The pros and cons of a Cepa with India: ‘The deal is worth the risk’

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 Selim Raihan, who led a feasibility study of the deal, on the other hand, spoke to The Business Standard about how both Bangladesh and India can gain from Cepa.

What are your thoughts on a Cepa deal with India? How important is this deal?

India is one of our largest trading partners; in fact, it is our second largest source. At the same time, various studies, including my own, have shown that whatever we export to India now, we can export more. The potential is largely untapped.

We also need to remember that in our current trade arrangement, India offers Bangladesh duty-free export facilities on almost all products except for alcoholic products and firearms. But regarding imports, Bangladesh charges reduced tariffs for some products due to Safta, but for other products, Bangladesh charges MFA tariffs.

In this context, an FTA between the two countries is needed. 

There are three major pillars of Cepa:

• Signing an FTA when it comes to goods.
• Liberalisation in service trade.
• Promotion of bilateral investment.

I actually led the joint feasibility study. In the study, Bangladesh Foreign Trade Institute represented Bangladesh, while the Centre for Regional Trade represented India. If we can include services in a trade deal with India, this should include many things like connectivity, health, education, tourism, port-access etc.

What should we focus on to get the most out of the deal? Can it help reduce the trade deficit?

Bangladesh has a trade deficit with India. While Bangladesh has the largest bilateral trade deficit with China, the trade deficit with India is more talked about. It is perhaps because of the political climate of the Indian subcontinent. On the other side, Bangladesh is generating a trade surplus with two major export destinations, North America and the European Union.

We shouldn't be concerned about the bilateral trade deficit as long as we can compensate by having a trade surplus with some other countries. Bangladesh has been able to do so.

The raw material and capital machinery that Bangladesh imports from China and India is used in our export-oriented and domestic industries. Then Bangladesh is making that export to North America, where Bangladesh has a huge trade surplus.

But if we want to decrease the trade deficit with India, investment is one of the important tools. If we get substantial investment from India and can use that investment to produce goods and in turn export to India and the rest of the world, it will increase our trade integration with India and help close the trade gap.

Our joint study suggests how India and Bangladesh can gain from Cepa. We need working groups to negotiate trade and goods, services and investments. These working groups will involve ministries and other stakeholders.

People are wary about the possibility of India-weighted economic agreements. How probable is that? Will we benefit from this deal?

From this deal, both countries will benefit. If they don't, they will say they are not interested. For a deal like Cepa to materialise, the partners must be convinced that something is to be gained.

Being a larger country, India has more advantages. In some respect, India already has the upper hand. India's export capacity is ample. And regarding investment, Indian investors can be found all over the world.

When it comes to Bangladesh, we need to focus on three things. The first thing is about trading goods. Bangladesh already gets a duty free facility from India; Bangladesh will have to give the same facility to India. So Bangladesh and India will be on the same level concerning tariffs. But there is a considerable trade deficit, and we have a limited number of products we can export. So we need to be careful about this fact.

Secondly, some sectors might be afraid that Indian products will take over the market. In such FTA agreements, some products are kept out of the agreement. Bangladesh must pick which products it wants to keep out of the deal. We need to do the proper homework. We must be cautious about choosing which products to keep out of FTAs.

Thirdly, there is a valid concern that Bangladesh will face non-tariff barriers while exporting to India. For example, different types of procedural obstacles. These barriers have discouraged business people from exporting to India. Issues like high transition and freight costs need to be addressed. Otherwise, even after FTA, things would remain the same.

There are some risks in any FTA deal; it's not just about India. But yes, this deal is worth the risk. Bangladesh should also start talking with the EU about FTA. Because after 2029, three years after LDC graduation, instead of GSP, we will have to go for GSP+, which has a lot of conditions.

Is the deal political as much as it is economical?

India is the closest neighbour to Bangladesh. We are surrounded on three sides by India, and you can not change your neighbour.

The challenges we have with India are mainly political issues related to border, river-sharing as well as issues of mistrust – all of which have historical context. We can not change that overnight. But I think Bangladesh has been largely smart in trading with India. We can see that by comparing Bangladesh to Pakistan. Due to Pakistan's political relation with India, they buy Indian products from UAE at a higher price. It doesn't make much sense.

On the other hand, no matter our political relationship with India, we have prioritised our economy, regardless of who was in power.