This writer has been suggesting for the last 15 years, the extension by India of unilateral free trade treatment to Bangladesh. This, in turn, would have had a beneficial spillover effect on the political
climate, which would have improved the prospects of cooperation in other areas
India-Bangladesh trade prospects
Muchkund Dubey
India and Bangladesh offer natural markets for each others export products. In their mutual trade, they enjoy the advantages of reduced transaction costs and quicker delivery due to geographical proximity, common language and a heritage of common physical infrastructures. That is why soon after the launching of liberalisation in Bangladesh in 1982, Indias comparative advantage in the Bangladesh market started asserting itself and Indian exports registered unprecedented growth. The value of exports increased from only about $20 millions in the early 1980s to nearly $200 millions in the early 1990s, to about $1 billion in 2000-2001. If the informal trade is included, then Indias exports to Bangladesh today are at the level of $3 billion. Bangladesh is one of the 10 largest importers of all goods, and the third largest importer of manufactured goods, from India.
Bangladeshs exports to India have also increased, but not at a commensurate rate. This is partly because liberalisation in Bangladesh has been more far-reaching than in India and partly due to supply constraint. As a result of the asymmetrical growth in exports, the trade deficit for Bangladesh has increased sharply and now stands at an unacceptable level.
This writer has been suggesting for the last 15 years, the extension by India of unilateral free trade treatment to Bangladesh. This would have pushed the trade exchanges to a much higher level, substantially reduced the trade gap and integrated the two economies in several ways. This, in turn, would have had a beneficial spillover effect on the political climate, which would have improved the prospects of cooperation in other areas.
In the context of the demonstrated comparative cost advantage for India, any increase in the import capacity of Bangladesh by virtue of an expansion in its exports is bound to be reflected in enhanced imports from India. Similarly, any growth in the GNP of Bangladesh has implicit in it prospects of larger imports from India. For, a sizeable part of the import content of the growth is likely to come from India.
Unfortunately, India lost all these opportunities by adopting an incremental approach to responding to Bangladeshs request for restriction-free entry of its goods into the Indian market. India did extend tariff concessions to Bangladesh from time to time. But the manner in which it was done generated frustration and mistrust all round. India took three years in granting duty free entry for 40 out of the 191 items on Bangladeshs request list. Recently it agreed to allow duty free entry for 39 more items. But Bangladesh has found the concessions given by India too little, too late and not very relevant to its export interests.
The Government of India, on the other hand, has also felt frustrated, because there has been no appreciation of what it has done in the face of formidable domestic constraints. In the last Commerce Secretaries meeting held in New Delhi in late March this year, India indicated to Bangladesh that further liberalisation would be possible only within the framework of a Free Trade Agreement (FTA). Indias offer for an FTA is under consideration in Bangladesh.
Though unilateral free trade would have been highly desirable from several angles, it has not apparently proved feasible proposition. Therefore, the FTA option needs to be looked at seriously by the two governments. An FTA is no panacea for bridging the trade gap or solving other trade problems. Besides, designing an FTA between two countries placed in a highly asymmetrical economic position, is by no means going to be an easy task. However, there are obvious advantages in an FTA which cannot be ignored.
First, an FTA will take the two countries out of the present rut of commodity-by-commodity negotiations and will provide for duty free entry for all goods except those included in a short negotiated negative list. Second, it will provide for the elimination of all non-tariff barriers in a time- bound framework. For, removal of such barriers is an integral part of creating an FTA. Third, an assured access to the large Indian market within a long-term contractual framework, will enable Bangladesh to create export capacity for even those products in which it has potential competitive advantage but which currently do not figure in its export basket. Fourth, such assured access would result in an enlarged flow of foreign private capital for investment for building export capacity in Bangladesh. Fifth, by arguing that an FTA is in Indias larger economic interest, the Government of India will be able to overcome the pressure of domestic lobbies and reservations of a political nature. Sixth, an FTA can provide for measures for deeper integration, such as freeing of trade in services, free flow of investment, trade facilitation, harmonisation and mutual recognition of standards and coordination of macro-economic policies.
Besides, an FTA is likely to improve the over-all competitiveness of the Bangladesh economy through access to the marketing network, skill and technology of Indian manufacturers and trading partners. Finally, having travelled much further down the road of liberalisation than India, Bangladesh will be in a stronger negotiating position, and India will have to make the major adjustments.
The experience after the India-Sri Lanka Free Trade Agreement (ISLFTA) went into force shows that Sri Lanka has gained substantially from the Agreement. In 2002, Sri Lankas exports to India increased by 136.9 per cent as against a rise of 48 per cent in Indias exports to Sri Lanka. The trade imbalance for Sri Lanka improved from 8.5:1 to 4.9:1. Sri Lankan exports registering substantial increases included such non-traditional items as sausages, biscuits, chocolates, toys, furniture and ceramics. And, above all, Indian investments worth $1 billion have either already been made or are in the offing in Sri Lanka.
In the ISLFTA, the question of asymmetry has been addressed by allowing Sri Lanka to have a longer negative list (1,180 items against Indias 429) and a longer time period (eight years as against Indias three years) to reach zero tariff level. Since Bangladesh is a least developed country, these provisions can be better calibrated in its favour. Besides, the following additional measures can be adopted to enable Bangladesh to derive equitable benefits from the FTA: (i) Some of the items such as tea and readymade garments in which Sri Lanka has both export capacity and competitiveness have been put under tariff quotas in the ISLFTA. In the FTA with Bangladesh, such items can be put in the positive list. (ii) There is no provision in the ISLFTA for phasing out the tariff quotas or the negative lists. The FTA with Bangladesh could provide for an asymmetrical phasing out of the negative lists. (iii) If there is a provision for special safeguards in the FTA, Bangladesh should be given greater flexibility with regard to sector coverage, duration of safeguards, establishment of injury etc. (iv) Within the FTA, India should establish a sizeable fund to substantially enhance the export capacity of Bangladesh.
The writer is a former Foreign Secretary with a deep knowledge of Bangladesh where he functioned as the Indian High Commissioner for several years. He is currently the President, Centre for Social Development, New Delhi
