US-Bangladesh FTA talks begin, RMG may see major boost

Highlights:

• US agrees in principle to FTA with Bangladesh
• FTA aims to boost Bangladesh's garment exports to US
• Bangladesh faces higher US tariffs than competitors like Vietnam
• Eight-member committee drafting agreement within 15 days
• FTA would address tariff imbalance favoring US exports
• Progress on FTAs with other countries remains limited

In a potentially transformative development for bilateral trade, the United States has agreed in principle to pursue a Free Trade Agreement (FTA) with Bangladesh. Stakeholders anticipate that such an agreement would grant duty-free access to Bangladeshi exports, notably including its crucial readymade garments (RMG) sector, thereby providing a significant impetus to the nation's exports to the lucrative American market.

Confirming this significant step to The Business Standard (TBS), Commerce Secretary Mahbubur Rahman hailed it as "a major breakthrough for Bangladesh," adding, "The US has already requested a draft of the agreement to expedite the process."

Sources indicate that a Bangladeshi delegation engaged with officials from the United States Trade Representative (USTR) last month. The discussions centered on the potential withdrawal of additional tariffs previously imposed by the Trump administration. During these deliberations, Dhaka proposed the establishment of an FTA as a means to significantly enhance bilateral trade relations with the US.

"Bangladesh has proposed an FTA to the US on multiple occasions in the past; however, there was a lack of interest at that time. This time, they have agreed, and we are now actively preparing to commence negotiations," stated the Commerce Secretary. He further noted, "We have formed a dedicated committee to swiftly prepare a draft text of the agreement."

Demonstrating the urgency of the matter, the commerce ministry constituted an eight-member committee on 12 May tasked with drafting the proposed FTA. This committee, headed by the Additional Secretary (FTA) of the ministry, has been given a 15-day timeframe to produce the initial draft.

The United States, the world's largest economy, stands as Bangladesh's premier export destination, absorbing 17.09% of the nation's total exports and over 18% of its total garment exports. Commerce ministry data reveals that approximately 26% of Bangladesh's woven garments, 11.71% of its knitwear, and 16.12% of its home textiles find their way to the US market.

RMG industry leaders point out that Bangladesh's primary competitors in garment exports, such as Vietnam and India, have already proposed FTAs with the United States. Currently, Vietnam benefits from a significantly lower 7% duty on its garment exports to the US, while Bangladesh faces tariffs exceeding 15%.

An FTA with the United States would substantially bolster Bangladesh's competitive edge in readymade garment exports to the American market, according to former Bangladesh Garment Manufacturers and Exporters Association (BGMEA) president Anwar-ul Alam Chowdhury Parvez, speaking with TBS.

Commerce ministry sources further indicate a disparity in the current tariff structure, with Bangladeshi exports to the US facing an average 15% tariff, while imports from the US are taxed at a considerably lower 6.1%. Notably, key import items like raw cotton and scrap iron attract duties of 0% and 1%, respectively.

Prior to 2013, Bangladesh enjoyed duty-free access for 97% of its exports to the US, with the notable exception of ready-made garments, which continue to be subject to a 15.5% tariff.

Adding complexity to the situation, the US, during the latter part of the Trump administration, proposed an additional 37% reciprocal tariff on Bangladeshi goods. This proposal is currently suspended for three months at Dhaka's request.

Anwar-ul Alam Chowdhury Parvez, who also serves as the president of the Bangladesh Chamber of Industries, highlighted that Bangladesh imports essential commodities such as cotton, scrap metal, soybeans, and other agricultural products from the US, the majority of which enter the country either duty-free or with minimal tariffs. "Therefore," he asserted, "signing an FTA with the US would likely have a limited negative impact on Bangladesh's revenue collection."

Dr. Mostafa Abid Khan, a former member of the Bangladesh Trade and Tariff Commission, viewed the potential FTA positively. However, he cautioned TBS that to fully capitalise on its benefits, Bangladesh would need to make strides in improving intellectual property rights, labor standards, environmental regulations, and the overall business environment.

In the last fiscal year, Bangladesh's exports to the United States amounted to $7.60 billion. In the first ten months (July to April) of the current fiscal year, exports to the US have already reached $7.19 billion, constituting 17.87% of the total exports during that period. Conversely, Bangladesh imported goods worth Tk28,144 crore from the US in the last fiscal year, with imports in the first nine months of the current fiscal year totaling Tk22,168 crore.

Bangladesh seeks balanced trade deal

Commerce ministry officials disclosed that a stakeholder meeting, chaired by the commerce secretary, convened on 13th May. The agenda included discussions on potentially granting duty-free benefits to 100 US products as a measure to avert the proposed reciprocal tariff, alongside strategising the initiative and process for signing the FTA.

Participants at the meeting noted that under World Trade Organization (WTO) rules, extending Most Favored Nation (MFN) status with duty-free access to these 100 US products would automatically extend the same benefits to all other WTO member countries. Concerns were raised that if US goods lack competitiveness compared to products from other nations, Bangladesh's private sector imports from the US might not see a significant increase.

Consequently, a proposal emerged advocating for Bangladesh to negotiate an FTA. This would involve exchanging duty-free access for select US products in return for guaranteed duty-free benefits on a broader range of Bangladeshi exports, including the vital ready-made garment sector and other products.

Md Hafizur Rahman, administrator of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), who attended the meeting, suggested that until an FTA is finalised, the existing Trade and Investment Cooperation Framework Agreement (Ticfa) could be utilised to grant duty-free access to the 100 US products. "In return," he stated to TBS, "Bangladesh will request the US to reduce existing tariffs on Bangladeshi exports."

Limited progress in FTA negotiations beyond Japan

Despite concerted efforts to secure FTAs with various nations in anticipation of Bangladesh's graduation from Least Developed Country (LDC) status, progress has been limited, with the Economic Partnership Agreement (EPA) with Japan being the primary success. The fifth round of discussions with Japan concluded in Tokyo earlier this month.

Negotiations for a Preferential Trade Agreement (PTA) with Indonesia have stalled after the fourth round nearly a year ago, primarily due to a mutual reluctance to grant duty-free access for each other's garment industries. Similarly, talks with Sri Lanka collapsed at the final stage due to the same sticking point. Bangladesh has held a preliminary round of FTA discussions with Singapore.

Furthermore, since the change in government, neither Bangladesh nor India has shown enthusiasm for initiating negotiations on a Comprehensive Economic Partnership Agreement (Cepa). Talks with China, initially slated to commence last year, have also failed to materialise.

Following the transition of power, Bangladesh expressed interest in joining the China-led Regional Comprehensive Economic Partnership (RCEP) and ASEAN but has yet to receive a formal response. Meanwhile, the interim government has reportedly taken steps to initiate Cepa negotiations with the United Arab Emirates.