BD to face tougher export challenges after LDC graduation

FT ONLINE

Bangladesh’s export sector will face tougher competition in the global market after losing duty-free market access and preferential trade benefits when it graduates from LDC status and officially joins the ranks of developing countries.

The Committee for Development Policy, a UN panel, on March 16 announced Bangladesh’s eligibility for the developing country category as it has met the three prerequisite criteria in terms of National Income per Capita, Human Assets Index, and Economic Vulnerability Index.

But the country will have to pass two more reviews in 2021 and 2024 to get rid of the Least Developed Country (LDC) tag.

Upon its promotion, Bangladesh will get three more years’ grace period after which it will lose the trade facilities it enjoys as an LDC.

Tougher challenges

As an LDC, Bangladesh enjoys duty-free access to the European Union and some other countries. However, once a developing nation, it will not be eligible for duty- and quota-free facilities and preferential market access.

After graduation, Bangladeshi exporters will have to pay an additional 6.7% tariff, making competition against rivals, some of whom enjoy benefits under EU GSP Plus and preferential trade agreements, tougher.

Probable new tariffs for EU, non-EU, and Canada are 8.7%, 3.9%, and 7.3%, respectively. The United Nations Conference on Trade and Development estimated that Bangladesh may face an export decline between 5.5% and 7.5%.

“Unless Bangladesh manages to renegotiate through bilateral agreements or as part of regional trade arrangements, it will face MFN (most favoured nation) tariff rates following the LDC graduation or reduced preferential margins under standard GSP scheme in EU market,” said Mustafizur Rahman, distinguished fellow of Centre for Policy Dialogue (CPD).

Preference erosion will likely have adverse implications for export competitiveness, and export earnings and consequently, for GDP, balance of payments, employment and poverty alleviation, the economist added.

Once Bangladesh loses duty-free market access, it will leave the country with different challenges regarding the tariff, Mustafiz warned.

He said Bangladesh would have to explore windows of opportunities through smart negotiations and engage proactively with international organizations for preferential treatment.

Ways forward

Bangladesh can overcome the challenges. New trade agreements and diversification of products and market can be one of the solutions.

“Bangladesh needs to renew efforts towards the supply-side capacity building, increasing export competitiveness and ensuring product and market diversification and reducing production costs to compensate for preference erosion and phasing out of international support,” said Mustafiz.

These efforts include adequate investment, trade facilitation measures, and attraction of significant foreign investment. These will help Bangladesh to strengthen its market access and raise competitiveness in the global market, the economist said.

During the run-up to the LDC graduation, Bangladesh will need to do its best to take the maximum advantage of the preferences it is currently enjoying, he added.

“Since Bangladesh’s export earnings are highly dominated by the RMG sector, focus should be given on intra-RMG diversification as well as on quality and value-added products,” former caretaker government adviser ABM Azizul Islam said.

In terms of availing regional trade benefits, Bangladesh should remain engaged in the process of regional trade agreements, so that graduation does not hurt export earnings.

Mustafiz also suggested taking advantage of the increasing south-south trade opportunities, particularly in the regional markets of India and China, through targeted product diversification and by attracting foreign investment.

He suggested exploring how Bangladesh could take advantage of non-LDC specific preferential arrangements such as the various GSP schemes for developing countries.

“The next six years will be very crucial in terms of workers’ skill development, productivity enhancement, and product diversification for Bangladeshi exporters as graduation will erode trade benefits,” BGMEA Senior Vice-President Faruque Hassan said to media.

He hoped the country would be able to meet the requirement to continue preferential trade facilities as manufacturers are upgrading machinery and introducing latest technology. Manufacturers also invest in research and innovation.

“What the export sector needs is infrastructure and uninterrupted supply of gas and electricity,” he added.

However, industry insiders and trade analysts emphasize upgrading technology, skill training, and going beyond the RMG sector by bringing the emerging sector into the spotlight.

“Since the production costs have gone up due to improved wages and safety improvement, manufacturers have to increase productivity through skills training and enhancement,” Exporters Association of Bangladesh President Abdus Salam Murshedy said.

When it comes to manufacturing high-value and quality products, introducing the latest technologies is necessary as it will help to reduce production cost as well as improve the quality, Salam said.

“Overcoming the single-product dependency, we should also focus on emerging industries such as the ICT, pharmaceuticals, electronics, furniture and light engineering,” he added.

EU GSP Plus: A ray of a hope for Bangladesh

The EU market is very important for Bangladesh as nearly 56% of its $34.65 billion export earnings ($19.35 billion) comes from there. Bangladesh enjoys duty-free market access under the Everything But Arms agreement.

Preferential trade benefits erosion is crucial for Bangladesh, but the country can enjoy trade benefits by availing GSP Plus, a standard scheme for the developing country to provide trade benefits.

In availing GSP Plus from the EU, ensuring rights of workers and people and attaining sustainable development goals are key elements, experts noted.

“I am not hopeful about availing EU GSP Plus. To become eligible for GSP Plus, exports to the EU must represent less than 6.5% of the value of the EU’s total imports from all GSP beneficiary countries, which is very close to the limit and may be over by 2024,” Mustafiz said. “The labour rights issue has yet to be properly addressed.”

“As of now, almost all of the export-oriented RMG factories have workers’ participatory committees and trade union registration has increased to over 600 since 2013,” BGMEA leader Faruque said.

In recent times, there has been no incident of workers’ harassment and they are enjoying the right to freedom of association, he added.