On India-Bangladesh Trade Imbalances
I read a wonderful report presented by the World Bank (Bangladesh branch) on the prospect of India-Bangladesh FTA. It analyzes the trade between India and Bangladesh, the mismatch of the volumes, the barriers of the import-export trade, some future prospects and suggestions for both India and Bangladesh.
One of the major reason of political discontent in Bangladesh is the huge trade gap (shown in the image above courtesy The Daily Star) which is also supported by the fact that India has a lot of non-trade barriers for Bangladesh exports. Although the exports from Bangladesh is growing at a healthy pace, there is no sign of squeezing the trade gap. However, the amount of loss due to non-trade barriers are never properly evaluated. As per a latest report by Bangladesh Commerce Ministry, as cited in the Daily Star, –
“the barriers to discourage import from Bangladesh are: laboratory test for every consignment of food products, cosmetics, and leather and textile products, delay in getting test results, imposition of state tax, packaging requirement, anti-dumping and countervailing duties. … Also, inadequate infrastructure facilities such as warehousing, transhipment yard, parking yard and connecting roads at land customs stations of India also hinder exports from Bangladesh, the list elaborated.”
However, the World Bank report painted a different picture of the same. It says – “The very low level and slow growth of Bangladesh’s exports to India is not necessarily attributable to restrictive import policies in India.” (Page xxii) It argued –
1. Despite the steep reduction in import tariff, increase in Bangladesh exports remains low.
2. “Bangladesh producers’ costs are too high to compete with Indian producers, or with exporters in other countries who have to pay the higher MFN tariffs.”
3. With respect to RMG, it writes as I quote –
“Three quarters of Bangladesh’s exports are ready made garments, most of which go the US and Europe. Bangladesh RMG producers appear to have a marked labour cost advantage over RMG producers in India, owing to lower wages and similar labour productivity, but India’s specific duties on garments appear to have prevented any substantial penetration of its domestic markets by developing country clothing producers including Bangladesh. … high protection levels provided by India’s specific duties on garments are mostly redundant by wide margins.That is, actual domestic prices in India are probably not far above and may even be below prevailing international prices at the cif stage in India. It is also relevant that Sri Lanka-which is a major RMG exporter- has had negligible RMG exports to India, despite the 75% preference for garments negotiated under the Sri Lanka-India FTA.”
The report is also not upbeat about Bangladesh RMG exports in India even if all restrictions are eased out (Page xxiii). It points out that there are various reasons why Bangladesh would not have a good market for RMG in India. In brief, they are –
1. India is also a major RMG exporter. The RMG price level in India is close to that of Bangladesh.
2. Bangladesh does neither produce yarns, nor it have a textile industry to back up.
3. Bangladesh RMG industry is a value-addition (i.e. to produce shirts) on top of a textile industry (i.e.fabrics). If there are rules of origin specified in a FTA, a lot of exports would be filtered out of it.
4. Popular choice (such as : brands, style and fashion) is different and diverse in India than those in Bangladesh. Interestingly, most of the Bangladesh exported RMG is actually marketed by retailers such as Walmart in US and Europe. Since India did not open market in retails, Bangladesh exports could face hurdles in marketing their products themselves.
The study also pointed out why Bangladesh RMG exporter may not be interested in exporting in India. The margin of export would be very thin (due to small difference in retail market price) which is again vulnerable to Rupee-Taka exchange rate (i.e. if Indian rupee is devalued, the profit margin may be wiped off). Instead, if they focus on exporting the same RMG to Europe and USA where Bangladesh enjoy less tariff barriers and healthy profit margins, they can have a sustainable market share.
The report also dedicated a chapter towards the informal trade or the underworld trade (i.e. smuggled trade) between India and Bangladesh. It points out –
“All the literature on the India-Bangladesh informal trade confirms that this trade is essentially one-way, from India to Bangladesh.”
The report concluded that this trade indicates higher trade barriers in Bangladesh side and suggested Bangladesh to reduce tariffs, ease customs administration and advised both countries to improve formal infrastructure to facilitate “un-smuggled” trade.
If anyone wants insight into the India-Bangladesh trade, the composition, history and tariff and routes – this is the right report to look into. A lot of my queries were in deed answered by this one piece of study thanks to World Bank.
The major items Bangladesh exports, include RMG (Ready-made Garment) and Leather goods. India is a producer of those items, but India does import them too. It’s interesting to note that Bangladesh has negligible share in Indian import of those items, i.e. India imports them mostly from some other countries. In 2008, India imported RMG worth 515 million USD, among which only 2.9 million USD was from Bangladesh. Similarly, India imported 380 million USD worth of Leather goods, among which only 7.3 million USD was from Bangladesh. This proves either producers in Bangladesh are less competitive compared to other countries India import from, or they are simply not interested to export to India. See the detailed chart at page 13 of this document.
Further Read : Bangladesh trade competitiveness study