LDC graduation: big achievement, bigger challenges
The potential loss of revenue in the RMG sector will have the biggest impact on the domestic labour market, as the sector is the largest source of employment in the country
Bangladesh is set to leave the least developed countries (LDC) group to join the developing country club by 2026. Even though it will be an incredible achievement, it will also usher in a new set of challenges with which we have to grapple to maintain the economic prosperity of the country.
Currently, as an LDC, Bangladesh enjoys duty free trading facility under the World Trade Organisation's (WTO) generalised system of preference. Our export oriented sectors can face setbacks after graduation, especially because it is still unclear whether Bangladesh will qualify for the GSP-plus facilities in the European Union market, which is an incentive given to countries for "sustainable development and good governance". Countries like India, China, etc. are getting such tariff benefits on a regional or bilateral basis with the EU.
Bangladesh has not yet developed enough to compete with other countries in the world. Consequently, the country can lose the biggest markets for its apparel exports like the EU, Canada, the UK, Japan, Australia, etc.
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If Bangladesh graduates from the ranks of LDCs, the benefits it currently has under WTO rules will be discontinued from 2026. According to a recent report, Bangladesh's export earnings can fall by $537 billion a year if it loses duty-free facilities. However, the EU will continue to provide the country with these benefits until 2027.
Losing GSP facilities will necessitate negotiation of free trade agreements (FTA) with other countries to retain access to their markets. Such measures are time consuming and dependent on bilateral preferences.
That means, if we want to get exclusive benefits from a country, we will also have to provide them with some concessions. The manner and amount of concessions will vary from country to country and will require a significant amount of research and negotiation.
In order to negotiate an FTA with a developed country, we have to make our country tariff-free for most of their products which will be a big obstacle in raising revenue. So, LDC Graduation in 2026 will be a very challenging issue.
As an LDC, any country can provide cash assistance and subsidies on goods or services produced by its own. Bangladesh is now providing subsidies upon various products or services of agricultural and industrial sectors.
After graduation, the use of arbitrary incentives/subsidies in export oriented sectors will not be possible as trade partners may not be okay with them due to WTO policies. Bangladesh may even face objections for providing cash assistance on export earnings or remittances, creating further problems for export oriented industries.
As a developing country, Bangladesh will be deprived of the benefits it gets under the agreement on trade-related aspects of intellectual property rights (TRIPS). Under the TRIPS agreement, the pharmaceutical sectors of the LDCs will enjoy the benefits till 2033 and the other sectors will get them till the July of the following year. However, the WTO has not yet finalised whether this facility will be valid for any country that has graduated from LDC within this period.
Bangladesh will also need to donate more money to the UN and lose out on some small benefits like the number of scholarships and courtesy tickets for government officials.
How LDC graduation may affect the domestic market
The potential loss of revenue in the RMG sector will have the biggest impact on the domestic labour market, as the sector is the largest source of employment in the country. This will not only cause widespread lay off of workers but will significantly shrink the number of employment opportunities in the near future.
These RMG factories are primarily dependent on bank loans for their source of capital. If even some of these factories go out of business, local banks will lose their capital, which can lead to a nation-wide depression. The potential loss of foreign currencies will also be a significant problem.
Negotiating FTAs with other countries is a long and arduous process. The government may have to allow the introduction of many foreign products which can create serious competition in the domestic market, killing native industries with significant potential in their cribs. Taking such decisions will require careful cost-benefit analyses.
Currently the National Board of Revenue sets the minimum import price on foreign goods during the national budget. However, if promoted from LDC, Bangladesh will no longer be able to do so under the WTO's customs valuation agreement and will face complaints, putting domestically produced goods at even more risk.
At present, Bangladesh can replicate any product it wants. However, promotion to the Developing Country will deprive Bangladesh from TRIPS benefits. As a result, the pharmaceutical industry and IT sector will be among most threatened.
If the pharmaceutical sector cannot develop its manufacturing capabilities and the API sector on its own, the price of medication will increase and will go beyond the reach of the populace. The same will happen for IT products made in Bangladesh.
Overcoming critical challenges
The Bangladeshi RMG sector has been able to compete in the global stage mainly by offering its products at cheaper rates, utilising its tariff-free benefits to the fullest. That will not be possible after becoming a developing nation.
As a result, adopting cost reduction measures will be critical in maintaining our ability to compete. In order to achieve that, the RMG sector will need to reform its inefficient linkage industry. That means, all elements of RMG production, except a very few, will need to be made in our country.
Although some large companies are working towards this goal, establishing such a large industry will require coordinated effort from all participants in the RMG sector.
Bangladesh has to decide about the nature and amount of concession it can make to negotiate beneficial FTAs. The government needs to assess the potential of many emerging industries, decide which ones are the most likely to succeed and take necessary steps to reduce competition for these sectors.
These analyses will have profound and significant consequences long into the future. These, therefore, cannot be rushed. The government will need to adopt a 15-20 year long research plan to truly decide which policies will be needed to maintain and flourish domestic industries in our country.
The provision of cash incentives for the export of goods needs to be gradually reduced from now. By doing so, the tendency to export products that are only for cash incentives will decrease and self-dependent products will start to be exported.
In addition, the Bangladesh government should launch a campaign abroad through the Ministry of Foreign Affairs and the EPB to increase investment in Bangladesh. As a result, it will be possible to set up EPZs in all the districts of the country within the next five years through the EPZ facilities that are currently being provided. As a result, upgrading from LDCs will not be a problem even if this facility is discontinued.
Graduating from LDC will certainly be a momentous occasion. But we have to adapt to the changing circumstances to maintain the country's economic prosperity. We cannot afford to be unprepared. But it will require a coordinated effort of all economic actors. We have to remember that the government is not solely responsible for maintaining domestic industries.
Md. Raihan Ubaidullah is the deputy chief of Bangladesh Trade and Tariff Commission.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.
