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Can BD maintain its competitiveness with RCEP countries?

Khondaker Golam Moazzem | November 23, 2020 00:00:00

The signing of the Regional Comprehensive Economic Partnership (RCEP) on November 15 took many by surprise. Trade pundits are excited about this agreement. Firstly because, countries involved in such partnerships often benefit from reduced import duty which results in a more competitive domestic market. Consumers are also benefited through such outcomes since a more competitive market means a more comfortable price tag on products. Secondly, such trade agreements often bring about increased intra-regional and extra-regional investment as well as exchange of technology which facilitates the creation of a robust value chain and a widespread production network. Furthermore, countries receive preferential treatment within their respective trading block over extra-regional entities which allows them to stay competitive. Consequently, private companies within partner countries can become more competitive on a regional as well as global level.

In terms of services, trade agreements like RCEP open the door for the exchange of skilled professionals among member countries. At its peak, RCEP will follow laws regarding intellectual property which can attract extra-regional producers to set up factories within the region.

There are several levels of trading blocs from free trade areas to economic unions. European Union is the epitome of success in such trading blocs. Other trade agreements like USMCA (which was called NAFTA), ASEAN and Mercosur have been successful as well. Given these precedents, everyone was reasonably excited about the Regional Comprehensive Economic Partnership and the Trans-Pacific Partnership. Both of these treaties were aimed at large-scale economic cooperation in the Trans Asia-Pacific region. For instance, the objective of the TPP was to develop a widespread trade network among Europe, Asia and the USA. On the other hand, RCEP was initiated in order to liberalise trade regulations in the Asia-Pacific region. But the US withdrew from the TPP for political reasons and consequently, the treaty did not see the light of the day. However, most countries in the Asia Pacific region were already looking for a trade agreement like the TPP. When they got the opportunity under RCEP, the eight years of tough negotiation has ended with the concrete outcome of signing up the agreement in November, 2020.

The RCEP region constitutes about 40 per cent of global trade and 2.2 billion consumers, making RCEP the largest trading bloc in history. The member countries include commodity and mineral suppliers, raw materials and intermediate commodity producers, machinery manufcatuers and exporters and a large consumer-base which make the region a big hub of global production networks and markets. Hence, the excitement and approbation is quite well-deserved.

In addition, the emergence of a China-backed trade bloc has important implications in contemporary global political and economic dynamics. After the failure of the TPP, this agreement is in fact, being viewed as a possibility to develop a big market with countries of different poltical perspecitves.

RCEP FROM BANGLADESH PERSPECTIVE: Any regional trade agreement may consist of countries with different economic status such as developed, developing and least developed. However, each country is a part of the agreement because of its certain comparative advantage either in terms of supplier of raw materials, producers and suppliers of machineries, availability of skilled but low-cost labour, strong regional connectivity and large consumer base. Generally, the more powerful parties (e.g., the developed economies) assume a leadership role in such treaties in order to make a balance between different parties with their diverse interest. Although LDCs are often at the receiving end, their participation in those trade blocs is also essential. Firstly because, the inclusion of smaller economies expands the production network within the region. Secondly, businesses can choose from alternative options to produce different components in their supply chain in more cost-effective parts of the region. Thirdly, it provides an opportunity to diversity investment within the region where low-cost sources of LDCs could play an important building bloc.

The participation in the RCEP was not open-ended for countries of the Asia Pacific region. Thus, Bangladesh's participation was not open during the time of negotiation. On the other hand, Bangladesh has limited experience of participating in regional trade blocs and the outcome was not so encouraging. Bangladesh scarcely had any prolonged exposure to bilateral Free Trade Agreements (FTA) with developing/developed countries, let alone a large trading bloc. For instance, SAFTA has not been functional; BIMSTEC passed its 20 years without having closure in its trade negotiation for FTA. The only experience Bangladesh has in bilateral FTA is also not with any economic powerhouse. On the flip side of the coin, smaller economies like Myanmar, Laos and Cambodia had prior experience in dealing with the terms and conditions of ASEAN. But Bangladesh does not have such experiences. In addition, required tariff concessions (gradual elimination of 95 per cent tariff) for the RCEP, compliance with Intellectual Property Right Laws, meeting standards for labour rights and data and IT related cooperation etc are rather difficult for Bangladesh to get along with.

However, Bangladesh should gradually be prepared for participating in such large trade blocs by complying with all required standards. In order to achieve that, Bangladesh can sign bilateral treaties with the members of RCEP and with other developing countries as well. For instance, Bangladesh has been approached by Japan, China, South Korea and Vietnam regarding trade agreements. Bangladesh should negotiate to reach agreements as per its capacity and convenience -either in the form of a preferential trade agreement (PTA) or Free Trade Agreement (FTA) or Comprehensive Economic Partnership Agreement (CEPA) that is tailor-made for the benefit of the country. While in some cases, Bangladesh may prioritise trade and investment, in other cases (e.g., Malaysia) it can focus more on the service components. Such agreements will eventually allow Bangladesh to familiarise itself with the production network of the RCEP and benefit from it without actually being a part of it.

RAMIFICATIONS FOR BANGLADESH: Broadly speaking, there will be three types of impact of the RCEP on the economy of Bangladesh.

Firstly, most of the RCEP member countries had a strong production network before RCEP was signed. However, the initiation of RCEP will eventually result in the creation of an even more formidable production hub in this region. Now some of these countries produce raw materials, while others produce agricultural products, minerals, intermediate products, consumer goods and so on. Now they can exchange and trade for these raw materials and intermediate products in a much more cost-effective manner.

Secondly, through ease of trading, low tariff barrier and increased availability of low-cost raw materials, exports from these countries, (especially from competitors like Vietnam, Cambodia etc.) may become less expensive and therefore, more competitive than Bangladesh. As a result, Bangladesh will face increased difficulty in exporting its products (e.g., RMG) within the Asia Pacific region. For the same reason, the RCEP member countries will be in a more advantageous position in terms of exports to the global market as well. On the other hand, domestic consumers from Bangladesh will be able to import goods from these countries at a more competitive price putting domestic producers at risk.

Thirdly, Bangladesh has been yearning for manufacturing-led foreign direct investment for many years. In this respect, Bangladesh has to compete with other Asian countries like Vietnam, Myanmar, Malaysia, Cambodia, Thailand etc. However, since these countries now belong to a trade bloc, they will offer better competitiveness to foreign investors in their countries.

To summarise, Bangladesh is going to face challenges in terms of trade, intra-regional and extra-regional exports and foreign direct investment.

In order to survive in such an increasingly competitive environment, Bangladesh must simultaneously diversify its exports, offer low prices and ensure robust quality control mechanisms. Bangladesh should promptly prepare its Special Economic Zones, make these regions more business-friendly and ease the business practices. That is, Bangladesh must offer a similarly competitive business environment to foreign investors compared to RCEP countries, beyond market access.

Bangladesh will graduate from the LDC category in 2024. In order to prepare its economy for possible contingencies posed by graduation, the Government of Bangladesh should prioritise negotiating bilateral treaties (FTA, TPA and CEPA) with favourable partners, especially from within the RCEP region. Furthermore, the Ministry of Commerce should enhance its technical capacity to better negotiate the bilateral agreements. In this case, the ministry should take technical support from experts outside the government, particularly those working in the think tanks. Finally, the Ministry of Foreign Affairs must also take a proactive role in consultation and cooperation with the Ministry of Commerce in signing FTAs.

Dr Khondaker Golam Moazzem is Research Director,Centre for Policy Dialogue (CPD). [email protected]

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