August 20, 2022, 3:20 p.m.

Last modification: August 20, 2022, 4:54 PM

Infographic: TBS


Infographic: TBS

Bangladesh is entering into formal negotiations with India for a Comprehensive Economic Partnership Agreement (CEPA). The negotiations are taking place at a time when Bangladesh is set to lose ease of duty-free and quota-free market access for India after 2026 when it graduates to developing country status.

In an interview with Adam Pitman, Dr. Sanjay Kathuria, former World Bank Senior Economist, explained his view of the political concerns that complicate trade in South Asia.

Doctor Sanjay Kathuria. Sketch: TBS

Doctor Sanjay Kathuria.  Sketch: TBS

Doctor Sanjay Kathuria. Sketch: TBS

Bangladesh’s private sector will have time to prepare for the free trade agreement with India

Many Bangladeshis are wary of the possibility of India-weighted economic deals. Are deals like the India-Bangladesh Cepa worth the risk?

I certainly believe it’s not only worth the risk, but important to take the plunge. And I really don’t think that’s a long-term risk, and I’ll tell you why.
At the macro level, everyone is concerned about bilateral trade deficits – the bilateral trade deficit with India, for example, is high and growing. And underneath that is the fear that “I can’t compete.” But we know that Bangladesh is macro-economically stable.

Bilateral trade deficits are political problems, but they are not economic [issues]. Bangladesh imports essential goods inputs for its garment industry, essential consumer goods, machinery and then uses them for production and exports. Critically, especially in these times, imports help control prices.

The concern should be with the overall current account deficit, rather than the bilateral trade deficit. This means the deficit after taking into account remittances and other service exports, such as tourism. And there, Bangladesh does not really have a problem. In fact, low-income countries would have to run some level of current account deficits in order to be able to, as they say, “import savings from the rest of the world”.

The bilateral deficit with India, although growing, has not led to any macroeconomic situation, and the balance of payments is stable. So first, don’t worry about bilateral trade deficits.

Second, trade and investment are very closely linked, and Bangladesh badly needs quality investment in export-oriented sectors.

If there is a free trade agreement between India and Bangladesh, as they are currently considering under CEPA, Bangladesh’s exports to India would increase by 182% under an FTA, and if they add trade facilitation measures and reduce transaction costs, then there could be either a 300% increase.

These statistics come from an article [Unlocking Bangladesh-India Trade: Emerging Potential and the Way Forward] I did it with Selim Raihan and Prabir De in 2012.

A free trade agreement could increase Indian investment in Bangladesh – not only for re-exports to India, but even as a base for exports to the rest of the world.

[That is] because Bangladesh is more competitive in certain sectors, such as clothing, and this range of products can be expanded through reforms and foreign investment.

Can you elaborate on the link between trade agreements and investment more directly?

The proposed CEPA goes beyond the liberalization of trade in goods. And there has been work by the World Bank that shows that deeper economic agreements lead to further economic ties, particularly in investment.

When governments show confidence by signing an agreement like Cepa, it can energize the private sector. Businessmen think ‘this is a stable economic partnership – what can I do profitably?’

Bangladesh could leverage Indian expertise in service sectors to improve competitiveness in a range of manufacturing industries. Services are essential to global competitiveness, including in the manufacturing sector.

Indian service companies could also invest and improve Bangladesh’s productivity in different sectors, such as logistics, for example, as well as labor skills – I just saw that Bangladesh performs very poorly in the Global Talent Competitiveness Index, below Nepal, Sri Lanka, and Pakistan.

And it wouldn’t just be about Indian investment in Bangladesh. There will also be Bangladeshi investments in northeast India, for example, to secure its own future for agricultural products.

So it will be a two-way street.

Also, if Bangladesh signs a free trade agreement with a big country like India, it may interest [businesspeople] other countries too. Companies could use Bangladesh as a base for exporting to India, and even develop joint ventures with [Indian companies] in Bangladesh.

So, I think there could be a lot of lucrative investments, but more importantly, this investment will help Bangladesh to diversify and become more competitive in sectors other than clothing.

How do you interpret ideas such as “India cannot be trusted” or “We are doomed to lose” when bilateral trade deals are being discussed?

This is normal for the course in South Asia. This is true in Sri Lanka, Nepal and all small countries when faced with a bigger country. It is the fear induced by asymmetrical size and capacity.

[But] large countries – like India – take into account the sensitivities of small countries in different ways: first, trade agreements are implemented over longer periods of time, which gives [industries] time to adapt; second, liberalization is asymmetrical, so a small country gets an “early harvest”, [which can create] political support for liberalisation; Third, certain sectors which are very sensitive, say, because of the number of people employed, may be excluded from liberalization altogether – such as certain parts of agriculture.

India has already unilaterally liberalized trade with all the least developed countries in South Asia. Then there is the India-Sri Lanka Free Trade Agreement, which was another example of asymmetric liberalization – India opened up to Sri Lanka much faster than the other way around.

And I am convinced that this will be the model for any future Cepa between India and Bangladesh.

The most sensitive sectors for Bangladesh will be opened at the end – 10 years later, or when they decide. This is normal when free trade agreements are designed between two partners of different capacities. So there will be enough time, provided there is an intention, for the private sector to adapt and prepare for greater competition.

And remember: there will be big winners along with losers. So the challenge is to manage the transition.
New and expanding sectors should be supported by a facilitation policy that improves [access to] capital, labor mobility and skills development.

How has domestic politics in South Asia changed your work on regional trade and connectivity?

It became clear to me that there are no quick wins in this scenario. But good things are happening and happening, and that should be celebrated.

My approach is this: don’t necessarily go for big reforms, but focus on progressive things, which are less likely to arouse opposition. Be opportunistic when openings present themselves, then go for it.

Carry on. To celebrate. Look for openings.

Don’t be discouraged by setbacks. Because it’s normal for the course. You know, one step forward, two steps back, or two forwards and one back. Really look for openings – and dialogue.

There are always opportunities, even in the most negative circumstances. There are issues. In fact, today there are new opportunities for South Asia – [even in] the grim global scenario in which we find ourselves. New opportunities, for example, [to develop] regional value chains [that take] world advantage [pursuit of] supply chain diversification.

I am inherently optimistic and I will continue to manage.