Bangladesh-India Detailed Economic Cooperation Agreement: New Challenges

Prime Minister Sheikh Hasina is on a four-day visit to India. There is no end to the discussion of what has been gained from this visit. It had already been predicted that the Tista treaty would not be concluded during this visit. Still nothing dramatic happened. Despite all this, it is now being discussed that economic and trade relations have become more important on the agenda of Prime Minister Sheikh Hasina’s visit this time around.

The prime ministers of both countries have agreed to engage in formal dialogue, in particular on the proposed Comprehensive Economic Partnership Agreement (CEPA). It is essentially a free trade agreement. Moreover, its scope is much wider than that of free trade agreements. India has shown interest in Sepa since 2018. Many believe that India’s interest is due to China’s growing economic, trade and investment ties with Bangladesh.

Bangladesh’s enviable economic growth, the emergence of a large consumer market in terms of attractive per capita income and purchasing power, the need for a large-scale supply chain due to increased exports, the need for a detailed economic and trade partnership with Bangladesh for economic and political security of the nearly isolated Northeast Indian states SEPA can be considered as one of the factors driving interest in contracts.

China’s huge economic and commercial presence in Bangladesh is not a very acceptable issue for Bangladesh’s closest neighbour, India. Bangladesh must also take into account India’s psychological response when establishing new economic and trade relations with China. China has long been looking forward to a free trade agreement with Bangladesh. China is now Bangladesh’s largest trading partner. About 25 percent of total Bangladeshi imports are now settled by China. India accounts for 16 percent. A few days ago, this picture was reversed.

The eastern part of South Asia namely Bangladesh, Bhutan, Nepal and the northeastern part of India was once considered one of the poorest parts of the world. Gradually, the countries began to eliminate poverty by using the resources of this segment. Regional cooperation platforms such as SAARC have raised a lot of hopes among hundreds of people in the region, but once the regional or multilateral cooperation areas were unable to progress much due to various complications. SAARC has never been construed as an economic or commercial cooperation agreement.

The SAFTA agreement concluded between South Asian countries in 1993 went into effect in 2006 but brought no benefits. The reasons that can be highlighted are the animosity between the two SAARC member states India and Pakistan, the suspicion and mistrust of the small economy countries towards India, the lack of expertise and experience among the majority of the members regarding the effectiveness of SAFTA . But detailed economic and trade partnerships, investment, connectivity and services-based goods trade issues were lacking in SAFTA.

Bangladesh tends to enter into such agreements on a bilateral basis because of the apparent fear of losing the trade benefits enjoyed as LDCs after transitioning to a developing country in the near future. India has already concluded such an agreement with Bhutan. India has already signed free trade agreements on a bilateral basis with SAARC member countries Bhutan, Nepal, Sri Lanka and Thailand in Southeast Asia, along with Singapore.

Sri Lanka concluded such an agreement with Pakistan in 2005. Although proposals for a free trade agreement came in at different times from many countries, including India and China, because Bangladesh is an import dependent country, Bangladesh found itself in a dilemma due to various accounting considerations. After the visit to India, both sides agreed to start negotiations to conclude a SEPA agreement with India. It can be assumed that the agreement will be executed very quickly.

The proposed SEPA agreement has three dimensions. Trade in goods, trade in services and investments. Key objectives include reducing Bangladesh’s trade deficit with India, leveraging connectivity between the two countries, and other opportunities for trade and investment. Apart from this, the agreement includes providing free access to the supply chain, joint production of defense products and joint venture production of vaccines and other pharmaceutical products.

Some believe that trade between the two countries will increase by about three times within a few years if the SEPA agreement is implemented. India has a large trade deficit with Bangladesh. This agreement is expected to reduce the trade deficit. This paves the way for the full implementation of BBIN and BIMSTEC. As a result of this agreement, new production centers will be established through joint investments. This removes existing barriers in the supply chain of both countries.

Due to the availability of road, rail and sea links between the two countries, supply chain crises have arisen due to Covid and the war between Ukraine and Russia; In the future, such a crisis will be avoided. Bangladesh is setting up three major special economic zones for Indian entrepreneurs. In these special regions, Indian investors will be able to set up factories to meet the supply chain needs of Bangladesh and the northeastern states of India and to export to other parts of the world.

According to the information published in the media, the proposed SEPA agreement also includes the development of railway and port infrastructure, border huts, multimodal transport system and regional connectivity. The process of linking Bangladesh to India has started very vigorously since the beginning of Prime Minister Sheikh Hasina’s government. Several major projects have already been undertaken to establish such multidimensional connectivity.

The Government of India provides loans to various projects to increase multimodal connectivity. But the implementation of these projects is delayed due to various complications. As a result, connectivity initiatives are not being implemented to the desired extent. During Sheikh Hasina’s current visit to India, it was announced that India will provide transit facilities to increase regional connections with Bangladesh and other neighboring countries. As a result, trade and communication with Bangladesh’s landlocked neighbors, Nepal and Bhutan, will increase and become easier.

There are several dilemmas within Bangladesh regarding the signing of SEPA or free trade agreement between India and Bangladesh. India has already given tariff preferences on most products from Bangladesh; However, there are many complaints that Bangladeshi exporters cannot fully enjoy it. The export of Bangladeshi products to India is not taking off due to non-tariff barriers created by India. There are reports that India’s own issues, including rules of origin, complexity in determining product quality, hinder the process. As a result, Bangladeshi products are not exported to India as expected as they benefit from the tariff benefits announced by India.

Indian businessmen are also under various pressures for fear of competing with Bangladeshi products. Just as Indian goods enter Bangladesh without visible barriers, Bangladeshi goods cannot enter India seamlessly. If Bangladesh’s SEPA agreement with India is implemented, goods from India will enter Bangladesh multiple times. Currently, about $14 billion worth of goods is exported from India to Bangladesh. If the SEPA agreement is implemented, India’s exports to Bangladesh are likely to more than double to $30 billion in the coming years and Bangladesh’s exports to India.

Note that only $1.71 billion worth of goods were exported from Bangladesh to India in 2021-22, according to the Export Development Bureau. Although in 2020-21 this export amount was 1 billion dollars. Although Bangladesh has enormous export potential in India, a country of about 1.5 billion inhabitants, it is not possible at the desired level. Although Bangladesh is the second largest exporter of ready-to-wear in the world, India managed to export only $238 million worth of clothing in 2020-21. India can be an important destination for clothing exports from Bangladesh.

Because Bangladesh’s clothes are cheaper than any other country in the world. In addition, Bangladesh now produces world-class clothing. Being a neighboring country, transportation costs for buying clothes from Bangladesh are very low; Moreover, fast delivery is possible. And so, just as Bangladesh’s garment manufacturers must gain access to India’s market of some 1.5 billion people, so must India’s importers. According to the news published in various media, the value of Bangladeshi clothing among the middle class of India is increasing day by day. What is most needed now is the removal of tariff barriers in all states of India, simplification of the rules of origin and also a change of mindset of Indian traders.

When the SEPA comes into effect, it will initially put a lot of pressure on the products produced in Bangladesh, but if Bangladeshi entrepreneurs can handle this pressure and gain capacity by taking into account a huge market like India, they can of India one of the main export markets of Bangladesh.

Bangladesh should now immediately conclude free trade agreements with several countries on a bilateral basis. The signing of the Comprehensive Economic Cooperation Agreement with India is an important test case for Bangladesh. In the near future, Bangladesh may start negotiating a free trade agreement with China. Bangladesh must move forward with the challenges of the future.

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