Bangladesh's trade relations with the United States.

Author:Islam, Sadequl
 
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Abstract

This paper examines the trade relations between Bangladesh and the United States. The empirical analysis of the paper is based on US -Bangladesh trade data at two-and ten-digit levels for the 1992-2012 period. The paper examines the composition of exports from Bangladesh and the export-performance of Bangladesh in the U.S. market. Based on the Global Trade Analysis Project (GTAP), the paper also explores the welfare effects of further trade liberalizations on Bangladesh and selected countries.

Keywords: revealed comparative advantage, trade liberalization, general equilibrium analysis

JEL Code: FI

  1. INTRODUCTION

    Bangladesh is a text-book example of a labour-abundant emerging country which has been experiencing high economic growth based on an outward-looking trade policy regime. During 2005-2012, the annual growth of exports of goods and services from Bangladesh averaged 13%. In 2012, Bangladesh was the 68th largest country in the world in merchandise exports. Bangladesh is now the largest exporter of manufactures among the Least Developed countries. More importantly, Bangladesh has become the second largest exporter of clothing in the world. For Bangladesh, merchandise exports and imports as a Percentage of GDP at current prices increased from 30% in the fiscal year 1999-2000 to 48.4% during 2011-12.

    Exports of Bangladesh are heavily concentrated in apparel products. Furthermore, apparel exports from Bangladesh are largely destined to two major markets: the European Union and the United States. The US is the second largest destination for Bangladesh garment exports. More importantly, Bangladesh is the second largest supplier of non-knitted apparel (HS Code 62) to the U.S. after China.

    Since Bangladesh, like China and India, is a labour-abundant country, traditional theory predicts that multilateral, regional, and bilateral trade liberalizations will increase exports of labour-intensive products from Bangladesh. Specifically, in the context of US-Bangladesh trade, the Hecksher-Ohlin model would predict that trade liberalization would augment the comparative advantage of Bangladesh in labour-intensive products. Recent models [among others, Bernard et al., 2007] also predict that labour-abundant countries would export more varieties of labour-intensive products while capital-abundant countries would export more varieties of capital-intensive products.

    The main objectives of this paper are: (1) to examine the trade relations between Bangladesh and the United States and (2) to explore the effects of several scenarios of trade liberalization on Bangladesh and selected countries/regions.

    The paper presents some trade statistics on Bangladesh's exports to the United States at two- and ten digit (HS Code) levels. The paper also uses the Global Trade Analysis Project (GTAP) model and data, version 8, to explore the likely effects of further trade liberalizations with special reference to the apparel sector.

    The paper is organized as follows. Section II briefly examines the trade policy regimes of Bangladesh and its major trading partners. Section III reports some basic statistics on US trade with Bangladesh. The fourthsection reports the findings from a general equilibrium analysis based on the GTAP model. The final section makes some concluding remarks.

  2. TRADE POLICY REGIMES OF BANGLADESH AND ITS MAJOR TRADING PARTNERS

    As a founding member of the WTO, Bangladesh provides MFN treatment to all its trading partners and receives special and preferential treatments provided for in the WTO Agreements [WTO, 2006]. Since the 1980s, Bangladesh has pursued an outward-oriented growth and trade policies. Trade is now at the centre of Bangladesh's development strategy and poverty reduction efforts.

    Since the late 1980s, Bangladesh has made efforts to liberalize its import policy regime. Significant liberalizations of the tariff regime started in the early 1990s. The maximum tariff rate declined from 350% in 1991-92 to 25.0% in 2011-12 while the simple average tariff rate fell from 70% to 14.9% during the same period [WTO, 2012 and ILO, 2013], Still, tariff rates in Bangladesh remain amongst the highest in the region. The simple average MFN applied tariff rate in 2011 was higher for agricultural goods (17.2%) compared to non-agricultural goods (14%) [WTO, 2013], Some of the goods with high average tariff rates are beverages and tobacco (25%), dairy products (24%), coffee, tea (21.8%), animal products (20.7%), clothing (24.5%), fish and fish products(23.3%), and textiles (19.9%). Tariff escalation with low rates on raw materials and high rates on finished products, remains pronounced, consistent with Bangladesh's industrial policy.

    An important feature of the import policy regime of Bangladesh is the existence of various import taxes, known as " para tariffs," beyond regular customs duties. These import taxes are infrastructure development surcharge (IDS), supplementary duties (SD), regulatory duties, and value-added taxes. Some of these taxes such as supplementary duties and value-added taxes being applied to selected products are not trade-neutral. While the average regular tariffs have declined, the average taxes (IDS, SD,RD) have increased from 2.98% in 1991-92 to 12.98% in 2011-12 [World bank, 2013, Vol. 2 and ILO, 2013].

    Bangladesh provides generous fiscal and non-fiscal incentives to exporters. The notable examples are the duty drawback system, special bonded warehouse facility, cash subsidy, and back-to back letters of credit. The duty drawback system refunds duties paid on imported inputs to exporters. Under the bonded warehouse facility, export-oriented companies can import essential raw materials and can process them for re-export without import duty. Ready-made garments and leather industries have been the main beneficiaries of this facility. New and small exporters are largely excluded from this facility. Cash incentives are provided to import-dependent export industries that do not use either the duty drawback or the special bonded warehouse facilities. Cash incentives range from 5-20% of values of exports from selected sectors such as agro-proceed products, jute goods, leather goods, and fish products. The back-to-back letters of credit allow ready-made garments exporters to obtain credit for imports of intermediate inputs using export orders as collateral [World Bank, 2013, Vol. 2],

    The export performance of Bangladesh in the U.S. market has been quite impressive despite absence of substantial preferential access and distance from market. The United States doesn't provide duty-free access for major Bangladeshi exports such as ready-made garments. Only a few products qualify under the U.S. Generalized System of Preferences (GSP). The US GSP program requires beneficiary countries to fulfil certain criteria including protection of labour rights and intellectual property rights. In June, 2013, the United States suspended GSP preferences for Bangladesh because of concerns over worker safety in garment industries. In November 2013, Bangladesh and the United States have signed the Trade and Investment Cooperation framework Agreement (TICFA) to promote trade and investment. (1)

    The export performance of Bangladesh in the European market has been even more remarkable because of the generous market access conditions. Since 2001, under the " Everything But Arms " initiative, the European Union (EU) allows quota- and duty-free access to products of Least Developed Countries including Bangladesh. The EU trade policy regime enabled Bangladesh to significantly increase exports of apparel especially knitted apparel to the EU countries. Since 2011, Bangladesh's apparel industries have benefitted from the more favourable rules of origin of the European Union, which replaced the " two-stage" transformation rule by the "one-stage" transformation rule.

    Bangladesh also enjoys duty-free status for its exports in Canada, Japan, Norway, and Australia subject to rules of origin requirements.

    Bangladesh is party to several regional economic and trade agreements, notably the South Asian Free Trade Area (SAFTA) and the Asia-Pacific Trade Agreement (the Bangkok Agreement). Bangladesh's efforts to deepen regional integration have been limited given its continuing focus on the two major markets, the European Union and the United States. However, as South Asia and East Asia become more diversified and dynamic, there is great potential for Bangladesh to increase trade with India, China, and other countries in East- and South-East Asia. (2)

  3. BASIC STATISTICS

    Table 1 reports some basic statistics on trade involving the United States and Bangladesh. Several points can be highlighted from Table 1. First, US imports from Bangladesh increased substantially from US $ 830.98 million in 1992 to about US $ 4.92 billion in 2012. The share of Bangladesh in the US market shows a fluctuating pattern with a rising trend: 0.156% in 1992 while 0.246% during January-October 2013. The rising pattern is evident during 1994-98, 2004-09, and during the January-October 2013 period. It should be noted that under the Agreement on Textiles and Clothing (ATC) of the WTO, the Multi-fiber quota regime was eliminated in several stages from 1995 to 2005: on January first 1995, January first 1998, January first 2002, and January first 2005.3 It appears that Bangladesh increased its market share during 1995-98 but lost during the 2002-2005 stage. It's possible that the loss of Bangladesh's market share was caused by increased competition following elimination of quotas [WTO, 2006]. It is interesting to note that during the recession year of 2009, while US imports from Bangladesh decreased, the share of Bangladesh in the U.S. market increased. This suggests that Bangladesh being an exporter of low-value-added apparel products, was less affected, compared to its competitors, in the US market. The US exports to Bangladesh increased from US $188.1 million in 1992 to US $ 585.6 million during...

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