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Global trade landscape and Bangladesh – Khondaker Golam Moazzem

Published in The Financial Express on Sunday, 15 November 2015.

Global trade landscape and Bangladesh

Khondaker Golam Moazzem

The global trade landscape has experienced significant changes in last decade and is likely to change further in the coming decades. Trade related policies, structure of trade governance, direction of international trade, composition of traded products and fragmentation of production networketc. would not be at the same level in the coming decades. Such changes in the global trade landscape would have both opportunities and challenges. Consequently, major global economies have been resetting their strategies on international trade. Unfortunately, poor countries particularly the least developed countries (LDCs) have yet to see taking such strategies.

Although Bangladesh has shown better performance in international trade during earlier decades compared to other LDCs, this performance would not facilitate much in the future. Bangladesh’s global share of export has increased from 0.09% in 2001 to 0.17% in 2013. Given its growing export competitiveness (though in limited number of products) Bangladesh could grab the opportunities in international trade in the future. At the same time, Bangladesh has been passing a transition phase of development particularly it is in the process of graduating from an LDC to a ‘developing country’ possibly by 2024. Moreover Bangladesh’s competing countries are increasingly integrated with major global markets. Such changes and dynamics in international trade regime would have significant adverse impact and implication on Bangladesh’s international trade. Hence Bangladesh should appreciate the future course of changes in trade regime and thereby needs to reposition herself to accelerate international trade.

Global trade regime in the future: In recent years a number of reports have been published on direction of international trade in 2030-2050. A number of these reports mentioned Bangladesh as one of the emerging economies in the coming decades. These reports have highlighted on possible changes in trade regime, direction of trade, size of international trade etc. Bangladesh needs to appreciate those changes to identify its gaps in terms of strategic perspectives.

Changing trade regime: Global trade is increasingly being governed by bilateral, sub-regional and regional trade agreements. Until 2013, a total of 432 regional trade agreements (RTAs) have been identified of which 238 are currently in operation. Besides there are another 30 RTAs which are at different stages of negotiation — about 110 countries are involved in the negotiation of those RTAs. In number of cases, these RTAs are targeting development of new form of RTAs in terms of design and content which would bear different quantitative and qualitative weights in world trade. However, future trade would be dominated by a number of mega-regionals which include Trans-pacific Partnership (TPP), Trans-Atlantic Trade and Investment Partnership (TIPP), Regional Comprehensive Economic Partnership (RCEP). The recently signed deal on TPP includes 12 countries across Asia-Pacific which represent about 40 per cent of world GDP. Similarly, TTIP between the EU and the US and the RCEP, between the 10 ASEAN5 countries and six of its RTA partners including China, India, Japan, South Korea, Australia and New Zealand would have diverse impact on non-member countries. These mega-regionals have been negotiating beyond market access issues including regulatory compatibility and other related issues. Similarly, bilateral FTAs currently under negotiation would gain the partner countries a lot which include US-South Korea; EU-Singapore; EU-Canada; EU-Japan; EU-India; EU-Mercosur; Australia-China; Canada-Korea; Canada-India; the embryonic CJK; and BITs between the US and China and the EU and China. LDCs in most cases are outside these FTA discussions and will face newer challenges once those are operationalised.

Rise in world trade flow: Global merchandise trade is projected to grow at a rate of 8% per year between 2014 and 2030 and it would outpace world GDP growth rate during the same period. A major share of this trade will be related with import-content export. By 2030, this import content export will increase to 60% up from 40% in 2012. This will be possible through further trade integration between major economies. Asia would be the centre of such integration and would become the manufacturing hub. The fastest growing trade routes would be Asia-Middle East and North Africa, Asia-Latin America and Asia-Africa. Middle East and Africa would be the new trade hub which will be grown through trade integration with Asia.

Rise of global trade will further integrate world economies through different production networks. Different projections indicate that share of intra-regional trade for most of the major economies will considerably increase between 2011 and 2030. A large part of this trade will be different kinds of raw materials, intermediate products and capital machineries. Rise of trade openness as well as reduction of applied tariff rates helped to reduce trade barriers; however, non-tariff barriers (NTBs) would still be major concern.

This rising trade is closely linked with rise in consumption owing to rise in per capita income mainly to be observed in growing middle class who live in urban areas particularly in developing countries. It is reported that world economy is likely to be doubled in size by 2037. Despite having a number of risks including near full employment in advanced economies, China’s sharper slowdown of growth and economic distress due to geopolitical factors, world economy will continue to grow in the coming decades. The future economic growth will be centred on Asia including China, India, Indonesia, Malaysia, Thailand, Vietnam, few African countries and newly emerged European countries. Total global annual consumption spending in rapid-growth markets will increase from US$12 trillion in 2014 to US$63 trillion in 2030.

Global trade destinations will be further diversified because of emergence of new growth centres in developing countries. The middle class of developing economies has been growing and will grow further. Two-thirds of the global middle class will be Asia-Pacific residents by 2030 which was one-third in 2009. In one estimate it has shown that emerging global middle and rich class in G20 developing countries which include China, India, Russia, Brazil, Mexico, Argentina, Indonesia, Turkey and South Africa, will grow from 739 million in 2009 to 1.3 billion in 2030. About 60% of rich and middle class will reside in developing countries in 2050. However, their purchasing capacity would still be lower than those reside in the advanced economies. Because of the faster growth in emerging markets, global and home-grown companies have been targeting these markets which will be intensified further in the future.

Such changes will be associated with various kinds of externarnalities. This rise in urbanisation will increase cost of assets, labour and capital and therefore would increase cost of production. This rising cost needs to be accommodated through higher productivity and efficient use of resources. Between 2011 and 2030 rise in the level of urbanisation will be highest in Asia (from 45% to 56%) followed by Africa (from 40% to 46%). Urban growth contributes to rise in income of urban people. Different essential facilities in urban areas will be further pricey. Hence, future producers will have to confront more pressure in terms of cost of land, labour and capital and need to be productive and efficient enough to be competitive in the global market.

Bangladesh’s challenges in the future: It is well understood that future world trade regime would bring both opportunities and challenges for Bangladesh. Growing demand for various kinds of goods and services in developing countries would mostly be met both by domestic supply and supply from developing countries. Bangladesh could be an important source of meeting global demand for goods in the future.

At present, Bangladesh’s global trade regime is by and large unidirectional — it is overwhelmingly influenced by preferential market access in major developed and developing countries such as EU, Canada, Japan, Australia, India, China and Korea etc. There is very limited success in other trade integration initiatives. RTAs particularly the South Asia Free Trade Agreement (SAFTA) in most cases are less effective and the Bay of Bengal Initiative of Multi stakeholder Technical Cooperation (BIMSTEC) is still in negotiating stage. Bangladesh does not have bilateral FTAs with any country. The Bangladesh, China, India and Myanmar Economic Corridor (BCIM EC) remains at an early stage of discussion. An exceptional development has taken place with regard to sub-regional transport corridor. In June, 2015, Bangladesh, Bhutan, India and Nepal Motor Vehicle Agreement (BBIN MVA) has been signed with a view to pass passengers, goods and vehicles between these four countries. Bangladesh has yet to be part of any strong regional value chain.

It is important to note that while Bangladesh will graduate from a non-LDC (most likely in 2024), it will no longer enjoy preferential market access. This would have adverse impact on its export to major markets such as EU where it enjoys duty-free market access under European Union ‘Everything But Arms (EUEBA)’ Initiatives. Similar consequences will happen in case of other major markets such as Canada, Japan, Australia, India and China. Being a developing country Bangladesh may seek ‘GSP plus’ support to the EU; however, those facilities would be for limited number of products. Moreover, Bangladesh will need to fulfil a number of conditionalities related to labour and environmental standards, and governance and institutional issues. Thus, Bangladesh has to overcome a number of hurdles in order to get the market access in major markets. Reduction of tariff preferences will put Bangladesh exporters in fierce competition with other LDCs and developing countries supplying similar kinds of products.

The aggressive move of trade integration by major competing countries would have adverse consequences on Bangladesh’s trade in the future. For example, India is a member of seven free trade agreements which are in operation, and it has started negotiation on another 16 FTAs. Most importantly, India has FTA/comprehensive economic partnership agreement (CEPA) with ASEAN, MERCUSUR, Singapore and Sri Lanka; it has started negotiation for FTA/CEPA with Australia, Canada, Russia, EU, Indonesia and Thailand. On the other hand, Vietnam has 8 FTAs which are now in operation and another seven are under different phases of negotiation. Vietnam has FTA/CEPA with Japan, Korea and India (under ASEAN), Australia and New Zealand. It has started negotiation with EU, Russia, China and Korea. Recently, Vietnam and other 11 countries including USA, Canada, Mexico, Australia, Japan has signed Trans-pacific Partnership (TPP) agreement under which it will enjoy duty-free market access to these markets. In the near future when these agreements will be enforced, Bangladesh will face either the same or higher tariffs in major markets for similar export products (particularly in the post-LDC era in 2024).

Bangladesh is not well-linked with major trading partners because of poor trade infrastructure. Major trading partners are linked mainly through sea-route. India and Myanmar are the two neighbouring countries connected by land, sea and inland water ways. Most of the land routes and inland water ways are not of international standard for cross-border trade. However, the situation has started to improve as a number of cross-border connectivity initiatives are currently at different stage of implementation including the BBIN MVA.

Bangladesh is way behind in terms of new standards and rules being discussed and negotiated in case of international trade including standards, transparency and social responsibility issues. Recently signed trade agreements such as TPP set a new set of standards for member countries which include labour standard, environmental compliance, governance and institution, public procurement and intellectual property rights etc. These standards would definitely divide countries participating in global trade between ‘compliant’ and ‘non-compliant’. Bangladesh would be in unfavourable situation because of its poor standards in labour, environment and governance.

Repositioning Bangladesh in changing trade architecture: Bangladesh has to rethink about its course of action, reposition itself and restrategise its direction in international trade. Following are the issues that need to be addressed through appropriate measures:

  1. a) Get prepared for acting as a ‘non-LDC’: Bangladesh should start to take preparation for being operated as a non-LDC. Given the various consequences related to graduating from an LDC, a national level awareness need to be developed. All major stakeholders including government, private sector, NGOs and workers need to be aware about the possible consequences of being ‘non-LDC’ and to take preparation to encounter those challenges.
  2. b) Develop cross-border connectivity and trade facilitation infrastructure: Bangladesh has to develop cross-border trade facilitation infrastructure as per the WTO Trade Facilitation Agreement. It should develop its infrastructure related with testing procedure at border points, expedited shipments, border agency cooperation, single window, pre-shipment inspection, common border procedures and uniform documentation requirements. On the other hand, cross-border connectivity has been developing under the framework of Asian Highway network and Trans-Asian Railway network. Besides a number of sub-regional initiatives are currently under discussion where Bangladesh should take appropriate position- these include Big-B Initiative at the Bay of Bengal, One Belt-One Road Initiative undertaken by China and Indian Ocean Rim Association (IORA). The recently initiated ‘Blue Economy’ is targeted to capture a number of these connectivity related initiatives.
  3. c) Restrategise future trade partners: Bangladesh should gradually put more focus on emerging markets which are future locus of economic growth, growth of the middle class as well as growth of major markets. Keeping the focus on major markets of developed countries Bangladesh should set strategies to enhance its export to emerging markets such as China, India, Russia, South Africa and Indonesia. Given the changing demand in advanced developed countries due to its changing demographic composition with more aged population, Bangladesh should further diversify its product bases targeted to those markets.
  4. d) Integrate with major players in the regional value chain: Bangladesh should try to integrate with major regional markets. A major focus of Bangladesh should be integrated with the ASEAN and it should also try to join in the RCEP. There is strong opportunity to develop bilateral FTAs with a number of countries such as Malaysia, Thailand; however these FTAs could include services as well. Bangladesh may consider signing CEPA with a number of countries which include India, Korea and China. Bangladesh should also pursue for PTAs for selected products with selected countries including South Africa, Russia and Brazil. Unlike the past, Bangladesh be pro-active in trade negotiation; therefore it should develop its institutional structure in order to analyse the possible consequences of FTAs and to negotiate those with prospective countries.
  5. e) Accommodating the new rules related to trade: Market competitiveness in the future would be judged not only by price competitiveness but also by non-price issues including labour standards, environmental standards, governance and corruption and intellectual property rights. Instead of developing few of these standards in one or two export-oriented sectors (such as RMG, processed fish), these standards and compliances need to be established in all export-oriented sectors and gradually all domestic-market oriented sectors. Hence, it is important to raise awareness among stakeholders.
  6. f) Further opening up of the financial market: In order to accommodate the huge amount of financial transaction across the world, it is important to develop necessary financial infrastructure. This would require easy access to global finance as well as further opening of capital account in order to provide opportunity to invest in suitable venture in the global market. Further transparency and competition need to be ensured in the financial market.

Dr Khondaker Golam Moazzem is Additional Research Director Centre for Policy Dialogue (CPD).

moazzemcpd@gmail.com

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