It is good news that we are coming out from the bad stamp of a poor country to a developing country. But there is a price for everything. We will be losing some of the benefits that we now get as an LDC.
The burning issue now is our impending graduation from LDC (least developed country) status to a developing country. As you know the UN body follows a triennial review process to decide on the graduation eligibility. The last review was in 2018. And the next one comes in 2021. It is almost assured that we will pass that. Once a country consecutively passes two assessments, it is recommended to the Economic and Social Commission (ECOSOC) for graduation. After 2021, we are expected to be recommended to the UN. The system requires that we have to be kept under watch. In the meantime we will frame policies and all those things to maintain our eligibility criteria. When we reach 2024, we will be declared a developing country. It is most likely these are going to happen.
So, it is good news that we are coming out from the bad stamp of a poor country to a developing country. But there is a price for everything. We will be losing some of the benefits that we now get as an LDC [It was introduced in 1971 and we were classified in 1975 as an LDC. Now there are 47 countries in LDC category.] Once we graduate out of the LDC category in 2024, the first thing we will be deprived of is duty-free quota free access for all our goods to the developed world. As the wording of the WTO says, those of the developing world who are able and willing to provide this duty-free quota-free market access can extend this facility to the LDCs. Among developing countries, we now get this facility from India, China and South Korea. These will all end in 2024 with our graduating to a developing country.
But then, there remains one thing. The European Union countries on their own have extended the period of market access facility to LDCs (Bangladesh is one of them) under a scheme called EBA (Everything but arms). They extend it for another three years, that means in the case of European Union countries we will get the privilege until 2027. But for the rest of the world it is 2024.
Now the question is: what will happen after 2027? There is a good misunderstanding even at policymakers' level in this country about what will happen after 2027. People in many responsible positions also say that we should apply for GSP Plus. Now we get it under GSP (generalized system of preferences). Now we will apply for GSP Plus and might have it granted.
But there are some things which I would like to take the opportunity to clarify. I wish our general readers and policymakers pay heed to this clarification. It is not my own imagination. This is rather a legal and practical reality. We have said that we graduate from the rest of the world in 2024. But after 2027, we graduate for the EU also as they have extended for three years the privilege for LDCs like us.
There is another thing. Now the European Union is scheduled to reexamine and review their EBA scheme in 2023, just a year before our graduation. They may extend it for five years instead of three years, or they might reduce it and say: 'No, it is not three years, now it is one year.' Or, they might attach new conditions.
So, we do not know what will happen. But as it now stands, after 2027, when extended period expires, it will be the time for applying to the European Commission that we want GSP Plus facility. What are the GSP Plus facility? Lot of our people think that we will get like the one we have been getting now-- the duty-free quota free access for all our products. No. Even if we are granted GSP Plus after 2027, only 66% of our products will enjoy it. Now it applies to 100% of the tariff lines of the European Union. If we are not granted, it is zero. So, that is a reduction of the privilege (from 100% to 66%) in case we get the GSP Plus facility to the EU.
How do we get the facility?
The first thing is, after 2027 in our case, we may apply to the European Commission seeking the favour of GSP Plus. What are the preconditions we have to fulfill? There are 27 conventions. Some of them are UN conventions, some of them are ILO and different types of other conventions we have to be signatory to. Of these, we already have signed 26 conventions. Only one remains, which relates to child labour, banning child labour, which we have not signed yet. But it is not very difficult to sign. So, we may sign.
Having those conventions signed, what are the other conditions?
Under the EBA scheme, our total export to the EU in 2027 should not exceed 6.5% of the total imports of the EU countries from all LDCs including Bangladesh. That is one precondition we will have to fulfill. Do we exceed the limit now? Are we below this? The latest estimate that was officially made by the EU and published in their documents few years ago, they found that our exports have already crossed 9% while maximum limit is 6.5%. Now it is now being said, not in EU document but in unofficial assessments, that we have already reached 12/13 % of total EU imports from LDCs under EBA scheme. So our chances to get GSP Plus are very little, almost nil. We can say we are not going to get it, though lot of our policymakers speak highly of it.
In fact, we have to be ready for a different situation once we graduate from LDC. In the world of trade, we then will not have a duty free quota free market access to anywhere including the EU countries, since it is almost obvious that we are not getting GSP Plus.
In the best case scenario, we may hope that the EU grant us GSP Plus facility after 2023 review and that they may raise the limit to 15% from 6.5% now. But that is most unlikely.
That means we have to export to the rest of the world, including the EU and USA, paying duties. Of course, even now we enter USA market with payment of duties. Once we come out of LDC status, the whole world including India, China, South Korea, EU countries and others will charge duty on our exports. That means our export is going to be more expensive in those countries, we are going to be less competitive than we are now. Definitely it will be a bad situation.
So, what to do?
Our garments and other industries need to do more and more exports because we are graduating. And obstruction is coming-- firstly in 2024, then in 2027. The reality is Bangladesh is not the only country to graduate. Five more countries will graduate by this time. Bangladesh is a major LDC. So our problem is different from others. We have studied those five countries and found that their problems are not like ours and we will need different responses.
Our goods and services will be subjected to duties in export destinations. How to overcome this? Only way remaining open to us is to join trade blocks, negotiate free trade agreements. What does a free trade agreement mean generally? His goods or her goods will be coming to our country duty-free, and our goods will be free to go to their country. Countries with whom we will have free trade agreement, we can send our goods duty free there. That will expand our market size. If we can, theoretically speaking, sign FTAs with rest of the world, then a wider market will be free for us. So we have to sign FTAs. There are different types of trade agreements: free trade agreements (FTAs), preferential trade agreements (PTAs), unilateral trade agreement, regional trade agreement and so on. We already have some PTAs like SAPTA, or APTA. But nothing of this is going to be there until we renew them.
So what is the imperative need of the country? The only opening remains to us that we have to try very hard with serious earnestly to sign as many free trade agreements as possible to keep your market size open. What about signing an FTA with USA, Canada, India, China, European Union? We can apply. But a free trade agreement takes quite a few years. We have seen. And they also have some conditions. The process takes years. But we can apply. We have already lost few years.
Now there are offers for FTAs. China proposed signing of FTA with us. Negotiation is going on. It will take sometime. India has proposed a CEPA- Comprehensive Economic Partnership Agreement. Incidentally Bangladesh Foreign Trade Institute, our organization, has been given the responsibility from the commerce ministry to work on the government side. It takes time. Once we arrive at FTA, PTA, or things like this, your market size will expand. But it has a price. Now we get duty and quota free access unilaterally, we do not give any concession for that. We impose duties on imports from EU countries, India, China, but they do not impose duties on ours. Because we are an LDC. When we cease to be an LDC, and if we cannot strike an FTA, they will charge duty on our exports also to their countries as we do now.
What are the ways to arrive at FTAs?
We should start right now and apply for FTAs and try to make those happen. Now we have a few problems. First is our export basket is very small. We export mainly garments, which form about 84 percent of our total exports. We must try very hard to expand our export basket. The government with the financing from the World Bank has taken up a project—Export Readiness Fund—to diversify export basket. BFTI also has partially worked to explore and expand four areas including light engineering, plastic, leather and leather goods, and footwear (leather and non-leather). The project has been going on and by the time we graduate, there may be some improvements in these four sectors. So these will add to our export basket.
Then we have to get more FDI- foreign direct investment. We have to improve conditions for a bigger flow of FDI. The government is now building more and more infrastructures. We need to have a better law and order situation. We must improve on the ease of doing business index. Everything is connected to every other thing. All these have to be done together to bring in more FDI. Then our export basket will be diversified and enlarged.
Now, what we need to do with utmost seriousness is to strike FTAs. We have to have unilateral agreements. And we have to have more FDI improving infrastructures and conditions like ensuring ease of doing business. But we have only four years in hand. We should have started before. Let us not indulge in blame game.
Let us take the example of Vietnam. It is not getting GSP Plus to EU. Vietnam used to get duty and quota free access to EU countries. When they saw it would come to an end, they started negotiation with the EU and last year, they signed FTA with the EU. It will take some year, may be one year or so, to come into effect. What will happen? When we lose our duty-free access to the European market, Vietnam will get it. Because their FTA will be effective by the time we graduate out of LDC, even before the time.
So, our goods will be haunted down by Vietnamese goods. It is because of our lack of foresightedness, I must say. We did not have foresight. But still better late than never. Let us apply now for EU- Bangladesh FTA. It takes time. We have to fulfill lot of conditions. But we must apply right at this moment. The government is very serious and is trying to do as soon as possible. But we do not have enough trained personnel to negotiate this sort of trade agreements. Whatever officers we have, we send them for negotiation. We need more properly trained people. BFTI has been negotiating with Sweden for training our people both in the government and private sectors on negotiation for trdae deals. Probably it will take two to three months to begin. It is being done under Swedish grant. The programme will continue for at least five years initially. This is one of the tools we are having.
I think we will have an initial jerk and there is nothing to be afraid of. I foresee a time when FDI will start coming. The government has brought down interest rate to 9 percent for industries. That is a good sign, though there are concerns about misuse, abuse, corruption and overlapping. These things might happen as it happened in the past. But this is still a good step to give our manufacturing sector a boost.
With graduation, another good this is coming. It will make borrowing from external sources easier for both our private and public sectors. They will be able to take loans from global agencies and private banks abroad at 3-4% interest rates, which are much less than here. Days are coming, when we will have a larger export basket by the time we graduate. I am optimistic. Here I may sound a bit emotional, Bengalis are always successful. We are not defeated anywhere. So far whatever challenges came, we have won. If you consider our language movement, consider our liberation war, we have won, though we have suffered a lot. We have overcome big cyclones and we are now graduating. We will also overcome all the problems related to it. USA offered us duty-free access and then withdrew, even then we survived. Our export rather surged in the US market.
So these are the speaks of efficiency of our economy. We will definitely overcome. But there is no scope for complacence. We have to work hard. Industrialists, the government, every sector must seriously work hard. The most biding necessity now is to negotiate with as many countries as possible for free trade agreements. To start with, it is EU. We must also open it with UK. We have already started with India and China. Nepal is coming next. Sri Lanka is in a peculiar position, their past government wanted an FTA with is, but the present government does not want it. So talks have not progressed. We do not have any country in the world we have FTA signed with. We have only PTAs or regional trade deals with some countries, but trade is not duty free under those deals.
Vietnam is also a member of so many things. They were below us, but they are superseding us. The time we graduate and EU imposes duty on our goods, they will get duty-free entry because of the signing of the FTA. So we should double quick as said in military language. March double. We should immediately apply for the EU FTA. It will take time. Some conditions have to be fulfilled. Some things have to be developed. Still we should ask for it. We might ask it for the USA, but I am not confident they will agree. But we should apply. We can apply for FTAs with Canada, Australia, Japan, the countries that we now export our goods to. That is the way we have to walk. This is very serious. I am very happy that policymakers now understand. Although we are a little late, we should start and run faster so that we are not left behind by our competitors. And we can give our people the pleasure, the happiness of graduating from an LDC to a developing country. That would be a lower middle income country, then we want to be above lower middle income country, a higher middle income country with per capita income crossing $4000. It is not very far, we will achieve it. If you see the economic history of countries which we call rich now, were not like this. They were very poor, much poorer than we are today. And they have developed. So we can develop. These people have not failed in anything. And they will not fail this time too. We will win.
Ali Ahmed, the writer is Chief Executive Officer of Bangladesh Foreign Trade Institute (BFTI).