Bangladesh risks 20% export decline to EU due to EU-Vietnam FTA, LDC graduation

Key takeaways from keynote presentation 

• Bangladesh's upcoming LDC graduation may further slow export growth 
• The country to take a hit from post-LDC higher tariffs and Vietnam's diversified strategies  
• These factors could potentially reduce Bangladesh's GDP by 1%
• To mitigate post-LDC challenges, Bangladesh needs to negotiate reduced tariffs for 3-5 more years
• The country needs to pursue free trade and investment agreements to attract FDI

Bangladesh could face a potential 20% decline in exports to the European Union if it fails to implement timely and effective policies, especially in comparison to its close competitors, said experts and entrepreneurs at a discussion today (27 November).

Additionally, the country's upcoming graduation from Least Developed Country (LDC) status may further slow export growth, they said.

Research firm Research and Policy for Development (RAPID), with support from German organisation Friedrich Ebert Stiftung (FES), organised the event titled "The EU-Vietnam Free Trade Agreement: Implications for Bangladesh's Export Competitiveness".

In a keynote presentation, Abdur Razzaque, chairman of RAPID, said, "As a result of Bangladesh's transition from LDC status and the European Union's Free Trade Agreement with Vietnam, the country's exports to the EU are projected to decline by 20%."

He further said the combined effects of higher tariffs following LDC graduation and Vietnam's diversified trade strategies are expected to significantly impact Bangladesh. These factors could potentially reduce the country's gross domestic product (GDP) by 1%.

Currently, Bangladesh enjoys duty-free market access under the Generalised System of Preferences (GSP) facility. However, following its graduation from LDC status by 2026, this facility will expire.

To mitigate the challenges posed by the LDC transition, the RAPID chairman recommended several strategies, such as negotiating reduced tariff increases for 3-5 years post-LDC graduation and achieving eligibility for GSP+ benefits.

The other strategies are pursuing free trade and investment agreements to attract foreign direct investment and enhancing industrial competitiveness to strengthen Bangladesh's position in global markets.

The economist said if Bangladesh transitions to the Standard GSP scheme, its apparel exports will face an average tariff of 9.5%, leather goods 7% and processed food 5.8%, compared to the current zero-duty benefits.

"Even if Bangladesh qualifies for GSP+, the safeguard measures under the forthcoming EU GSP regime may render its clothing exports ineligible for any preferential treatment, subjecting them to the Most Favoured Nation (MFN) tariff of 12%," he added.

The RAPID chairman highlighted the fact that the EU-Vietnam Free Trade Agreement (EVFTA) presents a significant challenge to Bangladesh's export competitiveness in the European market.

Under the EVFTA, the EU immediately eliminated duties on 71% of its tariff lines, with the remaining tariffs set to reach zero by 2027. By 2023, Vietnam's exports to the 27-nation bloc had more than doubled those of Bangladesh, despite both countries starting with similar export values in 2002.

However, Bangladesh has maintained its lead over Vietnam in apparel exports, primarily due to its heavy reliance on the sector, whereas Vietnam's export portfolio is significantly more diversified.

Under the EVFTA, export duties on textiles, apparel and footwear will be phased out over 3-7 years, with tariffs on sensitive items being eliminated by 2027. Tariffs on non-processed shrimp will be removed immediately, while pangasius (catfish) tariffs will be gradually eliminated within three years, he added.

Agreeing with the RAPID chairman, Abu Sayed Belal, trade counsellor at the EU Delegation to Bangladesh, said, "Vietnam has adopted effective policies that go beyond just market preferential access. The country has implemented significant policy reforms to streamline processes, which have been instrumental in attracting higher levels of FDI."

He added that Bangladeshi exporters are content with their export performance, while local manufacturers benefit from a highly protected domestic market due to duty measures. However, this protectionism discourages innovation and risk-taking, undermining Bangladesh's competitiveness in the international market.

Belal's advice was that Bangladesh should prioritise regional connectivity and establish more trade agreements with its trading partners. To achieve this, the country's economic model must evolve beyond protectionism to embrace greater competition and innovation.

Fazlee Shamim Ehsan, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), said while Bangladesh's export growth may slow down, the total export volume is unlikely to decline.

He noted that labour shortages in China and Vietnam, coupled with workers' reluctance to view RMG jobs as prestigious, could shift orders to Bangladesh.

However, he emphasised that Bangladesh faces significant challenges in creating a business-friendly environment, citing issues with banking facilities, inconsistent gas and electricity supplies, and certain government policies that hinder growth.

Anowar Hossain, administrator at the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), raised similar concerns about the quality and reliability of power supply, which remains a significant challenge for exporters, particularly in the textile industry. Many manufacturers face inefficiencies due to persistent gas shortages.

He also criticised the National Board of Revenue (NBR) for not extending bonded warehouse facilities to furniture exporters, which restricts export diversification and limits growth opportunities in emerging sectors.

Masrur Reaz, chairman of Policy Exchange Bangladesh, highlighted the rapid changes in global regulations and consumer preferences, stressing that traditional business practices will no longer sustain growth.

He also noted that the ongoing trade war has created new business opportunities for Bangladesh, despite potential US policy shifts post-Biden administration.

The economist urged reforms and innovation to enhance global competitiveness, stating, "Apart from policy support, political and economic reforms are essential to increasing export competitiveness."

Ayesha Akhter, additional secretary of the Free Trade Agreement (FTA) branch at the commerce ministry, noted that the "best possible opportunity" to address the challenges of LDC graduation is to sign an FTA with the EU.

She added that the Bangladesh government is actively working on the matter and has assessed the feasibility of FTAs with 28 countries, including China, Japan and Indonesia. Multiple discussions have been held with potential trade partners.