The proposed Comprehensive Economic Partnership Agreement (CEPA) with India is going to be a real shot in the arm for Bangladesh that is set to lose duty preferences after its graduation to a developing nation.
Once the trade deal is signed, Bangladesh's export earnings will go up by $3-5 billion and India's by $4-10 billion in next 7-10 years, according to a final draft report of the joint feasibility study by Dhaka and Delhi.
New investment windows will also open up for both the countries thanks to the proposed CEPA, which is a little different from FTA as it covers many issues, including trade in goods and services, investment, intellectual property rights and e-commerce, according to the draft report submitted to the commerce ministry on Monday.
Md Jafor Uddin, chief executive officer at Bangladesh Foreign Trade Institute, told The Business Standard, "We have submitted [the draft report] to the ministry, which will be finalised at a meeting of the advisory committee chaired by the commerce secretary following a discussion with stakeholders."
Commerce ministry officials say Bangladesh has no experience in making such agreements. So, they will cautiously complete bilateral negotiations with India over CEPA. Right now, it is not possible to say how many days it will take to sign the deal.
Agreement to benefit both countries
The report, prepared by Bangladesh Foreign Trade Institute and India's Centre for Regional Trade, says, "It may be concluded that the estimates and analysis of this study indicate that the proposed CEPA between India and Bangladesh is not only feasible but also mutually beneficial in terms of possible gains in the realms of trade in goods and services, and investment."
In FY21, Bangladesh imported nearly $8.6 billion worth of goods from India, while its exports amounted to only $1.3 billion.
Under CEPA, the country will have opportunities to enhance its share in exports to the neighbouring country. Marine goods, textiles and apparels, pharmaceuticals, animal and vegetable fats or waxes, inorganic chemicals and flour-based products are among potential export items, according to the draft report.
Bangladesh gets duty-free access to India for all products except 25 products, including arms and drugs under the South Asian Free Trade Area, but exports to the country are still not going up owing to non-tariff barriers.
Bangladesh exports to India crossed $1b last FY
For the first time in the last fiscal year, Bangladesh's exports to India crossed the $1 billion mark. In the first 10 months of the current fiscal year, exports amounted to $1.7 billion, up by more than 58% over the same period of the last fiscal year.
On the other hand, the neighbouring country will get a scope to export food and food items, earth materials, mineral fuels, chemicals, pharmaceuticals, plastic and plastic goods, wood products, cotton, woven fabrics, iron and steel, railway trams and locomotives and other vehicles to Bangladesh.
"Bilateral service trade is likely to benefit from the trade in goods, which is expected to grow as a result of CEPA, due to the necessity of supporting trade in services, such as transport services, insurance and banking services, telecommunication and distribution services," according to the report.
Under CEPA, Bangladesh will be able to export to India professional services, IT/ITes services, construction and related services, financial services, and communication services, while India's export services include other business services, tourism, personal travel and freight services, telecommunications, computer and information services, education and health services, it added.
The draft study report said any efforts to augment trade in goods and services between the two countries would require cross-country and cross-sectoral investment.
Besides, the feasibility study report reveals the potential sectors for investment from India into Bangladesh are food, pharmaceuticals, leather and leather products, textile and apparel sector, agro-based Industries and farm machinery plant, automobiles, light engineering and electronics, ceramics, ICT sector, banking and financial services, telecommunications and mega construction project.
Similarly, Bangladesh will have potential to invest in food and beverages, agro processing, pharmaceuticals, plastics and rubber products, leather and leather products, textile and apparel, jute and jute products, cement, spinning mills, electronics and batteries, travel and tourism and ICT sectors of the neighbouring India.
As per existing policy, Indian citizens are allowed to invest in Bangladesh but Bangladeshis need to take prior permission from the Indian government to do so.
Recommending that businesses from both the countries get equal opportunities in terms of investments, the draft report said both sides would strive for a legally binding investment regime under CEPA so that investment flows between the two countries are not only through automatic route but also through fast-track mode and single window system.
Scope to build regional value chain
The study suggests that there exists scope for building regional value chains (RVCs) between Bangladesh and India.
"The proposed CEPA between Bangladesh and India can help build RVCs through trade in goods and services and investment. Bangladesh and India could explore new RVCs or strengthen the existing ones in sectors, such as agro processing, chemicals, pharmaceuticals, textiles, leathers and electric machinery, because of the potential existing under trade in goods, services and investment and by addressing the challenges related to these, RVCs can play an important role for which CEPA could be the best enabler."
Abdul Matlub Ahmad, president at Bangladesh-India Chamber of Commerce and Industries and former president at Federation of Bangladesh Chambers of Commerce and Industries, told TBS that the value chain is now the most important issue in the world.
"India has cotton. We can make yarns and garments. So, if CEPA is signed, joint investment as well as bilateral trade in both the countries will increase," he said.
Skills and resources of the two countries can be utilised for each other's development through the signing of CEPA. This will benefit both countries. There will also be opportunities to create many jobs in Bangladesh, he noted.
"I agree with the fact that the final draft report of the joint survey has raised the possibility of increasing bilateral imports and exports," Abdul Matlub, also said, hoping that the trade volume will further increase if the existing barriers to bilateral trade under CEPA are resolved.
The study report said despite existing institutional mechanisms, trade and economic relations between India and Bangladesh have not reached full potential. Thus, there was a need to integrate both the economies and enhance trade linkages, by way of creating a new institutional mechanism in the form of a CEPA that could include trade and investment between the countries, to enable creation of RVCs.
Integrating both the economies through these dimensions would not only enhance trade but also lead to improve backward and forward linkages which in turn will result in overall economic growth and development on both the sides, it added.
Challenges and possible policy responses through CEPA
Although the possible CEPA would bring significant benefits for both Bangladesh and India, there are a number of possible challenges, including inter alia the need to balance the benefits for both the countries, seamless connectivity between two countries to be ensured through hard and soft infrastructure, securing proportionate protection to sensitive industries, which should be addressed.
The study report said a lack of understanding of the trade policy between the countries can have uncertain and unfavourable implications for importers and exporters and general consumers, especially at the border check-points.
Thus, there is a need for customs cooperation and trade facilitation through the mechanism of CEPA in a holistic manner.
For any success of CEPA, it would be essential to address non-tariff barriers, which CEPA could give due consideration to.
A lack of testing facilities has been a major problem to align food safety standards requirements in Bangladesh with India. Provisions for investment facilitation keeping such endeavours in mind would be useful while negotiating the investment chapter under CEPA.
"The CAROTAR (Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020) of India needs to be studied in connection with SAFTA rules to prevent any hindrances to trade flows. This could be adequately focused upon in CEPA negotiations."
May crowd out domestic employment
The study report said there are concerns relating to crowding out of domestic employment on both sides if trade in services is included in CEPA. So while giving special emphasis on the potential sectors of trade in services of both the sides, CEPA negotiations could focus on provisions that allay the fear without sacrificing on the potential for enormous growth in temporary movement of natural persons.
One of the most important constraints in the realm of trade in services was identified as the unduly restrictive Visa regimes. This prevented business-to-business contacts and ventures pertaining to trade as well as FDI.
The study report suggests that an adequate policy mechanism is required to mitigate any effects of sudden volatility of currencies so that trade and investment flows remain stable on a bilateral basis.
As a neighbouring country both India and Bangladesh have continued to consolidate their political, economic, trade and cultural relations and have built a comprehensive institutional framework to promote bilateral cooperation.
The two countries have several bilateral agreements and MOUs, including for trade and connectivity, economic and development cooperation, cooperation on water resource and power, investment promotion and protection, double taxation avoidance, opening of border haats, security and border management etc.
Bangladesh India's largest development partner
India's development cooperation with Bangladesh has grown in size and coverage. With $8 billion in three Lines of Credit under implementation, Bangladesh has become India's largest development partner.
During the bilateral commerce secretary level meeting between Bangladesh and India, held in February, 2018, the Indian side raised the issue to sign CEPA under enhancement of bilateral trade.
During the bilateral meeting of commerce ministers, held on September the same year in Dhaka, both the ministers agreed that a CEPA, covering goods, services and investment, would provide a sound basis for substantial enhancement of trade and commercial partnership and directed their officials to undertake a joint study on the prospects of entering into a bilateral CEPA.
During the bilateral meeting of commerce secretary level in January 2020, both the parties decided to undertake a joint feasibility study to find out whether a CEPA will be mutually beneficial for both the countries.