The policy of trade liberalization and free-market economy in the 1980s has created both challenges and opportunities for Bangladesh economy. The creation of the World Trade Organization has created new ways of enjoying the comparative advantage for Bangladesh. At the same time, the globalize trade scenario has opened up the structural limitations of Bangladesh economy, which needs immediate attention through the formulation of appropriate policy and actions. Bangladesh continues to suffer from a low-growth, high-poverty syndrome. However, Bangladesh has a large labor force willing to work for low wages resulting in a very competitive position for labor-intensive manufacturing exports. It has a large number of entrepreneurial businessmen who are able to develop and run small and medium scale enterprises.
It has a sufficient amount of natural gas reserves which can potentially provide low-cost energy for a downstream industrial structure. With amicable and mutually beneficial regional cooperation, Bangladesh can be an ideal location for huge foreign direct investments, which can serve as a huge market for goods and services in the South Asia. The growth potential of Bangladesh is, however, limited by a high population density and limited availability of land, which results in a continuing pressure on food supply. The low-income level makes it difficult for households to save, thus constraining the domestic development efforts. The education and health levels are low, resulting in a labor force lacking the skills needed for a modern economy. In addition, the traditions of central control of the economy and the awkwardness of government policy continue to work as a deterrent against private sector investment.
Within this global and regional trade scenario, this paper attempts to provide a synopsis of Bangladesh trade with the South Asian Association for Regional Cooperation (SAARC) countries and of its policies regarding bilateral and global trade. The common structure of the economies and the same intensive price competitiveness could lead to a great deal of formal trade between Bangladesh and the SAARC countries, but this potential is yet to be realized. Bangladesh suffers from a huge trade deficit with India. This paper will lay special emphasis on the trade relations with India and the proposed South Asian Growth Quadrangle consisting of seven north-eastern states of India, Bangladesh, Nepal and Bhutan. This paper will also examine the impact of GDP and of the exchange rate and its variability on the export and import growth of Bangladesh.
This study will also examine the trade policies of Bangladesh with special reference to both nominal and effective tariff levels, and non-tariff barriers that hinder the growth of Bangladesh global trade with its neighboring countries. Intra-SAARC trade is very negligible. This study will estimate a gravity model of international trade to examine whether intra-SAARC trade is lower or higher than what is predicated by the economic model. The results of this model will help us understand the possibilities of trade creation and diversion effects resulting from the South Asian Preferential Trading Arrangements (SAPTA) among SAARC member countries.
Gravity models of international trade estimate the trade flow as a function of variables that directly or indirectly affect the determinants of normal trade flow. The typical gravity model specification relates bilateral trade to income, population (or per capita income) and distance between the trading partners. If one finds a positive coefficient on the dummy variable indicating that two countries, both of which participate in the same preferential arrangement, trade more with one another than predicted by their incomes and distance, then the conclusion drawn is that the arrangement is trade-creating for its members. This paper will review the tariff concessions agreed upon by the SAARC member countries.
As it would appear, a significant part of the literature on the state of bilateral and regional economic and trade cooperation in South Asia deals with factors contributing to weak state of integration in the region. According to Sawhney and Kumar (2008), the underlying reasons originate from a combination of political, economic and institutional factors. A large segment of relevant literature deals with identifying opportunities that could emerge from closer cooperation among countries in the region.
Three strands of discourse are commonly discernible in this context: firstly, identification of challenges and opportunities of cooperation through regional and bilateral trade and other agreements with participation of SAARC member countries; secondly, quantitative assessments of economic gains, welfare losses which could potentially originate from such cooperation; and thirdly, evidence‐based assessments of trade potentialities at sect oral levels. Along with analysis at the regional level, some part of the literature has explored the relevant issues at the bilateral level. A number of studies have attempted to assess whether a bilateral route is more preferable to a regional one in advancing the level of trade and economic cooperation in the context of South Asia.
In recent times, increasing attention is being given to the state of bilateral economic cooperation between Bangladesh and India. One nagging limitation in this connection has been the lack of adequate data on informal trade which has tended to constrain the scope of analysis pertaining to bilateral and regional trade in South Asia.9 Only a few studies have attempted to capture this important aspect of trade in the region (Bakht 1996; World Bank 2006). In a feasibility study on the prospects of bilateral FTA between Bangladesh and India, Bhuyan and Ray (2006) conclude that such agreement between the two countries would bring about substantial benefits to both partners. I
n contrast to the multilateral arrangements, bilateral FTAs could be fast‐tracked and would offer additional preferential treatment to the partner countries. Based on a review of bilateral FTAs, they conclude that this mode of trading arrangement has shown a better record of success in expanding trade between countries, and stimulates investment compared to regional or sub‐regional integration schemes. De and Bhattacharyay (2007) argue that a bilateral FTA with India would enable Bangladesh to strengthen her foothold in the Indian market.
In view of the NTBs that severely limit the opportunities of bilateral trade between these countries, the study suggests that an FTA with India would be the best way to address the issue of NTBs. Some of the other studies have put more emphasis on the regional route. Among those, Sawhney and Kumar (2008) hold that implementation of the regional free trade agreement (e.g. SAFTA) would result in positive outcomes
for all member countries. The authors also conclude that regional cooperation through FTAs such as SAFTA could lead to higher volume of trade in goods and services through allocative efficiency and enhanced production capacity.
Rahman (2001) identifies a number of issues which would need urgent attention if Bangladesh-India bilateral economic relation is to gain momentum including multilateralism versus bilateralism, sectoral versus comprehensive approach, duty‐free market access, rules of origin (RoO), removal of NTBs and the need for policy coordination to stimulate investment. A number of studies have argued in favour of taking a holistic approach embracing cooperation in areas of trade, investment, transport and infrastructure in order to realise the potential opportunities of bilateral economic cooperation involving SAARC member countries (CPD 2004).
However, in articulating a contrasting view, Baysan et al. (2006) argue that the SAFTA makes sense only in the context of a much broader strategy of creating a larger preferential trade area in the region that would need to encompass China and also members of the Association of Southeast Asian Nations (ASEAN). Assuming that the SAFTA agreement was there to stay, the authors recommend a number of steps towards promotion of intra‐regional trade in a manner that minimizes likely trade diversion costs and maximizes potential benefits. In this context, some studies have highlighted the positive impact in terms of growth and poverty reduction through regional cooperation by citing other RTAs such as South East Asian and European regional entries (Sawhney and Kumar 2008).
In recent times, a number of studies have tried to quantify the potential benefits arising from cooperation among SAARC countries, both at regional and bilateral levels. A number of studies have tried to estimate the degree of market access under the preferential treatment. Mukherji (2000) estimates that the annual value of all imports that entered the SAARC member countries under SAPTA preferences amounted to approximately USD 480 million at the end of the 1990s.
According to his estimates, the share of intra-regional imports covered by the SAPTA preferences was the highest for Pakistan (39.6 per cent), followed by Nepal (35.2 per cent), India (30 per cent), Bhutan (17 per cent) and Sri Lanka (12 per cent). In contrast the import value coverage of Bangladesh and Maldives was relatively low. Based on import data for FY1997-98, highest revenue loss was sustained by India (USD 2.45 million), whereas that of Bangladesh was relatively modest (USD 0.02 million)
In a more recent study undertaken to evaluate the performance of SAPTA that also explored the prospects of the then proposed SAFTA, Hirantha (2004) applied the well- known gravity model to estimate potential benefits of an FTA in South Asia.11 The study finds that there will be substantial trade creation in the region under SAPTA with no significant trade diversion impact. The estimated results for 2002 showed that bilateral trade between any two pairs of SAARC member countries would be about 10.5 times higher under the SAPTA compared to two otherwise similar countries in absence of an RTA.
Moreover, according to estimated coefficients, not only would intra‐regional trade be enhanced, but this would also lead to increased bilateral trade with non‐members. This result contradicted earlier study of (Hassan 2001) which indicated that lowering of trade among SAARC countries would not result in substantial benefits and would lead result in reduced trade with non‐members.12 Rahman et al. (2006) supported the earlier findings of Hirantha (2004) and argued that there would be significant intra-bloc export creation as a result of SAPTA; though there would be net export diversion.13 However, results of this study showed that Bangladesh, India and Pakistan were expected to gain by joining the RTA, while Nepal, Maldives and Sri Lanka would be negatively affected.
Given the fact of Bangladesh’s export opportunities in India, a number of studies have tried to identify potential market opportunities for Bangladeshi sectors/products particularly in the Indian market. Based on analysis of secondary data and stakeholders’ perception, Bhuyan and Ray (2006) identify a set of potential exportable products from Bangladesh that could enjoy export potential in the Indian market. These were fish products (including shrimp), leather goods, cement, light engineering items, jute products, pharmaceutical products, ceramic products and processed agro‐products.
The authors recommended that an FTA with India would enable Bangladeshi producers and exporters to have access to the much needed raw materials and semi-finished products at competitive price. In yet another study, applying a computable general equilibrium (CGE) framework, Siriwardana and Yang (2007) estimate that a number of Bangladeshi items, including beverages and tobacco, fabricated metal products, textile and leather, petroleum and other minerals, food manufactures, and vegetables and fruits sector, will gain substantially in the Indian market both in the short‐run as well as long‐run, if import duties are abolished by India.
In a recent study, the World Bank (2006), however, finds that the prospect for trade between Bangladesh and India, through a bilateral FTA, to be rather limited. Analysis undertaken for a number of items including cement, light bulbs, bicycle rickshaw tyres and sugar indicate that if a bilateral FTA is signed with India it will be India which would be able to expand her exports to Bangladesh; Bangladesh’s export potential in the Indian market is rather limited. The study points out the reasons being (a) faster productivity growth in India bolstering India’s comparative advantage in competing goods, and/or (b) tariff and NTBs constraining Bangladesh’s major exports (RMG) as well as minor exports which have experienced rapid growth in other markets.
The study argues that in a situation where an Indian supplier gets advantage of captive protected market under the bilateral FTA with Bangladesh, there was likelihood of collusion amongst Indian producers or between them and Bangladeshi importers which would reduce some of the welfare gains. According to this study, Bangladesh’s interests would be better served through multilateral liberalization. In similar vein, Bandara and Yu (2003) also conclude that SAFTA would lead to a marginal 0.21 per cent gain in real income for India, 0.03 per cent gain for Sri Lanka, 0.10 per cent loss for Bangladesh, while the rest of South Asia would gain 0.08 per cent in terms of real income.
More recently, Raihan (2008) used the WITS/SMART model and carried out simulation exercise in view of various scenarios under the SAFTA accord (removal of intra‐regional tariff for all countries). The study makes an attempt to quantify export potentials of Bangladesh in the Indian market. The modeling exercise identifies export items of Bangladesh at disaggregated HS 6 digit level which were likely to expand in the Indian market under the SAFTA. The study finds that under the SAFTA Bangladesh’s exports to Indian market would rise by only about USD 78 million. Top 30 products (at the 6 digit HS code), together, account for 83 per cent of the increase in Bangladesh’s export earnings (USD 64.9 million).
A review of literature indicates that the majority of studies have tended to focus on tariff barriers and the impact of removal of duties on regional and bilateral trade. However, the presence of large number of NTBs was also recognised as a major constraint in these and other studies. Rahman (2010) identifies salient features of the NTBs prevailing in South Asian trade, and examined cross‐country experiences in addressing the NTBs. The study also documented how the NTBs are being addressed within the SAFTA architecture. Particularly, an in‐depth look at NTB‐related issues has become even more necessary in view of the recent debates, and the modalities that are being put in place to address those. An important recent study by Razzaque (2010), which combines qualitative analysis with three different types of quantitative analyses (gravity model, CGE model and GTAP) argues that the weaker economies in the SAARC region are expected to lose significantly from the SAFTA agreement, at least in its current form.
The study shows that the losses for the weaker economies, particularly for Bangladesh and Nepal, arise from increased imports from regional partners, nominal increase in exports within the region and loss of tariff revenue. Results of estimation carried out in this study based on WITS/SMART simulation, are similar to that of Bandra and Yu (2003), and shows that SAFTA will lead to an increase in Bangladesh imports from the region of about USD 400 million compared to rise in regional exports of only about USD 33 million. Results of the study also show that only India stands to experience regional export gains that would be higher than imports from regional sources.
The gravity simulation results suggest that SAFTA would influence regional trade flows mainly by increasing India’s exports, and Bangladesh and Nepal’s imports. For every USD 100 worth of new export trade almost USD 78 would accrue to India, whereas share of Bangladesh, Maldives and Bhutan would be insignificant. The authors recommend that LDC members of the SAFTA should continue with their respective policy reforms, and will need to address supply-side bottlenecks in order to benefit from the increasingly larger regional market.
In another study, Raihan and Razzaque (2007) ran two different simulations using the GTAP model and database. In the first scenario, the authors depict a case in which all member countries eliminate their intra-regional tariffs but retain their respective tariffs with the rest of the world intact. In the second scenario, in addition to SAFTA tariff cuts, the authors let Bangladesh slash its tariffs against the rest of the world by 50 per cent. Comparisons of the various scenarios give an opportunity to examine trade diversion effects when determining the overall welfare effects for Bangladesh. The results show that full tariff liberalisation under SAFTA alone would lead to a net welfare loss of USD 184 million for Bangladesh India, Sri Lanka, and the rest of South Asia in this scenario register welfare gains, as trade creation effects dominate trade diversion effects.
However, when Bangladesh undertakes MFN (most favoured nation) tariff cuts by 50 per cent along with the full tariff liberalisation for SAFTA members, it stands to gain by USD 84.1 million. In the latter exercise, the positive welfare gains of other countries were maintained. ADB and UNCTAD (2008) finds that the welfare gains, based on CGE analysis, for Bangladesh are likely to be one of the highest. According to the study, export gains for Bangladesh in SAFTA market under the phase‐I of liberalisation (2008-09) would be significant (38.08 per cent to South Asia), but not as high as the peak export growth to SAFTA seen by other countries. The study further contends that Bangladesh will be able to increase her global exports by about 4.3 per cent by 2016 on account of SAFTA. A number of authors have highlighted the importance of better regional connectivity to foster and promote intra-regional trade and deepen economic cooperation among the regional countries.
Rahmatullah (2010) points out in this connection that due to lack of integration of the transport system in South Asia, logistics costs are very high and ranges between 13‐14 per cent of GDP, compared to 8 per cent in the US. Whilst many studies have focused on aggregate level gains and losses originating from regional cooperation among SAARC countries, those focusing on identifying potential opportunities of bilateral trade between Bangladesh and India, at a disaggregated level, as was pointed out above are few. Additionally, in view of the rapid changes in the structure of bilateral trade in recent times, a closer look at the relevant issues has become even more urgent. Since the sensitive lists have emerged as a major area of concern, an in‐depth look at the Indian sensitive list, from the Bangladesh perspective, is also called for in order to identify the fall opportunities of market access by Bangladesh in the Indian market.
The issue of signing bilateral FTA as a more comprehensive and speedier tool of enhancing trade among SAARC countries has been highlighted by a number of authors. de Mel (2010) points out in this connection that negative lists of India, Pakistan and Sri Lanka are substantially larger than those in the respective bilateral trade agreements. Echoing this, Weerakoon (2010) observes that SAFTA has already been overtaken by bilateral process in many instances, and would appear to be in danger of being further upstaged by bilateral and other regional initiatives.
A review of literature thus, in general indicates that under the existing scenarios the potential benefits originating from regional trade cooperation among the SAARC countries would not be substantial. Bangladesh’s gains also appear to be inconsequential. The idea of bilateral FTA has been examined by some, but here also the positive impact in terms of additional trade flows is rather limit. However, one common limitation of most of these studies had been that these are based on static analysis. One way of addressing this is to examine and analyse the data with regard to the dynamics of trade, its composition and putting under scrutiny factors contributing to and factors constraining the trade flows.