High tariffs on raw materials hinder export diversification in Bangladesh: Economist

Bangladesh's high tariffs on the import of raw materials are a major barrier to the diversification of its export baskets, economist Zaidi Sattar said at a seminar on Wednesday.

"Bangladesh's average nominal tariffs are currently higher than the average tariffs of low-income, middle-income, and high-income countries, as well as those of most competitors," said Zaidi Sattar, chairman of the Policy Research Institute of Bangladesh (PRI).

In a keynote presentation, he mentioned that Bangladesh's nominal tariff is 27.6%, whereas it is 22.4% in Sri Lanka, 18.1% in India, 9.7% in Thailand, 9.6% in Vietnam, 5.6% in Malaysia, and 8% in Indonesia.

The Bangladesh Institute of Development Studies (BIDS) organised the seminar titled "Tariff Protection and Export Diversification Are Not Mutually Exclusive: The Bangladesh Phenomenon" at its office in the capital.

Chaired by BIDS Director General Binayak Sen, Salehuddin Ahmed, former governor of the Bangladesh Bank, and Ferdaus Ara Begum, chief executive officer of the Business Initiative Leading Development (BUILD), among others, spoke at the event.

"Tariffs are now the principal instrument of protection, serving as an incentive for import-substitute production," Zaidi Sattar said, emphasising that high tariffs are a critical requirement for sustaining so-called infant industries without regard to their period of establishment or the efficiency implications of long-term protection.

He said almost all consumer goods produced domestically have the benefit of extremely high and differentiated levels of nominal and effective protection.

He said typically, nominal tariffs on outputs (mostly consumer goods) are significantly higher than tariffs on inputs; depending on how much value addition is generated by each firm or sector, effective rates of protection for most import substitutes could range from 100% to 400% or more.

Even anti-export bias policy is also one of the bottlenecks for export diversification, pointed out the economist.

According to him, Bangladesh exports 1,377 non-readymade garment products, with 174 products considered highly competitive, 408 items moderately competitive, and 795 items marginally competitive.

He said Bangladesh exports 346 non-RMG products, generating approximately $1 million in annual revenue, yet these sectors do not have access to bonded warehouse facilities.

"These products can play a significant role in enhancing export diversification if they are brought under bonded warehouse facilities," he noted.

He said products from the jute industry, the leather goods industry, and home textiles are highly competitive in the world market.

However, he said the National Tariff Policy 2023 opens doors for export diversification.

According to him, the focus of the policy will be on such import taxes as customs duty, regulatory duty, and supplementary duty, which are not "trade neutral".

But value-added tax (VAT), advance income tax, and advance VAT are considered trade neutral and are not under the purview of the tariff policy, he said.

However, the economist pointed out that export diversification, the increase in the share of various non-RMG exports in the export basket, has not gained traction despite two decades of policy focus on "thrust sectors", "high-priority sectors", and "special development sectors".

He said Bangladesh is adopting various policies and gearing up to address upcoming challenges as well as opportunities that will befall this rapidly developing economy leading up to and beyond the period of post-LDC graduation.

Of them, the tariff policy is clearly one of them focused on sustaining export expansion and diversification (products and markets), he said.

Zaidi Sattar said non-RMG exporters can now compete in the world market purely on the basis of labour cost advantages.

"This approach would immediately minimise the phenomenon of trade policy dualism that characterises our current trade policy - one policy for the RMG sector and another for the rest," he added.

Regarding non-RMG exports, the PRI chairman stated that the current incentive system makes sales in the domestic market far more lucrative than exporting, which demands substantial effort but yields low profit margins.

According to him, the tariff policy acknowledges that industrial protection is deeply rooted in Bangladesh's economic policy and practice.

Tariffs and para-tariffs are now the principal instrument of protection, which is the way to grant incentives to import substitute production, he added.

Salehuddin Ahmed, former governor of the Bangladesh Bank, stressed the need for cash incentives and other benefits, such as bonded warehouse facilities, to promote export diversification.

He said relying solely on the tariff policy will not be sufficient for the expansion of export diversification.

Ferdaus Ara Begum alleged that several sectors with the potential to contribute to export diversification do not have access to bonded warehouse facilities.

She suggested providing them with the facility rather than incentives