The double challenge of graduating from LDC and preparing for FTA

Illustration: TBS

Bangladesh is strongly pursuing Free Trade Agreement (FTA), Economic Participation Agreement (EPA), and many other bilateral agreements with a number of countries as preparation for overcoming the challenges that will come with graduating from its Least Developed Country (LDC) status. The FTA wing of the Ministry of Commerce is working sincerely in this respect. Bangladesh has opened discussion for FTA and similar types of collaboration with about 28 countries, with Japan, Singapore, and India being the priorities.

One of the primary aspects of FTA is the revenue forgone. Bangladesh has a lower tax-to-GDP ratio depending on indirect tax, with about 70% of revenue coming from indirect tax. In the import stage, there are six types of taxes, with tax at source and advance tax contributing significantly to our tax structure. So far, Bangladesh has not successfully negotiated any large FTA because of revenue considerations.

Trimming tax for signing FTA and other similar bilateral agreements is a cause for concern for Bangladesh. When Vietnam signed the FTA with the European Union (EU), they had to trim 48.5% of their tariff lines immediately after the signing, comprising of roughly 64.5% of their total import revenue. Can Bangladesh forgo such a huge amount of import revenue if it signs an FTA with EU?

Currently, Bangladesh is having discussions to sign an EPA with Japan. While both Japan and Vietnam are experienced in signing an FTA and EPA with several countries, for Bangladesh it will be a brand new experience. But FTA/PTA can increase bilateral and regional trade between two countries.

Bangladesh has had a bilateral preferential trade agreement (PTA) with Bhutan since 2020. This agreement allows for duty free access to certain products from each country. Bangladesh has

given Bhutan duty free access to 100 products, while Bhutan has given Bangladesh duty free access to 50 products. The signing of this PTA has shown significant trade growth between the two countries. The export trade between them increased from $9.37 million to $22.11 million in 2022-23 against imports of $87.53 million and $97.27 million respectively.

Vietnam signed an FTA with EU in 2020. Trade between EU and Vietnam was $63.72 billion in 2023 and is is expected to increase further as FDI matures. EU invested €28 billion in 2,450 projects in Vietnam, in the high-tech manufacturing and services sectors. Vietnam presently faces standard GSP and an average tariff of 9.6%. With the implementation of an FTA, Vietnam 's export will face zero duty, keeping enough space for increasing export to EU.

Bangladesh's total trade with EU in 2023 was $23.73 billion, import accounted for $3.28 billion, while export was $20.41 billion. Between 2010 to 2023, Bangladesh's export increased from 6% to 22%. However, investment from EU was $3.5 billion in net Foreign Direct Investment (FDI). EU's FDI spending on Vietnam was 10 times higher. Bangladesh will face tough competition from Vietnam in the EU market, and after LDC graduation, Bangladesh will have to opt for standard GSP implementation of 27 conventions, including labour laws and safety issues.

The situation is the same in the United States, where Vietnam could significantly capture the apparel market in the US. Exports from Bangladesh to USA have dropped after withdrawal of support in 2016, but has risen for Vietnam. Exports from Vietnam to US have increased from $115 billion in 2023 to $128 billion in 2024. Comparatively, Bangladesh has seen an export drop to US from $9.70 billion in 2022-23 to $7.6 billion in 2023-24. This means that Vietnam has already developed its capacity to handle markets without duty free access, and the implementation of the EU FTA, and increased FDI will be an additional opportunity for Vietnam to increase exports in these two giant markets.

The export base of Bangladesh and Vietnam are different and Vietnam's export is quite diversified. 94.2% of apparel exports from Bangladesh go to the EU, whereas for Vietnam, it is only 9.5%. Vietnam also exports footwear and other products is amounting to 11.6%, while Bangladesh only contributes 2.7% of its export in this sector. After full implementation of FTA with EU, Vietnam will also be able to export more footwear than Bangladesh, and cause severe competition in the export of leather and footwear, which is the 2nd largest export sector in Bangladesh.

However, rules of origin (RoO) will be stringent for Vietnam, double transition will have to be maintained - a challenge for Vietnam in the apparel sector, even after tariff reduction. In case of mutual recognition of standards in areas like Sanitary and Phytosanitary measures (SPS), Geographical Indications (GIs), Labor Standards, and Corporate Social Responsibility (CSR), both Vietnam and EU will promote trade based on these criteria. Bangladesh's capability in these four areas will require rigorous assessment. Protecting intellectual property rights,and including geographical indications for special regional food and drink products will also be a challenge, as per a recent study conducted by RAPID.

Bangladesh will face serious trade diversion risks in the apparel and leather sector due to post-graduation tariff hikes and Vietnam's enhanced market access through the EU-Vietnam FTA. Bangladesh needs potential strategies to address these risks.

Bangladesh produces Fast Fashion items, which could also face potential tariff increase because of ESPR (Ecodesign for Sustainable Products Regulation) on RMG products. ESPR seeks to significantly enhance the quality of new textiles entering into the EU market, major changes in the composition of textiles (e.g. recycled fibre content, durable clothing, etc) will make RMG export difficult to EU market.

Some European brands are likely to start introducing new eco-design requirements stipulated by ESPR to their suppliers in Bangladesh to prepare for a wider shift in circular product design that will begin to emerge in the medium to long term.

EU has already announced an extension of the transition period up to 2029, with businesses requested to enhance the transition for at least up to another five years. EU GSP benefits for Bangladesh will also depend on several conditions. There are 32 international conventions required to be signed for technical and financial assistance from the EU.

Imports of post-consumer textile waste from the EU for mechanical and chemical recycling and yarn production as part of EU policies requiring collection and sorting of textile waste within Europe could provide Bangladesh with a new source of raw materials for its textile industry while supporting the EU's circular economy goals.

However, Bangladesh's recycling infrastructure needs to be prepared, as it is currently underdeveloped. Limitations for chemical recycling include the need for high energy input. Given Bangladesh's high share of fossil fuels in the energy mix, this would significantly increase the carbon footprint of recycled yarns.

LDC graduation will bring massive challenges for Bangladesh unless preparation is extensive. FTA negotiation is a priority, no doubt. For this negotiation to create a win-win situation, market access requirements and supporting infrastructure have to be established. We may have to face a basic change in the tax structure for which we need to be ready. We have a single product and at the same time the market is also not diversified. We need to work to explore new un-tapped markets.

We are already late in having FTA and PTA, and whatever regional agreement we had, we were not able to exploit the full benefits out of them. FDI has remained low for several years, with lengthy bureaucratic processes for approval, permission, and registration discouraging potential investors. In the current regime, we need to invigorate our efforts to attract new investment in the areas where we need it most.

Ferdous Ara Begum. Sketch: TBS

Ferdaus Ara Begum, CEO of BUILD—a public-private dialogue platform—works for the private sector.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.