Free trade: Are we prepared?

One major issue is the impact on Bangladesh's economy of the huge regional trade imbalances. This has added extra burden on the otherwise stymied economic interactions among the SAARC nations. The volume of regional trading in South Asia is the lowest in the world.

Integration: The very first step

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All signs indicate that Dhaka will soon strike a deal to trade freely with India. Being a nation that buys from abroad ten times more than it sells, a total re-haul of the nation's trade structure is needed urgently to prepare for the plunge.

Bangladesh may emulate the models embraced by East Asian countries as they've done spectacularly well in the 1980s with their maiden experiences as free traders. And, Dhaka must not forget that despite such a feat, the World Bank's 1996 index of integration showed Indonesia, the Philippines, and Thailand having a much lower level of integration than Malaysia and Singapore.

The index of integration consists of four components: the ratio of trade to GDP; credit rating; ratio of FDI to GDP; and the share of manufactured goods in total exports. Using this yardstick, Thailand is considered as having integrated faster than others as one of the late entrants in the ASEAN. Dhaka must assess soon where it stands.

Needs and reality

Of Bangladesh's $31 billion GDP, agriculture alone accounts for 30 per cent. Paradoxically, the agriculture's contribution to overall export is less than 1 per cent. Current agro-based exports are limited to Jute goods ($33 million a year) and fish plus fish products (about another $35 million). Lately, a handful of nascent agro- base industries have joined the rank and file of agro-exporting traders.

In the industrial sector, manufacturing outlets' contribution to the GDP is 15.2 per cent, of which only 9.3 per cent constitutes manufacturing activities per se. Excepting the $3-4 billion earning from garment exports, the share of manufactured goods in the nation's export kitty is as yet negligible.

As well, to remain competitive in garment exporting following the cessation on January 1, 2005 of the quota system being enjoyed under the Multi Fiber Agreement(MFA), Dhaka may face a hack of a trouble with other Asian neighbours who too have grown equally garment-savvy.

While such concerns will pose enormous challenges toward becoming a free trader, Bangladesh's quest for integration is also hamstrung by its virtual dependency in export on countries of North America and the EU.

As of now, the main export destinations of 'Made in Bangladesh' products are US (33%), UK (12%), Germany (11.4%), France (6.9%), Netherlands (4.9%), and Italy (4.8%). The look East policy demands a complete restructuring of the export regime by avoiding complementary products available in regional markets. The garment sector is one of the most vulnerable ones from such a standpoint.

Regional pendulum

Due to Dhaka's persistent trade surpluses with North American and the EU countries, its chronic deficits with regional nation-states make the regional free trade proposition itself a scary spectacle. But free trade being the only available game in global market, Dhaka can hardly bypass that reality. And it must not.

Between 1996-2003, Bangladesh's average yearly export to SAARC countries stood at $758.43 million while her import sky rocketed to a staggering $8.617 billion.

This has resulted into the swelling of Bangladesh's cumulative deficit to Taka 20,000 crore, or $12 billion. Besides India, deficit in regional trade includes China ($3 billion), Pakistan ($ 63.14 million), Taiwan ($59.20 million) Singapore ($3.24 billion), Japan ($2.1 billion), Sri Lanka ($ 14.55 million) and Myanmar ($15.60 million), to name but a selective few. Even Bhutan enjoys a trade surplus with Bangladesh.

Indo-Bangla free trade

Whatever way one tends to view it, free trade in the region cannot begin without India's full participation. As the Indo-Bangla Joint Economic Council (JEC) meets on July 14-15, Dhaka will insist on measures to curb trade imbalance through tariff reduction on a basket of Bangladeshi products.

India, however, is likely to dominate the talks with issues like transit, transshipment, Free Trade Agreement (FTA) etc. India may as well reiterate its previous stance to convince Dhaka to facilitating gas export as the fastest way to redress the imbalance.

Taking cue from Sri Lanka's tale of success in free trading with India, Bangladesh finance minister earlier proposed to his Indian counterpart that an Indo-Bangla free trade regime can be commenced for an initial duration of six months to see its efficacy. Indian external affairs minister reportedly agreed.

Study shows, Indo-Sri Lankan free trade is working in Sri Lanka's favour, and, in 2001, Sri Lanka's export to India rose by 136.9 per cent and Indian's to Sri Lanka by 48 per cent.

The JEC is meeting after six years of hiatus, indicating the degree of antipathy prevalent in trade issues of the two neighbours. Many observers even attribute blames on successive Bangladesh governments for having allowed Bangladesh's level of yearly import from India to overshoot the $1.2 billion mark while her export barely crossed the range of $450-500 million.

The trade deficit crisis exacerbated further lately by the Indian decision not to allow Bangladeshi cement to neighbouring North Eastern states. The measure costs Bangladeshi exporters Taka 6 crore per month, contributing another chunk of Taka 72 crores a year to the existing pool of deficit.

Bangladesh's predicament is further heightened by the lack of diversification needed in preparing a range of products suitable for Indian markets. The process warrants an exhaustive market research to ascertain the range of commodities; study on production feasibility within; and the viability of products in quality and price.

Protectionism: A nemesis

Protectionism is a nemesis of the free trade paradigm itself. A recent WB study claims, average customs duty and other protective taxes of India are highest in the region at 32.7 per cent, followed by Bangladesh at 26.4 per cent, Pakistan 18.2 per cent, Nepal 16.2 per cent and Sri Lanka at 12.5 per cent.

The study adds, India's average tariff in 2002 was second highest among 105 developing countries and two times higher than China, Brazil and Indonesia. India currently uses six normal customs duty rates along with 41 protective tax slabs to discourage import.

This is the continuation of India's pre-1990s economic policy, and, it deserves changes to facilitate unfettered access of goods and services to Indian markets.

Such a measure will also be in tandem with the latest round of WTO negotiations, whereupon the EU proposed that all developed and Advanced Developing Countries (which includes India) should offer duty and quota free access to LDC (which includes Bangladesh) products.

Devil in details

With regards to Bangladesh's ill-preparedness, a look beneath the apparent exposes more devils concealed in minute details. While extraneous factors of the like do create bottlenecks in trading freely, government's public sector strategy and performance seem to compound the problem of liquidity needed to finance and fine tune the nation for free trading. After all, a nation aiming to be merchants must not be seen as cash starved.

Reality is: Bangladesh's liquidity situation is a battered one; cumulative public and private loans -- 25% of which already defaulted -- having drenched the financial institutions of their ability to finance new projects. Government also lacks in wherewithal to patronise new ventures.

Why the government is so poor? So far, much is being heard about private defaulters, while the State Owned Enterprises (SOEs) too keep draining the public exchequer of resources that could have been used to meet other vitally important social and economic needs.

As the army of loan defaulter swells in number, Bangladesh ought to follow the South Korean example to surmount the problem. South Korean government re-capitalised its banks and set up a public asset management company to buy up bad loans.

Given that the total defaulted loan by 17 SOEs alone amount to Taka 1,335 crore 65 lakh -- according to last count-- the nation can hardly condone the magnitude of this problem. As well, total loaned amount with 19 SOEs stands at Taka 6,708 crore 47 lakh. Add to this the combined default loans in private and public sectors -- Taka 24,000 crore -- to gauge the severity of the problem.

Feigning that nothing happened, the government's investment strategy with respect to the SOEs remains unchanged. The government still invests 36 per cent of the nation's GDP --Taka 89,920 crore to be precise-- in the SOEs alone.

On the flip side, Taka 170 crore 8 lakh profits from some of the SOEs in FY 2001-02 hardly reconciles the taxpayers' pain who'd lost Taka 1,461 crore and 55 lakh due to mismanagement and corruption by 44 SOEs in the bygone fiscal alone.

Reforms, loans and cooperation

That notwithstanding, the World Bank's recent commitment to loan Bangladesh $1.25 billion in FY2004-05 -- provided Dhaka can bring about further reforms in various sectors of the economy -- is a sign of trust reposed on the nation's latest economic performances.

If India must accept this World Bank recognition of Dhaka's credit worthiness as a positive development, it must give a good shot to pull Bangladesh out of its prevailing 'export paralysis' by allowing a selective lot of Bangladeshi goods and services into Indian market under a liberalised tariff regime.

For, once Dhaka improves upon its existing performances, its credit rating is bound to go even higher. The World Bank's range of loans has increased gradually from $171.9 million in FY2000-01 to $1.25 billion for 2004-5.

The resilience of the Indian economy rests on its size and diversity. Indian GDP is $538 billion strong, growing further at an annual rate of 5-6 per cent. The spectacular success in the IT sector portends the continuation of this growth bonanza, particularly after the China-India rapprochement.

Bangladesh also expects India to recommend Bangladesh's accession into the ARF so that a truly Asian Free Trade Zone emerges in the neighbourhood, combining the ASEAN and the SAARC. The EU's expressed intent to join the ASEAN will indeed make the Asian region the hub and epicentre of global trading in coming decades. Are we ready?

Author and columnist M. Shahidul Islam is a senior assistant editor of this paper.