Economic Partnership of Bangladesh with the EU upon graduation

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AKM Asaduzzaman Patwary

Sr. Research fellow, Head of R&D, Policy Advocacy, DCCI, Economic Analyst.

Bangladesh has marked remarkably over 6% growth in the last decade until Covid hit. We have contained the pandemic stress with focused and exemplary recovery management shielded by wise business and policy leadership. The economy has been performing consistently well with a higher growth regime on some economic fronts after the pandemic recovery, while many economies were hit hardest. Export, one of the key indicators of the economy, contributes to this recovery process. The recovery has not become longer as the undeserving Russia and Ukraine war started enfeebling the global recovery management. Our foreign trade hit $145 billion in FY2022, and export has outperformed other economic actors while world trade faces a strong headwind. The global fallout and distress have become visible through the recent economic vulnerability witnessed in South Asia. The ripple effects of the geo-economics crisis have become widespread with harsh implications. Amidst the pandemic, the UN granted our LDC graduation qualification for the second time in 2021. Now, Bangladesh is passing through the transition till 2026 to be officially called a developing economy. The upcoming economic ambiance changes the orientation of Bangladesh on international trade, leading to economic growth through export and market expansion. Over the past several decades, the USA and EU have emerged as Bangladesh’s indispensable trade and development partners. Later 2000 onwards, the EU has become the single largest export destination having 65% of our total export. The EU is by far the largest export destination. Upon Graduation, we must sincerely enforce the diverse range of compliance as preconditions to avail new GSP scheme since we are nearby elevation as a developing country. The EU is the destination of $28 billion in export with higher potential. In this regard, the treatment, terms, and conditions for access to the EU market will change and require vigorous enforcement. The changes and approaches that we experience and challenge us are briefed hereafter:

  • With the preferential advantage of EBA of EU GSP, aggregate export of Bangladesh to the EU and that e UK stood at around $28% of total export, where RMG contributes 63%. Under the EBA privilege, Bangladesh annually gets Euro 2.2 billion tax benefit. Bangladesh receives more than 80% of all trade preferences from the European market. Bangladesh has been the largest beneficiary of EU trade preferential schemes, which will not exist.

Bangladesh has been taking the privilege of enhanced market access under the EBA of the EU for almost the last four decades. Thus, Bangladesh‐EU relation has moved to a trade-driven partnership. Alongside trade, the EU has been the most critical development partner providing assistance in disaster management, building resilience and sustainable development, and good economic governance. Bangladesh will formally graduate in 2026 and lose many preferences and ISMs. More than 90% of our EU exports could see tariff hikes. This will bring in new challenges for our current export market. LDC graduation will significantly impact Bangladesh’s export, with a 14% estimated decline in the local market. The challenge will be enabling the partnership to work for trade‐related supply-side capacity building in Bangladesh.

  • The proposed GSP framework seeks to improve the existing dispensation to ensure a smooth transition for all countries in graduating from the LDCs over the next ten years, according to a legislative proposal adopted by the European Commission for 2024-2034. This revised framework will be finalized and apply special-incentive arrangements for sustainable development and good governance only if the LDCs agree to strong sustainability standards.
  • The proposed rearrangement for trade preferences is expected to set the general threshold at 47%, down from 57%, and the textile threshold at 37%, down from 47.2%, to create space for the poorer countries. As a result, our major exportable goods might not get the GSP as the textile has already exceeded the threshold. Bangladesh could benefit from other items with lower exports, such as leather, plastics, light engineering, Jute and home textiles, and other sectors. And new product diversification to offset this loss is urgent.
  • Of 71 LICs and LMICs eligible countries, only 8 enjoy GSP Plus. These countries include Pakistan and Sri Lanka from the South Asian region and other countries.
  • Economic graduation in Bangladesh requires a compliant industrial and trading environment as the prerequisite of the GSP plus facility. Bangladesh must comply with 27 mandatory labour and human rights conventions, anti-corruption, and efficient and transparent public procurement. Compliance with these regulations will be gradual, and Bangladesh needs to be prepared with standard policy and institutional reforms. Since GoB developed the SSGP program to support the post-LDC specific strategies, the practical strategy on compliance may be designed from SSGP.
  • If the number of conventions is not cut, then a shared implementation action plan is needed to achieve this vast journey.
  • Since our export may be dearer due to new tariffs, exporters can demand competitive prices to remain competitive and sustain the export-oriented industries.
  • Bangladesh would face an average of 8.9% duty and possibly lose 26.28% of EU exports upon graduation. To mitigate these effects, Bangladesh needs to qualify for the GSP+ scheme. GSP+ grants the complete removal of tariffs on over 66 percent of EU tariff lines. But, this is very difficult since GSP plus criteria are uncertain in the current economic context for our readiness and preparedness in resource and capacity.
  • To avoid the tariff incidence and offset the business loss, Bangladesh needs to underscore product and market development in Africa & Asia and the Middle East and beyond. Considering the service sector’s share to GDP, diverse service export scopes must be harnessed. Robust research is needed for sharing real-life scenarios of our country for special consideration engaging export and local industries.
  • Labour law, women’s harassment, child labor, industry policy, tax law, and other relevant laws are being changed to align with our preparedness.
  • Upon negotiation with the Government, the EU has extended the current DFQF facility of Bangladesh till 2029 for transitional readiness, which benefits and helps to optimize our resources and post-LDC management.
  • Result-oriented trade deals are essential, including FTA or CEPAs with many countries. Any country will not get the GSP facility if any imported item holds more than 6% of the EU’s import as per the new GSP scheme, which is now 7.4%. Bangladesh has a 14% share. Even if we qualify for GSP+, the RMG sector will not be benefitted. The 6% import limit could be removed to benefit apparel exporters from the EU GSP scheme.
  • Vietnam’s export tariff in the EU decreases by 2% every year due to its agreement with the EU. Vietnam will get a zero tariff facility in 2029 in the EU, while Bangladesh may lose EU preference and competitiveness against Vietnam if we cannot be equipped enough. Bangladesh can replicate the learning experience of Vietnam in overcoming export market issues.
  • Since cash incentives for exporters will be withdrawn, inconsistent with WTO rules, exporters can be supported with low-cost financing, tax exemption on research and innovation, skills development, cost-efficient technology transfer, bond facility, efficient business infrastructure, and digital connectivity to sustain export market competitiveness. The Private sector also works on new import tariffs with a more significant impact on EU and Bangladesh bilateral economic relations.
  • Future trade relations of Bangladesh with the EU are linked to ensuring labor and human rights, and a roadmap can be developed on these matters. Focused economic diplomacy efforts are needed, led by MoFA backed by MoC, leading Private sector experts and trade analysts, and Legal experts to assess the new GSP framework in terms of mandatory conventions and RoO limit for utmost relaxation in negotiation. For learning and understanding, GSP plus facilities of South Asian countries and the Philippines can be seen.

Since the private sector is the catalyst of our economy, they will explore the likely prospects and address bottlenecks to revitalize post-graduation economic ties with the EU. Since the European economy also is struggling with recessionary effects, they may revise their resource mapping, strength, and economic diplomacy to allow trade preference with trade partners with no exception to us. Since we both have mutual economic dependence, our policymakers and MoFA can jointly pursue this agenda to gain the desired outcome by revising given conditions. The bilateral momentum and future demands of the Private sector need to synchronize to realize the development of this strategic economic relation in the changing trading regime for bagging the much-needed transformation.

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