markets, and requiring separate production facilities for exports to access bonded warehouses is impractical. Instead, all exporting firms should have access to bonded warehouses, with import duties adjusted later based on the proportion of goods for domestic and export use. In getting finance, subsidised loans, and other policy support measures, non-RMG sectors should be given equal access. 
• For non-RMG export items, enhancing product quality and meeting international standards are key for market expansion, as higher standards often yield higher prices. Investing in capacity building to meet international quality and safety standards is essential for potential exporters. Acquiring relevant certifications is critical for building credibility and trust in global markets.
• The government can further aid businesses by establishing or supporting accessible testing and certification facilities. Strengthening institutions responsible for quality control and compliance is also crucial, which involves investing in laboratories, equipment, and skilled personnel for efficient testing and certification.
• Attracting foreign direct investment can be a driver of export growth and diversification. It can facilitate knowledge and technology transfers and better management practices. 
• FDI firms are well-integrated into global value chains and can command higher export prices. Bangladesh needs to improve its investment climate, streamline investment procedures, and promote sustainable investment practices to attract  foreign investors.
• Tackling the high cost of doing business is critical for boosting investment and trade competitiveness. Bangladesh faces a significant disadvantage due to the high cost of doing business.
• Weak infrastructure, inefficient inland road transport, complex customs procedures, inadequate port facilities, and inefficient trade logistics contribute to longer lead times and higher costs, which undermine competitiveness.
• The two-way shipping costs for exporters importing raw materials and exporting final products exacerbate the problem. Addressing these infrastructural and logistical inefficiencies presents an opportunity to offset some of the losses from the withdrawal of LDC trade preferences and to improve Bangladesh's standing in international markets.
• A prudent exchange rate management strategy could significantly enhance export competitiveness, benefiting sectors beyond the RMG industry. Maintaining a competitive and stable exchange rate ensures that exports remain attractively priced in international markets.
• This is particularly beneficial for non-RMG exporters who may be trying to  establish a foothold in global markets and are more sensitive to price competitiveness. An effectively managed exchange rate can offset some of the cost disadvantages faced by  these sectors, making their products more appealing to  international buyers.
• Addressing the sector-specific supply-side constraints can help with export response from non-RMG sectors. To enhance the supply response of potential export sectors in Bangladesh, it is recommended to address sector-specific supply-side issues through a time-bound action plan.
• This plan should be based on the constraints identified in studies like the Diagnostic Trade Integration Study and its 2023 update. The action plan should include specific measures tailored to the unique challenges of each sector, setting clear timelines and responsibilities for implementation.
• This targeted approach will ensure that interventions are focused and effective, directly addressing the issues that hinder the productivity and competitiveness of these sectors on  the global stage. By systematically tackling these identified constraints, Bangladesh can significantly improve its export  performance in these key sectors.
• Devising WTO-consistent export-incentive mechanisms is crucial for Bangladesh, given its impending LDC graduation. As export subsidies may not be possible after LDC graduation,  learning from non-LDC countries can guide in formulating  effective support measures. For example, how the PRC and Vietnam support their export industries can provide important lessons for Bangladesh. Complying with WTO guidelines, especially regarding subsidies and sector-specific support should be important. 
• Seeking trade preferences beyond LDC graduation comprises an important strategy for export competitiveness. Graduating from the LDC group does not imply the cessation of preferential treatment altogether.

The UK's Developing Countries Trading 

Scheme, for instance, will continue to provide improved market access even after LDC graduation. Proactive engagements with the EU may be critical to secure similar preferences. Seeking unilateral trade preferences in the post-graduation period will be essential for Bangladesh, as many competitor countries have taken advantage of free trade agreements (FTAs) to obtain preferential market access.

For instance, Vietnam has secured FTA arrangements with Canada, the EU, and the UK; Cambodia, Myanmar, and Vietnam benefit from duty-free access in India due to the Association of Southeast Asian Nations (ASEAN) free trade agreement; and in Japan and the PRC under the Regional Comprehensive Economic Partnership, among others. 

For Bangladesh, striking FTAs within a short period of time will not be feasible. Thus, a renewed focus on retaining trade preferences will be an utmost policy priority. 

• In preparation for Bangladesh's upcoming LDC graduation, strengthening trade policy and negotiation capabilities to support the export sector is important.

This involves developing a comprehensive capacity-building strategy that focuses on enhancing the skills and knowledge of trade officials, negotiators, and policymakers. It is also important to enhance the capacity of the private sector so it can comprehend the changes in trade preferences and policy space following LDC graduation and thus can take other measures for improving firm-level competitiveness.