Liberal trade could boost Bangladesh’s GDP by 14.8%: World Bank study

Infographic: TBS

Unilateral trade and investment liberalisation could boost Bangladesh's GDP, investment, and exports by 14.8%, 20%, and 63.2%, respectively, according to a World Bank study.

Such unilateral reforms will help Bangladesh reduce trade costs and access to cheaper and better-quality imported inputs to boost domestic firms' competitiveness and output, it says, pointing out that Bangladesh's trade competitiveness is eroding mainly due to lack of lower export base.

For greater market access for exports, Bangladesh needs to explore deeper and comprehensive trade integration within the region and beyond, suggests the report "Bangladesh- Country Economic Memorandum: Change of fabric," which was disclosed on the bank's website on Friday.

Its chapter 3 on "Boosting Bangladesh's Trade Competitiveness" studies the potential gains for Bangladesh from regional and multinational integration as well as trade reforms. 

The report, while calling for deeper bilateral integration with India and the European Union, estimates that the impact of a preferential trade agreement with India will be higher, with export gains more than double the benefits of an agreement with the European Union.

Bangladesh could also reap significant benefits from participating in regional integration with South Asian and Southeast Asian countries, with an estimated increase in GDP between 1.4% and 14.3%, it estimates.

Bangladesh's trade intensity is lower than predicted for countries at similar levels of per capita income and the country is missing out on gains from trade due to an inward-looking trade regime, it points out.

While tariff modernisation is an important step to support export diversification, an ambitious trade agenda that covers goods, services, and investment can boost the gains for Bangladesh.

Bangladesh's gains from a deep regional integration scenario are estimated to be more than 10 times higher compared with shallow regional integration relying on tariff cuts only, the study estimates in its designated chapter.

Given historical political tensions, the degree of regional integration in South Asia is very low compared with other world regions, it points out. Despite growth over the past 20 years, trade and investment linkages between Bangladesh and South Asia are still constrained by high tariffs and NTBs, and burdensome and costly customs procedures, it says, suggesting that Bangladesh can focus on strategies that go beyond South Asia and include countries in Southeast Asia and beyond as well as pursue free trade agreements.

"Bangladeshi policy makers may consider joining existing regional groupings such as ASEAN or the Regional Comprehensive Economic Partnership," reads the report.

Commenting on the study, Dr Zahid Hossain, former chief economist of the World Bank in Dhaka, said Bangladesh can benefit from regional connectivity and signing FTAs with South Asia and South-East Asian countries. But in that case, along with achieving progress in ease of doing business, initiatives should be taken to remove existing tariff and non-tariff barriers in various markets.

While speaking high of regional and multinational integration, the World Bank study also points to the possible downsides in some areas.

"Bangladesh has a lot to lose from missing out on intraregional Southeast Asia integration, with GDP gains cut to about a third and export gains at less than a fifth compared with the open regionalism scenario," it assesses.

Removal of tariff wall needed for an export boost

The lack of export diversification may be at least partly attributed to the country's protective trade regime.

The high level of protection, provided through high tariffs and complex and nontransparent para-tariffs, such as regulatory and supplementary duties, is a key reason for the static export basket, it identifies.

Bangladesh's average tariffs doubled from 14.7% without para-tariffs to 28.8% with para-tariffs in FY2021, incentivising industries to focus on the domestic market rather than exports, thus creating creating an anti-export bias, the study points out, suggesting that reduction in protective tariff rate by 3-5% every year in line with the Eighth Five Year Plan.

Average tariffs in Bangladesh are higher than its competitors. Average tariff rate on intermediate goods in Bangladesh is 18.8%, which is more than double the rate in China (7.4%) and almost double the rate in Thailand and Vietnam (9.6%) but closer to the rate in India (14.7%). 
Modernisation of tariff regime by moving toward low and uniform tariffs and adopting a single rate for similar goods, irrespective of origin, gradual elimination of para-tariffs and making the tariff structure consistent with that of an upper-middle-income country can end the "anti-export" bias and help diversify exports, the report suggests.

Benefit from US-China tariff war

Bangladesh could also benefit in the short term from trade diversion if the United States and China were to engage in sustained trade tensions and keep retaliatory tariffs in place.

"Even in the absence of any additional reform measures, GDP in Bangladesh is estimated to increase by 0.4 percent," says the report.

Assuming that Bangladesh can capitalise on the opportunities provided by US-China trade diversion and expand exports to respond to these new sources of demand in the United States and China, exports could expand by 0.7%, it estimates.

Dr MA Razzaque, research director of Policy Research Institute, told The Business Standard that Bangladesh has already begun to enjoy some of the benefits of the US-China tariff conflict. The high growth in Bangladesh's garment exports to the US market over the past few months has been made possible due to the US-China conflict.

He said that China's share of the US RMG market is still about 25% which will decrease further in the coming days.

"For Bangladesh to export a portion of that, emphasis should be placed on man-made fibre, because a major part of China's RMG export is man-made fibre," he said.

MA Razzaque said, due to the dollar crisis, the exchange rate has been left to the market, so there has been a major reform in terms of export competition.

"The export sector is getting its benefits. However, Bangladesh's export capacity will not increase unless customs, ports, trade facilities, cargo handling and internal transport systems are modernised. The bottom line is both business costs and time need to be reduced," he said.