High tariff's impact on trade
Bangladesh has made a major transition in its trade policy from a protectionist stance to a freer trade regime since the early 1990s as is reflected by the reduction in the average tariff rate from as high as 105 percent in 1990 to 13 percent in 2016. Despite that, in 2016, Bangladesh's average applied tariff rate was the highest in South Asia and much higher than those of the countries in Southeast Asia. Also, in 2016, the share of tariff lines with international peaks (rates that exceed 15 percent) in total tariff lines was as high as 39 percent, which was much higher than most of the South Asian (except Nepal and Pakistan) and Southeast Asian countries. Given this scenario, it is suggestive that there is scope for further tariff liberalisation in Bangladesh in terms of cutting down the average tariff rate as well as the tariff peaks.
Admitting the need for further tariff liberalisation in promoting export and economic growth, there are concerns that a mere tariff cut is not sufficient to achieve such targets. First, since 2000, reduction in the average tariff rates has hardly had any systematic association with both the import-GDP ratio and export-GDP ratio in Bangladesh. Second, the presented scatter-plot shows an interesting analysis for 171 countries, where it appears that Bangladesh is in a group of countries (Group A) with low per capita GDP but high tariff rate. The countries in Group D (quite large in number) are with larger per capita GDPs and much lower tariff rates. However, there is also a sizeable number of countries in Group C, where countries have both higher per capita GDP and high tariff rates. All these indicate an apparent inconclusive association between the cut in tariff rates and the promotion of both trade and national income. Unfortunately, the discussion over trade policy in Bangladesh is primarily focused on tariff rates, and there are dominant conservative views against further tariff liberalisation with concerns over the loss in revenue and protection of domestic industries.
However, the emerging challenges and complexities in the global trading regime calls for an overhaul of conventional thinking in the trade policy regime in Bangladesh. Four critical issues need to be considered in this overhauling process.
First, the effort for further tariff liberalisation in Bangladesh, in terms of cutting down the average tariff rate as well as the tariff peaks, need to be continued as it creates a necessary condition for further diversification of the export basket. The use of para-tariffs for the protection of domestic industries needs to be transparent and consistent with the WTO framework, and timely phase-out of such para-tariffs is warranted. However, it should be kept in mind that with the escalation of the preferential trading arrangements (PTAs), and assuming Bangladesh's engagement in PTAs will increase in future, the preferential tariff rates will become more important than the MFN (most favoured nation) tariff rates. Therefore, the simple average tariff rate would not reflect the true picture of the status of tariff protection in future.
Second, the trade policy needs to be pro-active to effectively engage with multilateral, regional and bilateral trading arrangements, and to take initiative for participation in the prospective mega-trading blocs. Bangladesh, being an LDC and thus receiving trade preferences in major export destination markets, has so far been very passive in such trading arrangements. However, with the bright prospect of getting out of LDC status in the near future, such trade preferences will turn out to be redundant and the country has to bank on its comparative advantage and competitive strengths in future.
Third, the trade policy needs to facilitate Bangladesh's effective integration with the global and regional value chains. Currently, the country's successful integration in the GVC is only through the readymade garments, and there is a dire need to diversify the export basket. Providing export subsidies for export diversification has turned out to be an easy but ineffective tool. More fundamental problems are associated with policy-induced and supply-side constraints. In this context, the trade policy needs to be synchronised with other policies and programmes in the economy.
And finally, the trade policy needs to present an action plan to deal with the NTMs or non-tariff barriers (NTBs), which are increasingly getting more prominence in international trade. However, much of the alleged problems of NTMs/NTBs originate at home rather than in the export destination countries due to weak infrastructure, lack of human resources and various procedural obstacles. The action plan should help build the country's capacity in this endeavour.
Dr Selim Raihan is Professor, Department of Economics, University of Dhaka, Bangladesh, and Executive Director, South Asian Network on Economic Modelling (SANEM).
Email: selim.raihan@econdu.ac.bd