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Swasti Lankabangla Swasti Lankabangla

Free trade—the best option for Bangladesh

| Updated: October 22, 2017 14:03:16


Free trade—the best option for Bangladesh

It now appears that certain sections of people in  Bangladesh  are increasingly becoming concerned  about  the country 's economic future and  advocating a new regional economic trading arrangement or reinvigorating  such an arrangement currently in existence in  the form of South Asia Free Trade Agreement (SAFTA).  The reason they are rethinking on the issue is based on their perception that the globalisation process is facing a very strong headwind flowing from the USA which is also further reinforced by populist upsurge against globalisation in many European countries. What they are arguing in essence is that free trade under the current circumstances is not a viable option to pursue for achieving Bangladesh's developmental objectives or securing its economic future.
The context in which South Asian regionalism is canvassed ought to be examined in a wider global context. Globalisation has been interchangeably used for free trade. Free trade has been blamed for everything that has gone wrong in the USA, especially job losses in the manufacturing sector. Roberto Azevedo, WTO Director-General, in one of his recent statements clearly pointed out the core of the problem. Job losses around the world are the result primarily of technological advances rather than from free trade. What he meant is that advances in communication, transportation (such as containerisation) and automation are contributing to job losses. What was implicit in his address is that robots were a far greater threat to American jobs than trade or China or anything else that Trump has on his radar. Now there are empirical evidence available which clearly demonstrate that only about 20 per cent of job losses in the US manufacturing sector was due to relocating production facilities abroad in the first decade of this century.  That leaves 4.65 million jobs that were lost through automation, weak demand and a host of other factors.  Even if Trump can bring back manufacturing to the USA, this alone will not bring back those lost jobs, except some kind of a miracle. The irony is Trump's "Make America Great Again" hats were also made in China.
Globalisation does not inevitably carry the seeds of its own destruction; rather, it is threatened by short-termism and sustained by a narrative of apportioning blames and responsibility avoidance. Anti-globalisation is a product of political failure. As commentators in Bangladesh have argued that the World Trade Otrganisation (WTO) has problems reaching timely decisions as reflected in the Doha Round of Trade Negotiations and these shortcomings can be circumvented through preferential or free regional trading arrangements. These are valid criticisms of the WTO and alternatives suggested can look attractive.  But we must ask ourselves whether the prospects for arrangements such as a new regional trading arrangement or reinvigorating the exiting ones are any brighter.  The evidence is very clearly in the negative and that is also evidently clear in the case of the South Asian Association for Regional Cooperation (SAARC) established in 1985 and the subsequent attempt to promote regional trade through the South Asian Free Trade Area (SAFTA) agreement signed in 2004.
SAARC is composed of Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. It has a charter for the promotion of economic and social progress, among others. SAARC countries account for 3.0 per cent world area with 21 per cent of world population and 3.8 of global gross domestic product (GDP). The region is one of the poorest and   socially complex.   Its four member countries, Afghanistan, Bangladesh, Bhutan and Nepal, are listed as least developed countries (LDCs) by the UN.  India alone accounts for 75 per cent of total population and 80 per cent of GDP in the region. India is the largest economy   and it has not been in the best of circumstances for more than a thousand years or so, also a very poor country with extraordinary economic and social inequality and beset with internal strife in various parts of the country. In its drive to become global India its military reach has now reached the South China Sea to back the USA to encircle China, and it now (2017) ranks as the 4th largest spender on armaments (US$50.7 billion) in the world.  But, according to the World Bank, India ranked 138th in terms of per capita income in the world in 2016. Afghanistan for all practical purposes is an occupied country by the USA and desperately poor, Pakistan  not yet a failed state,  but definitely one of the most dysfunctional  states on earth, Bangladesh, Nepal and Maldives  go through occasional spasms  of political unrest and violence.  Sri Lanka has just come out of a very prolonged internal armed strife and is still recovering from that shock. Bhutan appears to be the only country in the region that has maintained stability notwithstanding its special relationship with India. Its monarch is more pre-occupied with achieving increased gross domestic happiness for the people than increased gross domestic product.
The smaller states in the region are apprehensive of India's role and attitude towards them.  India's use of bullying tactics (e.g. blockade of Nepal) in conducting its bilateral relations   with these smaller countries also does not help to allay those apprehensions. But, on the other hand, a former secretary of the Indian Foreign Ministry in a recent newspaper article blamed its smaller neighbours of making India a victim of negative neighbourhood politics. He even suggested "Bhutan provides an excellent example'' how bilateral relations between its smaller neighbours can work in a mutually beneficial way.  Such comments  coming from a former member of the Indian foreign policy establishment in effect further reinforce apprehensive attitude of India's smaller neighbours'  towards  India.  No wonder, interstate conflicts continually simmer in one form or another and that seriously undermine efforts towards regional cooperation.
After its 37 years of existence, SAARC does not appear to be anywhere near achieving its objectives. The reasons are mainly two folds: firstly, member countries' political relations are strained by bilateral political disputes spilling over into the economic arena and secondly, member countries are at various stages of economic development. Both together create an unfavourable climate for regional cooperation whether it is economic or political.
It is generally argued that all regional trade agreements are basically political projects with a trade agenda attached to it. However, economists provide some theoretical framework to analyse regional trading arrangements - it is the theory of second best which stipulates that in a given situation when one or more optimality criteria cannot be satisfied, under certain conditions the second best option can be considered. Therefore, under certain conditions formation of a free trade area where tariff barriers are removed among member countries can be the second best option. Why do countries then opt for the second best when the first best option of free trade will offer much higher benefits? That is because regionalism in trade is essentially a politically motivated economic integration? Furthermore, any benefits that will arise from such an arrangement depend on if "trade creation'' outweigh "trade diversion''. If that happens then there is a case for making such an arrangement and will fulfil the criterion of the second best option. All regional free trading arrangements result in both trade creation and trade diversion.
Member countries of the SAFTA trade extra-regionally (mostly with the EU, North America and North East Asia) rather than intra-regionally    (South Asia). They compete with one another in overseas markets to sell similar or same products as they have similar factor endowments such as lower labour costs or products made out of domestically processed raw materials. These countries also have very low levels of complementary thus further adding to low levels of trade flows between them. They trade in inter-industry products (based on comparative advantage) and hardly any intra-industry products (based on product differentiation) which is largely the domain of developed industrialised countries.  Furthermore, trade integration still continues to be low due to very high levels of tariffs existing in member countries relative to the rest of the world.
Under those circumstances it is clearly evident that a fully operational SAFTA with no tariff barriers will generate very small trade flows and more importantly those trade flows will lead to more trade diversion than trade creation for an economy like Bangladesh. Therefore, Bangladesh should opt for the first best option of free trade. This will best safeguard Bangladesh's economic interests because only the WTO can make it non-discriminatory and can confer universality unencumbered by the geo-political tensions  that mark  political and economic relations in the South Asian sub-continent.
The writer is an independent economic and political analyst.
muhammad.mahmood47@gmail.com

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