Do the arguments about anti-export bias of our industries hold enough water?
There is no causal empirical evidence that suggests that if tariffs are lifted for a product line - if anti-export bias is eliminated - it will increase the export of that product. Hence, it is surprising how this weakly-grounded proposition has gained so much traction over the years
This has been advocated for a long time: if the domestic market is protected by tariffs and non-tariff barriers, it disfavours exports over production for the domestic market, and hence creates an anti-export bias. This anti-export bias has been held responsible for slow export growth and lack of export diversification in Bangladesh.
The flow of argument goes like this: An entrepreneur decides whether to produce for the local market or the international market. If the local market is protected by tariffs, it leads to higher domestic prices than the international prices and hence the producers find producing for the domestic market more profitable.
The lack of competition from the international market will result in lower quality of output and higher prices. But if the protection is lifted or reduced, local producers will be subjected to international competition, which will lead to higher quality and lower prices, and hence larger export volume and export baskets.
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There are two parts to this argument. First, protection creates incentives for producing for the local market. This is the industrial policy of import substitution. We all know about the pros and cons of it.
The second part is problematic – protection is a disincentive for export, or more precisely, lifting of protection will lead to higher exports and export diversifications. This argument is based on three major strong assumptions.
The foreign market is a seamless extension of the domestic market
It is assumed that the decision to produce for domestic vis-à-vis foreign markets depends solely on price differentials. However, as we know, for a local producer, domestic and foreign markets are not close substitutes in the sense that producers cannot easily switch between these two smoothly.
Apart from search costs, "frictions" in international trade such as rules of the game in destination countries (eg, technical, environmental and social compliances), geopolitical issues (eg trade war), as well as competition from global manufacturing hubs such as China has made international trade worryingly more difficult than the mere search for arbitrages in prices.
In developing countries, "born to export" can occur in low-tech industries where the technology is simple and buyers' specifications are not hard to follow, as we observe in RMG. This is less likely to hold for high-tech industries (e.g. electronics) or industries that involve stringent compliance requirements (e.g. pharmaceuticals, agro-processing, etc.).
After producing refrigerators for about one and a half decades for the local market, Walton is now exporting to a few neighbouring countries and Africa, and supplying only compressors to a few global brands. After 40 years of experience in pharmaceutical production, a few industries have now received certifications to export to the Western market in a limited capacity.
Penetration in the processed food market in the Western world is way too cumbersome for entrepreneurs to explore because of their very strict food safety protocols. One needs to ponder: with very low tariffs on Indian bakery products, why don't we see Indian bakeries in the streets of New York or London? Why did Indian household electronics take about half a century to make a modest penetration in the Western market?
Local competition cannot achieve quality or lower prices, even in a large market
It is assumed that local competition cannot achieve the quality of products closer to international standards, even in a large domestic market. There is no reason why it cannot. Bangladesh does not produce capital machinery, with a few exceptions. If all the market players import capital machines and most of the raw materials come from China and India, and the blueprint of the technology is widely available, it is very likely that with the same technology and inputs, local competition can achieve at least Indian standards, if not Chinese.
The same argument goes for prices: with similar technology and market demand, competition will bring down prices. Easy access to technology will not allow domestic firms to appropriate monopolistic rents.
Our urban bakery market is a good example. One does not have to be a food connoisseur to appreciate the quality of bakery products in the last decade or so under protection. The same argument holds for domestic ceramics and some agro-processing industries, which are highly protected sectors.
Entrepreneurs are irrational fools
It is assumed that the entrepreneurs are not rational - they cannot see the arbitrage opportunities offered by the export market. They have become complacent in producing for the domestic market, so much so that they don't want to explore the export market.
It is very difficult to believe that profit maximisers will not explore export markets if opportunities are there. There may be other structural reasons for not having a competitive edge in the export market such as shortage of skills, finance, etc, but these have nothing to do with their profit motives.
The accusation of anti-export biases systematically undermines the success story of how our local traders have become industrialists in one generation in non-RMG sectors, and how they are now penetrating the world market after catering to the local market for decades.
The above assumptions do not have robust empirical evidence to back them. There is no causal empirical evidence that suggests that if tariffs are lifted for a product line - if anti-export bias is eliminated - it will increase the export of that product. Hence, it is surprising how this weakly-grounded proposition has gained so much traction over the years.
Recently, the Asian Development Bank (ADB) in its policy brief has also attributed anti-export bias to the high concentration of RMG export in Bangladesh. As we all know, the recent history of export diversification in many countries is all about FDI – the Vietnam model.
Without FDI, the transfer of technology and knowledge becomes very slow. Even within RMG, switching from innerwear (woven shirt, T-shirt) to outerwear (e.g. jacket) is challenging without FDI, as we see only a handful of local factories are now producing jackets. The culprit is the lack of FDI, not the protection-induced anti-export biases.
In fact, "jumping tariff" FDI is very common in large countries such as China and India. The mobile phone and automobile sectors in Bangladesh have attracted this kind of FDI, aiming to capture the local market.
In essence, the very notion of anti-export biases rests on establishing causal links between protection and exports – lower protection of a product leads to higher exports of that product. At the end of the day, this is an empirical question, and the strength of this proposition depends on how robust the causal links are.
As this proposition has little empirical basis in Bangladesh or elsewhere, it hardly holds any water. There are many convincing arguments for reducing trade barriers and known factors that are arresting export diversifications, and anti-export bias is not among them.
Disclaimer: The opinions expressed in this publication are those of the authors. They do not reflect the opinions or views of The Business Standard
