Govt mulls FTAs with China, India to face post-LDC challenges

The government is considering free trade agreements (FTAs) with China and India as part of its endeavour to strengthen ties with major trading partners to face post-LDC graduation challenges.

According to sources at the commerce ministry, China has already expressed its interest to sign a FTA with Bangladesh. On the other hand, the government has moved forward on a feasibility study for a Comprehensive Economic Partnership Agreement (Cepa) with neighbouring India.

The Bangladesh Foreign Trade Institute (BFTI) is conducting the feasibility study.

Given the large disproportionality in trade, signing FTAs with these two top import sources, however, will cause the government to lose a huge amount of tariff revenue and may affect the growth of local industries by exposing them to stiff competition with foreign companies. – which is also being considered by the government.

According to the National Board of Revenue (NBR), the country's tariff revenue from imported goods was Tk77,150 crore in the 2020-21 fiscal year and the lion's share of it came from goods imported from China and India. If Bangladesh goes into FTAs with these two countries, it will have to lose a huge amount of revenue.

In view of this, a section of economists recommend that the government first sign FTAs with countries with which Bangladesh has a positive trade balance.

Nonetheless, the government is considering FTAs as a tool to maintain the competitiveness in the export market in the long run.

According to sources, the Ministry of Commerce has prepared a list of countries and trade blocs – with which Bangladesh may sign FTAs – based on its own analysis and opinions of various departments concerned.

On 9 September this year, a meeting of the Sub-Committee on Preferential Market Access and Trade Agreement – one of the several sub-committees formed by the Prime Minister's Office to prepare for the possible post-LDC graduation challenges – discussed the list, that include Nepal, Indonesia, Sri Lanka, Malaysia, Singapore, Asean, Canada, the United States, the Eurasian Economic Union, and Mercosur, a South American trade bloc – apart from India and China.

Russia has also proposed to Bangladesh to sign a protocol on trade cooperation, which is currently being reviewed by the commerce ministry.

Md Hafizur Rahman, director general (DG) of the WTO Cell of the commerce ministry, told The Business Standard that Bangladesh has to sign FTAs with its trading partners in the interest of retaining market access after its graduation from the LDC status.

Mentioning that feasibility studies are being done on Cepa with India and FTA with China, he said whether the agreements will benefit Bangladesh will be understood once the studies are over.

Thrust on FTAs for future market access

Bangladesh will lose duty-free access to various export destinations, including Europe, once it comes out of the LDC status. Besides, obtaining tariff benefits under the GSP Plus scheme in the European market is also uncertain as the country is required to comply with 27 international conventions to qualify for the facility.

To face this challenge, the government has been showing an urgency to sign FTAs with its major trading partners ​​for the last few years. Businesses also have been demanding such agreements for a long time. Besides, economists have long been advocating FTAs.

Apart from considering FTAs, the government is making efforts to make sure preferential market access can be availed for extended times, sources at the commerce ministry said, adding the Ministry of Labor is in the process of amending labour laws in accordance with the guidelines of the European Union and the International Labour Organisation to this end.

This issue also came up for discussion at the meeting of the Sub-Committee on Preferential Market Access and Trade Agreement, the sources added.

The need for policy reform

In order to protect local industries or discourage the import of certain goods, Bangladesh levies supplementary duties, regulatory duties and other duties in addition to import duties.

WTO guidelines, however, urge gradual reduction in the tariff rates.

But, the last few years have not seen significant progress in this respect. As a result, no specific plan is evident as to how the NBR will cope with the revenue losses, if FTAs are signed with countries like China and India abruptly.

Syed Golam Kibria, member of the NBR, told TBS, "We have to move for FTAs in the long run but this requires preparation. In order to avoid the shock of a sudden drop in revenue, tariff rates will have to be reduced gradually within 2026. The revenue loss will have to be met by increasing the collection of income tax and VAT."

On the other hand, economists are emphasising policy reform before signing FTAs.

International trade analyst Dr Mostafa Abid Khan told TBS that once Bangladesh becomes a developing country, it will no longer get unilateral benefits.

After its LDC-graduation, Bangladesh will have to offer some benefit to a country if it wants some benefit from that country, he mentioned, adding, "But the kind of trade- or investment-friendly policy needed for overall success of FTAs has not yet been framed."

Stressing the need for enriching the country's export basket, he said whether signing FTAs hurriedly will be beneficial for Bangladesh is questionable as it has a limited number of export items.

Expressing similar views, Abul Kasem Khan, former president of the Dhaka Chamber of Commerce and Industry and incumbent chairman of the Business Initiative Leading Development (BUILD), said, "We need to reform existing policies. It is necessary to make sure policies framed to implement FTAs do not hamper trade and commerce.

According to the Bangladesh Bank and the Export Promotion Bureau (EPB), Bangladesh exported $38.75 billion worth of goods to the world market in FY21, which was 15.10% higher compared to a year ago. On the other hand the country's imports in FY21 stood at $65.59 billion, marking a 19.93% year-on-year growth.

Bangladesh imported $11.53 billion worth of goods from China in FY20, while its exports to the Chinese market that year amounted to merely $600 million.

At the same time, the country's imports from India stood at $8.2 billion and exports to the country amounted to $1.26 billion in FY20.