China-led trade bloc holds promise, with some caveats

Imagine the rewards of unfettered access to 2.5 billion people, 15 countries and a $12.7 trillion market. That is what the China-led Regional Comprehensive Economic Partnership (RCEP), the largest economic bloc in the world, has to offer.

If it sounds too good to be true, it probably is, at least at this point in time.

While in a survey, the Bangladesh Trade and Tariff Commission (BTTC) recommended Bangladesh join the bloc, its wording regarding the accession had some warnings embedded.

The BTTC said, "The government may express its positive stand regarding the accession of Bangladesh to RCEP considering all the issues, concerns and keeping in view the issue-wise stakeholder consultation and recognising that domestic rule and regulations may require to be changed in some cases, if situation arises."

The concerns and changes in domestic rules are indeed issues that require further scrutiny.

What's also important is the lion's share of any export growth would be for the apparel sector with others losing out.

Termed a paper tiger by the Wall Street Journal, the mammoth partnership is much more than that. Just joining the bloc would yield Bangladesh a 17.37% export growth, amounting to just shy of over $5 billion, recent findings by the Bangladesh Trade and Tariff Commission (BTTC) showed.

On 15 November 2020, the 15 countries – China, Japan, South Korea, Australia and New Zealand; 10 members of the Association of Southeast Asian Nations (Asean): Brunei, Vietnam, Laos, Cambodia, Thailand, Myanmar, Malaysia, Singapore, Indonesia and the Philippines – inked the world's largest free trade agreement that covers 2.2 billion people with a combined GDP of $26.2 trillion.

But, while Bangladesh would enjoy duty-free access to other RCEP countries, those countries would also get the same advantage in Bangladesh.

Accession to the RCEP would result in a significant increase in Bangladesh's global imports, which would grow by 14.46%.

This liberalisation of the trade regime would have an impact on many domestic industries which would no longer receive the current level of protections.

Textiles, leather products, transport equipment, metal products, paper, light, chemicals, pharmaceuticals and manufacturing could all see some level of replacement by imported products.

Joining the RCEP would thus force Bangladesh to drastically diversify its export basket, a call that has been made repeatedly over the years.

Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, conceded that Bangladesh would have to join the RCEP at some point, but preparedness to do so was crucial in its own interest.

"We have to achieve the standards mentioned in the RCEP rules and if we do not increase the productivity skills of the private sector, joining this bloc will hurt other sectors, except apparel," he said.

"We have to prepare ourselves. In which case, the sectors affected need to be strengthened in advance. While reducing business costs through ease of doing business, those must also be compensated at the same time," he added.

"Bangladesh's connectivity must include transport connectivity and foreign direct investment (FDI). RCEP member countries will invest in Bangladesh due to cheap labour and export the products at zero tariffs. Bangladesh has to export those products which the countries import and FDI will be an issue here."

In this regard, the BTTC found that the FDI data indicated inward FDI had reduced from RCEP countries while outward FDI had grown.

Much more to do

The BTTC recommendation to join the RCEP comes in light of Bangladesh preparing to graduate to a middle-income country, which would mean it would lose a number of trade preferences.

Of the 15 countries in the RCEP, Bangladesh enjoys duty-free export to Australia, Japan, New Zealand, China, South Korea and Thailand, which will be gone once it graduates from the LDC status in 2026.

Joining the RCEP would mean retaining the export facilities in these markets, while there will also be benefits of increased manpower exports and in turn remittance growth.

The heavy focus on benefits for the RMG sector - the key talking point of the RCEP - stems from the fact that the top 20 export items to RCEP are RMG products and these constitute 64% of the total exports.

Joining the RCEP would also boost GDP by a marginal 0.23%.

But the BTTC shows that this will be driven solely by the clothing sector and at the cost of negative impact on most of the other industries.

The RMG sector could grow by more than $5.04 billion and exports of few other sectors like textile, leather products, meat and livestock, beverages and tobacco would also have some positive impact, but again this won't be the case for most others.

"From an industrial perspective, only the apparel sector is likely to gain. Apart from the apparel sector, the overall fall of industrial output would decrease by 0.46%," the BTTC said in its report.

Asif Muztaba Hassan, an analyst at a Boston-based organisation, said gains could be made once the export basket is diversified.

"This deal will kind of push us towards diversification. It will help us understand what the second sector is that we need to focus on. For instance, if after entering the RCEP our policymakers see the scarcity of microchips, it can inform them to pivot domestic production towards that," he said.

Policy reform now crucial

The rise in exports will also not offset the rise in imports when Bangladesh joins the RCEP. Both would go up, but most of the domestic industries would adversely be affected by increased imports and the global trade deficit would increase by 2.69%.

Bangladesh is also more import dependent on RCEP, with 45% of its imports coming from that region as opposed to only 10% of exports.

A reciprocal 100% linear tariff cut both by Bangladesh and RCEP may likely result in an increase in imports for both the parties, though import increases for Bangladesh would be much higher.

As a result, the estimated revenue loss is likely to be higher for Bangladesh, US$2.5 billion compared to around US$541 million for RCEP.

Dr Mostafa Abid Khan, who was part of the feasibility study conducted by the BTTC, said Bangladesh must reform some policies before joining the RCEP.

"For example, we have no policy on the retail market. Any country can become influential in the retail market of Bangladesh with a few quality products."

"There will be benefits…but the private sector needs to be strengthened, including with policy reforms. The protective environment the private sector enjoys will not exist once we join," he added.

He said Bangladesh's concerns must be considered at the negotiation table.

The expectation, however, is that elimination of tariffs would result in decreased prices of imported raw materials which would make certain sectors more competitive in the global market. The synergy among so many nations, alongside possible transfer of skills and technologies, could also result in trade creation.

Apart from a trade deficit, loss of revenue will also come in loss in duties.

RCEP countries are responsible for around 43.92% of the total global import of Bangladesh, 55.33% of the total tax revenue and 58.56% of total customs duty revenue collected as of FY 2020-21.

Among the fifteen parties to RCEP, China remains the single largest contributor in terms of import and revenue generation, around 45% and 44% respectively of the total of RCEP.

Losing out such a large chunk of government revenue also needs to be planned for. If revenue is lost and domestic players aren't competitive, then the twin threat could undo a lot of good work.

Accession to the RCEP, however, could help secure Bangladesh's manpower exports to the region, from where around 11-13% Bangladesh's remittance is generated.

Demand for skilled and unskilled labour in the apparel sector would also increase by  around 18%, but demand for workers in other sectors could fall.