Need For More FTAs

Tariff debate also risks new export market, FTA appears to be a solution perfect.

Bangladesh and the USA have started final round of negotiations to ink a deal on tariff. Reciprocal tariff on Bangladeshi items have already declined to 20% from 35%. There is room for further reduction. I think it will be within 10% and 15% range. If further tariff reduction really happens, Bangladesh may get a significant share of US apparel market.

Bangladesh has already increased cotton and LNG import from the USA. Previous year Bangladesh imported $600 million worth of US cotton. This year that cotton import [from the USA] has reached more than $200 million in two months and we still have 10 months to go. But the EU market ,where half of our apparel export goes, is offering a tough competition. All the exemption of duties will be gone if Bangladesh is graduated from the LDC countries. In addition, the UK and India signed Free Trade Agreement (FTA), which is heralding boost in Indian export and investment in the UK. In this backdrop, both export earnings and remittances may shrink. There is more! As US dollar becomes weaker and the Euro getting appreciated , the total export of the Eurozone may shrink, casting shadow over their apparel import from Bangladesh.

Bangladesh's emerging apparel export market may bring bad news too. Bangladesh's apparel export to Russia has crossed $1 billion mark long ago. Russian apparel market is estimated to be $32 billion. India's growing ties with the Russia says the country may get a big chunk of this Russian apparel market, mitigating the loss of US export market resulting from the US punitive tariff. Furthermore, India has access to cheap Russian oil. And its processed petroleum export to the Netherlands and the UAE almost doubled in one year. Cheap Russian oil and weakened Rupee(which registers fall in recent weeks) mean its export items will be more competitive in years down the line. Relationship between China and India thawed recently. It may further boost bilateral trade between the two countries. In addition, diplomatic relationship between Canada and India resumed. Canada is a major destination of Bangladeshi apparel export. China's weak consumer spending,fall in industrial production and troubled real estate market mean Bangladesh's export to China may not see dramatic improvement in the next one or two year. So latest development indicates that there may be significant market share gain to the US market but there are serious challenges in Bangladesh's traditional destinations like UK and Canada and emerging destinations like Russia and China.

Another challenge lies in revenue generation. The main theme of this tariff debate is about narrowing down the trade deficit/surplus. In doing so, Bangladesh has to lower tariff so that more American goods & services enter the country. Previously Bangladesh got huge import duty [revenue] from LNG ,Soybean, cotton etc. As these items are coming from the USA in large amount, there is a loss in tariff revenue. If it is not compensated from other sources,then this loss in tariff revenue will stay and complicate the budget deficit. Two quick solutions are to impose tax on remittances and export and to depreciate Taka even more. Both are likely to augment tariff revenue. NBR can also aim 500000 shops scattered across the country. Most of them lack proper documentation of transaction and very frequently ownership of these shops gets changed,contributing nothing to govt coffer. NBR remains in the dark about the volume of transaction and owners of these shops. Similarly, a large sum of money originated from Dhaka's footpath/mobile vendors [falls into hands of vested quarters every year]. A study put the figure between Tk 15 -20 billion. Often it falls into wrong hands. I argued here several times that if NBR mops up part of the money by issuing special [tax] certificates worth Tk 500/1000 for 6 months/1 year then it will give them some sort of legitimacy and ensure that part of the money collected from them enters govt coffer.

But these are tiny drops to fill the growing budget deficits. We have to wait to see whether gains of reciprocal tariffs outweigh the losses. Best approach is to go for Free Trade Agreement with some major trading partners. Indonesia is a trillion dollar economy. We have almost finalized a preferential trade agreement (PTA) with them. We have to revive it. Similarly if we have FTA with Thailand, Malaysia, Brunei,Myanmar,Sri Lanka and Bhutan in the neighborhood ,then we will get cheap coal, palm oil,rice,aluminum, locomotive, oil, tea from these countries .It will keep the inflation low at one hand , and on the other our apparel,light engineering and agro products export will augment manifolds. To consolidate our apparel export, we need to ink FTA with South Korea,UK, Canada,Japan,Brazil and Australia. This will increase our export market share,remittances and FDI. In post WTO world where multiple trading systems and blocs [are becoming a reality], it seems more and more FTAs could secure export and FDI.