Govt examines pros-cons of joining world's biggest trade bloc

Infographic: TBS

The government is scrutinising the conditions to join the Regional Comprehensive Economic Partnership (RCEP), the world's largest trade bloc led by China, as well as weighing the pros and cons of joining the treaty.

The RCEP, a pact of 15 countries accounting for about 30% of the world's population (2.3 billion people) and a market of $26.3 trillion, was launched in January last year.

The commerce ministry has already started a formal review of the commitments that Bangladesh has to fulfil in order to join the bloc, by looking at the commitments made by Bangladesh's peer economies Vietnam, Cambodia and Laos which are RCEP members.

An official of the commerce ministry, on condition of anonymity, told The Business Standard that Bangladesh may have to make similar commitments to join the pact. That is why, a meeting has been convened next Tuesday, 1 August, to review the extent to which Bangladesh can comply with these commitments.

Senior Secretary of the commerce ministry Tapan Kanti Ghosh will chair the meeting.

Additional Secretary of the commerce ministry Noor Md Mahbubul Haq told TBS, "A study was conducted on Bangladesh's accession to the RCEP. The meeting will be held on Tuesday to review the findings of that study."

Last year, the Bangladesh Trade and Tariff Commission conducted a feasibility study on Bangladesh's accession to the RCEP. The report was mostly in favour of inclusion.

According to RCEP rules, any country can apply for accession to this bloc 18 months after its launch. Hence, interested countries are free to apply for joining the treaty from June 2023.

Tariff Commission study in favour of accession

The Tariff Commission in its study explored the pros and cons of joining the RCEP. The report was mostly in favour of accession to the pact.

According to the Tariff Commission report, joining the RCEP will increase Bangladesh's exports to the global market by 17.37%, amounting to more than $5 billion.

However, a major part of the export growth will come from the ready-made garments sector. As a result, the demand for skilled and unskilled workers in the garment sector will increase by about 18%. Joining the RCEP would also boost the country's GDP by a marginal 0.23%.

Several disadvantages also emerged in the Tariff Commission report. The overall industrial production outside of the ready-made garment sector may decline and Bangladesh's revenue and income from import duties may also decline. If Bangladesh joins the RCEP, consumers will benefit, but manufacturers may not do so well.

The feasibility study was led by the then-member of the Tariff Commission Dr Mostafa Abid Khan.

He told TBS, "Three things are important in making a final decision on joining this bloc – assessment, ability to fulfil commitments and review of the benefits."

"Assessment has already been completed. Countries with similar economies to Bangladesh like Vietnam, Cambodia, and Laos have joined the RCEP. By reviewing the commitments they have made, it will be clear whether Bangladesh has the ability to comply with those," Mostofa Abid Khan added.

The Tariff Commission in its report said, "The government may express its positive stand regarding the accession of Bangladesh to RCEP considering all the issues…."

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

Pros and cons of RCEP

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.

While Bangladesh would enjoy duty-free access to other RCEP countries, those countries would also get the same advantage as 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 protection.

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.

The Tariff Commission 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 the RCEP are RMG products and these constitute 64% of the total exports.

But the Tariff Commission 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 a 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 Tariff Commission said in its report.

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 be adversely affected by increased imports and the global trade deficit would increase by 2.69%.

Bangladesh is also more import-dependent on the 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 the RCEP may likely result in an increase in imports for both parties, though import increases for Bangladesh would be much higher.

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

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.