Tariff rationalisation and trade competitiveness of Bangladesh

Illustration: TBS

It has long been said that Bangladesh could not diversify its export basket in the last four decades, and concentrated heavily on a single product, which is risky. This became more apparent when export growth fell due to a fall in RMG exports in 2020, after the emergence of Covid-19.  

One of the reasons identified is tariff support for import substitute industries, which has made domestic industries profitable by offering a type of protection which sometimes burdens consumers with high cost. These have been reiterated and discussed with detailed analysis in some recent studies.

Bangladesh's export is driven by RMG, an industry that benefited from low labour cost and preferential market access from advanced countries. It created jobs and helped reduce poverty. However, export is still only 12-15% of the GDP, which is much lower than that of countries with similar-sized economies. 

The growth of the manufacturing sector is being anchored by a number of non-exporting industries, which raises the question of sustainability of the export-led growth model. Two studies presented by World Bank Group experts tried to explore the issue, and a fact that is glaringly obvious from the studies is that the percentage of exporters per million people in the country is much less than countries such as China, Vietnam, India etc. The entry and exit rates are high. Companies that have access to the global value chain (GVC) have a better chance at survival than those who do not have access to GVC. 

To promote export-led growth, modernisation of tariffs is one of the best options. The study found that the number of tariffs imposed increased from 6 to 50, and along with 95% ad valorem tax, regulatory duties and supplementary duties, the tax structure in Bangladesh is complex. 

MFN (Most Favoured Nation) tariffs in Bangladesh in case of capital, intermediate and consumer goods are high in comparison to some similarly placed countries. Of them, tariff impact on consumers is highest at 48.3%, with India standing at 29.9%, Thailand at 21.9%, Vietnam at 19.9% and China at 14.4%. 

Tax on intermediate goods in Bangladesh is also high; same is the case of capital. The study suggested setting the highest CD (Custom Duty) from 25% to 22.5%, removing RD (Regulatory Duty) and reducing SD (Supplementary Duty) to 20%. 

It also suggested a 25% cut in CD to compensate for hypothetical currency depreciation. It agreed that revenue loss will be tremendous which can be compensated by broadening the tax base, reducing exemption, collecting other forms of taxes due to increased income, strengthening tax administration and improving revenue forecasting, alongside minimising the cost adjustment especially for vulnerable groups.

The study, based on a  tariff protection survey on fifteen leather sector footwear,  showed that profitability is about 2.5% higher in domestic industries which discourages entrepreneurs from going for exports, which in turn hinders the export growth.

In regards to the policy concerns, the study said revenue loss will be high to address anti-export bias. Reducing the high level of para tariff will have an impact on the economy at least in the short term. 

Because of resource inefficiency, consumers are giving high prices, in that respect Bangladesh should learn from comparator countries. Trade policy analysts should explore strategies. They should also identify areas where tax reforms need to be implemented by considering the needs of the vulnerable group and adjust the tax base accordingly. The focus needs to be brought back on how to adjust the revenue loss while keeping in mind the need for export diversification. 

Coming to the point of  LDC graduation within next  four years, Bangladesh may face an even more difficult situation due to GSP discontinuation, especially in the EU market which is significant to the textile and clothing sector. The study by the World Bank shows that about 22% export shortfall can be expected from 12 products, some of them being RMG, food and fish products etc.  

Ferdaus Ara Begum. Illustration: TBS

Different integration scenarios also presented by another study suggested that Bangladesh should explore opportunities to deepen its integration with the global economy. In this respect the problem is high tariffs and inefficient border trade infrastructure, significant presence of non tariff trade cost equivalent to 200% ad valorem, higher documentation cost than comparator countries, slow progress in implementing trade facilitation agreements, etc. 

The study showed the total cost of non-integration. Bangladesh exports can increase significantly through comprehensive regional integration. In case of multilateral integration, opportunity cost is significant. More integration with the EU can increase exports from Bangladesh. 

From a detailed analysis of the two studies, a practical solution is to rationalise the high tariff regime of Bangladesh, implement trade facilitation agreements, reduction in non-tariff measures, and more bilateral, regional, multilateral integration have to be ensured.  

Speakers in the seminar also marked tariff rationalisation as very important for Bangladesh to boost export as it affects export, and suggested a national tariff policy. It is also suggested that high tariffs are one of the reasons acting as barriers for signing preferential trade agreements and free trade agreements. 

In the course of discussion for looking after export diversification needs, one of the important suggestions was to take forward looking trade agenda such as factor and non factor services export. Factor services are services that are generated by using the factors of production i.e land, labour, capital and entrepreneurship. 

On the other hand, non factor services are services that are not generated by land, labour, capital and entrepreneurship, such as remittances from overseas migrants and capital - income from investments, interest payments, dividend etc. Despite the increase of returnee migrants from abroad since the beginning of Covid-19, remittance had recorded an increase. Presently, progress has been a bit slow; however, this can be an area of earning foreign exchange.

There are a number of Export Processing Zones in Bangladesh, and it has a plan for building 100 EZs, which have the potential to become a good source of export in near future. Some of the automobile sector in the EZ has already started exporting.

Considering the trade-GDP ratio, it is true that with about $400 billion GDP, Bangladesh's export is only 12-15% which is comparatively low. Targets need to be set to increase export by at least $100 billion. The recent export policy approved by the cabinet has targeted export of $80 billion by 2024, of which it is not known how much RMG constitutes. 

Study findings have highlighted the lack of taxation on exports as the reason for the low survival rates of export firms. This could have been the case for small exporters because they are unable to use bonded warehouse facilities. 

Manufacturers who manufacture domestically, and export partially cannot increase exports since they are not exempt from duty costs of imported raw materials like fully export-orientated factories. There could be a discussion on common bonded warehouses for homogenous groups of industries, alongside home consumption bonds, agriculture bonds for agricultural industries and separate types of bonds for Engineering Procuring Construction (EPC) companies considering new development in the construction sector.

LDC graduation is a highly discussed issue. The government is also trying to establish a strategy so that graduation loss can be compensated. While in the study it is mentioned that export concentration loss to the EU will be significant. In the new GSP rules to be framed by the EU for implementation probably from 2024, Textile and Clothing will not be entitled, in that respect even GSP+ or standard GSP may not be possible and the sector may have only alternative to consider for MFN tariff. This will create a difficult situation for the country unless there is immediate discussion for bilateral arrangements. 

Tariff implications in the Chinese market may be different if the dipper concession announced by China in July 2020 are implemented, and  DFQF (duty-free quota-free) extended for about 98% of the total HS codes for Bangladesh. In that respect, the effective duty hike in the Chinese market may  be much higher. In the Canadian market textile and clothing were excluded, so it may not have any impact after graduation.

Change in the Rules of Origin is another aspect, because LDC Bangladesh was enjoying relatively less value addition requirements. In case of value addition, the case of Vietnam came up, where even though export is much higher, value addition may not be the same. 

In Bangladesh, about 39 products are enjoying cash incentives at different rates, with some more on the way. This is likely to be impacted after graduation. Detailed further studies need to look into these issues.  

In conclusion, the model has shown that by cutting tariffs at 20%, the country can achieve growth more than the current pace, which is a big challenge for the country. It is seen that tariff reduction is a  solution, but can not be a single remedy. 

There are a number of other policy necessities for export diversification such as infrastructure and institutional development, R&D, automation, internal preparation etc.  An export diversification strategy needs to be framed considering all necessary external and internal issues. 

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

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.