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Bangladesh, India Trade

Trade, India and Bangladesh, Free Trade Agreement
India, Bangladesh trade would do better if there were broad-based liberalization, rather than a Free Trade Agreement (FTA)

Report Summary:
 
There is no compelling case for India and Bangladesh to pursue a bilateral Free Trade Agreement (FTA). A broader-based liberalization would be more beneficial for both countries.
 
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Facts:
- Over 15% of Bangladeshi imports come from India.
- Bangladesh has a large trade deficit with India; this is offset by surpluses with other countries.
- Bangladeshi exports to India receive tariff concessions (under SAFTA).
- They account for less than 1% of total India’s imports.
- Illegal trade between the two countries amounts to 3/4 of regular trade.


Chapter 1: Introduction
India and Bangladesh have long shared common objectives for closer economic integration within the South Asia region and trade between the two countries has grown rapidly since the early 1990s. A free trade agreement (FTA) has been under consideration for some time. This report seeks to explore the implications of a bilateral FTA. Although the report points at possible advantages, it concludes that there is no compelling case for India and Bangladesh to pursue a bilateral FTA. Rather a broader-based liberalization would be preferable since this would yield much larger economic benefits, whilst minimizing risks. This introductory chapter gives a brief history of the trading relationship between the two countries.
 
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Chapter 2: Bilateral Trade and Exchange Rates
This chapter provides a statistical analysis of the trade relationship between India and Bangladesh since 1990s. India’s exports to Bangladesh have grown at over 9% annually since the 1990s. In contrast, Bangladesh’s exports to India have grown at a meager 3% annual rate. Bilateral real exchange rate plays an important role in determining these trends. Through most of the 1990s, relative depreciation of the Indian Rupee – which made Indian goods more competitive – fueled both legal and illegal Indian exports to Bangladesh.
 
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Chapter 3: India’s Trade Policies
This chapter summarizes India’s trade policies and its implications on Bangladesh exports to and imports from India. Under an existing bilateral (SAFTA) treaty, most Bangladesh goods enjoy substantial tariff concessions freeing their access to Indian market.
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Chapter 4: Bangladesh’s Trade Policies
Bangladesh provides relatively fewer tariff preferences to imports from India. At the same time, the pace of tariff reform in Bangladesh has slowed. Administrative constraints in land border trade have deepened corrupt practices among customs officials. This section summarizes Bangladesh’s trade policies and its impact on trade with India.
 
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Chapter 5: Reconciling the Trade Statistics
This chapter compares trade statistics between India and Bangladesh and their implications on policies and trade administration, especially customs administration. Statistical analysis shows that some Indian exports to Bangladesh were of higher value than the values of the same products in India. This discrepancy can be explained by ‘tax evasion’ schemes where Indian exporters understate value of their exports and Bangladeshi importers overstate the costs.
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Chapter 6: Bangladesh's Imports from India: Composition, Trends and Potential under an FTA
This chapter summarizes the nature of Indian exports to Bangladesh and takes it further by examining the likely effects of a FTA. According to the study, a bilateral free trade agreement would provide substantial benefits to Bangladesh consumers by giving them access to cheaper exports from India. These consumer benefits would far outweigh losses in government revenue or lost profits for local manufacturers. Yet such benefits could easily be wiped out, if the incentive systems don't give the right signals. By keeping out cheaper third-country imports, the FTA risks providing a captive, protected market where Indian producers might collude amongst themselves or with Bangladeshi importers to artificially increase prices. On the other hand cheaper goods from, say East Asia might be excluded, forcing Bangladeshi consumers and businesses to overpay.
 
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Chapter 7: Bangladesh's Exports to India: Composition, Trends and Prospects under an FTA
This chapter provides the perspective from the other side of the border. For India, the economic benefits from an FTA would be modest since its trade with Bangladesh is small in relation to India’s overall trade. These modest gains would mostly stem from expanded exports. India would stand to profit more from the continuation of its policies of unilateral liberalization – paying special attention to the removal of non-tariff barriers, specific duties on textiles and garments, and prohibitive tariffs on agricultural products.
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Chapter 8: Informal and Illegal Trade
Since Bangladesh’s independence there has been substantial informal and unrecorded trade between India and Bangladesh with participation from the community and customs officials of both countries. This informal trade is essentially one-way (from India to Bangladesh). Based on research findings, this chapter reveals how informal trade takes place.
 
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Chapter 9: Trade Financing, Logistics and Transaction Costs
It has long been recognized that there are various logistical problems (congestion, delays, bribes etc.) at customs stations along the India-Bangladesh border complicate trading relationships. This chapter quantifies the costs and time taken for customs offices to clear traded products. It also explores the various ways Bangladeshi importers pay for imports from India.
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Chapter 10: Quantifying the Economic Costs and Benefits of an FTA: Industry Case Studies
This section summarizes some of the findings of the likely simulated effects of an India-Bangladesh FTA in the cement, light bulb, bicycle tire, sugar and readymade garments (RMG) industry. For the first three industries, simulation results shows that there would be increased Indian exports to Bangladesh, but no exports from Bangladesh to India. The simulations for readymade garments predict increased Bangladesh exports to India, based on Bangladesh’s cost competitiveness, and the prospect of Bangladeshi garments finding niche markets. There is also the likelihood of increased exports from India to Bangladesh – thus cancelling some of the benefits Bangladesh may have gained.
 
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Chapter 11: Implications for Bangladesh and Indian Trade Policies
This chapter summarizes principal findings of the study and ideas for further research. India and Bangladesh could still greatly benefit from cooperation in other areas, without necessarily implementing an FTA. Mutual cooperation on trade facilitation could benefit both countries. Improvements in the transport, storage and administrative infrastructure at land borders would yield substantial benefits. Greater harmonization and cooperation in customs administration and banking relationships would also be highly beneficial. Informal and illegal trade can be reduced by improving infrastructure at land border customs posts; streamlining customs procedures and administration and expanding facilities at smaller customs border post. Bangladesh also needs to bring down its protective tariffs to levels closer to those of its comparators in South Asia and elsewhere.
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Website maintained by the World Bank Office in Dhaka, a launching pad to all information on World Bank activities in the country (strategy, projects, publications, etc.)
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World Bank Program in South Asia
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