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Was the SAFTA (Phase II) Revision Successful? A Case Study of Bangladesh’s RMG Exports to India
Abstract
Bangladesh has experienced phenomenal growth in its readymade garments (RMG) sector and become the world’s second-largest RMG exporter after China. Given the country’s robust position in this context, many observers expected that the SAFTA revisions under Phase II – which allowed Bangladesh’s apparel products duty-free and quota-free access to the Indian market – would lead to a surge in Indian imports of apparel and RMGs. However, this did not materialize. This study analyzes Indo–Bangladesh trade in RMGs in order to determine the underlying reasons for this anomaly. Using Balassa’s concept of revealed comparative advantage, the study establishes the strong comparative advantage enjoyed by Bangladesh though the results also show a lack of effective trade complementarity between the two countries. Overall, the findings suggest that India enjoys economies of scale in RMG production – as Bangladesh’s competitor, India has artificially maintained a secure regime through a combination of domestic export incentives and nontariff measures to restrain imports.
Bilateral cooperation between Bangladesh and India has been on the ascendant. On the economic front, Bangladesh–India trade has grown to become the largest bilateral trade relationship in South Asia. For Bangladesh, increased cooperation with India has resulted in economic gains through different channels including increased exports to India, inflow of Indian investment, and imports of electricity from neighboring Indian states. Further, mutual benefits could be realized through deepening cooperation. A Free Trade Agreement with India can unlock the trade potential of Bangladesh by improving its market access and providing cheaper and better-quality inputs for exporters. Bangladeshi firms could become key investors in the Northeastern region of India. Access to electricity generated in Nepal and Bhutan through India can open the opportunity for sub-regional energy trade and fulfill Bangladesh’s rapidly growing demand for energy. Finally, expanding direct connectivity between India’s Northeastern region and the rest of India via Bangladesh can generate positive spillover effects through increased trade, investment, and people to people contact.
https://link.springer.com/chapter/10.1007/978-981-15-3932-9_8
In recent years, south Asia has received growing attention as a region that has successfully begun the processof regional Integration. The opening offree trade in the region has led to countries in south Asia experiencing high trade costs due to inadequacy in trade and transport facilitation. South Asia's trade is constrained by poor infrastructure condition, congestion, high costs, and lengthy delays. These Problems are particularly severe at border crossings, many of which pose significant barriers to trade. This paper Supplements the findings of previous studies on this subject and reassesses the transaction costs for India's overland exports to Bangladesh. It finds that transaction costs of India'sexportsto Bangladesh have increased despite simplification of documentations at border. The paper concludes that the rent-seeking informal economy is very much deep-rooted and making the trade transaction expensive at border.
This paper attempts to identify the factors that affect Bangladesh's exports. The panel data estimation technique and a generalized gravity model have been used to analyze Bangladesh's export trade pattern. A theoretical justification for using the gravity model in the analysis of bilateral trade has been reaffirmed. The estimated results reveal that the main contributors to Bangladesh's exports are the exchange rate, partner countries' total import demand and the openness of the Bangladesh economy. All these factors affect the country's exports positively. Transportation costs have negative but insignificant effect on Bangladesh's exports. The country specific effects show that neighboring countries' influence on the Bangladesh's exports is more than the influence of other distant countries. Therefore, Bangladesh should reduce trade barriers, pursue competitive devaluation of its currency, improve product quality and increase product varieties.
Abstract:South Asian Association of Regional Cooperation (SAARC) was primarily concerned with peace thus success in enhancing intraregional trade was minimally displayed. Therefore formation of a South Asian Free Trade Area (SAFTA) was proposed with an aim of extending intraregional trade that came into force in 2006. SAFTA in terms of population is the largest of any economic bloc but has appeared as a least integrated bloc while taking trade among members into account, which is only 6.2% of total trade. To increase trade the list of commodities under sensitive categories has been revised in 2012. Taking an interpretivist approach this study reports that Bangladesh will be one of the significant beneficiaries of SAFTA as it will help reduce the longstanding trade deficit with India, create a large regional market and support its key industries such as; Readymade Garments (RMG) and pharmaceuticals to enhance competitiveness. Optimizing the benefits, however, may not be accomplished if nontariff barriers such as; mind-set, political tensions and bilateral conflicting issues are not dealt with extreme care beside tariff barriers.
The primary objective of this study is to analyze the impact on Bangladesh of increased market access in India, both within a static production structure and also identifying dynamic gains. The study shows that Bangladesh and India would both gain by opening up their markets to each other. Indian investments in Bangladesh will be very important for the latter to ramp up its exports, including products that would broaden trade complementarity and enhance intra-industry trade, and improve its trade standards and trade-handling capacity. A bilateral Free Trade Agreement would lift Bangladesh's exports to India by 182 percent, and nearly 300 percent if transaction costs were also reduced through improved connectivity. These numbers, based on existing trade patterns, represent a lower bound of the potential increase in Bangladesh's exports arising from a Free Trade Agreement. A Free Trade Agreement would also raise India's exports to Bangladesh. India's provision of duty-free access for all Bangladeshi products (already done) could increase the latter's exports to India by 134 percent. In helping Bangladesh's economy to grow, India would stimulate economic activity in its own eastern and north-eastern states. Challenges exist, however, including non-tariff measures/barriers in both countries, excessive bureaucracy, weak trade facilitation, and customs inefficiencies. Trade in education and health care services offers valuable prospects, but also suffers from market access issues. To enable larger gains, Bangladesh-India cooperation should go beyond goods trade and include investment, finance, services trade, trade facilitation, and technology transfer, and be placed within the context of regional cooperation.
The study suggests an approach to reduce India’s sensitive list under SAFTA. The concept of Revealed Comparative Advantage has been used to pair the RCAs for products on India’s sensitive list with the corresponding RCAs of the SAARC countries. Four categories of items are generated based on whether India or the SAARC country is competitive in each of the items. This process helps in identifying items in which India is competitive and those where the exporting SAARC country is not competitive. Such items are recommended for removal from India’s sensitive list. Items that are vulnerable to competition include those items where the exporting country is competitive but India is not. Such items can remain on the sensitive list and can be removed gradually in a phased manner.
This paper makes an attempt to analyze the post-MFA export performance of major apparel exporting countries with special concentration on that of Bangladesh's readymade garments (RMG) industries. It is observed that the end of MFA led to an adjustment in the country pattern of trade which generated both winners and losers among major exporters. Though it was anticipated that MFA termination may lead to a dramatic drop in the export from Bangladesh and other Asian nations, in reality the outcome remained counter-intuitive. In fact, our analysis reveals that Mexico, CBA nations and CAFTA regions in the U.S. market and Turkey in the EU market lost their market share despite of having preferential access and geographical proximity. In addition, all major apparel exporters except Bangladesh, Vietnam, and China lost their market share since 2008 due to the global recession in their export destinations. Bangladesh not only uphold their past gains, but also improved their performance considerably during both post-MFA and recession periods. This surprising and overwhelming growth of Bangladesh's RMG sector could be attributed to continuous support from her government, lowest wage rate, lower export price, accompanied by stable exchange rate, political stability since 2007 and above all, getting the GSP facilities for being remained in the least developed nations lists.
Attempts are made to provide a theoretical justification for using the gravity model in the analysis of bilateral trade and apply the generalized gravity model to analyse the Bangladesh's trade with its major trading partners using the panel data estimation technique. We have estimated the gravity model of trade (sum of exports and imports), the gravity model of export and the gravity model of import. Our results show that Bangladesh's trade is positively determined by the size of the economies, per capita GNP differential of the countries involved and openness of the trading countries. The major determinants of Bangladesh's exports are: the exchange rate, partner countries' total import demand and openness of the Bangladesh economy. All three factors affect the Bangladesh's exports positively. The exchange rate, on the other hand, has no effect on the Bangladesh's import; rather imports are determined by the inflation rates, per capita income differentials and openness of the countries involved in trade. Transportation cost is found a significant factor in influencing Bangladesh's trade negatively. Also Bangladesh's imports are found to be influenced to a great extent by the border between India and Bangladesh. The country specific effects show that Bangladesh would do better by trading more with its neighbouring countries. Multilateral resistance factors affect Bangladesh's trade and exports positively.
Trade between India and Pakistan has been fundamentally influenced by factors that are not purely economic. At the time of Partition in 1947, both economies were heavily interdependent, with the share of the Indian market in Pakistan’s exports at close to one-fourth, and over half of Pakistan’s imports coming from India. Thereafter, bilateral trade has had a chequered history. Trade virtually ceased after the wars of 1965 and 1971. Some positive steps have been taken since 1995, when India announced its decision to grant most favored nation (MFN) status to Pakistan, and the latter established a positive list with respect to imports from India. The signing of the South Asian Free Trade Agreement (SAFTA) in 2004 was a major step forward in the eventual establishment of a customs union in the region. Recently, Pakistan announced its potentially landmark decision to grant MFN status to India by the end of 2012. In the interim period, a restricted positive list has transitioned to a negative list, which opens up a large percentage of tariff lines for imports from India. Further, the two countries have agreed to simplify customs procedures and facilitate the process of goods certification. India has also announced that it welcomes investment by resident Pakistanis and companies. Clearly, the environment for bilateral trade has greatly improved. This augurs well for future growth in trade between the two countries, which are making an effort to move away from the old view of “peace first, trade later” to “trade now, peace later.” It is hoped that the expansion of trade will create stronger constituencies for peace in both countries. The objective of this chapter is to explore the possibilities of Indo–Pakistan trade in the new environment. Section 1 describes the current level and pattern of bilateral trade. Section 2 identifies some basic issues in the context of trade development between the two countries.
Comparisons with China suggest that reduction of barriers to trade - particularly to exporting - could, within a couple of decades, double India's per capita income and increase its exports fivefold. The bulk of this increase in exports would be in labour-intensive manufactures and services, although software exports will also continue to grow rapidly. This article, utilising comparisons with China, examines the future causal linkages between India's trade and its human resources.
To strengthen economic connectivity in south Asia, members of the South Asian Association for Regional Cooperation should not depend solely on the SAARC framework, and the agreement on the South Asia Free Trade Area. The natural market integration process that started in south Asia with the high growth in India in particular, can give an impetus to strengthening economic connectivity. The private sector in south Asia, through the SAARC Chamber of Commerce and Industry, has to play a key role as a pressure group to remove impediments for economic integration. Steps also need to betaken to not overload the SAARC agenda with soft issues so that economic connectivity issues receive due attention.
Abstract The South Asian regional trade integration process to date has generated only limited enthusiasm. It suffers from significant shortcomings, primarily on account of a very cautious approach adopted to achieve the ultimate objective of 'free trade' within the region. In turn, this has led to a fragmentation of the integration process, with some of the partners of the South Asian Association for Regional Cooperation (SAARC) bloc opting for a speedier and more liberal bilateral process with India. India's engagement remains the critical feature as the single most important trading partner for almost all the other South Asian countries. However, the dynamics of Indian economic integration initiatives too have been changing rapidly, whereby it is looking increasingly to strengthen its economic relations with the wider Asian region. In this context, the question of India's willingness to give leadership to carry the rest of South Asia as the bridge that connects the region to East Asia needs to be examined. The current evidence suggests that India has attempted to do so via a host of bilateral and regional arrangements, but that the divergences in strategic interests amongst SAARC countries has left Pakistan on the margins of an evolving scheme of overlapping trade initiatives in South Asia. Thus, while something approximating 'free trade' in South Asia appears to be taking shape, it is unlikely to take the form of an inclusive South Asian regional integration process envisaged by SAARC. Copyright 2010 Blackwell Publishing Ltd.
World-wide cross-country regressions are used to examine South Asia's export structure through the lens of Heckscher-Ohlin trade theory. By comparison with other regions, South Asia's exports are unusually concentrated on labour-intensive manufactures. This distinctive export structure is shown to be the result mainly of South Asia's distinctive combination of resources: by comparison with other regions, it has a low level of education and few natural resources, relative to its supply of labour. This basic economic fact must be recognized in the design of trade and development strategy for South Asia over the next few decades.
The concept of competitiveness, or competitive advantage, has been given numerous interpretations and tends to be ambiguous. Comparative advantage, although rigorously defined in the Ricardian trade model, is also subject to different interpretations when extended beyond the classical trade theory and, particularly, with respect to its measurement. The present paper first reviews the literature that deals with definitions and measurements of these concepts, distinguishing their main characteristics, such as macro vs. micro, static vs. dynamic, positive vs. normative, ex ante vs. ex post, as well as the different uses made of the proposed measures. Second, the paper proposes an integrated approach, in which it is demonstrated how competitiveness and comparative advantage are best related to each other and how they differ. The proposed measurement serves the purpose of quantifying the different sources of competitiveness. It is shown how it can be applied to guide policy makers in their evaluation of trade and industrial policies. The latter aspect is illustrated by reference to several applied studies using the method of analysis in the context of policy reforms in India, Mali, Kenya and Uganda. Copyright Springer Science + Business Media, LLC 2006
The paper analyzes the reasons behind persistent bilateral trade deficit of Bangladesh with India. It finds that the Bangladesh has export similarity with India and hence faces high export competitiveness. The lack of match between Bangladesh export and Indian import also generates a constraint of complementarity. The paper uses different trade-related indices like RCA and Cosine measures to examine the extent of trade similarity and complementarity in inter-industry bilateral trade. The possibility of intra-industry trade between the two countries is also studied with the help of G-L indices. Finally, an econometric time series analysis is done to identify the determinants of Bangladesh bilateral export and trade deficit. Export has been found to be of random nature and trade deficit has a perverse relation with exchange rate, driven by flow of remittances. The paper suggests that Bangladesh should pursue an appropriate exchange rate policy and aim at increased diversification in her export structure in order to avoid Dutch disease and to reduce the bilateral trade deficit.
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