Bangladesh has finally joined the wagon of bilateral free trade deal by singing the Preferential Trade Agreement (PTA) with Bhutan. Two countries formally signed the deal on December 06 last year to ease trade barriers. PTA is, however, not a full-fledged Free Trade Agreement (FTA) rather a partial free trade deal or a phase of pre-FTA.
Generally under any bilateral FTA (BFTA), partner countries provide duty-free treatment to maximum number of products to each other's market. Only a few or selected products are kept outside the deal considering those sensitive. Thus there is a negative-list for the products which may also be negotiable in future. Unlike any BFTA, a BPTA usually provides limited market access to limited products of the partner countries. This is also reflected in Bangladesh-Bhutan PTA under which 100 Bangladeshi products will get tariff free access to the small Himalayan kingdom. In return, Bangladesh will also provide duty-free treatment to 34 products made in Bhutan. Later, two countries will enhance the tariff-free coverage of products.
Bangladesh had been thinking and discussing to sign BFTAs with a number of countries for the last two decades. Hundreds of meetings and seminars were held in this connection. Experts have also conducted a series of researches, analyses and studies to identify the pros and cons of the proposed BFTAs. Nevertheless, FTA didn't get adequate space in the country's trade policy. It was only a few years back when the first comprehensive trade policy was formulated. It incorporates initiatives for expanding market access to non-traditional markets, and through PTAs and FTAs at regional or bilateral levels.
Being a least developed country (LDC), Bangladesh receives preferential treatment under the Special and Differential (S&D) provision of the World Trade Organization (WTO). Under the provision, preferential trade facilities are extended in the form of Generalised System of Preference (GSP) by the European Union (EU) as well as Japan and Canada. The country has also received preferential treatment to different developing countries through a number of regional trading agreements (RTAs). These are Asia and Pacific Trade Area (APTA) and South Asian Free Trade Area (SAFTA).
The S&D treatment thus allowed Bangladesh not to reciprocate for availing lower-duty or duty-free access to almost all the developed countries except the United States (US) and a number of developing countries like China and India. Taking advantage of the preferential market access, Bangladesh has been able to achieve phenomenal growth in her exports and has emerged as a leading apparel exporter in the world market. Being accustomed with unilateral market access benefits for long, it becomes uncomfortable for the country's policymakers and businesses to reciprocate any tariff preference to trading partners.
As the deadline for graduation from the LDC category to non-LDC one is approaching, it also becomes obvious that the era of non-reciprocal trade benefit will be over soon. Once Bangladesh will get out of LDC category in 2024, it will no more be eligible for unilateral preferential treatment and the existing benefits will end by 2027. To retain market access benefit in different countries, the only option is signing bilateral or regional free trade agreements with these countries. Otherwise, Bangladeshi products have to face higher tariff to get into those markets. For instance, currently Vietnam is paying 12.0 per cent duty to export its apparel into EU market. Bangladesh will also have to pay similar duty after 2027 for being a non-LDC.
Against the backdrop, signing a BFTA with Bhutan carries a symbolic value in the sense that Bangladesh has finally started to get out of its conservative trade policy approach. Though, signing a BFTA with Sri Lanka was almost finalised three years ago, it somehow got stopped. Again, there is a move to sign PTAs with Nepal and Indonesia by the end of June this year. Bangladesh is also discussing with some other countries to sign FTA or PTA.
One thing is, however, clear. There will be very little effectiveness of PTA or FTA with countries having small volume of trade or the potential of market expansion is quite limited. PTAs or FTAs with these countries will not enhance the export and ease the imports at optimal or desired level. The only real benefit of such a FTA is gaining experience of free trade negotiation.
Nevertheless, getting out of conservative approach on providing trade preference is not an easy task. Discussion on FTA becomes inconclusive for a several reasons. The plea to protect the local industry by a section of businesses becomes a strong barrier to move ahead. They lobby for not reducing import tariff or allowing duty-free access to different products although tariff cut is core to any FTA.
Revenue authorities also opposes any significant reduction on tariff fearing loss of revenue from customs duty. This is again reflected in a note, prepared by the National Board of Revenue (NBR) and submitted to the Ministry of Commerce, on FTA. In the note, the NBR categorically suggested not to sign any FTA or PTA with the countries having big trade deficit with Bangladesh, according to media reports. It means, NBR is not in favour of signing BFTAs with China and India. Nevertheless, Bangladesh-China BFTA is under discussion for long. Though China has extended tariff-free access to more Bangladeshi products last year, the proposed BFTA will be instrumental in the post-LDC period. Bangladesh and India have also agreed to sign a comprehensive economic partnership agreement (CEPA) which is more than a regular BFTA.
NBR also stressed on considering the overall revenue management aspect at the time of signing any free trade deal and argued that FTA, PTA or comprehensive economic partnership agreement (CEPA) may affect revenue collection negatively. It also mentioned that import revenue contributes around 30 per cent to total tax revenue. Direct import duty coupled value added tax, supplementary and regulatory duties and advance income tax account for such contribution. Any FTA or even PTA will definitely reduce some import tariff and there will be some negative impact on overall revenue collection. It is difficult to comprehend how a commercially meaningful FTA could be signed without sacrificing some revenue.
As a matter of fact, loss of revenue may be compensated indirectly in the long-run under a well-negotiated BFTA. In a similar vein, pressure generated from trade deficit is also manageable as trade negative balance is not always a bad thing.
The revenue board also stressed the need for considering protection of local industries at the time of signing such trade deals. This is the same logic as always forwarded by different business sectors of the country. Protection of local industry is needed for a period of time, not for indefinite period.
The revenue board, however, also made some logical and more realistic suggestions by saying that the country should prioritise its major export destinations and zones, like the Association of Southeast Asian Nations (ASEAN), for signing free trade agreements. It also proposed signing FTA and PTA with the countries where Bangladesh may lose the existing trade benefits after its graduation from LDC status. It categorically mentioned European Union (EU) in this regard.
The core objective of any BFTA is to increase export to and ease import from the partner country. Reduction of cost of raw materials and intermediate goods helps to reduce the cost of domestic production for local and export-oriented items. It thus also helps to make export-oriented products more competitive in the long-run and widen the scope of increase overall export. Again, with lower tariff, consumers can avail better goods in competitive prices.
Moreover, tariff reduction or zero-tariff is not the only core element of a FTA now a day. Besides rules of origin, standards of products and intellectual property (IP) regime also become essential components of an FTA. Trade facilitation is also there. Even investment and government procurement are also getting priority. Again, any FTA now includes trade in services beside trade in goods which is now the main focus. Finally, the wave of Covid-19 has started to bring changes in many traditional approaches regarding global trade. Thus, sticking to tariff negotiation and not giving adequate space to trading partner will not bring any positive outcome from any FTA.