The pros and cons of a Cepa with India: 'Bangladesh's private sector will have time to prepare for India FTA'

Bangladesh is starting formal negotiations with India for a Comprehensive Economic Partnership Agreement (Cepa). The negotiations are taking place at a time when Bangladesh is set to lose the duty-free and quota-free market-access facility to India after 2026 when it graduates to a developing country.

Dr Sanjay Kathuria, a former lead economist with the World Bank, in an interview with Adam Pitman, explained his view of political concerns that complicate trade in South Asia. 

Dr Sanjay Kathuria. Sketch: TBS

Bangladesh's private sector will have time to prepare for India FTA 

Many Bangladeshis are wary about the possibility of India-weighted economic agreements. Are agreements like India-Bangladesh Cepa worth the risk?

I certainly believe it's not just worth the risk, but it is important to take the plunge. And I really don't think it's a risk in the long run, and I will explain why.
At a macro-level, everybody is concerned about bilateral trade deficits – the bilateral trade deficit with India, for example, is high and growing. And underneath that, there's the fear that, 'I cannot compete.' But we know that Bangladesh is macro-economically stable. 

Bilateral trade deficits are political issues, but they are not economic [issues]. Bangladesh imports critical goods inputs for its garments industry, critical consumer goods, machinery, and then uses them for production and for exports. Critically, especially in these times, imports help keep prices in check. 

The concern should be on the overall current account deficit, rather than bilateral trade deficit. That means the deficit after accounting for remittances and other services exports, such as tourism. And there, Bangladesh doesn't really have an issue. In fact, lower income countries should be running some level of current account deficits so that they can, as they say, 'import savings from the rest of the world.' 

The bilateral deficit with India, while growing, hasn't led to any macro-economic situation, and there is stability on the balance of payments. So, one, don't worry about bilateral deficits in trade. 

The second thing is that trade and investment are very closely linked, and Bangladesh sorely needs high-quality investment in export-oriented sectors. 

If there is a free trade agreement between India and Bangladesh, as they are currently contemplating under the Cepa, Bangladesh's exports to India would go up 182% under an FTA, and if they add trade facilitation measures, and reduce transaction costs, then there could be an increase of 300%. 

Those statistics are from a paper [Unlocking Bangladesh-India Trade: Emerging Potential and the Way Forward] I did with Selim Raihan and Prabir De in 2012. 

A free trade agreement could increase Indian investment in Bangladesh – not only for re-exports to India, but even as a base for exports to the rest of the world. 

[That is] because Bangladesh is more competitive in some sectors, like garments, and that range of products can be expanded with reform and foreign investment. 

Can you spell out the link between trade agreements and investment more directly? 

The proposed Cepa goes beyond the liberalisation of merchandise trade. And there has been work by the World Bank which shows that deeper economic agreements spawn other economic linkages, especially when it comes to investment.

When governments show confidence in signing an agreement like the Cepa, it can energise the private sector. Businesspeople think 'this is a stable economic partnership – what can I do profitably?'  

The pros and cons of a Cepa with India

Bangladesh could leverage Indian expertise in service sectors to improve competitiveness across a range of manufacturing industries. Services are critical to overall competitiveness, including in manufacturing. 

Indian services firms could also invest in, and improve, Bangladesh's productivity in different sectors, like logistics, for example, as well as labour skills – I just saw that Bangladesh scores very poorly in the Global Talent Competitiveness Index, below Nepal, Sri Lanka, and Pakistan. 

And it wouldn't be just Indian investment in Bangladesh. There will also be Bangladeshi investment in India's Northeast, for example, to secure its own future for agricultural products. 

So, it will be a two-way street.

Also, if Bangladesh signs a free trade agreement with a big country like India, this can interest [businesspeople] from other countries as well. Businesses could use Bangladesh as a base to export to India, and even develop joint ventures with [Indian companies] in Bangladesh. 

So, I think there could be a lot of gainful investment, but more critically, this investment will help Bangladesh diversify, and become more competitive in sectors other than garments. 

How do you interpret ideas like 'India cannot be trusted,' or 'we're bound to lose,' when bilateral trade deals are under discussion? 

It is par for the course in South Asia. It's true in Sri Lanka, and Nepal, and in all smaller countries when they're faced with a larger country. It's fear induced by asymmetric size and capacity.

[But] larger countries – like India – take into account smaller countries' sensitivities in different ways: one, trade agreements are implemented over longer periods, giving [industries] time to adjust; two, liberalisation is asymmetric, so a smaller country gets an 'early harvest,' [which can create] political support for liberalisation; three, certain sectors which are very sensitive, say, because the number of people employed, may be kept out of the liberalisation altogether – such as parts of agriculture. 

India has already unilaterally liberalised trade with all the least developed countries of South Asia. Then there is the India-Sri Lanka Free Trade Agreement, which was another example of asymmetric liberalisation – India opened up much faster to Sri Lanka than vice versa. 

And I'm confident that is going to be the model for any future Cepa between India and Bangladesh. 

The most sensitive sectors for Bangladesh will be opened up at the end – 10 years down the line, or whenever they decide. That is normal when free trade agreements are designed between two partners of different capacities. So, there'll be enough time, provided there is intent, for the private sector to adjust and get ready for greater competition. 

And remember: there will be big winners along with losers. So, the challenge is managing the transition. 
New and expanding sectors should be supported by a facilitative policy that improves [access to] capital, labour mobility, and skill development. 

How have domestic politics in South Asia changed your work on regional trade and connectivity?

It has become clear to me that there are no quick wins in this scenario. But good things happen, and are happening, and that needs to be celebrated. 

My approach is: don't necessarily go with big reforms, but focus on incremental stuff, which is less likely to raise opposition. Be opportunistic when openings present themselves, then go for it. 

Keep going at it. Celebrate. Look for openings. 

Don't get disheartened by setbacks. Because that's par for the course. You know, one step forward two steps back, or two forward and one back. Really look hard for openings – and for dialogue. 

There are always opportunities, even in the most negative of circumstances. There are ways out. In fact, there are fresh opportunities today for South Asia – [even in] the bleak global scenario we find ourselves. Fresh opportunities, for example, [to develop] regional value chains [that take] advantage of the global [pursuit of] supply chain diversification. 

I am inherently optimistic, and will keep plugging away.