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India-Bangladesh Trade Relations: Prospects of aBilateral Free Trade Agreement (FTA)
Organized By
Islamic Economics Research Bureau
By
Professor Ayubur Rahman Bhuyan
Monthly Seminar
on
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Importance of Bilateral Trade with India
1. Indias large size (in terms of both population and GDP) makes ita large export market
2. On the side of import: geographical proximity, abundant naturalresources, and diversified production structure make India a
cheaper and convenient source of supply
3. Importance of bilateral trade is recognized at both official andprivate sector level
4. Official level: the existing trade agreement, SAPTA, SAFTA
5. Private sector level: Strong advocacy by FBCCI and FICCI, MCCIand CII to boost bilateral trade
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Trends in India-Bangladesh Trade
1. Trade between Bangladesh and India is heavily tilted in favour ofIndia.
2. In 2005-06, BDs official imports from India were $1851 million butits exports to India were just $242 million. Exports to India couldpay for only 13% of imports from India
3. Imports from India is growing fast, but exports to India remainedsmall and recorded a modest increase
4. In 2005-06, Bangladeshs exports to India accounted for as little as2.30 percent of its total exports, whereas imports from India in that
year were 12.5% of her total imports
5. Bangladeshs trade deficit with India increased from $962 million inFiscal 2001-02 to $1609 million in 2005-06 (a 1.7 times increase)
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Commodity Composition of Trade
Imports are highly diversified but exports are highly concentrated
Major Imports: textiles, food items, machinery, mineral products,transport equipment, chemical products, fish
Major exports: As few as six products, viz., raw jute, fertilizer, jutegoods, betel nuts, jute yarn and twine, and frozen fish, account for80% of total exports to India
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Unofficial Trade between India and Bangladesh
1. As in official trade, unofficial India-BD trade is essentially one-way
2. Unofficial imports from India are about 20 times larger thanunofficial exports to India
3. Unofficial imports at the present could be about 1.5 times theofficial imports.
4. Livestock and Cattle are the major import item but many othercommodities of everyday use are also imported. Items of unofficial
export are limited
5. Actual trade deficit with India would be much larger if unofficial
trade were included
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Causes of Bilateral Trade Deficit with India
Overvalued Taka vis--vis Indian Rupee makes exports
uncompetitive
Imports become cheaper
Despite import liberalization, unofficial imports remain profitable
A downward adjustment of the Taka/Rupee exchange rate iswarranted
A. Overvalued Exchange rate
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Causes of Bilateral Trade Deficit with India Contd.
Products that Bangladesh can export attract high tariffs in India
Such products include garment, knitwear, leather shoes, fruitjuices, jams and pickles, fish etc
There are also para-tariffs CVD, ADD, SD, additional customsduty, luxury tax, surcharge etc
Moreover, in the FY 2006-07 budget, the GOI raised tariffs onsome major Bangladesh products exported to India (see Table)
B. Tariffs
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Causes of Bilateral Trade Deficit Contd.Duty (CD) imposed by GOI in the FY 2006-07 Budget:
Commodities H.S. Code CD (%)2005-06
CD (%)2006-07
Raw Jute 5303.10.10 15.30 17.34
Frozen/Fresh Fish 0303.19.00 30.60 35.90
Jute Manufactures 6305.10.10 15.30 17.34
Betel Nuts 0802.90.19 100.00 100.00
Soap Toilet 3401.11.10 34.44 36.81
Jute Twine & Yarn 5607.10.10 15.30 17.34
Ceramic Tableware 6911.10.19 34.44 36.81
Copper Wire 7408.11.90 28.51 30.64
Cast Iron Articles 7325.10.00 34.44 36.81
Fruit Juice 2202.10.90 52.24 58.40
Wooden Furniture 9403.30.90 34.44 36.81
Source: Government of India. Annual Budget 2006-07.
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Causes of Bilateral Trade Deficit Contd.
Dispute over Classification of Goods for Customs Purposes
Requirement of Chemical Test
Customs Valuation
Non-acceptance of Certificates of Rules of Origin (ROO)
Arbitrary Imposition of Tariff Values
C. Non-Tariff Barriers (Some of them are State-mandated
Imposition and others are sheer bureaucratic Interference)
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Non-tariff Barriers Contd.
Imposition of CVD and ADD
Health and Quality Standards
Permits and Licences
Condition for obtaining ISI Certificate
Requirement to collect Health Certificate
Sanitary and Phytosanitary Measures
Quarantine Requirements
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Non-Tariff Barriers Contd.
Technical Standards
Inadequate Land Customs Infrastructure
Labeling and Marking Provision
Unexpected harassment like filing false cases for alleged violation of
rules regarding health, weights and measures; refusal to grantSAPTA concessions; rejecting consignments on false pretext
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Causes of Bilateral Trade Deficit Contd.
D. Failure of SAPTA to Enhance Trade
E. Weak Production Structure:
Export production in Bangladesh is narrowly based
India itself is a big producer and exporter of most of the productsthat Bangladesh can export
Undiversified production base rather than Indias restrictive tradepolicies is the root cause of BDs slow growth of exports to India
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Rationale for a Bilateral Free Trade Agreement with India
1) Reduction of Trade Deficit (by increasing Exports)
2) Forced Reduction of Imports to Improve Trade Balance will beSelf-Defeating
3) There is hardly any scope to cut down essential imports from Indiawithout jeopardizing growth
4) Piecemeal efforts by Government in the past to obtain tradeconcessions from India failed to raise exports
5) A free trade agreement (FTA) might offer a solution
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Official Level Discussion on FTA Talks began at Commerce Secretary Level in March 2003
India circulated a draft of the proposed agreement on bilateral FTA
India-Bangladesh JEC formed a Joint Working Group (JWG) in July2003 at the level of Joint Secretaries to begin negotiations on theFTA
The JWG met on four occasions so far but produced no result
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Opinion of the Free Trade Group (FTG)
FTA should provide for a true market access for Bangladeshproducts, free of all tariff, non-tariff and para-tariff barriers, and openup opportunities for investment
The principle of asymmetry and non-reciprocity should berecognized
The Group compiled a List of 180 products on which Bangladeshwill offer 100% tariff concession to India. It compiled a List of 3228
items on which Bangladesh will seek 100% tariff concession fromIndia
India should provide 50% tariff concession on signing of theAgreement and 100% exemption by the end of the first year.Bangladesh will phase out the duties over a period of 12 years
The FTG, formed by the MOC of GOB in September 2003,recommended, among others, the following:
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Likely Impact of the FTA on Bangladesh Economy
Despite high tariffs, Indian exporters can successfully compete inBangladesh market. In a free trade situation, they will enjoy asubstantial price advantage. Bangladeshs imports from India mighttherefore rise
Loss of government revenue and lower protection to local industries On the positive side, duty free imports from India will create
economic welfare benefits in the form of lower prices and betterquality products for Bangladesh consumers
Low-duty imports will bring down cost of production, and local
industries will be competitive Fall in import duty will be outweighed by increased revenue through
VAT and excise duty
These welfare benefits will considerably exceed the economicwelfare losses to Bangladesh producers
Effects on Bangladeshs Imports:
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Likely Impact of FTA Contd.
All major Bangladesh exports to India currently attract high importduties. In an FTA when there will be no tariffs, exports in thesegoods would increase
Long term benefits would be much higher
In an FTA environment, the entrepreneurs will be encouraged not
only to raise investment in existing export activity but also set upnew industries and produce new products for the large Indianmarket
Effects on Exports:
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Likely Impact of FTA Contd.
The FTA is very likely to attract investment and joint ventures byIndian entrepreneurs in the country
This happened in Sri Lanka and Nepal, and may happen toBangladesh as well
Effects on Investment:
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Likely Advantages of FTA
Cheaper imports of raw material will generate more manufacturingactivity and additional employment
FTA will make manufacturing production globally competitive asproduction cost will be lower
Government revenue from VAT/Excise will increase and outweighthe revenue loss from CD
Falling prices and costs will increase consumer welfare
Investment, both foreign and local, will get a boost
competition will force domestic industries to raise efficiency andcompetitiveness
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Probable Disadvantages of FTA
Certain sectors may face threats as protection will be lowered
To neutralize the adverse effects of FTA, safeguards measures willneed to be incorporated in the agreement
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Recommendations for Policy
1) Government may seriously consider signing the proposed FTAagreement, provided there is guaranteed market access (liberalrules of origin, no tariff and non-tariff barriers)
2) Fast Track Liberalization. Tariffs on fast track items should be
eliminated immediately
3) Normal Track Liberalization. Trade barriers on products of thenormal list could be phased out over an agreed timeframe 12years for Bangladesh, and a shorter period of not more than 2
years for India
4) Negative List. Products of export interest to Bangladesh shouldnot be in Indias Negative List
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Recommendations Contd.5) Dismantle all NTBs and Para-Tariffs
6) Safeguard Provisions. The Agreement should include asafeguard clause to protect Bangladeshs infant industries
7) Rules of Origin. The rules of origin should be more favourablethan under the India-Sri Lanka FTA
8) Expand Production Base
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Recommendations Contd.
9) Build Export Capacity. There is the need to build export capacity
in various products, which have good demand in India
10) Introduce an Export Development Assistance Scheme toassist exporters, the EPB, and the Business Chambers in theirexport promotion effort
11) Improve Trade Facilitation
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Recommendations Contd.
Infrastructural facilities should be improved at the land customsstations (LCS) on both sides of the border
The improvement in infrastructure would need to be done in acoordinated way there would no point if the infrastructure wereimproved on one side of the border but bottlenecks were toremain on the other side of the border
Petrapole-Benapole LCS should work 24 hours and 7 days a
week
New land customs stations for bilateral trade should be openedbetween Bangladesh and the neighbouring Eastern and North-Eastern Indian States
12) Improve Infrastructure
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Recommendations Contd.
13) Investment Liberalization. The FTA should provide for
liberalization of investment. The two countries may sign anInvestment Promotion and Protection Agreement and DoubleTaxation Avoidance Agreement
14) Remove State Government-imposed levies, for example luxury
tax, on Bangladesh Exports
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- The END -