A news report in the Financial Express (FE) of November 19, 2020 must-have bemused many trade economists and policy analysts. Under a headline 'NBR advises against deal in case Bangladesh has trade deficit' the reporter wrote, "The revenue board has suggested refraining from signing any free trade or preferential trade agreements with the countries having huge trade gap with Bangladesh."
The responsibility of designing, negotiating and reviewing free and preferential trade agreements (areas) with other countries is vested in the Ministry of Commerce. The ministry also looks after all trade-related policies of the government. The National Board of Revenue (NBR) was presumably informing the Ministry of Commerce of its concern about liberalising trade.
Bangladesh was slow to join FTAs; indeed it was not a member of any FTA till the early years of the millennium. Since a large number of countries of the world had joined one or more FTAs, there was a strong feeling that Bangladesh was being left out which could restrict its future trade opportunities. There was thus a strong pressure to form or join advantageous FTAs.
However, if Bangladesh joined any FTA it had to reduce tariffs and that could reduce tariff revenue and also lower prices of imported goods. The reduction in tariff revenue could reduce total revenue of the government and increase the budget deficit. The lower prices of imported goods could increase competition in the importable sector leading to a reduction in the domestic output of some industries. Thus the trade negotiators were in a difficult position of having to conclude FTAs without much affecting the import-competing industries or reducing tariff revenues.
The compromise solution of this dilemma was a device called 'negative list' which contained the names of all goods that would not be part of any trade liberalisation. This list was large often exceeding 1000 items in the 6-digit HS code level. This normally included goods which were mostly locally produced. Thus the main channel of improvement of productivity through trade, i.e., the reduction of output of industries that are internationally less competitive, was choked off. It was little wonder that the FTAs or PTAs that Bangladesh entered into yielded very little trade benefits in the form of greater trade or productivity gains.
An issue that countries interested in joining FTAs must resolve is the loss of trade revenues once these come into operation. There is little sense to engage in FTAs to expand trade if it were to be choked off by means of a long negative list. In the early years most trade negotiators were not even aware of this basic fact; instead they thought imposing a long list was somehow a 'win' for the country. Since all countries did the same, the end result was the restriction of trade among these countries.
This attitude seems to survive to date. The FE also reports that: "The National Board of Revenue (NBR) has exhorted the authorities to consider the overall revenue management aspect at the time of signing such trade deals." NBR is obviously worried that the trade negotiators might concede too much or shorten the negative list to the extent that its trade revenues are significantly reduced. The horrid state of tax collection during 2019-20 must have heightened its sensitivity about reductions in tax revenues.
It is also evident that all the discussions and debates here and around the world during the last two decades about free trade did not forge a national resolve not to depend on distortionary trade taxes for government revenues. The administration of income tax and value addition tax (VAT) has evidently not been wide enough or deep enough to permit a substantial reduction in the trade taxes. This has and will act as a drag on our economic performance.
NBR also provided a list of countries and advised against any preferential trade deal with any of them. All these countries, including China and India, export to Bangladesh a great deal more than they import, and consequently Bangladesh runs large trade deficits with them. Obviously, NBR is worried that liberalisation of trade through FTAs with such countries would reduce trade revenues and increase the trade deficit. Two widely held misconceptions about free trade are embedded in NBR's worry.
A country can enter into an FTA if and only if there is at least one other country agreeable to such an agreement. The other country would most likely have similar ambitions: it would want to promote its export and reduce trade distortions such as tariffs, quotas and surcharges on its exports. No country should ever go to a negotiation with a begging bowl; it must work out in advance what it could reasonably offer in exchange of offers of the other party. The days of unilateral favours from other countries are coming to end with the graduation of Bangladesh from the group of least developed countries, and the negotiators and policy-makers must wake up to this new reality. We cannot claim to soon become richer than the Indians, and then ask them for unilateral material favours. By this time we should know what price we have paid for the so-called concessionary loans or aid. There is no free lunch.
If Bangladesh wants to increase its export to other countries, it will have to open up its doors to them. To ensure fair competition, both parties would be required to reduce trade barriers in a similar way. If the other party gains more in fair competition, it is only because it is more productive than we are. The positive way to respond is to raise our productivity, which will increase not only our export, but also national welfare. It is essential to improve the quantity and quality of our human capital to achieve this end. The negative way is to raise trade barriers in the false hope that it will prevent harm. It is usually the case that countries which are more open do not suffer as much from balance of payments problems as less open economies do.
The countries with which Bangladesh have large trade deficits, such as China and India, are among the largest economies and traders of the world. They offer a very large market which needs to be exploited if Bangladesh wants to increase export rapidly. Thus, it needs to engage with these countries more, and not less, intensely. One way to increase market access would be to enter into suitable FTAs or PTAs with them. Bangladesh cannot solve its trade deficit problem by signing trade treaties with small economies like Bhutan, Nepal or Sri Lanka. It has to aim big.
The accounting methods of trade and external financing (balance of payments) are such that Bangladesh will have large trade deficits as long as it receives a large number of remittances as well as a considerable inflow of foreign aid and loans. These funds have to be balanced against trade deficits, debt service liabilities and addition to the stock of international reserves. The surplus we have in our income and financial accounts is reflected in the large trade deficits. This should not be concerning, instead we should gratefully appreciate the extra comfort provided by the additional import purchased by the hard earned wages of expatriates. We should rather consider how to return them the favour.
M A Taslim is a Professor of Economics, Independent University Bangladesh. [email protected]