Trade Policies and Pattern in Bangladesh -...

1

Final Report

Trade Policies and Pattern in Bangladesh

Monzur Hossain Narayan Chandra Nath

Research Report prepared for IFPRI under Policy Research and Strategy Support Program (PRSSP)

The Bangladesh Institute of Development Studies (BIDS)

April 7, 2013

2

Table of Contents EXECUTIVE SUMMARY ........................................................................................................ 5 CHAPTER 1 ............................................................................................................................ 5 INTRODUCTION .................................................................................................................. 12 1.1 Background ............................................................................................................... 12 1.2 Objectives ................................................................................................................. 14 1.3 Methodologies ........................................................................................................... 14 1.4 Organization of the Report ........................................................................................ 14 CHAPTER 2 .......................................................................................................................... 16 REVIEW OF TRADE LIBERALIZATION POLICIES ............................................................ 16 2.1 Phase-I (1972-75): Restrictive Trade Regime ........................................................... 16 2.2 Phase-II (1976-1990): Partially Liberalized Trade Regime ....................................... 16 2.3 Phase-III (1990s): Liberalized Trade Regime ........................................................... 17

2.3.1 Import Liberalization Policies and Impacts ............................................................. 17 2.3.2 Export Promotion Policies and Impacts .................................................................. 18 2.3.3 Evolving Markets for Subsidized Export Products ................................................... 21 2.3.4 Impact of Cash Incentives on Export Performance .................................................. 22

2.4 Trade Liberalization: Regional Scenarios ................................................................. 24 2.5 Concluding Remarks ................................................................................................. 25 CHAPTER 3 .......................................................................................................................... 26 ANALYSIS OF TRADE PATTERN IN BANGLADESH........................................................ 26 3.1 Introduction ............................................................................................................... 26 3.2 Trade Balance and Coverage of Imports by Exports ................................................ 27 3.3 Export and Import Trends ......................................................................................... 27 3.4 Analysis of Exports .................................................................................................... 30

3.4.1 Structure and Growth of Exports of Commodities ................................................... 30 3.4.2 Structure and Growth of Exports by Market Destinations ......................................... 32

3.5 Analysis of Imports .................................................................................................... 33 3.5.1 Composition and Growth of Imports by Commodities and Countries ........................ 33

3.6 Composition and Growth of Imports by Sources of their Supply ............................... 34 3.7 Concluding Remarks ................................................................................................. 35 CHAPTER 4 .......................................................................................................................... 37 EVOLVING MARKETS AND OPPORTUNITIES: AN ANALYSIS ....................................... 37 4.1 Indicator of Revealed Comparative Advantage and Specialization Pattern .............. 37

4.1.1 Geographic Revealed Comparative Advantage or Specialisation Index ..................... 39 4.2 Trade Potential Index ................................................................................................ 41 4.3 Concluding Remarks ................................................................................................. 42 CHAPTER 5 .......................................................................................................................... 43 INTERNATIONAL TRADE AND FOOD SECURITY OF BANGLADESH ............................ 43 5.1 Introduction ............................................................................................................... 43 5.2 Global Food Price and Volatility ................................................................................ 43 5.3 Agricultural Trade Liberalization ................................................................................ 44 5.4 Agricultural Trade and Food Security ........................................................................ 46

5.4.1 Export of food ..................................................................................................... 49 5.5 Comparative Advantage of Food crops production ................................................... 50 5.6 Rice Crops ................................................................................................................ 51 5.7 Boro: .......................................................................................................................... 51 5.8 Aman: ........................................................................................................................ 51 5.9 Aus: ........................................................................................................................... 51 5.10 Assistance Policy and Price Distortions in Agriculture .............................................. 52 5.11 Nominal Rate of Protection of Rice ........................................................................... 52 5.12 Effective Rate of Protection of Agricultural Products ................................................. 53 5.13 Concluding Remarks ................................................................................................. 55

3

CHAPTER 6 .......................................................................................................................... 56 CONCLUSIONS AND POLICY RECOMMENDATIONS ...................................................... 56 REFERENCES ..................................................................................................................... 60 Appendix .............................................................................................................................. 62

List of Figures

Figure 2-1: Impact of Tariff Reduction on Imports ...................................................................... 18 Figure 2-2: Evolving Markets for Exporting (subsidized) Products ............................................... 21 Figure 3-1: Trade pattern in Bangladesh .................................................................................... 26 Figure 3-2: Export Dynamics .................................................................................................... 28 Figure 3-3: Share of Exports, Imports and Trade in Global Trade (percent): 2005-07 ..................... 29 Figure 3-4: Import and Export Concentration Ratio for Bangladesh, 2000-2010 ............................ 29 Figure 3-5: Exports to Important Market Destination .................................................................. 33 Figure 5-1: Index of Global Prices of Selected Cereals ................................................................ 44 Figure 5-2: Import Dependency Index of Food Grain in Bangladesh ............................................. 48 Figure 5-3: Proportion of Value of Food Imports to Total Export Earnings and Total Value of Imports

....................................................................................................................................... 49 Figure 5-4: Movement of Domestic and Imported Price of Rice in Bangladesh ............................ 53

List of Tables

Table 2-1: Tariff Rates for Different Goods ............................................................................... 18 Table 2-2: Amount of Money Disbursed under the Cash Incentives Scheme: FY2002-03 to FY2008-

09 ( in million US$) .......................................................................................................... 20 Table 2-3: Benefits Generated from Export Subsidies ................................................................. 20 Table 2-4: Impact of Cash Incentives on Exports, 2000Q1-2008Q2 .............................................. 23 Table 2-5: Regional Scenario of protectionism ........................................................................... 24 Table 3-1: Indicators of Trade Pattern (Average percentage) ........................................................ 27 Table 3-2: Trade Balance (average) and Coverage of Imports by Exports ...................................... 27 Table 3-3: Exports and Imports as Percentage of Merchandise Exports and Imports ....................... 28 Table 3-4: Structure of Exports ................................................................................................. 31 Table 3-5: Growth of Individual Export Items ............................................................................ 32 Table 3-6: Structure of Imports by Commodity (in percent) ......................................................... 34 Table 3-7: Growth of Imports (average) by Sources of their Supply .............................................. 35 Table 4-1: Pattern of Changes of Revealed Comparative Advantage of 98 Products at 2-digit Level

during 2005-09 ................................................................................................................. 38 Table 4-2: Revealed Comparative Advantage (RCA), Trade Specialization Index and Concentration

Ratios for Bangladeshi Exports (out of 1571 Products), 2009 ............................................... 39 Table 4-3: Geographic Revealed Comparative Advantage of Bangladesh Exports, 1988-1998 ........ 40 Table 4-4: Trade Potential Index for Bangladesh (Number of items at 6 digit HS level) .................. 41 Table 5-1: Tariff Structure of WTO HS Agricultural Category for Bangladesh ............................. 45 Table 5-2: Tariff Structure for Selected Primary Goods ............................................................... 46 Table 5-3: Dependence on Import and External Supply of Food Grains in Bangladesh .................. 47 Table 5-4: Percentage of Food Import and Food Aid of Major Foodgrain Items to Total External

Supply ............................................................................................................................. 48 Table 5-5: Public versus Private Import of Food Grain during 1971/72-2008/09 ........................... 49 Table 5-6: Export of Primary Products of Bangladesh, Grouped into Harmonized System Codes

(Value in 1000 USD) ........................................................................................................ 50 Table 5-7: Domestic Resource Cost of Rice and non-rice Crops in Bangladesh: 1996/97-1998/99

Period ............................................................................................................................. 51

4

Table 5-8: Price Distortions in Agriculture and Assistance Policy to Agriculture Relative to Non-agriculture ....................................................................................................................... 52

Table 5-9: Nominal Rate of Protection of Rice Production ......................................................... 53 Table 5-10: Effective Rate of Protection of Agricultural Products ............................................... 54 Table A-1: Trends in Average MFN Applied Tariff Rates in Developing and Industrial Countries, 1981-2010 (Unweighted in %)……………………………………………….......62 Table A-2: Nominal and Effective Protection Rates in Bangladesh……………………........63 Table A-3: Nominal Protection Rates and Effective Protection Rates in South Asia, Various Years (percent)………………………………………………………………………….....63 Table A-4: Rate of Cash Incentives (Export Subsidy) provided for Export of different Products………………………………………………………………………………..….64 Table A-5. Incentive policies for export promotion ……………………………………...65

Table A-6: Average percentage share of individual export items………………………....68 Table A-7. Growth of Imports by Commodities ………………………………………….68 Table A-8. Compound Growth of Imports by Sources of Supply in % …………………..69

Table A-9: Pattern of Changes in Revealed Comparative Advantage of Major Items of 98 Product Categories of Exports of Bangladesh …………………………………………….69 Table A-10: Number of items (at 2-digit HS Chapter Level) exported from Bangladesh to top 30 destinations…………………………………………………………………………….70 Table A-11: Number of items (at 2-digit HS Chapter Level) exported from Bangladesh to top 30 countries.........…………………………………………………………………………..71 Table A-12: Description of the Trade Potential Index………………………………….....72 Table A-13: Import Dependence of Food Grain…………………………………………...73

5

EXECUTIVE SUMMARY

1. This study analyzes various trade liberalization policies implemented in Bangladesh in phases and examines how the policies have contributed to overall trade performances. It also analyzes comparative advantages of Bangladeshi products, evolving markets and within that context, highlights the issues that may be addressed in the short-to-medium term period to harness trade potentials. It also discusses different aspects of food trade in Bangladesh.

2. The trade liberalization was done in steps in Bangladesh. Historically, Bangladesh has been maintaining a restrictive trade regime since its independence in 1971. In the early decade of independence, Bangladesh followed an import substitution industrialization strategy. During the decade, trade regime was characterized by high tariffs and quantitative restrictions on imports. Partial liberalization of the trade regime started in the middle of the 1980s under structural adjustment reforms initiated by the World Bank and the International Monetary Fund. The major objective of the trade reform was to encourage exports by reducing the anti-export bias. The progress in trade liberalization was slower in the 1980s, particularly with respect to reduction in import tariffs.

3. Bangladesh pursued extensive reform measures in the 1990s. The various reform measures included simplification of import procedures, reduction and harmonization of tariff rates on similar products, gradual reduction of non-tariff barriers, removal of restrictions on repatriation of profit and income from foreign investment etc. The highest customs duty rate was reduced from 350 percent in 1990 to 32.5 percent in 2003 and 25 percent in 2011. At present, most of the quantitative restrictions are applicable to non-trade grounds such as health, environment, culture, national security etc. The number of operative tariff slabs was reduced from 24 in the 1980s to 5 in 2010, and the (un-weighted) average customs duty rate was reduced from 100 percent in 1985 to 57 percent in 2000 and 15 percent in 2010.

4. All quantitative restrictions on agricultural products have been removed in the 1990s.

Tariff lines of all products that faced quantitative restrictions were brought down to only 2 percent in 1994, and zero in subsequent years. Private sector imports of rice and wheat were legalized in the early 1990s, ending the government’s monopoly on food grain imports. The ban of rice export of fine quality rice (but not on exports of ordinary coarse rice) was also lifted. These liberalization policies have impacted positively to the growth of foodgrain import volumes.

5. Bangladesh’s nominal import protection level currently is comparable to South Asian countries. It is observed that tariff reduction in Bangladesh during the early 2000s was slower than other South Asian neighbours; however, recently Bangladesh has made a good progress to bring down her tariff structure to the regional level. In particular, Bangladesh’s MFN applied tariff (Ad-valorem) for agricultural goods is the lowest in South Asia (17.52% as against 20.62% in South Asia), but slightly higher than the low-income country level. Trade Restrictive Indices (TRI), calculated by the World Bank, suggest that Bangladesh is the least restricted in South Asia (11.33 vs. 11.75).

6

6. Various measures have been taken to promote exports. Measures include providing cash incentives to some traditional and non-traditional items, restructuring export credit guarantee scheme, creating export promotion fund, introducing duty-drawback and bonded warehouse facility, income tax rebate to certain extent, etc. Moreover, subsidized interest rate (7%) and under-valued exchange rate are some of the important policy support given to exporters.

7. Since 1994, Bangladesh government has been providing cash incentives at various rates across commodities to exporters in order to increase the volume as well as value of exports. Initially, it was for export of jute goods, produced by government and non-government jute mills, and export oriented local textiles. Later on, the scope and extent of the cash incentive program has been expanded for non-traditional items. Cash incentive for leather goods (100 percent export oriented industries) was introduced in April 2000. Cash incentive facility started for export of agricultural goods, particularly for frozen shrimps and other fish, agro product (vegetables/fruits) and processed agro-products, from December 2000. Other products that enjoy cash incentive benefits so far are bone meal; bi-cycle; commodities made of hogla, straw, coir of sugarcane; potato, eggs and day old chicks of poultry industries; liquid glucose produced at Iswardi EPZ from December 2005; light engineering products (February 2006); and halal meat from December 2006.

8. Annual disbursement of cash incentive for agricultural and non-agricultural products during FY2002-03 to FY2007-08 was USD 978.84 million with yearly average US$ 140 million. Product specific analysis revealed that amount of cash incentive provided for export of frozen shrimp and other fish has increased from US$8.64 million in FY2002-03 to US$52.60 million in FY2007-08. Total amount of cash incentive provided for export of Vegetables and fruits was US$22.96 million and annual disbursement has increased from US$0.13 million in FY2003-04 to US$9.42 million in FY2007-08. In case of potato, US$0.47 million was spent as cash incentive. On the other hand, US$6.02 million was spent as cash incentive for export of processed agricultural products during FY2006-07 and FY2007-08. In Bangladesh, although total export had been doubled between 2002 and 2008, total ratio of cash subsidy to total exports remained almost the same throughout the period. The benefit as a ratio of promoted exports is nearly 2 percent over the years, which appears to be a negligible amount that could hardly influence export performance. Econometric analysis also suggests that cash incentive has a positive but insignificant effect on exports. Many fraudulent claims for cash incentives were detected which undermines the spirit of cash subsidies for export promotion. Thus, a cautious and efficient management of cash subsidy for exports is necessary to get maximum benefit from cash incentive.

9. Both volume and value of exports of subsidized products (those enjoyed cash incentives) have been on a rising trend over the period of time. However, in most cases market destinations for these products are not the same for all the years, indicating that these products could not maintain steady access to a particular market for long time. In the cases of vegetables, bicycles, leather products and frozen shrimp a single market dominates for quite a long time; however, in the cases of potato, fruits, tobacco and jute products, destinations have been changing. It is observed that UK and the Middle East countries are the main buyers of agricultural products. It is

7

thus necessary to analyze the reasons behind the changing demand for Bangladeshi agro-food products in these markets.

10. Trade intensities are the prime indicators of trade pattern and trade performance of a country, which was estimated to be around 44 percent for the last five years. It is interesting to note that in the two phases of structural adjustment program and privatization program under New Industrial Policy of 1982 and 1986, trade intensities remain stagnated at only 16.7 percent. Gradually, trade intensities have increased to 23 percent in 1991-95 due to substantial liberalization move. In the last few years, trade intensity of Bangladesh witnessed a phenomenal growth despite global economic crisis during the period. It is worth noting that during 1981-2010, export intensity has made a steady progress; increased about 4 percent in 1981-85 to about 17 percent in 2006-10. At the same time, the difference with import intensity has also increased.

11. Import intensity has increased magnanimously from 13 percent in 1981-85 to 26 percent in 2006-10. It reveals increased capacity of the economy despite slowing down of aid flow of the economy. Its capacity to import seemed to have increased not only because of increased export intensity but also because of increased inflow of remittance income of migrant workers. One of the important indicators of global integration is the import penetration ratio. This has increased to 24 percent in 2006-2010 from 11.8 percent in 1981-85.

12. Widening of the difference between export and import intensities can be explained by the increase of import dependence as well as increased global price of imports relative to its exports. Another explanation is the increased import dependent exports by shifting from indigenous raw materials based export product to imported raw material based garments products.

13. Although Bangladesh has lost its importance in supply of jute goods, which was the main export item in the 1980s, it demonstrated tremendous success in knitted and woven garments export. While in the seventies, jute and jute goods constituted 77 percent of total exports and in the period of 2006-2010, garments constituted 77 percent of total exports in recent times. From the very insignificant proportion of 7 percent in 1981-1996, garments export rose steadily to 77 percent in 2006-10. In knitted garments it occupies third place in the world following Hong Kong and China. Though it made remarkable success in both knitted and woven garments, its main categories are not more than five. In knitted garments, T-shirts and pullovers (80%) and in woven garments, shirts, jackets and trousers are the major export products (86%). Here its potentials have not yet got exhausted, rather the sector can move forward comfortably with background experiences for a number of years with accumulated skill of 5000 entrepreneurs and 3 million garment workers and thousands of accounting and managerial professionals. There are many products yet to be developed. Again, in the same category of products, it can go for higher quality products. Aggressive marketing drive with brand name of Bangladeshi Companies is a feasible option. For this, economic diplomacy and investment for international marketing need to be facilitated by the government. One note of caution is that it is very risky to rely on a single product and export becomes vulnerable in the situation

8

of global market change, and therefore, there is a strong case for export diversification.

14. Only nine countries constitute about 75 percent share of total exports of Bangladesh during 1991-2010, which was 38 percent in 1981-85. Share of other countries than these nine countries has declined from 62 percent in 1981-85 to 25 percent in 2006-10. The country like USA alone accounts for 25 percent of total exports. Three European countries—UK, Germany and France, together, buy 25 percent of total export products. Thus 50 percent of exports destine to just four markets. Therefore, Bangladesh export is concentrated not only to a very few commodities but also to very few markets. This suggests the need for massive drive for greater market access to avoid instability and vulnerability of exports.

15. Imports are dominated by consumer goods. The composition of imports has changed little over time. The share of consumption goods increased from 31 percent in 1981-85 to 57 percent in 2006-10. Next important item of import is intermediate goods constituting about 22 percent in the recent period. Its share was 23 percent in 1981-85. The share of primary goods has substantially declined from 28 percent in 1981-85 to 14 percent in 2006-10. The share of capital goods has also substantially declined to 7 percent from 30 percent in 1981-85.

16. Imports of Bangladesh are concentrated in nine countries constituting 63 percent of total imports. Two suppliers, India and China constitute together one third of imports of Bangladesh. India and China constituted only 6 percent of imports in 1986-90 but have come up increasingly to outbid other suppliers in the market of Bangladesh. China alone accounted for 16 percent growth of imports, followed by India (14 percent). The share of imports from top nine countries has increased from 40.9 percent in 1986-90 to 62.5 percent in the recent period. The share of imports from other countries than these countries has sharply declined from 59 percent to 37 percent during the same period. While share of nine countries has increased, growth of imports from other countries like Malaysia, South Korea and Japan have considerably increased along with predominant supply from India and China. A high growth of imports can be observed from India, China and Malaysia. Growth of imports from USA is also stably high.

17. Estimated Revealed Comparative Advantage (RCA) and Symmetric Revealed Comparative Advantage Index (SBI) indices show that Bangladesh has been enjoying high revealed comparative advantage in knitted garments, woven garments, jute and jute goods, other textile articles, frozen fish, leather, footwear, headgear and parts. Our estimates show that 24.7 percent products of Bangladesh out of 1571 products at 4-digit level are enjoying comparative advantage in world market as their average RCA is around 20 and their average symmetric RCA is around 0.90, which is very high. Trade specialization index of these products is on average around 0.75. But these product categories are facing high concentration not only in terms of products (88% share for three products) but also of market destinations (55% for three markets). These results indicate that attention needs to be paid not only on revealed comparative advantage of products for specialisation, but also on diversification of export items and market destinations. This is important for ensuring sustainability of export earnings on a long term basis. At the same time, traditional export

9

commodities including tea and leather lost their previous comparative advantage. The sectors that came into dynamism are footwear, ceramic products, household articles including tableware and kitchenware, light engineering, pharmaceuticals, bicycle, tent, home textiles and vegetables.

18. Comparative advantage analysis cannot uncover potentiality of products or markets. Therefore, it is necessary to analyze trade potentials for Bangladesh. There are different approaches to estimate trade potential for a country. Here we estimated Trade Potential Index (TPI) to calculate potential at disaggregated product level. TPI is a scoring system which allows the analysis to focus on trade potential while taking cognizance of import demand, import trends, growth rates and unit values rather than focusing solely on trade potential values. It is evident that for Bangladesh a large number of products have huge potential for trade in a number of countries. In terms of number of items with very high trade potential, India ranks in the first place; countries like Italy, Germany, Australia, Spain and China are also very potential market for a number of products. Among these countries, Australia can be considered as the most potential market for Bangladesh. The other promising markets where Bangladeshi exporters can explore are Austria, India and Turkey in the coming days. However, the underlying condition is that despite potentials, Bangladeshi products must have to maintain importing countries quality standards as well as undertake sanitary and phyto-sanitary measures in order to get access to these potential markets.

19. Import of foodgrains has also been liberalized substantially, which has made positive contribution to food imports. In case of rice, maze and soya bean oil, import tariffs are brought down to zero in recent years to meet the growing demand and address international price volatility. Bangladesh has been a consistent net importer of foodgrains over the past decades. The major source of import during the 1980s and early 1990s was Thailand. However, the trade liberalization that permitted private sector imports coincided with India's rice trade liberalization, which dramatically changed the rice import trade for Bangladesh. Rice import dependency has drastically reduced in recent days.

20. Estimated import dependence ratio shows that import dependence of rice is insignificant hovering around 3 percent with closeness to selfsufficiency in rice production in recent years while import dependence of wheat is as high as 77 percent in 2010-11 increased from 28 percent in 1985-90. The reason is that while rice production has increased significantly over the years, wheat production has not increased that much. The ratio of food grain imports to total supply of food grains increased from 3.7 percent in 1985-90 to 11 percent in 2011-12. Thus while the country is proclaiming attainment of self-sufficiency in food grain production, policy makers need to be careful of land scarcity and problem of continuous squeezing of land to meet the needs of growing population for food grains.

21. Despite a robust growth in overall exports, agricultural exports, however, did not increase much. It remained stable at 0.5 percent of total exports during the 1990s and the first half of the 2000s, however, it showed a somewhat increase in 2006-10. The share of exports of frozen food has also declined in 2006-10 compared to previous periods, mostly due to failing to maintain compliance standards. Exports of processed

10

agricultural products, which were already relatively negligible, showed a much steeper decline in the 1990s than those of primary agricultural products. This was because some anomalies are seen in the case of raw material import and processed food import, which negatively impacted export of agro-processed food products. Among other food items, export of vegetables, fruits, coffee/tea, cereals shows an increasing trend.

22. Bangladesh has comparative advantage in domestic rice production for import substitution (but not for exports). Among the non-rice crops, potato and pulses enjoy comparative advantage for import substitution. The non-rice food crops enjoying comparative advantage for export are items of vegetables like brinjal, radish, cucumber, barbati, arum, tomato and cabbage.

23. The effective rate of protection suggests that though rice is strongly import substitutable, but it is not strongly exportable. Among the non-rice crops, pulses, potato and vegetables are strongly exportables as well as highly import substitutable. These products may be processed for domestic consumption in rainy days and may be exported to foreign countries. Thus commercialization of non-rice food products may be an important policy issue in agricultural diversification and food security. There are two important factors determining the future prospects of such exports: one relates to the tariff barriers in the importing countries, and the other relates to the sanitary and phytosanitary restrictions. Sanitary and phytosanitary measures seem to be more important for Bangladeshi exporters of these products. It is important to ensure that Bangladesh undertakes necessary measures to meet sanitary and technical standards of the importing countries. Appropriate institutions and technical expertise need to be built up for ensuring the safety and quality of exports.

24. It is well argued that differences in productivity, price, quality and timely delivery are

important determinants of bilateral trade flows. Under these circumstances, the challenges for Bangladesh are to increase price and non-price competitiveness and find new potential industries and markets for vitalizing the exports of the country in the wake of acute global competition. As comparative advantage is a major source of trade expansion, the country’s trade policy should be consistent with the dynamics of comparative advantage.

25. In order to diversify export basket, policies should be oriented towards stimulating productive investment, building technological capacities and strengthening linkages within and across sectors and between different enterprises. Strengthening domestic productive capacities should also be aimed at producing a wider range of sophisticated products. In order to increase productive capacity, the following measures can be undertaken:

- Strengthening national capacity to undertake analysis of competitive potential at

the product and subsector level;

- Establishing the quality and conformity assessment infrastructure required to increase exports;

11

- Providing special attention to productive sectors with high export potential to upgrade product and production quality and comply with standards and regulations so that enterprises can export successfully;

- Allocating sufficient fund for research and development (R&D) of agro-processed products;

- Developing troubleshooting mechanism in cases where export products encounter technical barriers and advising on technical solutions to problems, and

- Building capacities of existing research institutions, such as Bangladesh Agriculture Research Institute (BARI), Bangladesh Standard and Testing Institute (BSTI), Bangladesh Council for Scientific and Industrial Research (BCSIR) etc. needs to be done on an urgent basis.

26. A few measures are suggested below to enhance export of agro-based products to

harness the export potential of the agro-processed industry: - Special credit facility, interest and tax subsidy could be initiated to agro-processed

industry; - Cash incentives can be continued for existing agro products as well as expanded for

new products; - Import duty should be curtailed to minimum level in the case of import of necessary

inputs such as chemicals, packaging materials, raw materials, and so on; - Existing anomalies in tariff structures between inputs and processed products need to

be harmonized. For example, current structure of levying higher duty on raw materials and other inputs than processed products hurts competitiveness of local products;

- Bonded warehouse facility can be extended to agro-industries; and - Quality control measures must be strictly institutionalized and implemented.

12

CHAPTER 1

INTRODUCTION

1.1 Background

Bangladesh’s trade performance in recent years has been very impressive. Export earnings from readymade garments (RMG) have boomed—increasing from US$4.9 billion in FY 2003 to US$24.2 billion in FY2011, which generates major portion (about 77%) of export earnings. The share of trade (exports plus imports of goods and services) in the Bangladesh economy has increased significantly from about 12 percent of GDP in 1990-91 to over 30 percent in 2001-02, and afterwards, though slowly, from 36.3 percent in 2004 to 44 percent in FY2010, showing the importance of trade in the economy. The trade performance of Bangladesh is encouraging compared to some South Asian countries like India and Sri Lanka as the trade-GDP ratio remains almost equal to that of these countries in recent years. During the 2006-10, exports of goods and services grew by an annual average rate of 15.1 percent whereas imports grew by an average of 25 percent. Export growth, though slowed down during the global financial crisis in 2008-09, is in the recovery stage. The most spectacular thing is that global financial crisis in 2007-08 could not hurt export performance as was expected, mainly due to product specialization (particularly low-end products-base) and timely taken stimulus measures from the part of the Government. The success in stimulating trade in recent years lies in the fact that Bangladesh has managed to carve out an export niche in the global division of labor by exploiting its comparative advantage derived from particular resources, such as readymade garments. The country has been able to diversify its exports—shifting from agricultural products in the 1970s and 1980s to readymade garments in the 1990s onward. However, exports remain highly concentrated to garment products for more than a decade. Rapid growth of apparel export has also triggered the growth of accessories and packaging industries, most of which benefited from import liberalization. Moreover, easier access to imported inputs facilitated the growth of some other industries such as plastic, processed food, footwear, chemicals, printing etc., and the growth of exports of these items is gradually increasing. Still the share of trade in GDP is far from satisfactory compared to some Southeast Asian countries. The reasons of such retreat could be the lack of export diversification, market access, technological innovation and inability of creating production networks, nationally and internationally. The impressive trade performance of Bangladesh is largely attributed to the extensive reforms in trade policies pursued in the 1990s. Historically, Bangladesh has been maintaining a restrictive trade regime since its independence in 1971. In the early decade of independence, Bangladesh followed an import substitution industrialization strategy. During the decade, trade regime was characterized by high tariffs and quantitative restrictions on imports. Partial liberalization of the trade regime started in the middle of the 1980s under structural adjustment reforms initiated by the World Bank and the International Monetary Fund. The major objective of the trade reform was to encourage exports by reducing the anti-export bias. The various reform measures included simplification of import procedures, reduction and harmonization of tariff rates on similar products, gradual reduction of non-tariff barriers, removal of restrictions on repatriation of profit and income from foreign investment, etc. The highest customs duty rate was reduced from 350 percent in 1990 to 32.5 percent in 2003 and

13

25 percent in 2011. At present, most of the quantitative restrictions are applicable to non-trade grounds such as health, environment, culture, national security, etc. The number of operative tariff slabs was reduced from 24 in the 1980s to 5 in 2010, and the (un-weighted) average customs duty rate was reduced from 100 percent in 1985 to 57 percent in 2000 and 15 percent in 2010. The relevance of discussion on agricultural trade has of importance in the context of dominant agrarian base of the economy. Although agricultural trade in Bangladesh dominated in the 1970s and 1980s, the share of agriculture in the overall trade volume started declining since then, particularly when liberalization process started. The major exporting agricultural commodity was jute and jute goods, which have lost attractiveness because of fierce competition from synthetics as well as lack of proper research and development for jute and jute goods. While agriculture constituted around 21 percent of total trade in the 1980s, the share dropped to 11.1 percent in 2011. Food grain production, particularly rice production, has increased threefold since Bangladesh’s independence, mainly due to increased availability and affordability of agricultural inputs because of import liberalization policies. This has decreased import dependency on food substantially now-a-days. The average unweighted nominal protection level in agriculture fell from more than 76 percent in 1991-92 to 31 percent in 1999-2000 and 18.5 percent in 2008; on the contrary, the average weighted protection rate fell from more than 33 percent in 1991-91 to 12 percent in 1998-99 and 5.5 percent in 2008. Favorable trade policies help to maintain a good reserve of food—about 1.3-1.7 million metric tons, which is good enough to address any crisis situation. Although Bangladesh has been rated as a restrictive country until recently, the average nominal protection rate level is now comparable to other South Asian countries. However, there is scope for further trade liberalization as high regulatory duties are often placed on an ad hoc basis. Regional trade integration has come to the forefront in the face of global financial crisis in 2007-08. Aside from the already established SAFTA (South Asian Free Trade Arrangement), both India and Sri Lanka signed free trade agreements and talks on some other bilateral free trade arrangements including Bangladesh are underway. SAARC countries’ share of trade in the world is very small and insignificant (3.6 percent) compared to other regions such as East Asia (around 20 percent) and EU Area (around 25 percent). What are the reasons behind such low level of intra-regional trade in South Asia? Despite being a highly liberalized region, intra-regional trade in South Asia is negligible mainly due to some non-tariff and para-tariff barriers. Greater cooperation in different areas of trade is expected to contribute to greater intra-regional share of trade among the SAARC countries in the face of global financial crisis. In the context of above discussion, this study aims to address the following pertinent research questions:

1. How the trade patterns of Bangladesh, both in terms of composition and volume, have been changing over time since 1990?

2. Are trade patterns including agricultural trade consistent with trade and exchange rate policies?

3. Is there any change in spatial pattern of trade over the period? and 4. What is the status of intra-regional trade?

14

1.2 Objectives

The broad objective of this study is to review trade reform policies in Bangladesh and to assess the impact of such policies on trade pattern. Moreover, the study highlights various aspects of trade policies on food economy of Bangladesh. The specific objectives of this study are to:

1. Review trade liberalization policies of Bangladesh, as well as impact of these policies on trade;

2. Make comparison of effective and nominal rate of protection at the world level or at the region level (SAARC);

3. Review of present export incentive structures for export promotion and study the impact of incentives on export performance;

4. Examine the trade pattern as well as export and import pattern of Bangladesh over time;

5. Analyze evolving markets and explore the possibilities of trade opportunities for Bangladesh;

6. Discuss various aspects of international trade and food security of Bangladesh; and

7. Provide policy recommendations on trade policies and pattern.

1.3 Methodologies

This study uses various methodologies to assess the trade policies and their impact on trade pattern. In particular, the following methods are used:

- Descriptive statistics and graphs for tariff structure and export/import structure

- Revealed Comparative Indices (RCI) for products as well as geographies

- Trade Potential Index (TPI) for selected countries

- Vector Error Correction Model (VECM) to assess the impact of cash incentives on exports.

Data sources are Bangladesh Bank, Export Promotion Bureau, WITS, UNCOMTRADE and WTO.

1.4 Organization of the Report

After the Introduction, Chapter 2 discusses the trade liberalization policies pursued by the Bangladesh government in different phases since its independence in 1971 and assesses the

15

impact of liberalization policies on trade outcome. This chapter also discusses trade liberalization policies from the regional context. Chapter 3 analyzes trade pattern in general and export and import pattern in particular. Change of structure of import and export in terms of volume and composition has also been discussed. Chapter 4 analyzes evolving markets and trade opportunities for Bangladesh over time. Moreover, in this section, Trade Potential Index has been created for Bangladesh to examine potentialities of Bangladeshi products in different emerging markets. Chapter 5 discusses different aspects of international trade and food security issue of Bangladesh. Finally, Chapter 6 provides conclusions and policy recommendations.

16

CHAPTER 2

REVIEW OF TRADE LIBERALIZATION POLICIES This Chapter reviews trade liberalization policies undertaken by the Bangladesh government over the course of time and their impact on trade. Trade liberalization was done in steps. Trade policy reforms during 1972 to 2000 can be described in three phases. While in the initial years of independence, 1972-1976, Bangladesh maintained a controlled trade regime, it started pursuing some trade liberalization policies in the subsequent period of 1976-1989. From 1990 onward, Bangladesh pursued significant trade liberalization. The three phases of trade reforms are briefly discussed below.

2.1 Phase-I (1972-75): Restrictive Trade Regime

After the independence in 1971, the first Bangladesh government pursued highly restrictive trade and exchange rate policies partly because of uncertainty in various economic and socio-political structure of a new state and lack of capacity in handling liberalized environment. Thus, quantitative restrictions, high tariff rates and a fixed but overvalued exchange rate were used to control import levels, conserve scarce foreign exchange and provide protection for domestic industry. The protectionist trade regime continued till 1976. In this protectionist regime, there were provisions for import and export licensing. All foreign exchange earnings were accrued to the government and then allocated to competing uses through a discretionary and cumbersome mechanism of import licensing. At the same time, under the Export Performance License, certain exporters were given a specified proportion of their export earnings in the form of an Import Entitlement Certificate, which could be utilized either to import particular categories of goods or to sell to other traders at a premium to import such goods. Thus, there was a de facto dual exchange rate where the Export Performance License premium reflected, to some extent, the market price of foreign exchange. During this period, most agricultural commodities were on the restricted or banned lists of imports. At the same time, there were restrictions on the export of agricultural products. Some agricultural exports were also subjected to export duties. The restricted trade and exchange rate policy, however, was started liberalizing from the mid-1970s with slightly strengthened institutional capabilities of the country.

2.2 Phase-II (1976-1990): Partially Liberalized Trade Regime

The progress in trade liberalization was slower in the 1980s, particularly with respect to reductions in import tariffs (Bakht, 2001). But liberalization was done in the cases of some agricultural exports, for example, export duties on raw jute and tea were withdrawn in 1981, and those on dried fruits, fresh fruits, oil cakes, coriander seed, dry chili, dry ginger, black pepper, turmeric, tobacco, vegetables and potato were withdrawn in 1986. Major reforms in exchange rate policy took place in the 1980s. In mid-1979, Bangladesh adopted a limited flexible exchange rate policy by fixing the Taka to a basket of currencies of

17

major trading partners. Earlier, it was fixed to British Pound-Sterling. At the same time, import financing at the official exchange rate was rapidly reduced and an increasing proportion of imports were subject to the secondary exchange market including part of the foreign exchange received under commodity aid. About 40 percent of all imports were financed out of this source, while the share of secondary exchange market in non-aid imports was nearly 70 percent at the end of 1989 (Ahmed et al., 2007). On the other hand, the export licensing system was simplified substantially in 1986 by the introduction of Export Performance Benefit. This allows the beneficiary exporters to directly cash their benefit entitlement at their banks. These policies contributed to the rapid growth of non-traditional exports during the 1980s, as well as a rapid expansion of the secondary wage earners scheme market. A wide range of agricultural commodities benefited from the Export Performance Benefit incentives. However, exports of raw jute were not included in the Benefit scheme and thus suffered directly from the overvalued exchange rate. The enhanced role of the secondary exchange market resulted in narrowing of the gap between the official and the wage earners scheme rate. Eventually, the two rates were unified in 1992, which marked the end of the Export Performance Benefit arrangement (Rahman 1992). During this phase of reform, some progress has been made, as well as a window opened up for further liberalization.

2.3 Phase-III (1990s): Liberalized Trade Regime

2.3.1 Import Liberalization Policies and Impacts Trade liberalization in the early 1990s brought tariff rates down sharply. Import tariffs and total tax incidence on the import of major agricultural commodities declined sharply during the 1990s and 2000s (Table 0-1). While tariffs (un-weighted) for agricultural commodities were declined from 25.5 percent in 2000 to 18.5 percent in 2008, tariffs for industrial commodities declined from 22 percent in 2000 to 13.5 percent in 2008. Duties on capital goods, consumer goods and intermediate goods declined sharply during 2000-2008, while duties on raw materials remained almost the same during the same period. At the HS-4 digit level, the range of products subject to an import ban or restriction has been curtailed substantially from as high as 752 in 1985-1986 to only 63 in 2003-2006. Import restrictions have been imposed on two grounds: either for trade-related reasons (that is, to protect domestic industries) or for non-trade reasons (for example, to protect the environment, public health and safety, and security). During the past two decades, the number of trade related banned items has declined from 275 in 1985-86 to 5 in 2003-2006. In a similar fashion, other restricted and mixed (a combination of banned and restricted) import categories fell quite rapidly.

18

Table 0-1: Tariff Rates for Different Goods

Item/Category Tariff Year 1999 2000 2002 2003 2004 2005 2006 2007 2008

Trade Year 2002 2002 2002 2003 2004 2004 2004 2004 2008

Capital Goods Simple Average 13.18 13.04 11.12 11.67 10.95 9.35 9.34 8.3 7.3

Weighted Average 9.13 8.91 8.89 9.66 10.82 13.87 13.86 8.28 8.43

Consumer Goods

Simple Average 30.03 30.03 28.99 25.95 24.05 20.13 20.11 19.8 19.72 Weighted Average 29.19 29.19 28.97 27.14 24.19 17.12 17.11 16.66 18.52

Intermediate Goods

Simple Average 22.2 22.14 21.17 19.59 18.43 15.96 15.95 14.42 14.31


Raw Materials

Simple Average 14.71 14.71 15.05 13.88 13.99 12.25 12.21 11.63 13.88Weighted Average 9.32 9.32 9.49 11 7.42 3.44 3.41 3.05 4.03

WTO HS Agricultural commodities

Simple Average 25.46 25.46 25.01 22.72 20.79 17.73 17.7 17.26 18.52


WTO HS Industrial

Simple Average 22 21.91 20.65 19.23 17.97 15.29 15.27 14.3 13.58

Weighted Average 20.2 19.64 20.23 20.27 17.33 23.7 23.68 12.61 14.01Source: WITS. All quantitative restrictions on agricultural products have been removed in the 1990s. Tariff lines of all products that faced quantitative restrictions were brought down to only 2 percent in 1994, and zero in subsequent years. Private sector imports of rice and wheat were legalized in the early 1990s, ending the government’s monopoly on food grain imports. The ban of rice export of fine quality rice (but not on exports of ordinary coarse rice) was also lifted. These liberalization policies have impacted positively the growth of import volumes (Figure 0-1).

Figure 0-1: Impact of Tariff Reduction on Imports

Notes: Import values are expressed in billion Taka, tariff rates are presented in percent.

2.3.2 Export Promotion Policies and Impacts Various measures have been taken to promote exports. Measures include cash incentives to some traditional and non-traditional items, restructuring export credit guarantee schemes, creating of export promotion fund, introduction of duty-drawback and bonded warehouse facility, income tax rebate to certain extent, etc. (see Table A-5 in Appendix). Moreover, subsidized interest rate (7%) and under-valued exchange rate are some of the important policy supports given to exporters.

W. tariff UW. tariff

19

2.3.2.1 Cash incentives (subsidies) for exporting products

Bangladesh government has been providing various incentives including cash incentives to exporters in order to increase the volume as well as value of exports since 1994 as discussed above. It is thus important to analyze the impact of cash incentives on export promotion in Bangladesh. Initially, it was for export of jute goods produced by government and non-government jute mills, and export oriented local textiles. Later on, the scope and extent of the cash incentive program has been expanded in order to encourage exporters for product and market diversification, particularly for non-traditional items. Cash incentive for leather goods (100 percent export oriented industries) was introduced in April 2000. Cash incentive facility started for export of agricultural goods, particularly for frozen shrimps and other fish, agro product (vegetables/fruits) and processed agro-products from December 2000. Other products that enjoy cash incentive benefits so far are bone meal; bi-cycle; commodities made of hogla, straw, coir of sugarcane; potato, eggs and day old chicks of poultry industries; liquid glucose produced at Iswardi EPZ (from December 2005); light engineering products (from February 2006); and halal meat (from December 2006). However, rate of cash incentive varies across commodities (Table A-4 in Appendix). The government make changes to rates and sectors time to time, however, on ad hoc basis. Cash incentive provided for export of shrimp and other frozen fish was 10 percent during FY2002-03 to FY2008-09, which was increased to 12.5 percent in April 2009 under the stimulus package to combat negative impact of global economic crisis. For export of vegetables and fruits, rate of cash incentive was 15 percent in FY2002-03, 25 percent in FY2003-04 and FY2004-05, 30 percent in FY2005-06 and 20 percent during FY2006-07 to FY2008-09. Rate of cash incentive applicable for export of processed agro-products was 15 percent in FY2002-03 and 25 percent in FY2003-04 and FY2004-05. In FY2005-06, depending upon the local input use level for exported agro-processed products, two different rates were applicable. If the processed agricultural product used at least 80 percent of local inputs then it receives 30 percent as cash incentive; but for products that have used at least 70 percent local inputs then cash incentive was applicable at the rate of 20 percent of export value. Since FY2006-07, 20 percent cash incentive provided for export of agro-processed products which fulfils the minimum 70 percent local raw materials-use criteria. For export of potato, applicable cash incentive rate was 15 percent in FY2003-04 and FY2004-05, 20 percent in FY2005-06 and 10 percent since FY2006-07. For export of halal meat, applicable rate for cash incentive was 20 percent during FY2006-07 to FY2008-09. Cash incentives are provided on net fob (freight on board) value of the selected commodities exported (shipped) during a year. Export value is calculated using a fixed price set by the Bangladesh Bank. Annual disbursement of money provided as cash incentive for agricultural and non-agricultural products during FY2002-03 to FY2007-08 is reported in Table 0-2. Amount of disbursement has increased for both agricultural and non-agricultural products in this period compared to the 1990s. Product specific analysis revealed that amount of cash incentive provided for export of frozen shrimp and other fish has increased from $8.64 million in to $52.60 million and total spending for this commodity was $167.14 million over the period FY2002-03 to FY2007-08. Total amount of cash incentive provided for export of vegetables and fruits was $22.96 million and annual disbursement increased from $0.13 million in FY2003-04 to $9.42 million in FY2007-08. In the case of potato, $0.47 million was spent as cash incentive during FY2004-05 to FY2007-08, while, $6.02 million was spent as cash incentive for export of processed agricultural products during FY2006-07 and

20

FY2007-08. However, businessmen often complain about the lengthy process of disbursement of cash incentives. On the other hand, Bangladesh Bank argues that it takes long time because of scrutiny of claims of export proceeds as some fraudulent cases were detected.

Table 0-2: Amount of Money Disbursed under the Cash Incentives Scheme: FY2002-03 to FY2008-09 ( in million US$) Product FY2002-

03 FY2003-

04 FY2004-

05 FY2005-

06 FY2006-

07 FY2007-

08 2008-

09Frozen shrimps and other fishes 8.64 21.21 28.18 23.85 32.66 52.60

43.07

Agro product (vegetables/Fruits) - 0.13 1.63 5.81 5.97 9.42

7.04

Potato - - 0.03 0.14 0.17 0.13 0.08Processed agro products - - - - 1.98 4.04

6.31

Commodities made of hogla, straw, coir of sugarcane, etc. 0.06 0.19 0.16 0.16 0.33 0.39

0.65

Jute goods 14.68 11.88 16.29 14.91 18.11 24.78

42.73

Leather goods 2.33 3.36 5.95 5.96 6.58 14.71 21.58Bone meal 0.01 0.04 0.05 0.06 0.08 0.17 -Export oriented local textile 106.65 75.71 68.41 37.27 48.74 76.72

98.15

Tobacco - 0.16 1.63 1.58 1.24 2.16 -Light engineering product - - - - 0.03 0.00

-

TOTAL 132.37 112.68 122.31 89.74 115.89 185.13 220.62Source: Bangladesh Bank. In Bangladesh, although total export had been doubled between 2002 and 2008, total ratio of cash subsidy to total exports remained almost the same throughout the period (Table 0-3). The benefit as a ratio of promoted exports is nearly 2 percent over the years, which appears to be a negligible amount that could hardly influence export performance.

Table 0-3: Benefits Generated from Export Subsidies Product FY2002

-03 FY2003

-04 FY2004

-05 FY2005

-06 FY2006

-07 FY2007

-08 FY200

8-09 FY200

9-10 Total exports ( in Million US$) 6548 7603 8655 10526 11346 14111

15565 16204

Total manufactured exports ( in Million US$) 6086 7050 8007 9753 12178 13123

14871 15517

TOTAL cash subsidy ( in Million US$) 132.37 112.68 122.31 89.74 115.89 185.13

214.28 257.14

Benefits as a ratio of promoted exports 0.02 0.02 0.02 0.01 0.01 0.01

0.01

0.02

REER Index (decrease indicates depreciation) 92.27 89.27 88.42 83.86 86.55 86.02

91.30

97.74

Source: Authors’ calculation; Bangladesh Bank

21

2.3.3 Evolving Markets for Subsidized Export Products It appears that in most cases both volume and value of exports of subsidized products (those enjoyed cash incentives) have been on a rising trend over 2001-02 to 2006-10 (Figure 0-2). However, in most cases, market destinations for these products are not the same for all the years, indicating that these products could not maintain access to a particular market for long time. In the cases of vegetables, bicycle, leather products and frozen shrimp, a single market dominates for quite a long time; however, in the cases of potato, fruits, tobacco and jute products, destinations have been changing each year. These might have happened for several reasons including tariff structure of those markets, inability to maintain sanitary and phyto-sanitary standards of those markets, etc. However, this issue needs to be analysed further, which is beyond the scope of this study.

Figure 0-2: Evolving Markets for Exporting (subsidized) Products

22

Notes: Value of exports in thousand Taka.

2.3.4 Impact of Cash Incentives on Export Performance The impact of export subsidy has been a contentious issue. On the one hand, it is argued that export subsidy creates “trade distortions” as it affects trading patterns amongst trading partners. Moreover, it creates fiscal burden on the budget, as well as leads to both inefficiency and inequity in resource allocation as it leads to regressive transfers from the exchequer to a section of industry. On the other hand, various arguments are given to justify export subsidies from the viewpoint of welfare maximization. These include the use of export subsidies by one’s competitors, neutralization of import duties, the infant-industry argument based on capital market imperfections and externalities and second-best considerations related to moral hazard and adverse selection. In many countries where only one or two exporting products dominate the total exports, subsidies are used as a means for expansion and diversification of exports. However, the impact of export subsidy is mixed in the literature. The experience of India shows little impact of export subsidies on exports. The experience of Mexico and Brazil shows that export subsidies are a costly instrument of export diversification. However, it is widely argued that export subsidies worked well in East Asia for export expansion and diversification.

Although Bangladesh offered cash incentives for certain export products, the impact of it has not yet been analyzed seriously. In this section we estimate an export demand function to examine the effect of cash incentives on exports. There are two primary determinants of export demand (Dornbusch, 1988; Hooper and Marquez, 1993): foreign income variable that measures the economic activity and the purchasing power of the trading partner country (“income effect”) and the relative price or the terms to trade variable (“price effect”). As real exchange rate volatility and cash incentives might affect exports, these two are additional factors that need to be explicitly taken into account (“volatility effect” and “incentive effect”). Incorporating these determinants, the export demand function takes the form as follows:

xt = α0 + α1 worldty + α2 world

tp + α3 Vt + α4 It + εt (1)

where xt is the natural logarithm of real export (total export is deflated by the export price index) of Bangladesh. We have estimated two equations considering world

ty as the natural

logarithm of the real GDP of USA and EU, while worldtp as the terms of trade of USA and

EU, Vt as the real exchange rate volatility of Taka measured as the two-quarter moving

23

average standard deviation1, It as the logarithm of total cash incentives provided and εt is an error term.

Quarterly data are used for the period 2000-2009.2 Applying the ADF test, we find that all series, such as xt, yt, and pt exhibit I(1) process except Vt and It which are I(0). Thus, we go for estimating cointegration equations considering Vt and It as exogenous variables. The results are shown in Table 0-4. To examine the impact of volatility, we estimate the short-term adjustment factors including REER volatility and cash incentives under the Vector Error Correction model.

The signs of the coefficients are found to be consistent with the theoretical predictions. The volume of exports (imports) to a foreign country ought to increase as the real income of the trade partner (domestic country) rises, and vice-versa. So we expect α1>0. A rise (fall) in the terms of trade of a trade partner will cause the domestic goods to become less (more) competitive than foreign goods, therefore exports will fall (increase) and imports will rise (fall). So we expect α2 < 0.

REER volatility has a significant and positive impact on exports to the USA, while it is not significant in terms of exports to EU. The low magnitude of the coefficient of volatility indicates that Bangladesh maintains a stable REER that makes a positive impact on exports. Cash incentives provided to exporters have no significant effect on total exports to both EU and USA markets, although the sign is positive. This was expected as cash subsidy given to exports is negligible in amount, which could hardly influence exports. However, the impact could be assessed more rigorously by analyzing longer time series data than ours.

Table 0-4: Impact of Cash Incentives on Exports, 2000Q1-2008Q2 Total Export

(VEC-1) Total Export

(VEC-2) Long-term equation

US Income 4.85 (0.45)*** EU Income 1.30 (0.17)***

US Price -1.24 (0.69)* EU Price -20.63 (3.44)***

Constant -31.93 Constant 92.58 Short-term equation

Vol_REER 0.05 (0.02)** Vol_REER 0.028 (0.03) Cash Incentives 0.01 (0.05) Cash Incentives 0.04 (0.06)

Error correction term -1.76 (0.28)*** Error correction term -0.29 (0.22)

Notes: At most 1 cointegarting equation is significant at both 1 per cent and 5 per cent level. *, ** and *** indicates 1 per cent, 5 per cent and 10 per cent level of significance respectively.

1 Vt is calculated as follows: ( )2/1

1

221 lnln1

⎥⎦⎤

⎢⎣⎡ −= ∑

=−+−+

m

iititt REERREER

mV

2 Only quarterly data are available from Bangladesh Bank. A longer and monthly time series of cash-incentives, if available, would produce better results.

24

2.4 Trade Liberalization: Regional Scenarios

This section reviews regional scenario of trade liberalization. It can be observed from Table 0-5 that Bangladesh’s nominal import protection level currently is comparable to South Asian countries. It is observed that tariff reduction in Bangladesh during the early 2000s was slower than other South Asian neighbours; however, recently Bangladesh has made a good progress to bring down its tariff structure to the regional level. In particular, Bangladesh’s MFN applied tariff (Ad-valorem) for agricultural goods (17.52% as against 20.62% in South Asia) is the lowest in South Asia, but slightly higher than the low-income country level. Trade Restrictive Indices (TRI), calculated by the World Bank, suggest that Bangladesh is the least restricted in South Asia (11.33 vs. 11.75) and even among low-income countries (Table 0-5).

Table 0-5: Regional Scenario of protectionism Indicators Bangladesh South Asia Low

Income countries

1995-1999

2000-2004

2005-2008

2006-09 Latest

2006-09 Latest

2006-09 Latest

Trade Restrictiveness Indices (TRIs) TTRI (MFN applied tariff) - all goods .. 20.11 15.11 11.33 11.75 11.54 MFN Applied Tariff (AV-only) MFN applied tariff (AV-only) - Simple Average - Agricultural (AoA) Goods (%) 24 22.49 17.29 17.59 20.62 14.97 MFN applied tariff (AV-only) - Simple Average - Non-Agricultural Goods (%) 21.50 19.69 14.48 14.36 12.85 11.67 Tariff escalation MFN Applied tariff escalation (diff, finished-raw) - Agricultural (AoA) Goods (%) .. 5.27 6.61 6.40 6.23 4.93MFN Applied tariff escalation (diff, finished-raw) - Non-Agricultural Goods (%) .. 1.75 3.22 1.51 1.96 4.47 Customs Duties Customs and other import duties (as a percent of goods imports) .. 17.64 13.85 11.80 10.45 9.52 Customs and other import duties (as a percent of tax revenues) .. 40.62 39.36 35.63 35.54 24.99 Market Access - Trade Restrictiveness Indices (MA-TRIs) MA-TTRI (applied tariff incl. prefs.) - all goods .. .. 6.16 3.56 7.61 5.60

Source: The World Bank, World Trade Indicators.

25

2.5 Concluding Remarks

Bangladesh pursued significant reforms in trade policies in the 1990s in a new democratic environment. The various reform measures included simplification of import procedures, reduction and harmonization of tariff rates on similar products, gradual reduction of non-tariff barriers, removal of restrictions on repatriation of profit and income from foreign investment, etc. Presently, most of the quantitative restrictions are applicable to only non-trade grounds. These liberalization policies have positive impact on the growth of import volumes. On the other hand, various incentive measures are taken to promote export. Measures include providing cash incentives to some traditional and non-traditional items, restructuring export credit guarantee scheme, creating export promotion fund, introducing duty-drawback and bonded warehouse facility, income tax rebate to certain extent, subsidized interest rates, etc. In particular, cash incentives in total constitute only about 1-2 percent of total export earnings. Econometric analysis suggests that cash incentives have positive but insignificant impact on export promotion, indicating that more cautious and efficient management of cash subsidy is required.

26

CHAPTER 3

ANALYSIS OF TRADE PATTERN IN BANGLADESH

3.1 Introduction

Trade intensities are the prime indicators of trade pattern and trade performance of a country. These reflect the extent of integration of a country with the global economy. As Figure 0-1 shows, trade intensity (trade to GDP ratio) has reached 45 percent of the country’s GDP and its average figure is around 44 percent (excluding trade in service) in the 2006-2010 period. It is interesting to note that in the two phases of structural adjustment program and privatization program under New Industrial policy of 1982 and 1986, trade intensity remains stagnated at only 16.7 percent. Gradually, it increased to 23 percent in 1991-95 due to substantial liberalization move. In fact, trade intensity of Bangladesh made a phenomenal growth in 2006-10 despite global economic crisis during that period. It is worth noting that during 1981-2010, export intensity has made a steady progress, increased from about 4 percent in 1981-85 to about 17 percent in 2006-10 (Table 0-1). At the same time, the difference between export and import intensities has also increased. Widening of the difference between export and import intensities can be explained by the increase of import dependence as well as increased global price of imports relative to its exports.

Figure 0-1: Trade pattern in Bangladesh

Source: Export Promotion Bureau, Bangladesh Bank Another explanation is the increased import dependent exports by shifting from indigenous raw materials based export product to imported raw material based garments products. Import intensity has increased magnanimously from about 13 percent in 1981-85 to 26 percent in 2006-10. It reveals increased capacity of the economy despite slowing down of aid flow of the economy. Its capacity to import seemed to have increased not only because of increased export intensity but also because of increased inflow of remittance income of migrant workers. One of the important indicators of global integration is the import penetration ratio. This has increased to 24 percent in 2006-2010 from 11.8 percent in 1981-85. Although it takes 20 years for it to be doubled, the driving forces behind it were import liberalization policies and increased domestic demand for better quality imported items.

27

Table 0-1: Indicators of Trade Pattern (Average percentage) Economic phases

Trade intensity

Export intensity Import intensity Import penetration ratio

1981-85 16.848 3.9582 12.8895 11.82 1986-90 16.780 4.9068 11.8734 11.09 1991-95 22.551 7.9877 14.5632 13.64 1996-00 30.042 11.9514 18.0910 17.05 2001-05 34.600 13.5835 21.0169 19.54 2006-10 43.937 17.6908 26.2458 24.15 Source: Estimated from the data of BBS.

3.2 Trade Balance and Coverage of Imports by Exports

One of the important trade performance indicators is trade balance. Its ratio with GDP would give reflection about dependence for development on foreign aid or external income other than exports of goods. Better view of export/import relation is indicated by normalized trade balance. Data suggest that every year the government has been incurring trade deficit of around US$7500 Million. Trade deficit has escalated from US$1733 million in 1981-85 to US$7486 million in 2006-2010 i.e. escalated by 27.5 percent per period. Average annual growth of trade deficit has increased highly in the periods 2001-05 and 2006-10 as compared to negative growth rate in the period of 1996-2000. It is worth noting that proportion of trade balance to GDP hovers around 7 percent in all the periods. Compared to this, normalized trade balance has decreased substantially. Import coverage ratio has also increased significantly from about 31 percent in 1981-85 to about 66 percent in 2006-2010 (Table 0-2).

Table 0-2: Trade Balance (average) and Coverage of Imports by Exports

Economic Phases

Trade balance as % of GDP

Normalized trade balance

Growth of trade balance

Trade balance in million US$

Coverage of imports by exports in %

1981-85 -8.93 -0.53 -0.74 -1733.0 30.91 1986-90 -6.97 -0.41 1.07 -1919.8 41.6 1991-95 -6.58 -0.29 15.43 -2357.7 54.75 1996-00 -6.14 -0.21 -2.62 -2775.6 66.14 2001-05 -7.43 -0.21 17.73 -4333.4 64.47 2006-10 -8.56 -0.19 13.15 -7464.5 65.96

Source: Calculated from the Data of BBS.

3.3 Export and Import Trends

Bangladesh registered a sizeable proportion of manufactures export and import as percentage of total merchandise export and import respectively (88% vs. 54%) in 2007 (Table 0-3). Readymade garments have been the major export items (Figure 0-2). Food import varies between 15 and 19 percent of total imports, while food export remains miniscule.

28

Figure 0-2: Export Dynamics

Dynamics of Structure of Exports of Bangladesh

0

20

40

60

80

100

1972-80

1981-85

1986-90

1991-95

1996-00

2001-05

2006-10

Economic Phases

Pere

ntag

e% Primary Products

% Mfg exports to totalexports% garment to totalexports% of Jute and JuteGoods to total exports% of raw jute tototalexports% of Jute textiles exportto total exports

Table 0-3 shows that manufactures, particularly merchandise export (about 90%), dominate the export basket, while the share of manufactures is only 54.2 percent in merchandise imports. Food export has been on a declining trend, while food import has been increasing. Trade in services as percentage of GDP has been increasing, but slowly.

Table 0-3: Exports and Imports as Percentage of Merchandise Exports and Imports Year Manufactures

exports (% of

merchandise export)

Food export (% of

merchandise)

Manufactures import (% of merchandise import)

Food import (% of merchandise import)

Trade in service (% of GDP)

1990 77.49 14.31 55.85 18.95 3.62

1995 85.15 10.45 69.14 17.30 5.88

2000 90.51 7.61 67.65 16.48 5.17 2005 91.77 6.18 64.94 15.6 5.75 2007 88.28 6.52 54.21 22.46 6.58

Source: WDI CD ROM, World Bank, 2011.

During 2005-07, Bangladesh had made a remarkable progress in increasing its share in global exports and imports, which together accounts for about 0.12 percent (Figure 0-3). Compared with some other LDCs, the progress is remarkable in terms of increased global share of trade (exports and imports).

29

Figure 0-3: Share of Exports, Imports and Trade in Global Trade (percent): 2005-07

0.000

0.020

0.040

0.060

0.080

0.100

0.120

0.140

0.160

Afgh

anis

tan

Bang

lade

sh

Bhut

an

Cam

bodi

a

Kirib

ati

Lao

PDR

Mal

dive

s

Mya

nmar

Nep

al

Sam

oa

Solo

mon

Isla

nds

Tim

or-L

este

Vanu

atu

Yem

en, R

ep.

Tota

l

import_w orld export_w orld trade_w orld

Source: UNCTAD. However, within the manufacturing sector, lack of export diversity remains a measure of least development, as evident in Figure 0-4. Estimated export and import concentration ratios, measured in terms of Herfindahl-Hirschman index (HHI), shows that export concentrations are much higher than import concentration (Figure 0-4). The estimated concentration for export is about 0.50, while it is just 0.1 for import in 2010. Higher export concentration is due to the dominance of readymade garments in the export basket, which accounts for around 75 percent exports of Bangladesh. High concentration in exports implies that the country is more vulnerable to external shocks. To reduce dependence on a particular exporting item, Bangladesh needs to diversify its export basket.

Figure 0-4: Import and Export Concentration Ratio for Bangladesh, 2000-2010

0 0.1 0.2 0.3 0.4 0.5 0.6

2001‐022002‐032003‐042004‐052005‐062006‐072007‐082008‐092009‐10

HHI FOR EXPORT AND IMPORT

IMPORT_HHI

EXPORT_HHI

Source: Economic Trends, Bangladesh Bank

30

3.4 Analysis of Exports

3.4.1 Structure and Growth of Exports of Commodities Over the whole period under review, consumer goods dominated the export basket overwhelmingly (Table 0-4). Consumer goods along with materials for consumer goods constitute 97 percent of exports. The picture has not been changed since the beginning of the 1980s. During the 1996-00 and 2001-2005 periods, consumer goods constituted about 90 percent of exports basket. In terms of different categories of exports, such as high tech products, primary products, intermediate products, capital equipment and consumer goods, picture did not change much over the period (Table 0-4). As per such categorization, though proportion of primary products decreased, proportion of intermediate products or capital equipment or high tech products did not increase. Share of high tech products and capital equipment is stagnated at 0.2 percent and 0.3 percent respectively, while share of intermediate products along with primary products has fallen considerably. The result is that around 89 percent of export is composed of consumer goods in 2009, which was 78.1 percent in 2005. This may not be inconsistent with the technological background of the entrepreneurs and structure of the economy biased against technology oriented production. Although Bangladesh has lost its importance in supply of jute goods, which was the main export item in the 1980s, it demonstrated a tremendous success in knitted and woven garments export. While in the 1970s, jute and jute goods constituted about 77 percent, in the period of 2006-2010, garments constituted 77 percent of total exports. From the very insignificant proportion of 7 percent in 1981-1996, garments export rose steadily to 77 percent in 2006-10. In knitted garments, it occupies third place in the world, followed by Hong Kong and China. Though it made a remarkable success in both knitted and woven garments, its main categories are not more than five. In knitted garments, T-shirts and pullovers (80%) and in woven garments, shirts, jackets and trousers are the major products (86%). Here its potentials have not yet got exhausted, rather the sector can move forward comfortably with background experiences for a number of years with accumulated skill of 5000 entrepreneurs and 2.6 million garment workers and thousands of accounting and managerial professionals. There are many products yet to be developed. Again, in the same category of products, it can go for higher quality products. Aggressive marketing drive with brand name of Bangladeshi Companies is a feasible option. For that economic diplomacy and investment for international marketing need to be facilitated by the government. One note of caution is that it is very risky to rely on a single product and export becomes vulnerable in the situation of global market change.

31

Table 0-4: Structure of Exports

A. Structure by types of Commodities

Source: Calculated from the data of BBS. B. Structure of Exports By Stages of Processing Indicators (average) 2005 2006 2007 2008 2009 Share of high-tech products (%) 0.3 0.2 0.1 0.2 0.2 Share of primary (%) 7.5 7.3 9.4 5.1 4.8 Share of intermediates (%) 13.4 17.1 13 7.8 5.9 Share of capital (equipment) (%) 0.7 0.6 1.7 0.5 0.3 Share of consumer goods (%) 78.1 75.3 75.8 86.4 88.8 Total 100 100 100 100 100

Source: Adapted from the Data of UNCTAD. Detailed structure by commodities shows that share of the traditional exports has fallen, while share of woven and knitted garments has substantially increased (Table A-6 in Appendix). Knitted garments superseded woven garments in recent years and share of woven garments has virtually declined from 50 percent in 1991-95 to 38 percent in 2006-10. It is worth noting that though garments have played a crucial role in the last two decades, it is concentrated mainly in five products: T-shirts and Pull over (80% taken together) in knitted garments and jackets, trousers and shirts (90% taken together) in woven garments. Though proportion of traditional exports has declined tremendously, they are growing rapidly in recent years. For example, jute goods and raw jute exports grew at the rate of 20.4 percent and 26.5 percent respectively in the period of 2006-10 (Table 0-5). Though proportion of non garments declined from 62 percent in 1981-85-to 32 percent in 2006-10, its growth was from negative to the positive, 13.4 percent, during the same period. Thus, not only performance of garments was substantial but also of others is appreciable amidst global economic crisis. Though knitted and woven garments contributed to the extent of 77 percent in the period 2006-10, other products except paper board and tea seem to be still prospective despite decline in their role in the growth of exports (Table 0-5).

% Share in Exports

Period % Share of consumers goods in exports (average)

% share of material for consumer goods in exports (average)

% share of capital goods in exports

(average)

% share of materials for capital goods

(average)

1981-85 68.5 29.4 1.0 1.1 1986-90 74.4 23.4 1.5 0.7 1991-95 81.2 16.4 1.7 0.6 1996-00 90.2 8.5 0.7 0.6 2001-05 89.3 10.0 0.4 0.3 2006-10 84.3 13.6 0.6 0.5

32

Table 0-5: Growth of Individual Export Items

Export items 1981-85

1986-90

1991-1995

1996-00 2001-05

2006-10

Raw jute 1.85 -1.51 -6.26 0.35 7.22 26.46 High growth recently Tea 14.44 -4.72 -1.88 -6.28 -1.12 -13.45 Negative growth Frozen food 18.56 10.38 18.78 3.06 5.46 6.82 Positive though lowered Agri products 63.95 12.82 7.06 15.99 40.09 20.38 High growth Other primary prods 4.18 5.12 21.28 -0.96 17.01 26.43

High growth

Total primary commodities 7.03 0.52 8.06 1.28 7.82 12.32

High growth

Jute goods 0.14 -2.17 -0.43 -3.24 3.69 20.44 High growth Total jute and Jute goods 0.51 -2.38 -2.17 -3.03 4.33 21.07

High growth

Leather 3.09 28.37 3.78 -0.24 3.83 5.50 Reasonable growth

Leather goods 117.24 -100.00 79.64 2.56

Prospective

Footwear -85.71 - 66.78 9.49 78.53 26.43 High growth Naphthalene and furnace oil 5.42 -2.03 57.80 15.82 10.11 12.32

Reasonable growth

Woven garments 20.49 44.70 25.63 11.27 3.31 13.10 Reasonable growth Knitwear -20.00 0.00 184.99 27.14 17.96 20.10 High growth Total garments (Woven and Knitted) 20.44 45.33 29.68 14.54 8.35 16.36

High growth

Chemical products 76.26 76.66 50.94 -4.57 24.91 -6.94

Negative growth

Fertilizer -31.35 111.70 423.00 -24.89 -100.00 - Negative growth Pharmaceuticals 40.27 87.95 162.89 22.27 -54.29 - Prospective Paper products 0.73 -13.26 -23.27 187.50 - - Negative growth Handicraft -10.40 27.65 10.73 8.77 -9.63 3.82 Low positive growth Engineering products 79.96 89.14 36.31 -12.47 - 29.51

High growth

Specific textiles 89.18 90.07 98.98 -1.09 - - Negative growth Total export 5.19 11.26 18.34 10.72 8.87 15.44 High growth Total exports except garments 2.29 2.43 7.41 2.55 10.53 12.93

Reasonable growth

Total manufactured exports except garments -0.03 4.01 7.14 3.35 11.89 13.37

Reasonable growth

Source: Calculated from the data of EPB

3.4.2 Structure and Growth of Exports by Market Destinations Only nine countries constitute about 75 percent share of total exports of Bangladesh during 1991-2010, which was 38 percent in 1981-85. Share of other countries than these nine countries has declined from 62 percent in 1981-85 to 25 percent in 2006-10. In the period of 1996-2005, share of other countries was abysmally lower at 19 percent only. The country like USA alone accounts for 25 percent of total exports. Three European countries, UK, Germany and France, together buy 25 percent of total export products. Thus 50 percent of exports destine to just four markets. Figure 0-5 shows that exports in these four markets have been increasing over time. Thus, Bangladesh export is concentrated not only in a very few

33

commodities but also in a very few markets. This suggests the need for massive drive for greater market access to avoid instability and vulnerability of exports. Diversification of export commodities in these developed markets is definitely a possible option to pursue. Their import demand needs to be studied closely at detailed product categories. The country can think in increasing exports in emerging economies like China, India, Brazil, Russia and Korea. As exports are concentrated in only nine markets, there is a huge potential for taking the benefits from market expansion. Note that though Bangladesh export market is concentrated in nine developed economies, growth of exports to other market destinations has been remarkably high in the recent period of 2006-10 (see Table A-10 in Appendix).

Figure 0-5: Exports to Important Market Destination

Exports to important market destination

0

1000

2000

3000

4000

5000

6000

1972

-73

1975

-76

1978

-79

1981

-82

1984

-85

1987

-88

1990

-91

1993

-94

1996

-97

1999

-00

2002

-03

2005

-06

2008

-09

Year

Valu

e in

Mill

ion

Dol

lars

USAUKGermanyFranceBelgiumItalyNetherlandsCanadaJapan

3.5 Analysis of Imports

3.5.1 Composition and Growth of Imports by Commodities and Countries Imports are dominated by consumer goods. The composition of imports has changed little over time. The share of consumption goods increased from 31 percent in 1981-85 to 57 percent in 2006-10. Next important item of import is intermediate goods constituting about 22 percent in the recent period. Its share was 23.3 percent in 1981-85. The share of primary goods has substantially declined from 28 percent in 1981-85 to 14 percent in 2006-10. The share of capital goods has also substantially declined to 7 percent from 30 percent in 1981-85 (Table 0-6). In terms of growth, there is no stable growth of capital machinery and primary goods. Growth of consumption goods is predominantly high, followed by intermediate goods. Growth of all categories of imports was high in the period of 2001-05. Growth rate has declined from 33 percent in 1981-85 to 11 percent in 2006-10. The growth rate of intermediate goods has improved, while of capital machinery has deteriorated during the same period (Table A-7 in Appendix).

34

Table 0-6: Structure of Imports by Commodity (in percent) Category (average) 1981-85 1986-90 1991-95 1996-00 2001-05 2006-10 Primary goods Import 27.9 19 12.1 12.3 12.3 13.8Rice import 3.1 2.1 2 3 1.5 1.8Wheat import 11.5 9.3 3.5 2.5 2.3 2.9Oil seeds import 0.1 0.6 1.2 1 0.6 0.6Raw cotton import 9.9 4.5 3.1 2.4 3 2.7Crude petroleum 3.4 2.6 2.3 3.3 4.9 5.8Major intermediate goods 23.3 16.2 16.4 14.5 19 21.9Edible oil 9.5 5.3 3.1 3 3.6 4.3Petroleum products import 6.6 4.7 4.1 4.8 8.5 9Fertilizer import 4 1.9 2.5 1.4 1.9 3.4Clinker import 1.3 2.5 2.6 1.2 1.4 1.5Staple fibre import 0.2 0.2 0.6 0.5 0.5 0.5Yarn import 1.4 1.6 3.6 3.6 3.1 3.2Capital machinery import 29.6 34.2 29.7 9.3 8.4 6.9Other imports 19 31 42 64 60 57

Source: Estimated from the data of BBS

3.6 Composition and Growth of Imports by Sources of their Supply

Imports of Bangladesh are concentrated in nine countries constituting about 63 percent of total imports (Table 0-7). Two suppliers, India and China, together constitute one third of imports of Bangladesh. India and China constituted only 6.2 percent in 1986-90 but have come up increasingly to outbid other suppliers in the market of Bangladesh. The share of imports from top nine countries has increased from 40.9 percent in 1986-90 to 62.5 percent in the 2006-10 period. The share of imports from Japan has sharply declined during the period under review. The share of imports from other countries than these countries has sharply declined from 59 percent to 37.5 percent during the period. While the share of nine countries has increased, growth of imports from other countries has also increased considerably in the recent period (Table 0-7). Imports from countries like Malaysia, South Korea and Japan have considerably increased along with predominant supply from India and China. A high growth of imports can be observed from India, China and Malaysia. Growth of imports from USA is also stably high. Major contribution to import growth of Bangladesh has come from top nine suppliers (63%). However, China alone accounted for 15.9 percent growth of imports, followed by India (14 percent).

35

Table 0-7: Growth of Imports (average) by Sources of their Supply

Country Fiscal year 1986-90 1991-95 1996-00 2001-05 2006-10

India 3 8.8 13.2 13.9 13.8 China 3.2 5.6 7.9 10.4 15.9 Singapore 6.7 6.1 5.8 8.7 5.9 Japan 13.3 9.8 7.9 6.2 4.1 Hong Kong 3.3 6.9 5.7 4.6 3.6 Taiwan 0 2.8 4.3 3.6 2.3 S. Korea 2.9 5.8 4.5 3.8 3.3 USA 7.2 5.2 4.1 2.5 2.1 Malaysia 1.2 1.1 1.8 1.9 3.5 Others 59.1 50.2 44.8 44.4 37.5 Total 100 100 100 100 100 Top nine sources of imports 40.9 49.8 55.2 55.6 62.5

Source: Estimated from the data of BBS.


Despite global economic crisis during the 2006-10 period, trade intensity of Bangladesh showed a phenomenal growth (currently more than 45% of GDP). It is worth noting here that while export intensity has made a steady progress, import intensity has increased magnanimously. Bangladesh’s export is now overwhelmingly dominated by readymade garments, which constitutes about 77 percent of total export. In the 1970s and 1980s, agricultural product jute had dominated export basket. Bangladesh has thus been able to diversify its export basket by shifting from primary products (jute) to manufactured products (readymade garments). However, in terms of number of exporting items, there is a strong case for diversification of export basket. For this purpose, it is important to harness evolving markets with potential and non-traditional products. Against the backdrop of losing international jute markets, Bangladesh is still considered as one of the major jute producing countries. Demand for jute products in the international markets is likely to increase with increased demand for environment friendly products. To capture the new markets of jute products, research and development of jute and jute goods needs to get priority by the industrial entrepreneurs as well as the government. Research results and products of Jute Research Institute and Bangladesh Council of Scientific and Industrial Research (BSCIR) need to be revisited and public investment and institutional intervention are necessary for regaining market share of jute goods. Diversification of jute products is a point of desirable focus. Raw jute exports need to be discouraged and problem of price incentive and non-price assistance to the jute growers need to be addressed with particular care for increased supply of raw jute. Timely and cheap supply of credit facilities to the growers in season and jute processing units as per requirements needs to be addressed on priority basis. Move for revival of jute as golden fiber may be successful if proper policy package is developed and effective action program is undertaken.

36

To summarize, Bangladesh has made a good progress in gaining share of trade in GDP in recent years, but its share in global and regional trade is still insignificant. Its exports are less diversified, thereby exposed to external shocks. To enhance Bangladesh’s share in global trade, more integration with sub-regional economies, diversification of exports, trade liberalization and greater market access would be necessary. Other than RMG products, agro-processed food, pharmaceuticals, leather and footwear, plastic, ceramics, etc. need proper attention and policy support in order to diversify exports of Bangladesh.

37

CHAPTER 4

EVOLVING MARKETS AND OPPORTUNITIES: AN ANALYSIS Analysis of trade pattern in the previous chapter reveals the fact that Bangladeshi exports are highly concentrated in a very few products and markets, which calls for diversification of export items as well as greater market access. In this context, it is important to identify potential products and markets. This chapter therefore analyzes evolving markets and opportunities for Bangladesh through estimating different sets of standard indicators, like Revealed Comparative Advantage (RCA), Geographic RCA and Trade Potential Index (TPI). The findings based on these indicators will help identify potential products and markets.

4.1 Indicator of Revealed Comparative Advantage and Specialization Pattern

Revealed Comparative Advantage index reflects a country’s comparative advantage or disadvantages of different products, which can be employed for evaluating the performance and specialization of a country. A quantitative comparison can be made between different products in the same country and rest of the world. Changes in the indicator of comparative advantage may be due to both a shift in specialization and a variation in trade performance. In the context of highly concentrated export basket and escalating trade deficits, Bangladesh needs to carefully invest along the lines of its dynamic comparative advantage to expand and diversify exports. The modified Balassa Revealed Comparative Advantage (BRCA) index and standardized revealed comparative advantage have been used as analytical tools to uncover changes in comparative advantage patterns over time and of the products. Along with it, we have tried to use trade specialization index to see whether the products are specialized in the lines of their comparative advantage. This study focuses on time series data of a wider range of commodity groups and market destinations to make dynamic assessment of comparative advantage of Bangladesh in the global market. RCA index of a country depicts the relative share of a commodity in the country’s total exports with respect to that commodity’s share in world exports. BRCA can be expressed thus as:

BRCAi=

where bXi = Bangladesh export of product i, bXT =Total export of Bangladesh, wXi = World export of product i and wXT = World total exports. From RCA, a Symmetric Revealed Comparative Advantage Balassa Index (SBI) can be calculated as follows:

SBI = (BRCA-1)/(BRCA+1). The country would be considered to have a comparative advantage or disadvantage in products depending on whether the ratio of BRCA is greater or less than 1. It ranges from 1

38

to infinity when it enjoys comparative advantage, but zero to one when it has comparative disadvantage for the products. To address asymmetric values of the index, symmetric revealed comparative advantage indexes for different products are calculated. The SBI ranges from -1 to 1. The estimated index and changes in pattern of index are shown in Table 0-1 and Table A-9. Estimated RCA and SBI indexes show that Bangladesh has been enjoying high revealed comparative advantage in knitted garments, woven garments, jute and jute goods, other textile articles, frozen fish, leather, footwear and headgear and parts. Our estimates show that 24.7 percent products of Bangladesh out of 1571 products at 4-digit level are enjoying comparative advantage in the world market as their average RCA is around 20 and their average symmetric RCA is around 0.90, which is very high. Trade specialization index of these products is on average around 0.75 (Table 0-2). But these product categories are facing high concentration not only in terms of products (88% share for three products) but also of market destination (55% for three markets). These results indicate that attention needs to be given not only on revealed comparative advantage of products for specialization, but also on diversification of export items and market destinations. This is important for ensuring sustainability of export earnings on a long term basis. At the same time, traditional export commodities including tea and leather lost their previous comparative advantage. The sectors which came into dynamism are footwear, ceramic products, household articles including tableware and kitchenware, light engineering, pharmaceuticals, bicycle, tent, home textiles and vegetables. It is well argued that differences in productivity, price, quality and timely delivery are important determinants of bilateral trade flows. Under these circumstances, the challenges for Bangladesh are to increase price and non-price competitiveness and find new potential industries and markets for vitalizing the exports of the country in the wake of acute global competition. Since comparative advantage is a major source of trade expansion, the country’s trade policy should be consistent with the dynamics of comparative advantage. It is felt that analysis of aggregate trade data cannot uncover exactly which products are better competitive. To overcome this, trade potential index has been estimated in the next section.

Table 0-1: Pattern of Changes of Revealed Comparative Advantage of 98 Products at 2-digit Level during 2005-09

Type of changes in comparative advantage No of Products % Stably high and increased 5 5.10 Advantage lowered 4 4.08 Shift from disadvantage to advantage 3 3.06

Disadvantage reduced 7 7.14 Shift from advantage to disadvantage 8 8.16

Increased disadvantage 24 24.49 Shift from advantage to disadvantage 47 47.96 Total 98 100.00

Source: Authors’ calculation. Data are taken from UNCTAD.

39

Table 0-2: Revealed Comparative Advantage (RCA), Trade Specialization Index and Concentration Ratios for Bangladeshi Exports (out of 1571 Products), 2009

Products having comparative advantage RCA

Symmetric RCA

No of Products

% total products

Exports in 000 US$

% of total

Trade Specialisation Index

Product concentration

Consent ratio of markets

Knitted Garments 36 0.95 102 6.49 7,754,376 45.42 1.03 69 44 Non-knit garments 30 0.94 114 7.26 6,381,134 37.37 1.01 67 64

Other textile articles 12.2 0.85 49 3.12 688,265 4.03 0.99 51 41

Head gear and parts 14.5 0.87 10 0.64 98,200 0.58 0.96 100 83 Vegetable fibres and fabrics 113.5 0.98 15 0.95 387,707 2.2 0.87 91 49

Leather 6.1 0.72 19 1.21 167,457 0.98 0.71 94 61 Fish 5.1 0.67 45 2.86 482,667 2.87 0.96 91 49 Footwear 2 0.33 22 1.40 226,449 1.33 0.74 85 51 Tobacco and manufactured thereof 1.1 0.05 5 0.32 49,238 0.29 0.69 98 43 Fertilizer 1.1 0.05 2 0.13 59,378 0.35 -0.74 100 81 Mating materials 1 0.00 5 0.32 2,727 0.02 1.00 98 43

All 20.24 0.91 388 24.70 16,297,598 95 0.75 86 55

Potential Products Ceramic products 0.8 -0.11 16 1.02 34,579 0.35 -0.03 95 50Pharmaceuticals 0.1 -0.82 15 0.95 36,253 0.21 -0.56 92 37Plastic products 0.1 -0.82 39 2.48 38,742 0.23 -0.86 68 58 Non-Woven, , felt, twine 0.7 -0.18 20 1.27 15,787 0.09 -0.30 71 76 Leather goods 0.4 -0.43 19 1.21 20,158 0.12 0.24 59 69

Meat, fish and food prep. 0.4 -0.43 7 0.45 20,344 0.12 0.88 99 50 Carpets and other floor cover 0.6 -0.25 11 0.70 7,769 0.05 0.61 90 49 Artificial flowers 0.3 -0.54 7 0.45 1,071 0.01 0.41 96 88 Source: Authors’ calculation. Calculated from UNCOMTRADE data.

4.1.1 Geographic Revealed Comparative Advantage or Specialisation Index Geographic Specialization Index shows the revealed comparative advantage in a particular market and geographic specialization. The most commonly used index for this is Balassa Geographic Specialization Index, which is expressed as follows:

GB =

where, wXw = Export of the world, wXa = Export of the world to the market ‘a’, bXa = Bangladesh export to market ‘a’, and bXw = Bangladesh export to the world. A country is said to have specialization and thus comparative advantage in the export in region ‘a’, if GB is greater than 1.

40

A symmetric Balassa (SGB) index is estimated as: SGB =

The symmetric Balassa Geographic Specialization index for Bangladesh reveals that Bangladesh has comparative advantage in export to the North America and the Western Europe (Table 0-3). Standardized Trade Specialization Index (STSI) considers both the commodity and the geographic specialization of a country in international trade. Bangladesh had comparative advantage in 19 percent of products at 2-digit level and 10 percent at 4 and 6-digit levels in 1998. By analysing export performance of Bangladesh by product for 2009 (Table 0-2), we found that products having comparative revealed disadvantage may enjoy comparative advantage as per Trade Specialization Index. However, in most cases, products with revealed comparative advantage would have comparative advantage as per TSI. As far as geographical trade specialization is concerned, Bangladesh has been geographically specialized in two regions: European Union and North America, especially USA (Table 0-3). Bangladesh does not enjoy geographic comparative advantage in Asian countries except Thailand; however, it enjoys slight geographical advantage with Vietnam, Laos and Cambodia among other South Asian countries. Bangladesh’s disadvantage with Philippines and Middle East is small and tends to be overcome in course of time. It may be noted that Bangladesh’s comparative disadvantage with Asian giants like Japan, China, India and Korea Republic could not be reduced over the years. This raises question regarding effectiveness of export promotion efforts in these countries. Narrowness of exports in number of items and markets indicates vulnerability of Bangladesh in international trade. Our calculation revealed that TSI has been increasingly positive in consumer goods during the period concerned with average positive figure 0.44. We have not found any sign of trade specialization in any other types of goods traded.

Table 0-3: Geographic Revealed Comparative Advantage of Bangladesh Exports, 1988-1998 Geographical Area Balassa RCA

Symmetric Balassa Index

1988 1993 1998 2009 1988 1993 1998 2009 North America 1.62 1.90 1.77 2.3 0.23 0.31 0.27 0.39

Western Europe 0.71 0.99 1.09 2.4 -0.17 -0.0013 0.046 0.41

Other Industrialised Countries

0.79 0.40 0.38 0.40 -0.11 -0.42 -.44 -0.42

Africa 1.87 0.57 0.192 0.32 0.30 -0.27 -0.67 -0.51

Developing Asia 1.09 0.54 0.43 0.65 0.05 -0.29 -0.40 -0.21 Other Developing America

0.12 0.08 0.81 0.135 -.77 -0.85 -.85 -0.07

Source: Authors’ calculation.

41

4.2 Trade Potential Index

As was discussed in the previous section, comparative advantage analysis cannot uncover potentiality of products or markets. Therefore, it is necessary to analyze trade potentials for Bangladesh. There are different approaches to estimate trade potential for a country. Some of the approaches focus on mainly identifying trade potential for a country at aggregate level only e.g. gravity analysis, whereas Trade Potential Index (TPI) helps to calculate potential at disaggregated product level. TPI is a scoring system which allows the analysis to focus on trade potential while taking cognizance of import demand, import trends, growth rates and unit values rather than focusing solely on trade potential values (Rensburg and Letswalo, 2010). Following the methodology used by Rensburg and Letswalo (2010), we have estimated TPI for Bangladesh. However, we have modified the criteria of calculating “indicative trade potential” for our estimation. A score of either 1 or 0 is assigned to five of the trade indicators contained in the database. This score is then aggregated to give a total score, which is measured against a final score of 5. A score of 0 would therefore represent the lowest end of the scale and the least trade potential while a score of 5 would indicate the greatest trade potential. For the purpose of calculating TPI for Bangladesh, first we have selected some countries. To select those countries we have taken Bangladesh’s export growth, over the period of 2002-2007 at 2-digit HS level to its top 30 export destinations in the year 2007. We have then selected the countries for which Bangladesh’s export growth has registered a growth of more than 50 percent. We have ended up of a country group of 14 through this process (Table 0-4). Then, finally, we have calculated TPI with these countries at HS 6-digit level using the UN Comtrade data base through World Integrated Trade Solution (WITS). However, due to lack of sufficient information, TPI for Indonesia could not be calculated. The summary of the estimated trade potential index for Bangladesh has been reported in Table 0-4. Highly potential commodities include garments and its accessories, plastic, light engineering, pharmaceuticals, chemicals, tableware/kitchenware, frozen food, etc3. Therefore, to harness the potentiality of these products, it is important to improve domestic production capacity, liberalized environment, international production network and efficient incentive structure.

Table 0-4: Trade Potential Index for Bangladesh (Number of items at 6 digit HS level)

SL No. Country Name

Trade Potential Index (TPI) Score Share of 5 in total (%) 5 4 3 2 1 Total

items 1 Australia 151 34 4 189 79.89 2 Austria 46 42 3 91 50.55 3 Canada 43 71 107 62 16 299 14.38 4 China 101 197 72 11 381 26.51 5 Denmark 63 50 23 6 1 143 44.06 6 Germany 177 151 74 16 3 421 42.04 7 India 221 130 79 15 2 447 49.44 8 Italy 187 109 44 14 2 356 52.53 9 Mexico 34 37 30 7 108 31.48

3 The list of potential items is not given in this paper, but can be provided upon request.

42

10 Pakistan 35 69 24 16 5 149 23.49 11 Spain 117 72 28 5 3 225 52.00 12 Turkey 57 51 18 2 128 44.53

Source: Authors’ estimation based on 2007 data. Note: The TPI is measured against a potential score of 5. A score of 0 would represent the lowest end of the scale and the least trade potential whilst a score of 5 would indicate the greatest trade potential. From Table 0-4, it is evident that for Bangladesh a large number of products have huge potential for trade in a number of countries. In terms of number of items with very high trade potential, India ranks in the first place; countries like Italy, Germany, Australia, Spain and China are also very potential market for a number of products. Among these countries, Australia can be considered as the most potential market for Bangladesh as out of 189 items exported in the year 2007 around 80 percent items have very high potential. The other promising markets where Bangladeshi exporters can explore are Austria, India and Turkey. However, the underlying condition is that despite potentials, Bangladeshi products must have to maintain importing countries quality standards, sanitary and phyto-sanitary restrictions in order to get access to these potential markets.


Estimated RCA and SBI indexes show that Bangladesh has been enjoying high revealed comparative advantage in knitted garments, woven garments, jute and jute goods, other textile articles, frozen fish, leather, footwear, headgear and parts. Trade specialization index of these products is on average around 0.75. But these product categories are facing high concentration in terms of not only of products (88% share for three products) but also of market destinations (55% for three markets). At the same time, traditional export commodities including tea and leather lost their previous comparative advantage. The sectors which came into dynamism are footwear, ceramic products, household articles including tableware and kitchenware, light engineering, pharmaceuticals, bicycles, tent, home textiles and vegetables. These results indicate that attention needs to be given not only on revealed comparative advantage of products for specialization, but also on diversification of export items and market destinations. This is important for ensuring sustainability of export earnings on a long term basis. Trade Potential Index indicates that for Bangladesh a large number of products have huge potential for trade in a number of countries. In terms of number of items with very high trade potential, India ranks in the first place; countries like Italy, Germany, Australia, Spain and China are also very potential market for a number of products. However, Australia can be considered as the most potential market for Bangladesh. The other promising markets where Bangladeshi exporters can explore are Austria and Turkey in the coming days. However, to get access to these promising markets, products of high quality need to be maintained in line with sanitary and phyto-sanitary restrictions in these countries. For this purpose, development of necessary institutions and building expertise will be required.

43

CHAPTER 5

INTERNATIONAL TRADE AND FOOD SECURITY OF BANGLADESH

5.1 Introduction

Food security has always been a major concern for a densely populated country like Bangladesh. While Bangladesh could produce about 10 million metric tons foodgrain in the 1970s leaving most of its people in food scarcity, recently foodgrain production has increased by three times, about 30 million metric ton. This tremendous progress in foodgrain production has made the country almost self-sufficient in food. Though Bangladesh has improved its capacity to import foodgrain, its import dependency on rice has gradually declined over time. Bangladesh imports foodgrains, particularly rice and wheat almost every year to meet up domestic demand, maintain public food distribution system and respond to any shocks like natural disasters. Bangladesh has made a good progress in food trade liberalization in the 1990s allowing private sector to import foodgrain, which was not possible earlier. The events of 2006-2008 when prices had soared to heights, not seen globally for 30 years, added a new dimension to food security and made all governments including Bangladesh to rethink food security. Food security has three essential elements, viz., food availability, access to food and food utilisation. Food availability depends on both domestic production and imports. This chapter focuses only on food imports and exports and related policies. For this, we first discuss the various characteristics of agriculture trade, relevant policies and future actions that need to be taken into consideration. From the aspects of unusual behaviour of global commodity prices, especially cereals prices, this issue deserves special discussion.

5.2 Global Food Price and Volatility

Global food prices, particularly of cereals, began to rise from early 2006 and had its highest peak during the first half of 2008 (Figure 0-1). It subsided subsequently but had already wrecked havoc in many countries. And the low point of early 2006 is yet to be regained, certainly for rice. Inflation in the developing world has been rising in recent years, mainly due to rising trend in food prices in the international market. An 83 percent increase in global food prices was observed in 2007-08 (World Bank, 2010). The price of rice in the international market rose by 165 percent between April 2007 and April 2008. During the same period, global wheat price was increased by more than 100 percent. Afterwards, global food prices continued to increase, but at a lesser extent. It is argued that global food prices showed an extra-ordinary increase during the period for several reasons: (i) higher food demand in the emerging economies such as China and India that have led to reduction in food export from these countries; (ii) rising oil prices, (iii) increased demand for bio-fuel raw materials such as wheat, soya bean, maize and palm oil, and (iv) reduction of cropland due to bio-fuel production. Price developments in the global commodity markets have brought into forefront the effects of external price changes on domestic food security.

44

Commodity Market Review, 2009-2010 of FAO indicated that the volatility was also contagious and high price of oil had been a major cause of volatility but food stocks had a dampening effect on it. Bangladesh has also been experiencing persistent price increases, especially of food items, in the backdrop of rising global commodity prices for the last few years. For example, during the period of 2006-08, the price of rice increased by 61 percent to Tk. 29.90 per kilogram (kg) from Tk. 17.69 per kg (yearly average), while it was increased by 30 percent during 2009-2010. Similar pattern of price increase could be observed for wheat during the same period. Adverse price developments in the international market coupled with rising prices of production inputs contributed to the rising prices of food commodities in the domestic markets. As a result, Bangladesh has been facing high inflationary spiral for the last few years, particularly from 2007 (Hossain and Rafiq, 2012). It is argued by many researchers in Bangladesh that maintaining healthy stocks are important for regulating prices.

Figure 0-1: Index of Global Prices of Selected Cereals

Source: World Bank (Pink data set), 2012.

5.3 Agricultural Trade Liberalization

During the mid-1980s through the mid-1990s, agricultural input markets in Bangladesh were substantially liberalized (See Table 0-1 and Table 0-2). Reforms have been quite extensive in the areas of fertilizer marketing, privatization and deregulation of minor irrigation, and seed development and marketing (Dowlah, 2001). The fertilizer sector, which played a crucial role along with modern high-yielding varieties in tripling rice production in Bangladesh, went through some fundamental reforms. Up to the early 1980s fertilizer production, pricing, marketing and distribution were all extensively controlled by state enterprises. Fertilizer marketing was controlled by the Bangladesh Agricultural Development Corporation (BADC), which enjoyed a monopoly on imports and purchases of fertilizer from domestic factories. However, by the late 1980s, BADC withdrew its control, and an elaborate network of private sector companies took over the fertilizer marketing operation. The government now administers the fertilizer pricing, marketing, and distribution system throughout the country.

45

Extensive policy reforms were also carried out in the area of minor irrigation since the late 1980s. The ban on imports of small engines was lifted, and all import duties on irrigation equipment were removed. Regulations on engine standardization as well as spacing of wells were also withdrawn. As a result, a robust private economy now operates in the minor irrigation sector, which has not only brought down prices for irrigation equipment but also contributed to a substantial increase in irrigated area. Minor irrigation played a crucial role in the expansion of irrigation area as more than 90 percent of irrigation now takes place through this mode. Liberalization of agricultural inputs has made a positive and significant impact on foodgrain production. Much of the expansion in rice output came from a shift from traditional varieties to modern varieties and the expansion of area under boro rice. Higher application of agricultural inputs, such as irrigation and fertilizer, also had a significant role in expanding rice production. Wheat also owes its expansion to similar factors. Production of other crops, such as vegetables and non-rice winter crops, has grown considerably slower, owing to many factors, including land constraints, problems of transport, marketing and the availability of improved seeds (for details, see World Bank (1999a, pp. 11–13) and Mitchell, 1998).

Table 0-1: Tariff Structure of WTO HS Agricultural Category for Bangladesh Tariff Year 1989 1994 1999 2000 2002 2003 2004 2005 2006 2007 2008

Simple Average 91.23 83.07 24 24 23.85 21.72 20.39 17.37 17.37 16.97 17.59

Weighted Average 50.75 50.2 11.31 11.31 11.31 14.53 9.44 7.41 7.41 5.53 5.56

Standard Deviation 62.77 40.15 13.18 13.18 13.14 10.58 9.85 9.07 9.07 9.36 8.94

Minimum Rate 0 15 0 0 0 0 0 0 0 0 0

Maximum Rate 400 300 37.5 37.5 37.5 32.5 30 25 25 25 25

NBR of Total Lines 575 773 794 794 989 1022 1024 1005 1005 1000 967 NBR of Domestic Peaks 2 14 0 0 0 0 0 0 0 0 0NBR of International Peaks 526 746 561 561 681 724 713 594 594 589 581

Source: WITS Import of foodgrains has also been liberalized substantially, which has made a positive contribution to food imports. Table 0-2 shows that in the case of rice, maze, soya bean oils, import tariffs are brought down to zero in recent years to meet the growing demand and address international price volatility. Bangladesh has been a consistent net importer of foodgrains over the past decades. The major source of import during the 1980s and early 1990s was Thailand. However, the trade liberalization that permitted private sector imports coincided with India's rice trade liberalization which dramatically changed the rice import trade for Bangladesh. Rice import dependency has drastically reduced in recent days.

46

Table 0-2: Tariff Structure for Selected Primary Goods Tariff Year 1998 1999 2004 2005 2006 2007 2008 Trade Year 2002 2002 2004 2005 2006 2007 2008 Product Code (HS 4 digit) Product description

0301 Live fish 18.33 15.28 16.67 16.67 15.94 20.83 21.88

0302/0303/0307 Fish, fresh or chilled, excluding fish fillets 30 25 25 25 25 25 25

0401

Milk and cream, not concentrated nor containing ad.. 40 37.5 25 25 25 25 25

0701 Potatoes, fresh or chilled 6.67 6.25 7.14 7.14 12.5 8.33 7.14

0702 Tomatoes, fresh or chilled 40 37.5 25 25 25 25 25

0709 Other vegetables, fresh or chilled 24.55 20.45 25 25 24.96 25 25

0805/0813/0902

Citrus fruit, fresh or dried; tea, whether or not flavored 40 37.5 25 25 24.96 25 25

1001 Wheat 7.5 5 7.5 6 5 2.5 1.75 1005 Maize (corn) 0 0 0 0 0 0 0 1006 Rice 0 0 4.86 3.89 2.83 0 0 1101 Wheat or meslin flour 15 15 15 13 12 15 12

1201 Soya beans, whether or not broken 7.5 5 0 0 0 0 0

1207

Other oil seeds and oleaginous fruits, whether or 13.41 10.91 2.27 2.27 9.34 0 0

1208

Flours and meals of oil seeds or oleaginous fruits 15 15 0 0 0 0 0

1507

Soya-bean oil and its fractions, whether or not refined 23.82 22.94 7.5 6 5 5.71 1.91

1511

Palm oil and its fractions, whether or not refined 26.11 23.15 14.17 10.95 9 11.11 6.17

1516/1518 Animal or vegetable fats and oils 30 15 15 13 12 15 12

1603 Extracts and juices of meat, fish or crustaceans, 25 25 25 25 25 25 25

1701 Cane or beet sugar and chemically pure sucrose 30 25 25 25 15.33

2001-7 Vegetables, fruit, nuts and other edible parts of 40 37.5 25 25 25 25 25

2009

Fruit juices (including grape must) and vegetable 40 37.5 25 25 24.99 25 25

Source: WITS.

5.4 Agricultural Trade and Food Security

The role of food trade for food security is manifested in Bangladesh by food import liberalization and export restriction. Bangladesh’s annual foodgrain imports ranged between 1.58 and 5.5 million tons in the 1990s, while its overall production reached 30 million metric

47

tons in 2007/08 (BBS, 2010). Although food production almost tripled in the last two decades, the country’s food import bills still remain significant. In recent years, food grain imports constituted about 18 percent of its total import bills and 34 percent of its total export earnings, compared to around 26–30 percent of import bills and about 50–70 percent of export earnings in the 1980s (USAID 1999). Food subsidy in the 1990s ranged between Tk. 1.6 billion and Tk. 3.8 billion, excluding the Food-For-Education Program, one of the largest food-subsidized programs in the country. In addition, the food security of the country remains vulnerable to frequent natural disasters, such as droughts, floods, cyclones, and land erosion by rivers along the coastal areas, which often result in emergency food shortages.

Estimated import dependence ratio shows that import dependence of rice is insignificant hovering around 3 percent with closeness to selfsufficiency in rice production in recent years while import dependence of wheat is as high as 77 percent increased from 28 percent in 1985-90 to 77 percent in 2011-12 (Table 0-3). The reason is that while rice production has increased remarkably over the years, wheat production has not increased that much.The ratio of food grain imports to total supply of food grains increased from 3.7 percent in 1985-90 to 11 percent in 2011-12. Thus while the country is proclaiming attainment of selfsufficiency in food grain production, policy makers need to be careful of land scarcity and problem of continuous squeezing of land to meet the needs of growing population for food grains.

Table 0-3: Dependence on Import and External Supply of Food Grains in Bangladesh

Period 1981-90 1991-00

2001-09

2010-11

2011-12 Average

Standard Deviation

Coefficient of Variation

Rice

Total rice import and aid (in 000 Tons) 360 822 815 553 1552 820 453 0.55

Total availability of rice 17717 21255 32362 36565 37437 29067 9041 0.31

Dependence on external supply (in %) 2.03 3.87 2.52 1.51 4.15 2.82 1.15 0.41

Import dependence (in %) 1.5 3.8 2.47 1.5 4.14 2.68 1.25 0.46

Total wheat import and aid 2701 2432 5135 3024 3640 3386 1076 0.32

Wheat

Total availability of wheat (in 000 Tons) 3799 3869 6259 3996 4635 4511 1032 0.23

Dependence on external supply (in %) 71.09 62.87 82.04 75.67 78.53 74.04 7.42 0.1

Import dependence (in %) 41.37 38.46 35.1 71.76 77.54 52.85 20.13 0.38

Total Food Grain

Total availability of food (in 000 Tons) 19175 23515 31657 38231 40245 30564 9126 0.3

48

Dependence on external supply ( in %) 15.96 13.85 10.44 9.72 13.55 12.7 2.58 0.2

Import dependence ( in %) 9.59 9.77 9.47 8.92 12.78 10.1 1.53 0.15

Source: Calculated from the data of BBS, Ministry of Food and Disaster Management, GoB.

Figure 0-2: Import Dependency Index of Food Grain in Bangladesh

Table 0-4: Percentage of Food Import and Food Aid of Major Foodgrain Items to Total External Supply

Period Rice Wheat Food aid Import Total Food aid Import Total

1980-85 6.46 34.11 12.51 93.54 65.89 87.491986-90 5.25 25.19 11.56 94.75 74.81 88.441991-95 1.12 28.19 18.11 98.88 71.81 81.881996-00 2.75 47.65 34.29 97.25 52.35 65.702001-05 6.00 31.10 28.64 94.00 68.90 71.372006-10 19.75 31.48 30.94 80.24 68.31 68.90

Source: Ministry of Food and Disaster Management The Bangladesh government now procures grain internationally on a commercial basis. Before liberalizing foodgrain import trade in 1991–92, the government (such as the Trading Corporation of Bangladesh, the Directorate of Food, and other statutory importers, such as the Bangladesh Food and Allied Corporation) enjoyed a de facto monopoly in importing foodgrain. The trade regime in agriculture has also changed; the share of state trading agencies in foodgrain imports fell to 3 percent in 1992 from 94 percent in 1978. However, if all agricultural imports handled by government and semi-government bodies are taken into consideration, the share would range between 5 and 24 percent even in the 1990s. In addition, the government routinely procures foodgrain through food aid, which has, however, declined in recent years. Bangladesh received 1.07 million tons of food aid annually during 1992–97, which was 45 percent below the average amount received during 1987–92. Also, the need for food aid has been declining as domestic production of foodgrain has been increasing.

49

Table 0-5: Public versus Private Import of Food Grain during 1971/72-2008/09 Rice Wheat Public (%) Private (%) Public Private

1980/81-1989/90 100 0 100 0 1990/91-1999/00 16 84 73 27

2000/01-2008-09 10.2 89.8 70 30 Source: Calculated from the data of Department of Food and Ministry of Food and Disaster Management, GoB.

Food import scenario has not changed much over the period in terms of export earnings and total imports, albeit it has changed in terms of absolute value (Table 0-7). On the other hand, food export is still miniscule compared to food imports.

Figure 0-3: Proportion of Value of Food Imports to Total Export Earnings and Total Value of Imports

Source: BBS and Department of Food, GoB.

5.4.1 Export of food Despite a robust growth in overall exports, agricultural exports, however, did not increase much. It remained stable at 0.5 percent of total exports during the 1990s and first half of the 2000s, however, it showed somewhat increase in 2006-10 (Table 0-7). The share of exports of frozen food has also declined in 2006-10 compared to previous periods, mostly due to failing to maintain compliance standards. Exports of processed agricultural products, which were already relatively negligible, showed a much steeper decline in the 1990s than those of primary agricultural products. This was because some anomalies are seen in case of raw material import and processed food import, which negatively impacted export of agro-processed food products. Among other food items, export of vegetables, fruits, coffee/tea, cereals show an increasing trend (Table 0-6).

50

Table 0-6: Export of Primary Products of Bangladesh, Grouped into Harmonized System Codes (Value in 1000 USD)

Product group 2000 2001 2002 2003 2004 2005 2006 2007 Meat, fresh/chilled /frozen 34.10 61.72 10.22 1.06 3.56 43.96 Dairy products: milk and cream, fresh 0.61 0.08 4.16 2.51 1.26 Eggs in shell, fresh /preserved/cooked 31.48 Vegetables, fresh/chilled/dried/whole/cut, not further processed 9167.32 15697.19 17512.16 21816.22 40760.42 60804.79 42049.64 54280.27 Fruits and nuts, fresh/chilled/dried 9.82 16.22 4.20 496.91 4389.72 36942.68 44143.39 21655.60 Coffee, tea, mate, and spices 24703.19 16943.94 16731.87 11295.40 18330.37 23557.78 12503.98 16790.33 Cereals, cereal products unmilled 29.83 45.14 98.31 680.43 2805.97 10526.35 8456.08 6581.43Oilseeds and Oleaginous fruits 18.19 117.74 162.19 140.82 10.10 250.17 Raw sugar And honey 1.02 9.17 2.17 5306.40 428.91 2681.74 8918.84

Source: WITS.

5.5 Comparative Advantage of Food crops production

A country is expected to pursue production practices that give it a stronger comparative advantage, which can be expressed in terms of relatively higher economic return and lower domestic resource cost . Shahabuddin and Dorosh (2002) have calculated net economic return and domestic resource cost of food crops production showing their relative comparative advantage in Bangladesh with respect to other countries (reproduced in Table 0-10). The results show that Bangladesh has comparative advantage in domestic rice production for import substitution (but not for exports). Such results support estimates of Mahmud et al. (1994) and Ahmed (2000). Among the non-rice crops, potato and pulses enjoy comparative advantage for import substitution. The non-rice food crops enjoying comparative advantage for export are items of vegetables like brinjal, radish, cucumber, barbati, arum, tomato and cabbage.

51

Table 0-7: Domestic Resource Cost of Rice and non-rice Crops in Bangladesh: 1996/97-1998/99 Period

Crops Irrigation Technique Domestic Resource Cost

Import Parity

Export Parity

Rice Crops

Boro:

HYV Modern 0.70 1.12 Local All 0.93 1.40

Aman:

HYV Modern 0.62 0.96 HYV Rainfed 0.59 0.91 HYV All 0.61 0.93

Local T. Rainfed 1.04 1.57 Local B. Rainfed 1.55 1.40

Aus:

HYV Rainfed 0.81 1.27 HYV Modern 0.73 1.13 HYV All 0.82 1.30

Local B. Rainfed/ 1.25 1.91 Non-Rice Crops

Wheat All 0.89 - Mustard Seeds Traditional 1.25

Masur (Lentil) Tradtional 0.43 0.56

Gram Traditional 0.44 (H) 0.57 Khesari Traditional 0.62(H) 0.81

Chilli (Dry) Modern 1.11

Traditional 1.64 Onion All 0.25

Potato HYV Modern 0.18 0.63

Brinjal Modern 0.10 Traditional 0.11

Tomato Modern/Traditional 0.05

Cabbage Modern/Traditional 0.05

Source: Adapted from Sahabuddin and Dorosh (2002), The estimates are average for 1996/97, 1997/98 and 1998/99, and expressed at 1997/98 prices.

52

5.6 Assistance Policy and Price Distortions in Agriculture

It is important to understand the state of price incentives and assistance policy for agricultural production vis-à-vis non agricultural production. The government has proactive role for price stabilization of agricultural products. Such price stabilizing role of Government is claimed to lead to a negative correlation between the Nominal Rate of Assistance (NRA) and the border price. Ahmed et al. (2007) have calculated relative rate of assistance of agriculture with respect to non-agriculture. These estimates show that of other tradables in the country. though agriculture’s nominal rate of assistance has been positive, in some years, it has always been well below the NRA for the non-agricultural tradables. Hence, the Relative Rate of Assistance (RRA) estimates are strongly negative, and suggest that the relative price of farm products has been depressed relative to prices faced by producers of other tradables in the country by more than one-fifth in the period since independence (Table 0-8). All these figures indicate persistent comparative advantage of agriculture vis-à-vis no-agriculture. This might be because of abundant unskilled labours that are absorbed at relatively lower wages in agriculture, which may not be used in non-agricultural sectors at least in the short time. Secondly, this is a matter of survival strategy of farmers to produce for their own food security. Lastly, food products are in general non-tradables and regulated by government intervention for food security. Price stabilization of food products acts as a biased measure against agriculture and is also treated as a political weapon for political stability. This may affect food production and the interest of farmers vis-à-vis non-farm population.

Table 0-8: Price Distortions in Agriculture and Assistance Policy to Agriculture Relative to Non-agriculture

Period

Total Agricultural

NRA

Agricultural Tradable Nominal Rate of Assistance (NRA)

Non Agricultural

Nominal Rate of Assistance RRA

Exportables Importables

1974-75 -36.5 9.5 36 3.5 -2 1976-80 -11.4 -31 -13.8 -15.2 -32.8 1981-85 -10.4 -24 8.4 4.8 -15.2 1986-90 -3.2 -33.2 16.2 10.6 -14.8 1991-95 -1.2 -34.4 0.6 -2 -25.8 1996-00 -5.6 -10.2 -6.8 -0.2 -27 2001-04 2.5 -24 8.4 4.8 -15.2

Source: Recalculated from Ahmed et al.,(2005), Note: Relative Rate of Assistance (RRA) = 100*[(100+NRAag)/ (100+NRAnonag)-1] , where NRAag and and NRA nonagriculture are the percentage NRAs for the tradables of the agricultural and non-agricultural sectors, respectively.

5.7 Nominal Rate of Protection of Rice

As rice is the main staple food, we have calculated nominal rate of protection of rice for the period 1975-2011, i.e. for the last 36 years. It has been found that up to 2001, nominal rate of protection was negative, but after 2001, it was positive (Table 0-9). The reason of such finding should be investigated. In general, private importers do not get incentives to import if there is negative rate of return. Also, there is incidence of climatic hazards and regime of export restrictions raising domestic market. Besides, cost of rice production has increased

53

remarkably and farmers require price incentives on its output. Domestic price is lower than import price due to transport, insurance, time of delivery and uncertainty of marketing the imported rice in the situation of uncertainty of domestic rice production. Besides, government intervention for price stabilisation tends to keep the domestic price low. Recent price upsurge in the domestic price is the result of high price of material and labour inputs and uncertainty of food availability in the international market in times of crisis. Table 0-9: Nominal Rate of Protection of Rice Production

Price Category 1975/76-1979/80

1980/81-1989/90

1990/91-1999/00

1984/85-1993/94

1994/95-2000/01

2001-2005

2006-2011

Domestic price in Bangladesh 3.91 7.71 11.14 9.32 11.85 13.43 23.95Import price (Thai) 5.38 8.1 12.9 9.32 13.77 9.67 19.72Nominal rate of protection with respect to Thai rice -27.32 -4.81 -13.64 0.00 -13.94 38.87 17.65Import price (India) 9.5 11.89 9.99 12.87 Nominal rate of protection with respect to Indian rice -23.22 -6.73 -7.19 -8.61

Source: Calculated from the Data of Ministry of Food and Disaster Management and Adapted from Shahabuddin and Dorosh (2002) for the period 1975-2001.

Figure 0-4: Movement of Domestic and Imported Price of Rice in Bangladesh

Source: BBS and World Bank.

5.8 Effective Rate of Protection of Agricultural Products

We have calculated effective rate of protection using the figures of Sahabuddin and Dorosh (2002), for rice and non-rice products. It has been found that though rice is strongly import substituble, it is not strongly exportable. Among the non-rice crops, pulses, potato and vegetables are strongly exportables as well as highly import substituble. These products may be processed for domestic consumption in rainy days and may be exported to foreign countries. Thus commercialisation of non-rice food products is an important policy issue in agricultural diversification and food security. There are two important factors determining the future prospects of such exports: one relates to the tariff barriers in the importing countries, and the other relates to sanitary and phytosanitary restrictions. Sanitary and phytosanitary measures seem to be more important for Bangladeshi exporters of these products. It is important to ensure that Bangladesh undertakes necessary measures to meet sanitary and

54

technical standards of the importing countries. Appropriate institutions and technical expertise need to be built up for ensuring the safety and quality of exports. Further studies may be undertaken to examine what efforts have been made so far in Bangladesh to meet such requirements in the importing countries. The effect of such measures is still not visible as revealed in export figures of these products, which are unstably low. Ministry of Commerce and Export Promotion Bureau (EPB) have been engaged in examining the export prospects of such commodities. State of current production of these two groups of commodities in Bangladesh is encouraging with increased domestic demand as a result of increased per capita income of the people. There are good prospects of increased production of such commodities in the country. These products have comparative cost advantage as revealed in different studies. Moreover, there has been a considerable expansion of domestic production of such commodities in recent years. What is necessary is to examine how and why the domestic production of these commodities has expanded in recent years. The increased production so far has been probably mainly in response to increasing demands of the urban population diversifying their diet. There is an emerging demand of these products in foreign countries where Bangladesh expatriates live. Thus, there is a huge prospect for these products not only to meet domestic demand but also to expand export demand. Current export policy of the government in respect of these commodities is positive. There are currently export incentives to promote such exports. One has to look into appropriate incentive policy measures to boost exports of such food items.

Table 0-10: Effective Rate of Protection of Agricultural Products Crops Irrigation Technique Effective Rate of Protection

Import Parity Export Parity Rice Crops Boro:

HYV Modern -0.3 0.12 Local All -0.07 0.4

Aman: HYV Modern -0.38 -0.04 HYV Rainfed -0.41 -0.09 HYV All -0.39 -0.07

Local T. Rainfed 0.04 0.57 Local B. Rainfed 0.55 0.4

Aus: HYV Rainfed -0.19 0.27 HYV Modern -0.27 0.13 HYV All -0.18 0.3

Local B. Rainfed/ 0.25 0.91 Non-Rice Crops:

Wheat All -0.11 Mustard Seeds Traditional 0.25 Masur (Lentil) Tradtional -0.57 -0.44

Gram Traditional -0.56 -0.43 Khesari Traditional -0.38 -0.19

Chilli (Dry) Modern 0.11 Onion All -0.75

Potato HYV Modern -0.82 -0.37 Brinjal Modern -0.9 Tomato Modern/Traditional -0.95

55

Cabbage Modern/Traditional -0.95 Source: Calculated from the figures of Sahabuddin and Dorosh 2002. Note: The estimates are average for 1996/97, 1997/98 and 1998/99, and expressed at 1997/98 prices.


With substantial improvement of foodgrain production, import dependency of food has declined over time. Import of foodgrains has been liberalized substantially, which has made positive contribution to food security (Dorosh and Shahabuddin, 2005). For rice, wheat, maze, soyabean oil, import tariffs are brought down to zero in recent years to meet the growing demand and address international price volatility. The major source of import during the 1980s and early 1990s was Thailand. However, the trade liberalization that permitted private sector imports coincided with India's rice trade liberalization which dramatically changed the rice import trade for Bangladesh. Rice import dependency has drastically reduced in recent days. Despite a robust growth in overall exports, agricultural exports, however, did not increase much. It remained stable at 0.5 percent of total exports during the 1990s and first half of the 2000s; however, it showed a somewhat increase in 2006-10. The share of exports of frozen food has also declined in 2006-10 compared to previous periods, mostly due to failing to maintain compliance standards. Exports of processed agricultural products, which were already relatively negligible, showed a much steeper decline in the 1990s than those of primary agricultural products. This was because some anomalies are seen in the case of raw material and processed food import, which negatively impacted export of agro-processed food products. Among other food items, export of vegetables, fruits, coffee/tea, cereals shows an increasing trend. To cope with the high and volatile food prices, strategy of self sufficiency in staple food items, particularly rice, is a better option. High food stock is also an important option to combat the volatile supply situation in the world of climate change. Government role needs to be strengthened to give support to farmers and organize social safety-net programs and public food distribution system effectively. Thus, strategic trade liberalization and management of food aid are important drivers of checking high and volatile food prices.

56

CHAPTER 6

CONCLUSIONS AND POLICY RECOMMENDATIONS This study makes an in-depth review and analysis of trade policies pursued by Bangladesh over time and how the policies contribute to trade performances of the country. It also highlights prospective markets and potentials of Bangladeshi products with special emphasis on food trade. Trade intensities are the prime indicators of trade pattern and trade performance of a country. In the last five years, trade intensity of Bangladesh witnessed a phenomenal growth despite global economic crisis during the period, which indicates increased capacity of the economy despite slowing down of aid flow of the economy. Its capacity to import seemed to have increased not only because of increased export intensity but also because of increased inflow of remittance income of migrant workers.

Imports are dominated by consumer goods. The composition of imports has changed little over time. Two suppliers, India and China, together constitute one third of imports of Bangladesh. India and China constituted only 6.2 percent of imports in 1986-90 but have come up increasingly to outbid other suppliers in the market of Bangladesh. There has been a big trade gap with China and India, which needs to be narrowed down. Removal of non-tariff and para-tariff barriers is an important option for having greater market access to India. More bilateral negotiations on how to minimize these barriers along with trade facilitation measures could help narrow the trade gap between India and Bangladesh.

Although Bangladesh has lost its importance in supply of jute goods, which was the main export item in the 1970s and 1980s, it demonstrated tremendous success in knitted and woven garments export. This indicates that Bangladesh has been able to diversify its export basket from agro-products to manufactured products over time. It appears that Bangladeshi exports are highly concentrated to one industry and few markets, which makes the economy vulnerable to external shocks. However, there have been diversifications within the industry. Here its potentials have not yet got exhausted, rather the sector can move forward comfortably with background experiences for a number of years with accumulated skill of 5000 entrepreneurs and 3 million garment workers and thousands of accounting and managerial professionals. There are many products yet to be developed. Again in the same category of products, it can go for higher quality products. Aggressive marketing drive with brand name of Bangladeshi companies is a feasible option. For this, economic diplomacy and investment for international marketing need to be facilitated by the government. Maintaining buyers’ compliance and other standard measures at factory level could be an important option for maintaining current track of RMG exports. Estimated Revealed Comparative Advantage indices indicate that attention needs to be made not only on revealed comparative advantage of products for specialization, but also on diversification of export items and market destination. This is important for ensuring sustainability of export earnings on a long term basis. At the same time, traditional export commodities including tea and leather lost their previous comparative advantage. The sectors that came into dynamism are footwear, ceramic products, household articles including tableware and kitchenware, light engineering, pharmaceuticals, bicycle, tent, home textiles and vegetables. For diversification of export basket, the government has been providing cash

57

incentives to exporters of certain traditional and non-traditional products since 1996. Both volume and value of exports of subsidized products (those enjoyed cash incentives) have been on a rising trend over the period of time, albeit marginally. However, in most cases, market destinations for these products are not the same for all the years, indicating that these products could not maintain steady access to a particular market for long time. It is thus necessary to analyze the reasons behind the changing demand for Bangladeshi products in these markets. Thus, streamlining of cash incentives is required both in terms of its amount and modalities. For greater market access, the underlying condition is that despite potentials, Bangladeshi products must have to maintain importing countries quality standards as well as undertake sanitary and phyto-sanitary measures in order to get access to these potential markets. In this regard, development and capacity strengthening of relevant institutions is necessary to gain greater market access. Capacity building of Bangladesh Standard and Testing Institution (BSTI) is in the center point of discussion, and the government has already undertaken some initiatives to upgrade its capacities through collaboration with India and some other countries.

Regarding food trade, import dependence of rice is insignificant hovering around 3% with closeness to self-sufficiency in rice production in recent years, while import dependence of wheat is as high as 77% in 2010-11 increased from 28% in 1985-90. The reason is that while rice production has increased significantly over the years, wheat production has not increased that much. Thus while the country is proclaiming attainment of selfsufficiency in food grain production, policy makers need to be careful of land scarcity and problem of continuous squeezing of land to meet the needs of growing population for food grains. Despite a robust growth in overall exports, agricultural exports, however, did not increase much. Exports of processed agricultural products, which were already relatively negligible, showed a much steeper decline in the 1990s than those of primary agricultural products. This was because some anomalies are seen in the case of raw material import and processed food import, which negatively impacted export of agro-processed food products. Among other food items, export of vegetables and fruits shows an increasing trend. Bangladesh has comparative advantage in domestic rice production for import substitution (but not for exports). Among the non-rice crops, potato and pulses enjoy comparative advantage for import substitution. The non-rice food crops enjoying comparative advantage for export are items of vegetables like brinjal, radish, cucumber, barbati, arum, tomato and cabbage.

The effective rate of protection suggests that though rice is strongly import substitutable, it is not strongly exportable. Among the non-rice crops, pulses, potato and vegetables are strongly exportable as well as highly import substitutable. Thus commercialization of non-rice food products may be an important policy issue in agricultural diversification and food security. There are two important factors determining the future prospects of such exports: one relates to the tariff barriers in the importing countries, and the other relates to sanitary and phytosanitary restrictions. Sanitary and phytosanitary measures seem to be more important for Bangladeshi exporters of these products. It is important to ensure that Bangladesh undertakes necessary measures to meet sanitary and technical standards of the importing countries. Appropriate institutions and technical expertise need to be built up for ensuring the safety and quality of exports. Further study may be undertaken to examine what efforts have been made so far in Bangladesh to meet such requirements in the importing countries.

58

It is well argued that differences in productivity, price, quality and timely delivery are important determinants of bilateral trade flows. Under these circumstances, the challenges for Bangladesh are to increase price and non-price competitiveness and find new potential industries and markets for vitalizing the exports of the country in the wake of acute global competition. As comparative advantage is a major source of trade expansion, the country’s trade policy should be consistent with the dynamics of comparative advantage. In order to diversify export basket, policies should be oriented towards stimulating productive investment, building technological capacities and strengthening linkages within and across sectors and between different enterprises. Strengthening domestic productive capacities should also be aimed at producing a wider range of sophisticated products. In order to increase productive capacity, the following measures can be undertaken:

- Strengthening national capacity to undertake analysis of competitive potential at the product and subsector level;

- Establishing the quality and conformity assessment infrastructure required to increase exports;

- Providing special attention to productive sectors with high export potential to upgrade product and production quality and comply with standards and regulations so that enterprises can export successfully;

- Allocating sufficient fund for research and development (R&D) of agro-processed products;

- Developing troubleshooting mechanism in cases where export products encounter technical barriers and advising on technical solutions to problems, and

- Building capacities of existing research institutions, such as Bangladesh Agriculture Research Institute (BARI), Bangladesh Standard and Testing Institute (BSTI), Bangladesh Council for Scientific and Industrial Research (BCSIR) etc. needs to be done on an urgent basis.

Despite the obvious need for trade capacity-building services and trade related infrastructure, private sector, in many cases, is not able to provide these services due to huge costs involvement. In this context, international assistance can play an important role in eliminating barriers to trade by strengthening essential public sector capacities. One mechanism for mobilizing international support for trade capacity development is Aid for Trade. Aid for Trade concept is a key outcome of the WTO Doha negotiation process. In the Hong Kong Declaration in 2005, it is stated that Aid for Trade should aim to help developing countries to build the supply-side capacity and trade-related infrastructure. Therefore, the focus of Aid for Trade is to address “supply-side constraints” of trade. However, like other developing countries, Bangladesh should continuously seek assurance that Aid for Trade will be provided in addition to existing resource commitments. Various studies including the current study indicate that agro-processed commodities have huge potential to emerge as one of the most important exporting industries of Bangladesh. The initiative of “Everything but Arms” of EU provides LDCs with zero-tariff, zero-quota export facilities to the EU market, which should open up market opportunities for Bangladeshi exporters of agro-processed products.

59

Demand for jute products in the international markets is now increasing because of increased demand for environment friendly products. To capture the new markets of jute products, research and development of jute and jute goods needs to get priority by the industrial entrepreneurs as well as the government. Research results and products of Jute Research Institute and Bangladesh Council of Scientific and Industrial Research (BSCIR) need to be revisited and public investment and institutional intervention are necessary for regaining market share of jute goods. Diversification of jute products is a point of desirable focus. Raw jute exports need to be discouraged and problem of price incentive and non-price assistance to the jute growers need to be addressed with particular care for increased supply of raw jute. Timely and cheap supply of credit facilities to the growers in season and jute processing units as per requirements needs to be addressed on priority basis. Move for revival of jute as golden fiber may be successful if proper policy package is developed and effective action program is undertaken. A few measures are suggested below to enhance export of agro-based products to harness the export potential of the agro-processed industry:

- Special credit facility, interest and tax subsidy could be initiated to agro-processed industry;

- Cash incentives can be continued for existing agro products as well as expanded for new products;

- Import duty should be curtailed to minimum level in the case of import of necessary inputs such as chemicals, packaging materials, raw materials, and so on;

- Existing anomalies in tariff structures between inputs and processed products need to be harmonized. For example, current structure of levying higher duty on raw materials and other inputs than processed products hurts competitiveness of local products;

- Bonded warehouse facility can be extended to agro-industries; and - Quality control measures must be strictly institutionalized and implemented.

60

REFERENCES Ahmed, Nazneen, Bakht, Zaid, Dorosh, P., Shahabuddin, Quazi (2007). “Distortions to Agricultural Incentives in Bangladesh” Agricultural Distortions Working Paper 32, December. Ahmed , R. (2000), Past Gains, Constraints and Future Prospects for Production of Rice : The Strategic Staple of Bangladesh, Mimeo. Ahmed, S. And Sattar, Z. (2004). “Impact of Trade Liberalization: Looking at the Evidence”, Economic and Political Weekly, September 4, 2004. Bakht, Z. (2001). “Trade Liberalization, Exports and Growth of Manufacturing Industries in Bangladesh” in M.M. Huq and J. Love (eds.), Strategies for Industrialization: The Case of Bangladesh, Dhaka: University Press Ltd. Dorosh, PA. and Q. Shahabuddin (2005). “Trade Liberalization and Food Security in Bangladesh”, in S.C. Babu and A. Gulati (eds.), Economic Reforms and Food Security: The Impact of Trade and Technology in South Asia, New York: Haworth Press. Dornbusch, R., (1988), Exchange Rates and Inflation. MIT Press, Cambridge.

Dowlah, C.A.F. (2001). “Bangladesh: Overview on Agriculture and the Food Sector” in Agriculture, Trade and WTO in South Asia, edited by Merlinda D. Ingco, The World Bank. Hoekman, B., Francis Ng, and Marcelo Olarreaga, 2001. “Eliminating Excessive Tariffs on Exports of Least Developed Countries”, World Bank Policy Research Working Papers, WPS 2604 (Washington). Hooper, P. and Marquez, J. (1993). “Exchange rates, prices and external adjustments in the United States and Japan”. International Finance Discussion Paper, No. 456, Board of Governors of the Federal Reserve System. Hossain, M. and Ahmed, M. (2009). An Assessment of exchange rate policy under floating regime in Bangladesh, The Bangladesh Development Studies, Vol. XXXII, No. 4, December 2009 Hossain, M. and Rafiq, F. (2012). Global Commodity Price Volatility and Domestic Inflation: Impact on the Performance of the Financial Sector in Bangladesh, SANEI Working Paper Series No. 12-04, South Asia Network of Economic Research Institutes (SANEI), Dhaka

International Monetary Fund (2001). “Market Access for Developing Countries’ Exports”,

SM/01/137, Revision

Mahmud W. et al, 1994, “Agricultural Growth through Crop Diversification in Bangladesh”, Working Paper on Food Policy in Bangladesh, No.7.,IFPRI, Washington.

61

Mujeri, M. And Khondker, B. (2002). “Poverty Implications of Trade Liberalization in Bangladesh: A General Equilibrium Approach”, Department for International Development (DFID), UK. Rahman, S.H. (1992), “Trade Policies and Industrialization in Bangladesh: An Assessment”, mimeo, Bangladesh Institute of Development Studies, Dhaka. Raihan, S. (2008). “Trade Liberalization and Poverty in Bangladesh” Working paper No. 15, Macao Regional Knowledge Hub, December. Sahabuddin and Dorosh (2002), Comparative Advantage in Bangladesh Crop Production, MSSD Discussion Paper No.47, IFPRI,2033 K. Street, N.W, Washington, D.C. 20006 USA, www.ifpri.org. World Bank (1999). Bangladesh Trade Liberalization: Its Pace and Impact, Report No. 19591-BD.

62

APPENDIX Table A-1: Trends in Average MFN Applied Tariff Rates in Developing and Industrial Countries, 2000-2010 (Unweighted in %) Country / Group 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Afghanistan 4.2 6.2 6.2 6.2 Bangladesh 22.2 21.0 21.0 19.5 18.2 15.5 15.5 14.5 14.8 Bhutan 15.4 15.4 17.7 22.2 22.2 17.7 16.0 India 32.7 30.9 28.4 28.4 16.0 14.5 14.0 9.7 10.1 Maldives 21.3 21.1 21.3 21.2 21.1 21.3 21.4 21.5 21.5 Nepal 14.2 14.7 14.6 14.8 14.8 14.7 12.5 12.4 12.7 12.4 12.4 Pakistan 23.6 20.2 17.2 16.8 16.2 14.6 14.8 14.9 14.0 14.7 Sri Lanka 9.3 8.9 8.9 8.7 9.9 11.3 11.0 10.7 10.1 9.3 Lao, PDR 9.3 9.5 8.7 7.0 6.5 5.8 9.3 Cambodia 17.0 16.7 16.3 16.3 15.6 14.1 12.5 12.4 Vietnam 15.1 15.2 14.2 13.7 13.9 13.0 11.9 11.7 8.0 7.1 Memo: simple average Developing Countries (134) 14.9 13.6 13.3 12.5 11.1 11.3 10.4 10.4 10.4 10.0 8.9 Low Income (34) 15.4 14.9 14.6 14.1 12.4 14.2 12.7 12.1 12.4 12.1 11.2 Middle Income (100) 14.8 13.2 12.8 11.8 10.7 10.5 9.6 9.8 9.7 9.2 8.0 High Income non-OECDs (19) 6.9 7.3 7.5 5.1 4.0 5.5 6.0 7.3 5.8 4.1 7.8 High Income OECDs (11) 3.8 4.4 3.9 3.7 3.3 3.3 3.2 2.9 2.8 3.1 2.8World, all above co. (164) 12.9 11.9 11.6 10.6 9.5 9.9 9.3 9.4 9.2 8.7 8.1

Notes: All tariff rates are based on unweighted averages for all goods in ad valorem rates, or applied rates, or MFN rates whichever data is available in a longer period. *Tariff data is primarily based on UNCTAD TRAINS database and then used WTO IDB data for gap filling if possible. Data in 1980s is taken from other sources (see below). ** Tariff data in these countries came from either WTO Trade Profiles or IMF Global Monitoring Tariff file in 2004 which might include other duties or charges. Country codes are based on the classifications by income per capita in WDI 2011, where 1 = low income, 2 = middle income, 3 = high income non-OECDs, and 4 = high income OECD countries. EU members are counted as one country. Sources: UNCTAD TRAINS database (through WITS); WTO IDB database (through WITS); WTO IDB CD ROMs, various years and Trade Policy Review -- Country Reports in various issues, 1990-2005; UNCTAD Handbook of Trade Control Measures of Developing Countries -- Supplement 1987 and Directory of Import Regimes 1994; World Bank Trade Policy Reform in Developing Countries since 1985, WB Discussion Paper #267, 1994 and World Development Indicators, 1998-2006; The Uruguay Round: Statistics on Tariffs Concessions Given and Received, 1996; OECD Indicators of Tariff and Non-Tariff Trade Barriers, 1996 and 2000; and IMF Global Monitoring Tariff data file 2004.

63

Table A-2: Nominal and Effective Protection Rates in Bangladesh 1992/93 1995/96 1998/99 Nominal Protection Rate

Un-weighted 55.4 27.1 27.2 Weighted 28.2 22.3 20.3 Effective Protection Rate

75.7 33 26.8

Source: Mujeri (2000)/CPD/WB. Table A-3: Nominal Protection Rates and Effective Protection Rates in South Asia, Various Years (in percent) Category Country Percent Source Bangladesh Nominal protection rate Total agriculture, 1991 76.0 Dowlah (2001) Total agriculture, 2000 31.0 Dowlah (2001) Effective protection rate Total agriculture, 1992–93 69.6 Dowlah (2001) Total agriculture, 1999–2000 20.7 Dowlah (2001) Sri Lanka Nominal protection rate Total agriculture, 1960–85 –40.1 Krueger, Schiff,

and Valdés (1991) Total agriculture, 1993 1.33 Kelegama (2001) Effective protection rate Plantation tree crops, 1990 0.00 World Bank

(1996) Plantation tree crops, 1993 0.00 World Bank

(1996) Total agriculture, 1993 24.0 World Bank

(1996) Manufacturing, 1990 80.0 World Bank

(1996) Manufacturing, 1993 30.0 World Bank

(1996) India Nominal protection rate Wheat, cereals, pulses, groundnut, cotton,jute, and sugar, 1995–96

–40.0 WTO (1998)

Pakistan Nominal protection rate Total agriculture, 1960–86 –39.5 Krueger, Schiff,

and Valdés (1991) Wheat (import), 1990–91 –42.0 Khan (2001) Basmati rice (export) –41.0 Khan (2001) Rice—coarse (export) –6.0 Khan (2001) Seed cotton (export) –41.0 Khan (2001) Sugarcane (import) –33.0 Khan (2001) Wheat (import), 1998–99 –15.0 Khan (2001) Basmati rice (export) –21.0 Khan (2001)

64

Rice—coarse (export) –6.0 Khan (2001) Seed cotton (export) –29.0 Khan (2001) Sugarcane (import) 24.0 Khan (2001) Source: Merlinda D. Ingco. (2003). Agriculture, Trade, and the WTO in South Asia. The World Bank, Washington, D.C. Table A-4: Rate of Cash Incentives (Export Subsidy) Provided for Export of Different Products (in %)

Product FY2001-02

FY 02-03

FY 03-04

FY 04-05

FY 05-06

FY 06-07

FY 07-08

FY 08-09

FY 09-10

FY 10-11

FY11-12

Potato 15 15 15 20 10 10 10 10 10 20

Tobacco 10 10 10 10 10 10 -- -- --

Leather product 15 15 15 15 15 15 15 15 17.5 15 12.5

Jute product 7.50 7.50 7.50 7.50 7.50 7.50 7.50 7.50 10 10 10

Handloom 15 10 5 Agro product (veg) 15 25 25 30 20 20 20 20 20

20

Agro product (fruit) 20 25 25 30 20 20 20 20 20

20

Crushed bone 15 15 15 15 15 15 15 15 15 15 15

Bicycle 15 15 15 15 15 15 15 15 15 15 15 Frozen shrimp and other fish

10 10 10 10 10 10 10 10 (Jul-Mar), 12.5 (Apr-June)

12.50

10 10

Halal meat 20 20 20 20 20 20

Home textile 5 5 5 5 5 5 Poultry hatcing egg and day old chick 15 15 15 15 15

15

Commodities made of hogla, straw, coir or sugarcane 15-20

15-20 15-20

15-20

15-20

15-20

Light Engineering products 10 10 10 10 10

10

Ship 5 5

Crust leather 3 3 Finished leather 4

4

Pet bottle 10 10

Source: Bangladesh Bank, F.E. Circulars.

65

Table A-5. Incentive policies for export promotion Incentives Description Restructuring of the Export Credit Guarantee Scheme (ECGS)

At present, there are four schemes, namely, the Export Credit Guarantee (Pre-shipment), Export Credit Guarantee (Post-shipment), Export Payment Risk Policy (Comprehensive Guarantee) and Whole Turnover Pre-shipment Finance Guarantee to cover risks on export credit as well as probable commercial and political risks occurring abroad. These schemes, however, are becoming effective to the desired extent due to existence of various complicacies in realizing their benefits.

Utilization of Foreign Exchange by Exporters

Exporters are entitled to retain either 40% of export earning or at a rate fixed by the government from time to time on proper review. However, in cases of export products where the import contents used in the manufacture of such items are relatively high (such as, naptha, furnace oil, bitumen and other petroleum products, readymade garments and electronic goods) and in the case of export of services ( legal advice, consultancy and similar professional services ), the exporters concerned will be entitled to retain only 7.5% of their FOB export earnings. Exporters may utilize this foreign exchange for business purposes, such as, undertaking business trips abroad, participating in export fairs and seminars, importing raw materials, machineries and spares and even setting up overseas business offices. Foreign exchange may also be kept in the renewable interest bearing fixed deposit account which will bear interest.

Export Promotion Fund (EPF)

The following assistance and support are provided out of the Export Promotion Fund to producers/exporters of new and non-traditional items for product development and product and market diversification: - Venture capital on easy terms and low interest rates; - Assistance in obtaining foreign technology and consultancy for

product development and diversification; - Assistance in fielding marketing missions abroad and participating in

international fairs for market compatibility of products; - Assistance in Establishing Sales and Display Centers abroad and

extending warehousing facilities; - Assistance for participation in overseas training programs on product

development and marketing to help develop technical skill and marketing expertise ;

- Assistance in any other activity related to product and market development.

Extension of Time-limit for adjustment of Export Credit from 180 days to 270 days:

At present export credit is allowed at concessional rate of interest for a maximum period of 180 days. This limit has been extended to 270 days for a section of exporters who cannot enjoy the benefit of such concessionary credit facility due to structural characteristics of certain commodities. This limit is applicable to the export of frozen food, tea and leather.

Export Financing • Introduction of Credit Card: In view of the risks involved in carrying of cash foreign exchange/travelers cheque while undertaking business trip abroad, the practice of issuing credit cards to exporters against their respective foreign exchange entitlements will continue.

• Limit of Export Credit: Exporters may obtain export credit from commercial banks up to 90% of the value of their irrevocable letter of credit/confirmed contract.

• Credit to first time applicant: With a view to encouraging the new comers to enter into export trade, the commercial banks will consider

66

their credit proposals on a priority basis. • Monitoring the over-all flow of export credit: The C.C. limit of the

exporters will be determined only on the basis of their export performance in the preceding year. This will not be subject to any general credit squeeze measure. Such credit facilities will also be available to new contracts.

• Overdue interest: No overdue interest will be charged by the commercial banks in cases of export against irrevocable letter of credit on sight payment basis. In such cases, however, exporters will be required to submit necessary export documents within the specified time.

• Export credit cell: A special export cell to supervise and monitor the export financing has been functioning in Bangladesh Bank. Besides, in every commercial bank a special unit has been created for processing exclusive export credit proposals.

• Export monitoring: A high-powered committee has been functioning to assess the export credit requirement and to review and monitor the flow of export credit to ensure that adequate and timely credits are made available to the exporters.

• Inland back-to-back letter of credit: Authorised dealers may establish inland back-to-back letter of credit in favour of local suppliers of raw materials, against the corresponding master letter of credit.

Rebate on insurance premium

- Special rebates are allowed on premium covering fire and marine insurance to export-oriented industries (non-traditional items). Such rebates will be available also to the exporters of these items on shipment of goods. - Incentives are provided to export of non-traditional/new industrial products, especially where value addition is 50% or more. - Export firms having exceeded the proportionate export target set for that product-sector will be considered for incentives facilities.

Income tax rebate on export earnings

Previously, 50% rebate on taxable income generated from export earning was admissible under the Finance Act every year. From now on 50% of the income tax on any income on export will be exempted through incorporation of a new provision in the Income Tax Ordinance itself rather than as a temporary relief hitherto granted under the Finance Acts on a yearly basis.

Lowering the rate of AIT at source

Tax at source on all export earnings shall be deducted at the rate of 0.80% (FY2012-13).

Payment of duty drawback through commercial banks

For quick disbursement of duty drawback with a view to giving a competitive edge to exports in the international market, payments will be made by the commercial banks immediately on receipt of foreign exchange against all exports except the deemed exports, determined on the basis of the principles laid down by the National Board of Revenue.

Bonding facilities for export-oriented industries

Bonded warehouse facilities have been provided to the import-led export-oriented industries. Such facilities will be further simplified, and extended to all industries recognised as 100% export-oriented industries.

Duty-free Import Duty free import facility of capital machinery has also been extended to

67

of capital machinery by export-oriented industries

the 100% export oriented industries outside the EPZ.

Alternative facilities in lieu of customs bond or duty drawback for export-oriented domestic textile sector and garments industries

During fiscal year 1995-96, the government, in an attempt to give incentive to the domestic textile and garments sector, allowed 25% compensatory assistance to the industries of this sector. Cash incentives have been extended and revised based on the need to some other exporting items (see Table A-4)

Tax holiday Tax holiday incentive continues till the year 2000 in consonance with the Industrial Policy. The industrial enterprises enjoying the benefit of tax holiday shall be exempted from deduction of tax at source. After 2000, decision on tax holiday will be taken in the light of the government policy of that period.

Duty drawback scheme

(a) Exporters of manufactured products are entitled to draw back after the export is realized. The amount of duties and taxes paid on importation of raw materials under any of the three systems, namely, actual drawback, notional drawback and flat rate drawback. However, as a simpler mechanism of getting drawback, the flat rate method shall continue to receive greater weight.

(b) The rate of duty drawback payable on export of all traditional and non-traditional items will be renewed at regular intervals and more and more, new products will be brought under the duty drawback system.

Value Added Tax (VAT) on packaging materials

Should jute clothes and bags be used in the packing of export goods, VAT paid on such products will be refunded.

Simplification of the procedure for refund of VAT paid on export support services

To maintain competitiveness of export prices, VAT paid on export support services, namely, C & F service, telephone, telex, fax, electricity, insurance premium, shipping agent's commission/bill will be refunded under a simplified procedure.

Source: Export Policy Order (various issues); Bangladesh Bank (F.E. Circulars, various issues)

68

Table A-6: Average percentage share of individual export items

Export Items 1981-85 1986-90

1991-1995

1996-00

2001-05

2006-10

Observation

Raw jute 15.91 9.7 3.6 1.93 1.09 1.27 Substantial decline

Tea 6.72 3.34 1.66 0.73 0.25 0.07 Substantial decline

Frozen Food 8.67 12.33 7.77 6.44 5.03 3.48 Stable and prospective

Agriproduct 1.03 1.68 0.51 0.54 0.51 0.97 Slight increase Other primary commodities 1.1 0.8 0.69 0.35 0.29 0.58

Slight decrease

Total primary goods 33.43 27.84 14.23 10 7.16 6.38 Substantial decline

Jute goods 46.09 27.98 12.94 6.29 3.67 2.82 Substantial decline

Total Jute and Jute goods 62 37.68 16.54 8.22 4.76 4.08 Substantial decline

Leather 8.91 11.87 6.75 4.02 3.13 1.75 Substantial decline

Leather goods 0 0 0.49 0.67 0 0 Prospective

Footwear 0 0 0.41 0.59 0.29 0.58 Increased and prospective

Nathalie and furnace oil 4.69 1.36 0.97 1.66 7.16 6.38 Increased

woven Garments 3.9 34.26 50.41 53.14 48.42 37.6 Substantial increase

Knitwear 0 0.19 8.78 18.49 26.72 39.16 Substantial increase

Total garments 3.9 34.46 59.2 71.62 75.13 76.76 Substantial increase

Chemical products 1.06 2.11 2.22 1.86 1.6 1.35 Stable

Fertilizer 0.91 1.79 7.4 1.61 0 0 Declined Pharma 0.02 0.01 0.07 0.1 0.05 0 Stably low Paper prod 1.02 0.78 0.14 0 0 0 Decline Handicraft 0.36 0.34 0.29 0.14 0.08 0.04 Stably low Engineering products 0.29 0.46 0.4 0.27 0.36 1.52 slight increase Specific textiles 0.07 0.14 1.14 0.96 0 0 Stably low Other mfg. 0.1 0.21 1.15 3.43 8 7.09 Increased Total Mfg Exports 66.57 79.75 85.77 90 92.83 92.5 Substantial increase Total Exports 100 107.59 100 100 100 100 Total export exec garments

96.1 73.13 40.8 28.38 24.87 23.24 Substantial decline

Total Manufactured exports except garments

62.67 45.29 26.57 18.38 17.7 16.87 Substantial decline

Source: Calculated from the data of EPB

69

Table A-7. Growth of Imports by Commodities Category 1981-85 1986-90 1991-95 1996-00 2001-05 2006-10 Growth rate of primary goods import -9 4 19 14 27 -7Growth rate of rice import 139 83 402 271 87 -71 Growth rate of wheat import -4 3 -1 25 23 19 Growth rate of oil seeds import 8 664 28 -6 17 -1Growth rate of raw cotton import -21 9 -2 20 25 -12 Growth rate of crude oil -5 20 23 15 26 9 Growth rate of major intermediate goods -13 13 13 7 26 1 Growth rate of edible oil -12 5 17 13 25 4 Growth rate of petroleum products import -13 11 14 19 28 -1 Growth rate of fertilizer import -12 61 1 1 49 13 Growth rate of clinker import 26 16 5 19 20 -2 Growth rate of staple fibre import 114 40 24 -3 23 4 Growth rate of yarn import 13 15 36 -3 21 3 Growth rate of capital machinery import 4 10 10 -2 27 -1 Growth rate of consumption imports 33 21 17 14 13 11

Source: Estimated from the data of BBS Table A-8. Compound Growth of Imports by Sources of Supply (in %)

Country Fiscal Year 1986-90 1991-95 1996-00 2001-05 2006-10

India 24.7 39.7 -6.7 14.4 19.4 China 15.6 33.3 -5.3 23.4 22.9 Singapore 11.5 -4.7 19.6 1.9 8.3 Japan 16.8 15 -0.4 -9.8 12.4 Hong Kong 35.9 21.3 3.9 4.3 6.4 Taiwan 15.6 1.6 3.4 S. Korea 18.5 19.8 -3.4 0.9 14.9 USA 6.1 10.9 -0.4 7.3 10.2 Malaysia 11 6.4 11.9 16.9 35.2 Others 10.1 8.2 10.1 10.1 12.7 Total 12.3 13.5 4.8 8.9 16.4 Top Nine Sources 15.6 11.1 7.6 8.3 8.3

Source: Estimated From Data of BBS

Table A-9: Pattern of Changes in Revealed Comparative Advantage of Major Items of 98 Product Categories of Exports of Bangladesh

Commodities 2005 2006 2007 2008 2009 Pattern of Change Industry (Bangladesh) RCA RCA RCA RCA RCA 00 All industries 62 Articles of apparel, accessories, not knit or crochet 27.2 28.1 29.8 40 36 Stable high 61 Articles of apparel, accessories, knit or crochet 30.9 30 29.1 32 30.1 Stable high 03 Fish, crustaceans, molluscs, aquatic invertebrates nes 8.1 15 11 13.8 12.2 Increased

70

53 Vegetable textile fibres nes, paper yarn, woven fabric 115 9 121 7.7 5.1 Positive though declined

63 Other made textile articles, sets, worn clothing etc 9.6 108 10.6 129.5 114 Increased substantially 41 Raw hides and skins (other than furskins) and leather 9.8 9.8 9.6 8.4 2 Declined though positive 87 Vehicles other than railway, tramway 0.1 8.8 4.5 2.1 6.1 Shift to high advantage

31 Fertilizers 4.4 1.5 0.1 0.1 0.1 Shift to disadvantage 64 Footwear, gaiters and the like, parts 1.6 0.1 1.8 18.3 14.5 Increased substantially58 Special woven or tufted fabric, lace, tapestry etc 6.6 8 0.1 1.2 0.1 Shift to disadvantage 07 Edible vegetables and certain roots and tubers 2.2 0.1 0.1 0.5 1.1 Lowered advantage 65 Headgear and parts thereof 16.5 13.3 7.5 0 1.1 Lowered advantage 52 Cotton 1.3 2.6 2 0.1 0 Shift to disadvantage 27 Mineral fuels, oils, distillation products, etc 0 0 0.1 0.1 0.1 Reduced disadvantage 56 Wadding, felt, nonwovens, yarns, twine, cordage, etc 4.2 3.4 12.8 1.1 0.1 Shift to disadvantage 39 Plastics and articles thereof 0.2 0.9 0.2 0 0.8 Reduced disadvantage

28 Inorganic chemicals, precious metal compound, isotopes 0.9 1.2 1.3 0.1 0 Disadvantage increased 72 Iron and steel 0.2 0.1 1.4 0 0.2 Stable disadvantage 84 Boilers, machinery 0 0.6 0.1 0.9 0 Stable disadvantage 08 Edible fruit, nuts, peel of citrus fruit, melons 0.9 0.1 3 0.7 0.4 Disadvantage increased 55 Manmade staple fibres 1.3 2.6 2.8 0.6 0.4 Shift to disadvantage 69 Ceramic products 1.1 0.2 0.5 0.2 0.2 Shift to disadvantage 06 Live trees, plants, bulbs, roots, cut flowers etc 2.2 0.9 1.4 0 0.4 Shift to disadvantage

24 Tobacco and manufactured tobacco substitutes 1.1 0.1 0.1 0.1 0.1 Shift to disadvantage 09 Coffee, tea, mate and spices 1.4 0 0.3 0.4 0.3 Shift to disadvantage

90 Optical, photo, technical, medical, etc apparatus 0.1 0.1 1 0.2 0.7 Reduced disadvantage 49 Printed books, newspapers, pictures etc 0.6 0.8 0.1 0.5 0.2 Disadvantage increased 30 Pharmaceutical products 0.1 0.5 0.9 0.6 0 Disadvantage increased

Source: Authors’ calculation. Adapted from the data of UNCTAD of 2005-09 Table A-10: Number of items (at 2-digit HS Chapter Level) exported from Bangladesh to top 30 destinations. Sl No Country 2002 2003 2004 2005 2006 2007 % change (2002-2007)

1 Australia 26 39 43 45 50 45 73.08 2 Austria 18 17 23 20 21 27 50 3 Belgium 32 27 46 39 36 40 25 4 Canada 28 39 47 52 50 49 75 5 China 29 30 42 45 48 52 79.31 6 Denmark 20 20 31 34 31 34 70 7 France 38 42 46 44 44 44 15.79 8 Germany 37 43 54 59 59 58 56.76 9 Hong Kong, China 44 36 40 38 41 45 2.27 10 India 40 48 64 62 67 69 72.5 11 Indonesia 18 24 33 29 30 36 100

71

12 Iran, Islamic Rep. 12 12 13 15 18 13 8.33 13 Ireland 12 15 20 24 14 19 58.33 14 Italy 35 44 51 51 55 55 57.14 15 Japan 44 48 46 52 49 50 13.64 16 Korea, Rep. 39 43 49 51 61 56 43.59 17 Mexico 9 14 12 12 11 15 66.67 18 Netherlands 33 39 38 35 34 39 18.18 19 Pakistan 29 44 47 48 50 46 58.62 20 Poland 15 13 21 16 20 16 6.67 21 Russian Federation 20 23 18 14 13 15 -25 22 Saudi Arabia 29 35 46 46 41 36 24.14 23 Singapore 45 48 53 47 53 55 22.22 24 Spain 21 37 32 34 36 38 80.95 25 Sweden 26 27 36 31 34 35 34.62 26 Switzerland 20 29 24 24 29 28 40 27 Turkey 13 15 22 21 24 24 84.62 28 United Arab Emirates 43 48 52 54 57 58 34.88 29 United Kingdom 54 62 68 75 68 69 27.78 30 United States 69 62 67 66 71 72 4.35

World 86 89 94 95 94 95 10.47 Source: Authors’ estimation based on WITS.

Table A-11: Number of items (at 2-digit HS Chapter Level) exported from Bangladesh to top 30 countries Sl No Country 2002 2003 2004 2005 2006 2007 % change (2002-2007)

1 Australia 26 39 43 45 50 45 73.08 2 Austria 18 17 23 20 21 27 50.003 Belgium 32 27 46 39 36 40 25.00 4 Canada 28 39 47 52 50 49 75.00 5 China 29 30 42 45 48 52 79.31 6 Denmark 20 20 31 34 31 34 70.00 7 France 38 42 46 44 44 44 15.79 8 Germany 37 43 54 59 59 58 56.76

9 Hong Kong, China 44 36 40 38 41 45 2.27

10 India 40 48 64 62 67 69 72.50 11 Indonesia 18 24 33 29 30 36 100.00 12 Iran, Islamic Rep. 12 12 13 15 18 13 8.33 13 Ireland 12 15 20 24 14 19 58.3314 Italy 35 44 51 51 55 55 57.14 15 Japan 44 48 46 52 49 50 13.64 16 Korea, Rep. 39 43 49 51 61 56 43.5917 Mexico 9 14 12 12 11 15 66.67 18 Netherlands 33 39 38 35 34 39 18.18

72

19 Pakistan 29 44 47 48 50 46 58.62 20 Poland 15 13 21 16 20 16 6.67

21 Russian Federation 20 23 18 14 13 15 -25.00

22 Saudi Arabia 29 35 46 46 41 36 24.1423 Singapore 45 48 53 47 53 55 22.22 24 Spain 21 37 32 34 36 38 80.95 25 Sweden 26 27 36 31 34 35 34.62 26 Switzerland 20 29 24 24 29 28 40.00 27 Turkey 13 15 22 21 24 24 84.62

28 United Arab Emirates 43 48 52 54 57 58 34.88

29 United Kingdom 54 62 68 75 68 69 27.78 30 United States 69 62 67 66 71 72 4.35

World 86 89 94 95 94 95 10.47 Table A-12: Description of the Trade Potential Index

- The value of imports from a country: If trade in the form of exports by Bangladesh to any of the selected country did exist in 2007, a score of 1 is allocated. The absence of trade is allocated a score of 0. The existence of a trade relationship is deemed a significant factor in furthering trade.

- Growth in export demand: If exports from Bangladesh to any of the country have registered a positive growth measured over the five year period from 2003 to 2007, a score of 1 is allocated. No growth or negative growth rates are awarded a score of 0.

- Growth in import demand: If imports by a country from the rest of the world have registered a positive growth measured over the five year period from 2003 to 2007, a score of 1 is allocated. No growth or negative growth rates are awarded a score of 0.

- Export growth: Growth of exports from Bangladesh to the rest of the world is indicative of supply capacity, and increased demand for locally produced goods. A positive growth rate in the value of exports over a five year period from 2003 to 2007 is awarded a score of 1, whilst no or negative growth is awarded a score of 0.

- Indicative Trade Potential: Indicative trade potential isolates total demand and total export capacity thereby providing a rough estimate of how much countries could “theoretically” trade between them. A positive “indicative trade potential” suggests that a trade opportunity exists. A thumb rule is set for this purpose which is if the country’s total import on that particular product line is 10 times higher than Bangladesh’s export of that product to that specific country then a score of 1 is allocated. Trade potential with a lower value or with no or negative trade potential values are allocated a score of 0.

Source: Rensburg, MrGert van and Ms Joyce Letswalo (2010). Country Market Study: Saudi Arabia.

73

Table A-13: Import Dependence of Food Grain Period Import

Dependence of Rice

Import Dependence of Wheat

Import Dependence of Total Food Grain

1985-90 1.48 27.82 3.72 1990-95 1.85 20.89 3.33 1996-00 3.84 28.11 6.04 2001-05 4.05 61.88 8.98 2006-10 2.29 65.89 8.73 2011-12 3.26 76.85 11.16

Trade Policies and Pattern in Bangladesh -...

Documents

Transcript of Trade Policies and Pattern in Bangladesh -...