Policy Rate Perks And Taxing Export

Policy rate has many solutions to offer, Tax export to fill govt coffer.

Latest inflation data reveals that inflation rose to 8.55% from 8.48% in July. Constant increase in rice prices,caused food inflation to rise to 9.56% in June , and rise in nonfood inflation from 9.37% to 9.38% maybe the reason for this hike. Rice price in particular increased by Tk 8/ kilo, prompting govt to allow private importers to import rice.

Meanwhile, keeping the policy rate at double digit is still being criticized though it brought down inflation from 11% to current level. The govt is apolitical and it has courage to do this thing before election. Otherwise, popular govt may have difficulties maintaining this kind of contractionary policy amid pressure from various groups. Before election, investors are reluctant to go for new investment and poor private sector credit growth tells all of it. So the timing is good and central bank is doing the right thing though many thought it was wrong.

As I highlighted before, keeping the policy rate high thwarted would-be launderers from taking loans and keeps Taka's value stable. Lowering the policy rate may make central bank's intervention in the foreign exchange market ineffective. With the high policy rate, depreciation pressure on Taka is low, so central bank's intervention in forex market will lead Taka keep a desired value. With low policy rate, depreciation pressure on Taka will be higher as the NPL keeps growing, so forex market intervention may not yield the desired result and wild fall of Taka maybe observed, worsening the passthrough effects of inflation and farther raising the cost of goods and services. Another thing I mentioned in one of my earlier posts is that higher policy rate is helping many ailing private and public institutions and it helps provident fund to grow,addressing the inflation. Otherwise, govt would have to intervene and provide cash to them through printing money or using the bloc grants. The balance sheets of many institutions say ,as the news reports revealed, they made profit through investment in treasury bonds. Again market mechanism addressing the prevailing maladies, when investment prospect and law & order situation is doomed at grassroot level. Recently, I encountered a news report on a public sugar mill[,located in Jhenidah,] bogged down with unsold sugar worth of TK 360 million as market price is lower than the govt set price. The mill is waiting with the sugar stock amid undue payments for the workers. If the provident fund's money is invested into treasury bonds, then by this time workers would take loan from provident fund and may not face financial hardship. They might sell the sugar in favorable time and clear the loans. Govt intervention would not need at all. Moreover, situation like workers [descending] on streets could be avoided.

The 20% tariff is not something to remain complacent. Back in February, no one would imagine such a situation might pop up. But it happened and seriously jolted the macroeconomic situation. We have to accept that WTO is dead and we live in post WTO world. We exactly do not know what will happen in the next two quarters. So there is no reason for being content with the 20% tariff. Rather, we should chalk out contingency plan how to avoid situation like this again.

It is indeed interesting that other countries are imposing [tax] on our exports and remittances while we are charging nothing. I argued several times if we would tax remittances and export(*see "Tax On Remittance: Good Or Bad?", published here on May 20,2025), govt coffer might fill with ample money to provide more private sector credit. 1% tax on remittances and export will bring Tk 4/5 billion revenue , discarding the need for imposing minimum tax on all the TIN holders. Revenue will be used to intervene in the forex market to depreciate Taka in a bid to give incentives and provide private sector credit to banks. There should be two way traffic of receiving incentives and giving tax.

It is indeed a good move to keep the policy rate same as it screens out would-be launderers, improves balance sheet of companies amid stagnant business, keeps the depreciation pressure low, checks cost of production and [reduces] need for govt intervention. 20% tariff does not herald a new dawn rather exposes challenges in a post WTO world where black swan events will be more frequent. We should start imposing tax on remittances and exports to cover the incentives. Preparing and bracing ourselves against the black swan event will prevent the need for Middle Eastern intervention for saving the day.

[*Update: this piece is updated on August 12,2025. The update includes reference to tax on remittance argument.]

Reshaping Global Trading System: What Lies Ahead

Trade restructuring starts with tariff debate, Leading to multiple systems as global trade's fate.

The Trump administration imposed 37% reciprocal tariffs on Bangladeshi exports to the USA. The imposed tariffs are much higher than its rivals to the US market. The disruptive action is not a deliberate but well planned move to reorder the global trading system. In 2024, the USA incurred a budget deficit of $1.83 trillion. In addition, the US gross debt to GDP reached 120%. And that is not all. The Tax Cuts and Jobs Act 2017 allows US citizens to enjoy reduced income tax rates till 2026. The Act also reduced corporate tax rate to 21.2%. Economist Stephen Miran, who is also the current chair of the Council of Economic Advisors, argues in his "A User's Guide To Restructuring The Global Trading System" ( a policy paper published by Hudson Bay Capital in November 2024) to continue tax rebate beyond 2026 the US economy requires $5 trillion every year. Deficits plus the extra money to sustain the policies means the money has to come from somewhere else. And the solution is to tariff the other countries. This,he thinks,is one of the tools to reshape the global trading order.

We can clearly see here the US runs huge budget deficits, yet USD remains overvalued decades after decades. Because the US dollar is beings used as reserve currency/asset in many other countries. Any devaluation of the US currency would result in loss of reserve asset in other countries.

But to make America great again, to bring back the manufacturing plants from other parts of the world to the USA and to make American goods more competitive ,you need to do something. At the heart of US - China trade dispute during Trump's first presidency is the undervalued Yuan. Appreciation of the Yuan will take away the competitive advantage of many manufacturing items and help relocating their plants in other parts of the world including the USA. Over the years, this perception of undervalued currency extended to currencies of other countries. Added to that the idea of America is forced to overvalue its currency to maintain ongoing order. So Miran came up with some tools in his paper,which he would like to describe as an essay to comprehend their consequences, to fix the issue and thereby help the Trump administration achieving "Make America Great Again". The other tool is the currency, which will be touched a little later.

The tariff drives up the domestic price of the tariffed good,a general perception. Miran argues it will not happen if the tariffed /exporting country depreciates its currency to the full magnitude of the tariff. That means if Bangladesh depreciates its currency by 37% then prices of its exportable items will not rise in the US market. Tariff is not inflationary in this case. And forex reserve will continue to grow for Bangladesh. Bangladesh Bank with its foreign currency will buy treasury assets. And individuals holding foreign currency will buy foreign goods. Think of China that has a closed capital market. The Chinese govt restricts investment abroad. So holders of foreign currency are forced to invest in less productive and risky domestic assets like real estate that accumulated huge bad debt. Miran argues continuing currency devaluation under capital controls will not sustain amid high tariffs. So there will be great capital flight from China. And it will force the Chinese central bank to raise interest rate , leading to appreciation of Chinese currency. The plus side of tariff war is that the US govt will get revenue without incurring the inflation. However, the US may lose revenue if the partner country does not depreciate the currency and an ensuing inflation may be expected.

The currency tool has two approaches: the multilateral approach and the unilateral approach. In the multilateral approach, the US sits with major trading partners and convince them to appreciate/strengthen their currencies and to depreciate/weaken the USD. This starts to happen when they start to sell USD from their forex reserve. The US starts to buy those dollars and issues new treasury security with duration of 100 years. In addition, the US sells those bonds to friendly countries who need security assistance in troubled waters and territories. By the way, the century bonds will replace the short and medium term bonds,easing the burden of the Fed to make huge interest payments and improving the budget deficits. Here the US projects the global security assistance as public good. And buying the century bond ,you are actually paying for that public good. In addition, holders of the century bond will enjoy favorable tariffs in the US market while the hostile partner will face a different kind of tariff. This multilateral currency approach has a precedent. In 1985, the US,France,UK,Germany and Japan met at the Plaza hotel and agreed to devalue the USD.

The unilateral approach reveals the leverages the US has to reshape the global trading system.It emerges when multilateral approach fails(many countries do not give consent to devalue dollar). One of the leverages is the International Emergency Economic Powers Act 1977 that allows the US president to halt and limit transfers of credit, payments or securities internationally. The US could hold part of the interest payments on treasury security in a bid to make USD unattractive for using it as reserve currency. This will lead countries to lower the size of their USD holdings, creating a depreciation pressure on USD.

Another leverage is the reserve accumulation,which means the US will buy other currencies in a bid to increase the demand of other currencies provided that the Fed prints and supplies the much needed USD.

So far the USA employed the tariff tool. The currency tool has not yet been applied yet. Stephen Miran's work is the guiding principle of Trump's fiscal policy. There is some kind of thinking behind this latest policy action.

Here are my observations:

1. The tariff tool tends to worsen the inflationary pressure in the partner country. The pass through effect(37%) of depreciation may become unmanageable. I hope the US and Bangladesh starts negotiating tariff terms soon and bring about a solution.
2. What about the European countries? They have a common currency. Yet they face different tariffs. How do they depreciate the Euro? Will the members agree and allow the European central bank to depreciate the Euro?
3. The formula used to calculate the tariffs does not take into account tariffs paid by the member countries. The formula ,which is criticized right and left ,is:

   Change in tariffs= (US exports to partner - US imports from partner) ÷ (Price elasticities of import demand × Import price elasticities with respect to tariffs × US imports from partner)

   According to Pew research center, Bangladesh paid 15.2% tariffs on its exports to the US in 2024, much higher than what the other countries in the South and South-East Asia paid(see "Bangladeshi Exporters Pay Highest Tariff In US Market", Textile Today,April 23,2018). It has been doing so more than a decade. This means Bangladesh pays more money to US govt than its rivals in exports. Yet this acknowledgment is not reflected in reciprocal tariffs. If the trade deficit is adjusted for the revenue paid by the partner country, the reciprocal tariffs become much lower. In 2024, Bangladesh exported $8 billion to the USA and imported $2 billion worth of goods and paid $1.216 billion as tariffs(15.2% of $8 billion export). Taking into account the tariffs already paid, the adjusted trade deficit becomes $4.784 billion and and the resulting reciprocal tariff is around 29%.
4. The reciprocal tariff formula used, it appears,tries to capture overvaluation/undervaluation of a partner currency through the trade surplus/ deficit. If partner country's currency is undervalued ,the trade deficit will be larger,so will be the reciprocal tariff. So a political consideration is being played out in this formulation of tariff. It is all about to redesign the trade rules,keeping certain countries out of the global trading system.
5. If currency tools come into effect, then Bangladesh may incur loss in forex reserve. To mitigate the loss, Bangladesh should immediately convert part of its forex reserve into gold. Say USD depreciates by 20% ,then we should buy gold with the 20% of forex reserve.
6. Following the Plaza Accord, the Yen appreciated and the Japan went into recession. If the Euro zone and the Japan go into recession again, our export will dip and we will face serious macroeconomic instability.
7. Threat perceptions and security concerns are different for different countries. Territorial encroachment appears to be bigger threat. In that light,former foe may become ally to defend my territory. This is particularly true for Europe. China has vast frontiers with the Russia. In case of any aggression to Europe, it can mobilize troops along the Russian border and defuse tensions between Russia and Europe. In that light the Chinese security assistance is more plausible for the Europe than the one provided by the USA. Intertwining trade and security concerns does not address the issue.
8. If trade and security concerns are intertwined, there will be many new trading systems, not just one. These regional blocs then draft rules to do trade among the blocs,abolishing the WTO or reinventing its roles in the world of multiple providers of global security.

Stephen Miran's work lays out the blueprint for the new trading system and subsequent action of Trump tells that the recent move is a political one. Trump administration wants renegotiation of trading terms among the partner countries. He wants to weaken the dollar, keep the tax rate low for the Americans, relocation of manufacturing plants of high-end products like semiconductor, automobiles in the USA , so that the US narrow down the trade deficits and remain a formidable power. I hope this tariff war will not last long, because impoverished world is not the result we want to see here. Bangladesh should brace itself for a world with multiple trading systems. For the moment, Bangladesh should also prepare itself for worst case scenario: the reciprocal tariffs stay for indefinite period. Many try to argue that our rivals will take advantage from the heightened tariffs. Harmonized system code for our export items will get us find our true rivals.Cambodia, Vietnam ,China and Pakistan appear to be our rivals in exports. Even if India manages some advantages from the ensuing tariffs,Bangladesh can offset the advantage by depreciating its currency. A 10% depreciation of Taka( difference between the tariffs faced by Bangladesh and India in the US) will bring the trade favor on our side. Our economy can sustain the effect of 10% depreciation of Taka at this moment or near future. One thing emerges clear as the sun is that Taka has to be depreciated in future.