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The Financial Express

Will graduation cut into exports?

Wasi Ahmed | Published: January 03, 2017 20:59:44 | Updated: October 24, 2017 00:39:26


Will graduation cut into exports?

Despite miles to go, there is no arguing that graduation from the LDC category to a relatively dignified developing country status is a reality fraught with disadvantages that Bangladesh should be well-prepared for.
The country's economy, for decades, has thrived from benefits, concessional loans and trade preferences as an LDC. So quitting the group obviously implies its 'ineligibility' to access those benefits. Although lowering of tariffs and regional and bilateral trade agreements have already dented the benefits to a certain extent, Bangladesh's foreign trade till today is the highest beneficiary of the preferential scheme -- generalised system of preferences (GSP).
Preparedness is thus crucial given the apparent, albeit inevitable disadvantages. The economy has to grow more robust with accompanying factors, and in order for that to happen, the governance culture has to undergo a change of heart though the countrymen are yet to experience the slightest trace of it. Equally important is the need for dynamism in the economy, a momentum in productivity, investment and job creation - to name a few of the vital areas.
The country's prominent think-tank Centre for Policy Dialogue (CPD) warns that once graduated from LDC category to the developing country club, Bangladesh will have to seriously grapple with certain undesirable realities such as fall in exports, among others. The country's exports will fall between 5.5 per cent and 7.0 per cent if it loses duty-free market access upon its graduation from the grouping of the least-developed countries, says the CPD at a press briefing while launching the UNCTAD's LDC Report-2016. Again, according to the CPD analysis, exports will fall by 6.5 per cent to 7.0 per cent if Bangladesh graduates from the LDC category and loses duty benefits while other LDC nations retain their existing preferential treatment.
Although a country is provided with a breathing time of three years upon graduation to continue with the preferential treatment it received as an LDC, it is true that the shock of higher duties in accessing the already prevailing markets due to lack of preferential access may be daunting. That means, if Bangladesh hopefully graduates in 2024 shedding its LDC identity, it will still retain all the privileges it enjoys under the current arrangement until 2027 to facilitate a smooth transition.
Now, how prophetic should one take the forecast of export slump? There is indeed strong logic behind arguing that preference erosion will be a stumbling block for Bangladesh's export. This is particularly so in export of the readymade garment (RMG) to the EU countries-the largest export destination, where it is the preferential treatment under EU GSP scheme that largely accounts for the competitive edge of our RMG products over formidable rivals like Turkey, India, Pakistan and Vietnam. RMG being the highest export earner -- to the proportion of around 80 per cent of the country's total exports - a shock due to preference erosion is likely to reflect adversely on the overall exports.
There are, however, quarters in the country, including the government and a segment of the exporters that tend to be too optimistic not to heed to such a forecast. Such optimism may be traced to a scenario following the scrapping of the Multi-fibre Arrangement (MFA) little over a decade ago when despite the abolition of textile quota, Bangladesh was able to maintain its unwavering growth in RMG exports, although many researchers had foretold a calamity for the country's RMG sector in the post-MFA stage.
True, the country did well, more than anyone had anticipated. But the reality that must not be forgotten is that although quota abolition had placed the country on an equal footing with other competitors in terms of unrestrained access to major markets - the EU and the USA, the key stimulus for Bangladesh was the EU GSP that largely made up for competition from the rivals, most of whom were ineligible for the preferential scheme. So, while thriving of our export sector, especially of the RMG, was initially prompted by MFA quota that debarred most traditional garment exporters to go beyond a certain limit in exporting -- usually far below their capacities, it was the preferential duty treatment that sustained the momentum subsequent to the abolition of quota. The scenario in the post-graduation stage does not offer any such stimulus.
Beside the loss of access to preferential treatment, loss of access to Special and Differential (SDT) provisions of the World Trade Organisation (WTO) for a graduating country can also limit policy space and flexibility and give rise to unaffordable adjustment costs. The WTO TRIPS Agreement is possibly the most significant case of potential graduation cost arising from loss of eligibility for SDT provisions. In case of Bangladesh, for example, the longer implementation period for the pharmaceuticals sector has provided the policy space and legal certainty needed to foster the development of the pharmaceutical industry. The loss of eligibility for the extended implementation period under the TRIPS Agreement also gives rise to substantial additional financial costs and administrative burdens to establish domestic legal and institutional intellectual property frameworks consistent with the TRIPS Agreement.
So, once the transition phase of three years after graduation is over, it's a ruthless battleground open to all. The CPD, understandably, has done its homework before making the forecast taking into account market-specific behaviour of various factors including presence or absence of duty preference and the way they influence market access.
In fact, there is no justifiable argument to attest to an unscathed export sector if the country succeeds in quitting the LDC league, as projected. It is thus all about how the country prepares to face the reality, and fights it out.
wasiahmed.bd@gmail.com

 

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