CEPA with India may not offer zero tariffs

Bangladesh will have to contend with huge losses of revenue if the country offers zero tariff facility to India under the proposed Comprehensive Economic Partnership Agreement (CEPA), and the local infrastructure is not ready for a significant boost in trade creation.

The Bangladesh Foreign Trade Institute (BFTI) made the observation, and sent a letter in this regard to the commerce ministry on Tuesday, of which The Business Post has obtained a copy.

It reads, “Providing zero tariffs to India would result in a significant fall in the import tariff revenue of Bangladesh. The largest fall in tariff revenue may originate from motor vehicles, cotton, machineries and equipment, man-made fibres, iron and steel, coffee, tea or spices, etc.

“Bangladesh may not be able to offer zero tariffs immediately under CEPA, and a gradual phase-out of tariffs could be a better approach.”

It should be noted that India is Bangladesh’s second largest trading partner after China. During FY22, Bangladesh’s exports to India hit $2 billion for the first time, while imports through the official channels stood at about $10 billion.

The BFTI letter further highlighted risks on trade in goods, services and investment with India, and made some recommendations or prospectus about the CEPA between the neighbouring countries.

To compensate for this potential loss of tariff revenue, Bangladesh could diversify its export base, attract foreign investment, reduce non-tariff barriers, implement tax reforms, and negotiate favourable terms under CEPA.

While this could present opportunities for Bangladesh’s economy, it would require careful planning and management to ensure a smooth transition, and avoid any negative consequences for domestic industries.

There is a possibility of significant trade creation and diversion between Bangladesh and India under the CEPA.

However, port-related access and lack of adequate hard infrastructure, trade facilitation related soft infrastructure and shipping lines pose tremendous challenges to trade, the letter pointed out.

The lack of essential infrastructure, such as transportation and logistics, may hinder Bangladeshi companies’ competitiveness in comparison to Indian companies, the commerce ministry wing points out.

To counter such issues, the BFTI recommended that the efforts to negotiate CEPA must keep a futuristic template of improved road, rail, inland waterways, air and shipping links upfront so as to augment trade in goods on a bilateral basis.

‘India has comparative advantage’

With the elimination of tariffs and other trade barriers, Indian goods may become more competitive in the Bangladeshi market. This could lead to a decrease in demand for Bangladeshi goods, particularly in industries where India has a comparative advantage.

Lack of clear understanding of the trade policy between the neighbouring countries can have uncertain and unfavourable implications for importers and exporters and the general consumers, especially at the border check-points, states by the BFTI letter.

Although the CEPA aims to eliminate tariffs and other trade barriers, non-tariff barriers such as technical standards, product regulations, and licensing requirements may still pose obstacles to trade.

There are some opportunities

Along with the risks, the BFTI also sees some opportunities. Bangladesh expects a significant reduction in non-tariff barriers for its key export products such as textile and apparel, frozen seafood, leather products, and agro-based products.

This reduction will help increase the competitiveness of Bangladesh’s exports in the Indian market.

Promotion of cross border e-commerce between the two countries would help facilitate online trade, promote digital payments, and reducing barriers to cross-border data flows, said BFTI.

The institution recommended that Bangladesh must engage in negotiations with India to repeal the recently extended anti-dumping duties on jute products to prevent negative impacts on the jute industry and exports.

‘Many may lose employment’

Regarding the services sector, the BFTI said, under the CEFA agreement, the import of Indian services to Bangladesh will increase. As a result, many people may lose employment in Bangladesh. In the context of investment same BFTI addressed same risk.

In this regard, the BFTI letter read, “CEPA may cause job losses in Bangladesh due to increased competition, closure of some Bangladeshi companies to close or lay off workers, and Indian companies may bring their own workers.

“Adequate policy mechanisms are required to mitigate any effects of sudden volatility of currencies so that trade and investment flows remain stable on a bilateral basis.”

Improving customs integration is crucial for boosting investments between Bangladesh, and a robust Investor-State Dispute Settlement (ISDS) mechanism needs to be introduced to protect investors, and resolve disputes in a fair and transparent manner, BFTI recommends.

What exactly is CEPA?

The proposed Bangladesh-India Comprehensive Economic Partnership Agreement (CEPA goes beyond the traditional free trade agreements, and also addresses trade in services, investment, intellectual property rights and e-commerce.

Bangladesh is preparing to work with India to continue trade facilitation in view of its graduation from LDC in 2026. Both countries have already agreed to move forward with the agreement.

The two countries have also jointly conducted a feasibility study. Based on this study, Bangladesh and India are studying the agreement separately. The BFTI provided its observations on CEPA based on the feasibility study being conducted by Bangladesh.