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SAFTA - SAFTA and the Bangladesh Economy Assessments of...

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Unformatted text preview: SAFTA and the Bangladesh Economy: Assessments of Potential Implications Selim Raihan* * Assistant Professor of Economics, at the University of Dhaka, Bangladesh;. E­mail: [email protected] This paper is w ritten under a resear ch grant from th e Common wealth Secretar ial, London to CUTS Interna tional, Jaipur. View s expressed in this paper are those of the author and not necessarily reflect those of their institutions and of the Commonwealth Secretaria t and CUTS Internati onal. i Table of Content Acronyms and Abbreviat ions ............................................................................................... iv 1. Introduction....................................................................................................................... 1 2. Bangladesh’s Trade with Neighbouring Countries: Patterns and Trend .............................. 1 3. SAFTA and the LDCs in South Asia: Implicat ions for Bangladesh.................................... 5 4. Potential Implicat ions of SAFTA on Bangladesh’s Economy: A Review of Qualitat ive and Quantitative Studies ............................................................. 9 4.1. Welfare Effects of SAFTA: So me Qualitat ive Assessments of Potential Implicat ions for Bangladesh ........................................................................ 9 4.2. Empirical Studies on Welfare Effects of SAFTA: Some Quantitative Assessments of Potential Implications for Bangladesh ............... 12 4.2.1. The Gravit y Models ........................................................................................... 12 4.2.2. Partial Equilibrium Models ................................................................................ 13 4.2.3. The CGE Models ............................................................................................... 14 4.2.4. SAFTA and the Expansio n of Bangladesh’s Exports into Indian Market: A Simulation Exercise using the Partial Equilibrium WITS/SMART Model ......... 17 4.2.5. Some Final Observat ions on the Partial Equilibrium and General Equilibrium Simulat ion Results ............................................................ 19 5. Feedback from the Policy Makers and Business People in Bangladesh ............................ 19 6. The Prospect of Mult ilateralism wit h Regio nalis m for Bangladesh .................................. 21 7. Challenges and policy options for making SAFTA an effect ive vehicle of rade­led growth for Bangladesh: The Call for a ‘SAFTA­Plus’ Agreement ..................... 22 8. Conclusio n ...................................................................................................................... 23 References .......................................................................................................................... 24 ii List of Tables Table 1: Share of Bangladesh’s Exports with Neighbouring Countries in her Total Exports .............................................................................................. 4 Table 2: Share of Bangladesh’s Imports with Neighbouring Countries in her Total Imports................................................................................ 4 Table 3: Exports rise for top 30 products (HS 6­digit) from Bangladesh to India (‘000 US$) under SAFTA .................................................... 18 Table 4: Non­tariff and Para­tariff Barr iers Faced by Bangladeshi Exporters in India ........ 20 List of Boxes Box 1: LDCs Have Longer Time­span for Tariff Reduction Compared to Non­LDCs ........................................................................................... 6 Box 2: Sensit ive Lists Amo ng the SAFTA Members ............................................................ 7 Box 3: Trade Creation and Trade Diversio n Effects of FTA ................................................. 9 Box 4: The GTAP Model ................................................................................................... 15 Box 5: Trade Creation and Trade Diversio n Effects of SAFTA Simulations ....................... 16 Box 6: Changes in Imports to Bangladesh fro m Different Countries under SAFTA1 (in US$mn) .................................................................... 17 List of Figures Figure 1: Country­wise Share (%) in Intra­SAARC Imports in 2003 .................................... 2 Figure 2: Country­wise Share (%) in Intra­SAARC Exports in 2003 .................................... 2 Figure 3: Bangladesh’s Trade with Neighbouring Countries (millio n US$) .......................... 3 iii Acronyms and Abbreviations ASEAN BIMSTEC Association of Southeast Asian Nations Bay of Bengal Initiative for Multi­Sectoral Technical and Economic Cooperation CGE CU DFQF EU GDP GTAP EU FTA LDCs NAFTA NTBs RMGs RoO RTA QRs SAARC SAFTA SAPTA S&DT TLP WTO Computable General Equilibrium Custom Union Duty Free Quota Free European Union Gross Domestic Product Global Trade Analysis Project European Union Free Trade Area Lease Developed Countries North American Free Trade Area Non­Tariff Barriers Readymade Garments Rules of Origin Regional Trade Agreement Quantitative Restrictions South Asian Association of Regional Cooperation South Asian Free Trade Area South Asian Preferential Trade Agreement Special and Differential Treatment Trade Liberalisation Programme World Trade Organisation iv 1. Introduction In recent years, there has been increased interest in regio nal econo mic integration in South Asia. Wit h the stalemate of the World Trade Organisation (WTO) negotiat ions, it is expected that the interest in regional trading arrangements will increase further. Regio nal integrat ion in South Asia got the mo mentum in 1995 when the South Asian Associat ion for Regio nal Cooperation (SAARC) Preferent ial Trading Arrangement (SAPTA) was signed. In early 2004, the SAARC member countries agreed to form a South Asian Free Trade Area (SAFTA), which has beco me a parallel init iat ive to the mult ilateral trade liberalisat ion commit ments of the south Asian countries. SAFTA has co me into force since July 01, 2006, with the aim o f boosting intraregional trade among the seven SAARC members. There have been so me strong arguments for the regional econo mic integrat ion in South Asia, as this integration is believed to generate significant intraregional trade and welfare gains for the South Asian countries. There are also aspirations amo ng the polic y makers and business communit y in Bangladesh about the posit ive impacts SAFTA might have on the Bangladesh economy. It is expected that the SAFTA mechanism, when fully implemented, will provide Bangladesh improved market access, help boost its exports to the region, and improve the country's intra­regional trade balance. SAFTA is expected to generate substant ial new trade – the so­called static gains. The dynamic gains could be even higher than the static gains due to the possible expansio n in the scale of operation by getting access to the markets of the relat ively larger member countries. However, crit ics have po inted out a number o f factors which could undermine the potentia l benefits fro m the SAFTA. For example, it is argued out that there are limited complementarit ies in the region. Therefore, even under the free trade mechanis m the expansio n of intra­regional trade would not be very substantial. Secondly, these countries trade very litt le amo ng themselves and major trading partners of the individual South Asia n countries are located in the West. Thirdly, it is alleged that SAFTA may lead to substant ial trade diversio n than trade creation for so me o f the member countries. And, finally, it ma y work as a stumbling bloc to mult ilateral trade liberalisat ion. These concerns have also bee n endorsed by so me studies while examining the potential impacts of SAFTA on the Bangladesh econo my. Against the backdrop of the aforement ioned arguments and counter­arguments the purpose of this paper is to examine the implicat ions of SAFTA for Bangladesh. The structure of the paper is as fo llow: Sect ion 2 provides an evo lut ion o f Bangladesh’s trade with it s neighbouring countries; Sect ion 3 depicts the current status of SAFTA wit h special reference to any favourable treatment given to least developed countries (LDCs); Sect ion 4 undertakes a review o f the studies on potential implicat ions of SAFTA; Sect ion 5 reviews the feedback fro m the key po licymakers and representatives of other stakeholders in Bangladesh on SAFTA; Sect ion 6 assesses the prospect of mult ilateralism wit h regio nalism for Bangladesh; Section 7 ident ifies the challenges and po licy options for making SAFTA an effective vehicle of trade­led growth for Bangladesh; and finally Section 8 presents the conclusion. 2. Bangladesh’s Trade with Neighbouring Countries: Patterns and Trend While examining Bangladesh’s trade with her neighbouring countries it should be kept in mind that the intra­regional trade among the South Asian countries is very low. Unt il 1951, total intra­regional trade in South Asia as a percentage of the region’s total trade was in the 1 double digits. However, as South Asia became progressively more closed relat ive to the world market and also the polit ical rivalry between India and Pakistan intensified over time, by 1967 intra­regional trade fell to just two percent of the region’s total trade. The share began to recover during the 1990s and by 2002 it rose to 4.4 percent (Baysan et al, 2006). Figure 1 suggests that even wit h a low intra­regional trade Bangladesh is the single largest importer in South Asia. In 2003, Bangladesh accounted for 36.4 percent of total intra­regiona l import. In contrast, Figure 2 indicates that in 2003, Bangladesh’s exports to the regio n accounted for only 2.3 percent of the total regio nal exports. Figure 1: Country­wise Share (% ) in Intra­SAARC Imports in 2003 Sr i L an k a 26.6% Ban g lad e s h 36.4% Pak is tan 7.1% Ne p al 14.5% M ald ive s 2.6% In d ia 12.8% Data Source: UN COMTRADE Figure 2: Country­wise Share (% ) in Intra­SAARC Exports in 2003 Sr i L an k a M ald ive s Ban glade s h 7.5% 0.3% Pak is t an 2.3% 7.3% Ne p al 5.4% In dia 77.2% Data Source: UN COMTRADE Bangladesh’s trade with her neighbouring countries is also highly unequally distributed. It appears fro m Figure 3 that Bangladesh trade very little wit h Bhutan, Nepal and Sr i Lanka. In South Asia, India is the major trading partner of Bangladesh fo llowed by Pakistan. But, the trade with India is largely o ne­sided, as the vo lume o f imports from India to Bangladesh is 2 considerably very large, whereas the vo lume o f exports from Bangladesh to India is very low. It, therefore, appears that Bangladesh has high bilateral trade deficit wit h India, which has been an issue for debate whether it is a matter of any concern (Raihan and Rahman, 2007).1 Bangladesh exports a miniscule (one percent) share of India’s imports, a negligible share (one percent) of its own exports, and a small range o f products (fertiliser and jute goods made up two­thirds of exports). Though ready­made­garments (RMG) is the major export item for Bangladesh, its exports to India are very much insignificant.2 Figure 3: Bangladesh’s Trade with Neighbouring Countries (million US$) Bangladesh’s trade with Bhutan 8 7 6 Bangladesh’s trade with India 1600 1400 1200 Export Import Export Import M illio n U S$ M illio n U S$ 5 4 3 2 1 0 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 1000 800 600 400 200 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Y ear Year Bangladesh’s trade with Nepal 1 2 Bangladesh’s trade with Pakistan 250 Export 1 0 Import 200 Export Import 8 M illion US $ M illion US $ 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 150 6 100 4 2 50 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Y ear Y ear Bangladesh’s trade with Sri Lanka 1 Bangladesh’s perennial large bilateral trade deficit with India might be a cause for concern but it has not led to any balance of pa yments problem for Bangladesh as consistent trade surpluses with such trading partners as US and EU compensate for these deficits. 2 It is alleged that, one of the major reasons behind very low exports of RMG products from Bangladesh to India is India’s relativel y high specific tariffs on Bangladesh’s RMG products (­­­­­­­­­­) 3 14 Export 12 10 Import Data Source: UNCOMTRADE M illio n U S$ 8 6 4 2 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Y ear It is clearly evident from Table 1 that in terms o f exports, South Asia has not been a significant export destinat ion o f Bangladesh. In fact, over the last 10 years, there has not been any major change in this pattern. In 1995, Bangladesh’s exports to the South Asian regio n accounted for only 2.3 percent of her total exports, which by 2004 came down to only 2 percent. Table 2 also suggests that over time Bangladesh’s dependence on South Asia as a source of her imports declined. In 1995, Bangladesh’s imports from the South Asian region accounted for 15.5 percent of her total imports, which by 2004 declined to 12.6 percent. India has been one of the major sources of imports for Bangladesh, as India accounted for, on average, 12 percent of Bangladesh’s total annual imports in recent years. Table 1: Share of Bangladesh’s Exports with Neighbouring Countries in her Total Exports 1995 Bhutan India Nepal Pakistan Sri Lanka South Asia Total Rest of the World 0.00 0.79 0.03 1.03 0.41 2.26 97.74 1996 0.00 0.91 0.25 1.05 0.11 2.31 97.69 1997 0.00 0.59 0.13 0.85 0.12 1.69 98.31 1998 0.00 0.20 0.00 0.65 0.03 0.88 99.12 1999 0.00 0.31 0.00 0.79 0.07 1.17 98.83 2000 0.00 0.35 0.00 0.91 0.10 1.36 98.64 2001 0.00 0.43 0.02 0.56 0.06 1.07 98.93 2002 0.00 0.47 0.01 0.57 0.04 1.09 98.91 2003 0.03 0.64 0.01 0.56 0.09 1.33 98.67 2004 0.05 1.27 0.01 0.57 0.12 2.02 97.98 Source: Computed using the data from UN COMTRADE Table 2: Share of Bangladesh’s Imports with Neighbouring Countries in her Total Imports 1995 Bhutan India 0.13 1996 0.07 1997 0.08 1998 0.04 1999 0.03 12.37 0.07 1.24 0.12 13.83 86.17 2000 0.03 6.66 0.01 1.40 0.13 8.22 91.78 2001 0.03 10.88 0.00 1.28 0.12 12.31 87.69 2002 0.02 13.40 0.02 1.24 0.01 14.70 85.30 2003 0.01 14.16 0.02 1.22 0.09 15.51 84.49 2004 0.01 11.24 0.00 1.25 0.08 12.59 87.41 11.31 17.38 19.69 14.82 0.01 0.11 0.15 0.16 3.95 1.82 0.96 1.11 0.11 0.15 0.20 0.12 South Asia Total 15.52 19.52 21.08 16.24 Rest of the World 84.48 80.48 78.92 83.76 Source: Computed using the data from UN COMTRADE Nepal Pakistan Sri Lanka 4 One important aspect of Bangladesh’s trade with India is that Bangladesh’s informal border imports fro m India have always been thought to be very high. Though there has not been any comprehensive quant itative assessment on the informal border trade between India and Bangladesh, it is po inted out by a few studies that the informal and illegal trade between India and Bangladesh could be as high as three quarters of recorded trade (World Bank, 2006). However, such informal trade is most ly one way – fro m India to Bangladesh. Therefore, if such informal imports fro m India were taken into considerat ion, India’s share in Bangladesh’s total imports would rise considerably. The upshot of the aforement ioned analysis po ints us to the fact that, apart fro m the imports fro m India, South Asian countries have not been the major trading partners of Bangladesh. As far as export destinat ions are concerned, Bangladesh’s major trading partners are the EU and US. On the other hand, apart fro m India, other major import sources for Bangladesh are China, Singapore and Japan. Any evaluation o f the prospects of SAFTA should, therefore, take note of these facts. 3. SAFTA and the LDCs in South Asia: Implications for Bangladesh Four LDCs in South Asia, namely Bangladesh, Bhutan, the Maldives and Nepal have bee n provided so me special and different ial treatments (S&DTs) within the SAFTA Treaty Text. These special provisio ns may have important implicat ions for Bangladesh. This sect ion crit ically analyses these special provisio ns and the stakes Bangladesh might have in these provisio ns. The S&DTs in the SAFTA Treaty Text are contained in: (i) three sub­paragraphs in Article 3 (Object ives and Pr inciples); (ii) four paragraphs in Art icle 7 (Trade Liberalisat ion Programme); (iii) ent ire Article 11 (Special and Different ial Treat ment for the Least Developed Contracting States); and (iv) one paragraph in Art icle 16 (Safeguards Measures). A discussio n on these S&DTs for the LDCs and the related concerns include the fo llowings: (a) The Treat y Text allows lo nger t imeframes to reduce or eliminate tariffs o f the LDC members. Also, the Treaty asks for a rapid tariff reduction or eliminat ion by non­LDC partners on products originat ing fro m LDCs (see Box 1). This provisio n has been argued to be favourable to the LDC members. However, concerns have been raised on two grounds: first ly, the first stage of tariff reduction seems to be redundant for all the South Asian countries, as current ly in these member countries, because of unilateral tariff liberalisat ion, tariff rates on most of their products are less than 20 percent or so. Therefore, LDC members are unlikely to have any significant gain during the first two years o f the Tariff Reduct ion Programme. Secondly, there are also concerns about the second stage, as the 3­year gap between LDC and non­LDC members appears to be low. Also the presence o f negat ive lists by the non­LDC members restricts significant ly the potentials o f market access o f the products to the LDC members in the non­LDCs. 5 Box 1: LDCs Have Longer Time­span for Tariff Reduction Compared to Non­LDCs LDCs will take eight years thereafter, instead of six years by Sri Lanka and five years by others, to reach the free trade level of 0­5 percent duties. The non­LDCs will reduce their duties for the products of the LDCs within three years compared with five years for reducing duties on each other's products. Country Category LDC s First St age From existing tari ff to 30% over 2 year s From existing tari ff to 20% over 2 year s Second Stage From 30% or below to 0 ­5% over 8 year s From 20% or below to 0 ­5% over 5 year s Target ye ar for FTA 2016 (0­5% for items outside negative list) 2013 (0­5% for items outside negative list) Non­LDC s (b) The Treat y asks for special provisio ns when considering the applicat ion o f ant idumping and countervailing measures to LDCs. In order to protect domest ic industry from possible injury due to increased preferent ial import, the Treaty provides scope for partial or full withdrawal o f preference granted under SAFTA for a period of maximum three years. However, safeguard measures cannot be applied against the product of LDCs if the share of imports fro m an LDC of the product concerned in total imports of importing country is less than five percent. But, these provisions do not go far enough to ensure that the LDCs will be able to derive equitable benefit s fro m SAFTA. At the penult imate stage of the negotiat ions, the Trreaty got held up because Bangladesh wanted it to go further towards securing S&DT to the LDCs. At the final stage of the negotiat ions, a co mpromise was reached that only part ially meets the demands o f the LDCs. For example, instead of the LDCs’ demand that the non­ LDCs should refrain fro m imposing anti­dumping and countervailing measures against them during the period o f negotiat ion, the Treaty contains the vague formulat ion that special regard shall be paid to the situation of these countries while considering the application o f such measures. (c) The Treaty provides for greater flexibilit y for LDCs in the number o f products contained in their sensit ive lists (see Box 2). However, a major flaw o f the Treaty is that it does not subscribe categorically to phasing out the negat ive list or el...
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