Do bilateral agreements really facilitate trade?

The sole purpose of bilateral agreements with India and other countries was to facilitate and expand bilateral trade relations. It would be, therefore, appropriate to look into at this point of time whether these bilateral GTAs concluded mostly in the 1970s and 80s serve any useful purpose at all in the new brave world of multilateralism.

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Trade within a country was always viewed positively for improving the living conditions of its citizens. The utility of foreign trade, however, was in doubt, till Adam Smith, in the eighteen century, first established that a nation would be better off if it specializes in the production of those goods in which it has absolute cost advantage and then engages in trade with other nations. David Ricardo, another classical economist, demonstrated that even if a trading nation does not possess an absolute advantage in the production of any product, it still gains by producing and exporting those goods in which it has comparative cost advantage and importing those goods which it produces less efficiently.

However, nations can benefit from international trade only if their markets are open for each other's products. The liberal access to foreign markets and fair competition enable their business enterprises to produce and sell products for which they have comparative cost advantage. Similar conditions at home enable them to import from foreign countries and sell in the domestic market those goods in the production of which a country has comparative cost disadvantage. In this scenario national governments participate in multilateral, regional and bilateral trade agreements in order to benefit from trade by putting their resources to most productive uses.

The foundation of multilateral trading system was laid after the Second World War on October 30, 1947 when 23 contracting states signed the General Agreement on Tariffs and Trade (GATT). It entered into force on January 1, 1948. The World Trade Organization (WTO) was established on January 1, 1995 as the successor to the GATT. It is now the forum in which trade relations among nations evolve through collective debate, negotiation and adjudication, and is the prime mover for facilitation and expansion of global trade.

The multilateral trading system (MTS) which has been evolving since 1947 and blooming fully in this era of globalization after the founding of the WTO has a few fundamental principles. The first and foremost among them is non-discrimination. The famous "most-favoured-nation" clause of the Article I of GATT provides that members accord same treatment to the products imported from every other member -- no less favourable treatment than that accorded to the products of any other country. Thus, every country benefits from any move towards lowering of trade barriers anywhere.

A second form of non-discrimination known as "national treatment," requires that once goods enter a market legally, they must be treated no less favorably than similar domestically produced goods. This is Article III of the GATT. Further, the MTS creates a secure and predictable market access environment. For instance, MTS generally prohibits quotas, but allows non-discriminatory tariffs or customs duties irrespective of source of imports, save in certain cases of permissible exceptions and are largely "bound." Binding means that once a member country commits a tariff levels for any product in negotiation with any country it can not raise it without compensation negotiations (Article XXVIII of GATT 1994) with its major trade partners.

Progressive international trade liberalization came through multilateral negotiations, known as "trade rounds" under the auspices of GATT. Its early trade rounds were mostly devoted to continuing the process of reducing tariffs. The eighth round, known as Uruguay Round, conducted between 1986 and 1993, which led to the founding of the WTO was the last and most extensive of GATT negotiations. Its results provided business enterprises much higher degree of security and predictability at domestic and international markets.

In addition to further reduction in tariffs it raised the percentage of bound tariff lines from 78 to 99 percent for developed countries, 21 to 73 percent for developing countries and from 73 to 98 percent for economies in transition. Trade in agriculture as well as textiles and clothing were brought under the fold of GATT discipline. Multi-Fiber Arrangement (MFA), which regulated world trade in textiles and clothing since 1974, was phased out by January 1, 2005. The round also brought trade in services; trade related investment and intellectual property within the framework of the multilateral trading regime. An elaborate dispute settlement mechanism was also devised.

The WTO, contrary to the popular notion, is not a "free-trade" institution. It permits imposition of tariffs for raising revenues and to protect domestic industries and in certain circumstances also allows other form of protections. Its rules on non-discrimination are designed to secure an open, fair and competitive global trading environment and so too are those on dumping and subsidies.

In its early years most developing countries justifiably used to view GATT as a club of rich nations. This notion, however, has changed gradually with the increase in their membership. They now compose more than two-thirds of the WTO member countries. Since its establishment the quest for progressive trade liberalization as well as to make use of trade as an instrument for promoting development around the globe has gradually gained momentum.

The WTO has retained the GATT provisions intended to facilitate and expand developing countries trade, particularly Part IV of GATT 1994 contains three articles, introduced in 1965, encouraging industrialized countries to assist developing member states "as a matter of conscious and purposeful effort" in their trading conditions and not to expect reciprocity for concessions made to them. A second measure, adopted at the end of Tokyo Round and generally referred to as the "enabling clause," provides a legal basis for the market access concessions to developing countries by the developed ones under the Generalized System of Preference (GSP).

The WTO Ministerial Meetings in Seattle (2000) and Cancun (2004) witnessed violent anti-globalization demonstrations. They, however, did not deter it from its pursuit to liberalize and expand world trade further. A new round, first under the auspices of WTO, has been launched in Doha with focus on development issues in 2002. In the Hong Kong Ministerial Meeting held in December, 2006 among other things it was also agreed upon that 97 percent of products of LDC origin would be allowed duty free access in developed country markets.

Bangladesh joined GATT after independence in 1974 and is a founding member of the WTO. The WTO agreements created rights and obligations for the member states. They set the boundaries within which national governments frame and implement domestic trade laws and regulations and also their trade relations with other countries. Non-discrimination rule of MTS does not permit any member country granting more favourable trade terms to any of its trade partner in particular than enjoyed by a fellow WTO member except to countries which form a free trade area or customs union of which it is a member.

Therefore, in its bilateral trade agreements concluded with 30 plus countries Bangladesh has adopted the "most-favoured-nation" treatment clause of GATT as a cardinal principle. As many of these countries were not members of GATT, particularly those belonging to the Soviet Bloc and developing ones, these agreements provided an equitable basis for trade with them. Some of these agreements also created scope for conclusion of barter protocols and state trading.

However, with making Taka convertible for current account transactions these provisions became obsolete under the IMF rule. Relaxation of the foreign exchange regulations and abolition of import licensing procedures made them all the more irrelevant. Further, many of them in the meantime have joined the WTO.

In the agreement with India its Article VIII also provided that: "The two government agree to make mutually beneficial arrangements for the use of their waterways, railways and roadways for commerce between the two countries and for passage of goods between two places in one country through the territory of the other." The two countries concluded an Inland Water Transport Protocol under its auspices for allowing transportation of Indian goods through designated Bangladesh waterways between West Bengal and Eastern India.

In the present day context of global trade regime the 30 plus bilateral trade agreements Bangladesh has, except those with non-WTO member countries, are of little or no practical value for promotion, facilitation and expansion of mutual trade. WTO rules regulate trade among its members. Large trade imbalance and illegal border trade are two vexing problems confronting the trade relations between India and Bangladesh.

The bilateral trade agreement with India utterly failed and proved to be grossly inadequate to redress them. These problems could perhaps be redressed only within the framework of a carefully crafted agreement of a customs union containing provisions for economic development, safeguards and compensations in the aftermath of its formation.

In this scenario it would be worthwhile for Bangladesh to re-examine the usefulness of all its bilateral trade agreements including the one with India and scrap those which do not facilitate expansion of mutual trade and fail to address burning bilateral trade issues. A river transportation agreement with India for allowing its use of age old river routes through Bangladesh may be concluded separately for transportation of goods from its one part to another.

Ghulam Rahman is a former Secretary, to the Government.