FTA from Bangladesh perspective
Wednesday, 22 July 2009
Ferdous Ara Begum
Bilateral Free Trade Agreement (FTA) has been gaining momentum since 1990 because of the slow progress of global trade talks under multilateral trading system, according to experts. From the statistics of the World Trade Organisation (WTO), a surge of regional trading arrangements (RTA) is noticeable. Ninety per cent of the RTAs, which are 421 in number, are FTAs and these have been notified to the GATT/WTO up to December 2008. Of these, 324 RTAs were notified under Article XXIV of the GATT (General Agreement on Tariffs and Trade) 1947 or GATT 1994; 29 under the Enabling Clause; and 68 under Article V of the GATT. Till that time, 230 agreements signed were in force.
Bangladesh is an exception in not being involved in any bilateral FTA so far. The Indian government proposed to the government of Bangladesh to sign a FTA in 2002 and a draft text of the agreement was also forwarded to Bangladesh. Two rounds of discussion were held in 2003 and 2004 but no substantive progress was made. Besides, Bangladesh also held some inconclusive discussions with Pakistan and Sri Lanka to sign FTAs.
Several studies were conducted for finding out the potentials of these proposed FTAs. A core committee has recently been formed to identify the positive and negative aspects of FTA and to suggest modalities of negotiations. The committee has already raised some points. For example, it needs to be clarified whether or not a bilateral FTA with any SAARC member country should be a SAFTA+ agreement. The coverage of goods and services, potential for comprehensive economic partnership and increase of investment possibilities, should also be identified. Sectoral cooperation, analysing non-tariff barrier (NTB) issues, special and differential factors in favour of the least developed countries (LDCs) and dispute settlement mechanisms, are also some important ingredients that are needed to be discussed. Trade remedy measures, rules of origin, time frame of implementation and required additional facilities for LDCs also demand importance. The preparation of a negative list, considering the stages of the domestic industries, is yet another important task to be accomplished.
Among the SAARC countries, India is the largest trading partner of Bangladesh. The export from Bangladesh to India was about $358.08m against its import from that country of $31.39b in recent years, making the two-way trade at $3.74b. On the other hand, two-way trade Bangladesh and China was about $3.21 billion in 2007-08. These two big neighbouring countries contribute about one-sixth of our total foreign trade. If smuggling is considered, the amount would possibly be double. A World Bank (WB) study finds that apart from cross-border smuggling, the practice of over, and under-invoicing in formal trade makes a significant contribution to the informal trade. In addition, there is bootleg smuggling which bypasses customs posts altogether. Combining all these, existing import would be much more. Bangladesh has the longest land border with India -- running nearly 4,096 km. Unofficial trade is not recorded in the book but definitely it is making a serious impact on the manufacturing sector, making our products uncompetitive. It so happens sometimes that products originating in India or China are cheaper in Bangladesh than in those countries.
Bangladesh and India have several bilateral agreements. The Bangladesh-India Trade Agreement (BITA) and the Bilateral Investment Promotion and Protection Agreement (BIPPA) were signed in February 2009. During the 14th SAARC Summit, held in New Delhi in April 2007, Bangladesh and India agreed on zero-duty market access with effect from January 01, 2008 for products originating from the SAARC LDCs, except items in the sensitive list. In April 2009, 264 items were excluded from 744 items of sensitive list of the regional LDCs. A memorandum of understanding (MOU) was signed to extend duty-free, quota-free (DFQF) access to 8.0 million pieces of readymade garment (RMG) products from Bangladesh every year (customs notification was issued on April 21, 2008). All these agreements, signed in good intentions, have not yet been able to make much positive impact. Supply-side constraints and the existence of several unidentified non-tariff barriers are possibly the most important factors for which Indo-Bangladesh bilateral trade still remains unfavourable for Bangladesh. Possible remedies lies in strengthening the SAARC spirit and creating a level playing field for the weaker economies in the SAARC region.
Some other agreements and MOUs were also signed between Bangladesh and India. The MoU between Bureau of Indian Standard (BIS) and BSTI, Protocol of Passenger Bus between Dhaka and Kolkata, and Dhaka and Agartala have certainly made a positive impacted on increasing people-to-people and trade to trade connectivity.
A total of 181 foreign direct investment (FDI) and joint venture investment proposals from India, worth over $453m, have been registered with the Board of Investment (BoI) in sectors like agriculture, textiles, chemicals and engineering industries. More than 50 of these units are already in production. A large number of domestic industries are also dependent on supplies of Indian raw materials.
A World Bank (WB) team has done some case studies on several products like cement, light bulbs, fluorescent tube bulbs, bicycle rickshaw tyre, sugar, automobiles and RMG. It appeared that under an FTA there will be expanded Indian exports to Bangladesh, but exports from Bangladesh to India are unlikely to increase such. India exports all these products to the rest of the world and, except for cement, also to Bangladesh. Indian export prices are substantially lower than ex-factory, before-tax prices of the similar products in Bangladesh. None of these products is exported by Bangladesh. Potential export prices of such products of Bangladesh -- defined as ex-factory prices minus estimated duty draw-back for inputs subject to tariff --substantially exceed ex-factory prices in India. It is concluded in the study that if the domestic industry can run without protection, welfare benefits from FTA would be higher. If the present situation prevails, FTA will increase import and revenue earnings but at the cost of production-cut by the domestic industries. Employment consequences of the domestic industries would also be very bad.
A mixed reaction: Industrial leaders have a mixed reaction towards FTA. Entrepreneurs in the light engineering sector (bicycle producers) say that they have developed the sector, which has an investment of more than Tk 14 billion (1400 crore), and can export their products in a limited scale but may become uncompetitive with entrepreneurs from neighbouring countries, if FTA were in operation.
On the other hand, manufacturers of filters (a light engineering product) mentioned that there is a large market of an estimated at Tk 10 billion (1000 crore) in the north-eastern Indian states. An FTA would help them access this market. At the same time, they are apprehensive about the presence of several non-tariff barriers and requirement of standard issues.
In the case of leather sector, entrepreneurs felt that FTA with India would be very risky if it is not done in a very intelligent manner. They gave the example of the Bata factory in Dhamrai, and said that the industry is so big that it can consume all the leather produced in Bangladesh. On the plea that raw materials are not available in the country, they import raw materials from the 'neighbouring country' that makes some of the primary industries uncompetitive.
Manufacturers of steel products feel investment from India should be complementary, instead of being competitive; otherwise, the domestic industry will face a setback. They suggest sectors should be gradually opened based on sectoral experience.
An FTA might have some positive elements if the experience of Sri Lanka is followed. There should be more joint ventures in the hi-tech areas under buy back arrangements, and for building capacities for utilisation of existing facilities, upgradation of quality standard and certification. Signing of mutual recognition arrangements in the required fields can be the possible prescription for attaining benefits from regional and bilateral agreements. Some entrepreneurs suggest that we also need to develop non-tariff barriers to protect local products from cheap import from other countries. A series of public debate and discussion should be held with the concerned stakeholders, before finalising the sensitive lists and other related activities for any possible FTA. Not only that, negotiation modalities will also have to be well devised to get a good agreement for a win-win situation.
(The writer is former Executive Director, SAARC Chamber of commerce and Industry or SCCI)
Bilateral Free Trade Agreement (FTA) has been gaining momentum since 1990 because of the slow progress of global trade talks under multilateral trading system, according to experts. From the statistics of the World Trade Organisation (WTO), a surge of regional trading arrangements (RTA) is noticeable. Ninety per cent of the RTAs, which are 421 in number, are FTAs and these have been notified to the GATT/WTO up to December 2008. Of these, 324 RTAs were notified under Article XXIV of the GATT (General Agreement on Tariffs and Trade) 1947 or GATT 1994; 29 under the Enabling Clause; and 68 under Article V of the GATT. Till that time, 230 agreements signed were in force.
Bangladesh is an exception in not being involved in any bilateral FTA so far. The Indian government proposed to the government of Bangladesh to sign a FTA in 2002 and a draft text of the agreement was also forwarded to Bangladesh. Two rounds of discussion were held in 2003 and 2004 but no substantive progress was made. Besides, Bangladesh also held some inconclusive discussions with Pakistan and Sri Lanka to sign FTAs.
Several studies were conducted for finding out the potentials of these proposed FTAs. A core committee has recently been formed to identify the positive and negative aspects of FTA and to suggest modalities of negotiations. The committee has already raised some points. For example, it needs to be clarified whether or not a bilateral FTA with any SAARC member country should be a SAFTA+ agreement. The coverage of goods and services, potential for comprehensive economic partnership and increase of investment possibilities, should also be identified. Sectoral cooperation, analysing non-tariff barrier (NTB) issues, special and differential factors in favour of the least developed countries (LDCs) and dispute settlement mechanisms, are also some important ingredients that are needed to be discussed. Trade remedy measures, rules of origin, time frame of implementation and required additional facilities for LDCs also demand importance. The preparation of a negative list, considering the stages of the domestic industries, is yet another important task to be accomplished.
Among the SAARC countries, India is the largest trading partner of Bangladesh. The export from Bangladesh to India was about $358.08m against its import from that country of $31.39b in recent years, making the two-way trade at $3.74b. On the other hand, two-way trade Bangladesh and China was about $3.21 billion in 2007-08. These two big neighbouring countries contribute about one-sixth of our total foreign trade. If smuggling is considered, the amount would possibly be double. A World Bank (WB) study finds that apart from cross-border smuggling, the practice of over, and under-invoicing in formal trade makes a significant contribution to the informal trade. In addition, there is bootleg smuggling which bypasses customs posts altogether. Combining all these, existing import would be much more. Bangladesh has the longest land border with India -- running nearly 4,096 km. Unofficial trade is not recorded in the book but definitely it is making a serious impact on the manufacturing sector, making our products uncompetitive. It so happens sometimes that products originating in India or China are cheaper in Bangladesh than in those countries.
Bangladesh and India have several bilateral agreements. The Bangladesh-India Trade Agreement (BITA) and the Bilateral Investment Promotion and Protection Agreement (BIPPA) were signed in February 2009. During the 14th SAARC Summit, held in New Delhi in April 2007, Bangladesh and India agreed on zero-duty market access with effect from January 01, 2008 for products originating from the SAARC LDCs, except items in the sensitive list. In April 2009, 264 items were excluded from 744 items of sensitive list of the regional LDCs. A memorandum of understanding (MOU) was signed to extend duty-free, quota-free (DFQF) access to 8.0 million pieces of readymade garment (RMG) products from Bangladesh every year (customs notification was issued on April 21, 2008). All these agreements, signed in good intentions, have not yet been able to make much positive impact. Supply-side constraints and the existence of several unidentified non-tariff barriers are possibly the most important factors for which Indo-Bangladesh bilateral trade still remains unfavourable for Bangladesh. Possible remedies lies in strengthening the SAARC spirit and creating a level playing field for the weaker economies in the SAARC region.
Some other agreements and MOUs were also signed between Bangladesh and India. The MoU between Bureau of Indian Standard (BIS) and BSTI, Protocol of Passenger Bus between Dhaka and Kolkata, and Dhaka and Agartala have certainly made a positive impacted on increasing people-to-people and trade to trade connectivity.
A total of 181 foreign direct investment (FDI) and joint venture investment proposals from India, worth over $453m, have been registered with the Board of Investment (BoI) in sectors like agriculture, textiles, chemicals and engineering industries. More than 50 of these units are already in production. A large number of domestic industries are also dependent on supplies of Indian raw materials.
A World Bank (WB) team has done some case studies on several products like cement, light bulbs, fluorescent tube bulbs, bicycle rickshaw tyre, sugar, automobiles and RMG. It appeared that under an FTA there will be expanded Indian exports to Bangladesh, but exports from Bangladesh to India are unlikely to increase such. India exports all these products to the rest of the world and, except for cement, also to Bangladesh. Indian export prices are substantially lower than ex-factory, before-tax prices of the similar products in Bangladesh. None of these products is exported by Bangladesh. Potential export prices of such products of Bangladesh -- defined as ex-factory prices minus estimated duty draw-back for inputs subject to tariff --substantially exceed ex-factory prices in India. It is concluded in the study that if the domestic industry can run without protection, welfare benefits from FTA would be higher. If the present situation prevails, FTA will increase import and revenue earnings but at the cost of production-cut by the domestic industries. Employment consequences of the domestic industries would also be very bad.
A mixed reaction: Industrial leaders have a mixed reaction towards FTA. Entrepreneurs in the light engineering sector (bicycle producers) say that they have developed the sector, which has an investment of more than Tk 14 billion (1400 crore), and can export their products in a limited scale but may become uncompetitive with entrepreneurs from neighbouring countries, if FTA were in operation.
On the other hand, manufacturers of filters (a light engineering product) mentioned that there is a large market of an estimated at Tk 10 billion (1000 crore) in the north-eastern Indian states. An FTA would help them access this market. At the same time, they are apprehensive about the presence of several non-tariff barriers and requirement of standard issues.
In the case of leather sector, entrepreneurs felt that FTA with India would be very risky if it is not done in a very intelligent manner. They gave the example of the Bata factory in Dhamrai, and said that the industry is so big that it can consume all the leather produced in Bangladesh. On the plea that raw materials are not available in the country, they import raw materials from the 'neighbouring country' that makes some of the primary industries uncompetitive.
Manufacturers of steel products feel investment from India should be complementary, instead of being competitive; otherwise, the domestic industry will face a setback. They suggest sectors should be gradually opened based on sectoral experience.
An FTA might have some positive elements if the experience of Sri Lanka is followed. There should be more joint ventures in the hi-tech areas under buy back arrangements, and for building capacities for utilisation of existing facilities, upgradation of quality standard and certification. Signing of mutual recognition arrangements in the required fields can be the possible prescription for attaining benefits from regional and bilateral agreements. Some entrepreneurs suggest that we also need to develop non-tariff barriers to protect local products from cheap import from other countries. A series of public debate and discussion should be held with the concerned stakeholders, before finalising the sensitive lists and other related activities for any possible FTA. Not only that, negotiation modalities will also have to be well devised to get a good agreement for a win-win situation.
(The writer is former Executive Director, SAARC Chamber of commerce and Industry or SCCI)