Understanding Bangladesh-China Free Trade Agreement

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Bangladesh and China are negotiating a Free Trade Agreement (FTA) for increasing bilateral trade and investment. During the visit of the President of China to Bangladesh on 14-15 October in 2016, a memorandum of understanding between Bangladesh and China was signed regarding the joint feasibility study of the signing of the FTA between them. On March 28, 2024, Bangladesh and China exchanged a draft feasibility study report for initially signing a Free Trade Agreement (FTA) between the two countries to increase trade and investment. In this context, the write-up focuses on understanding Bangladesh-China free trade agreement.

Why FTA?

In March 2012, the University of China conducted a survey on the effectiveness of free trade. Among 37 economists, who answered, 35 either strongly agreed or agreed that ‘Freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment’ (https://www.kentclarkcenter.org/surveys/free-trade/). Two economists answered ‘uncertain’ while none answered disagreed. So, from this survey of the renowned economists, one can argue that free trade matters. And in the context of Bangladesh, it matters a lot.

Usually, an FTA covers a wide range of trade and investment issues. ‘From the standpoint of economic theory, an FTA offers advantages to all member countries. FTA is also likely to attract foreign investment, creating employment and increasing economic welfare of the member states’ (Wong and Chan, 2003, 509).

Is FTA with China beneficial? China maintains 17 Free Trade Agreements (FTAs) with its trade and investment partners. Let’s have a look at a few FTAs with China. First, Cambodia-China Free Trade Agreement (CCFTA) came into effect in early January 2022. Under the terms of the CCFTA, 98 per cent of Cambodia’s exports to China and 90 per cent of China’s exports to Cambodia are exempted from tariffs. On 09 October 2023, May Kunmakara wrote at the Phnom Penh Post that within two years, there has been significant growth in bilateral trade, as well as a surge in Chinese investment in Cambodia due to CCFTA.  Anthony Galliano, group CEO of Cambodian Investment Management Co Ltd, however, shares that ‘The CCFTA’s influence on trade with China has been marginal thus far. The primary advantage for Cambodia would be an uptick in exports to China, starting from a modest base. The existing trade deficit of $9 billion will require years to chip away at’.

Second, the China–Australia Free Trade Agreement (ChAFTA) entered into force on 20 December 2015. According to the Department of Foreign Affairs and Trade (Government of Australia), ChAFTA is an historic agreement and delivering enormous benefits to Australia, enhancing its competitive position in the Chinese market, boosting economic growth and creating jobs.

Why FTA with China?

First, after LDC graduation in 2026, Bangladesh will lose duty-free quota-free access to the developed and developing countries after 2026. As a result, the export products of Bangladesh will have to face the generally imposed duties when entering the market of those countries. There is a possibility of shrinking the export market of Bangladesh in those countries. In this context, FTA with China might help to promote the export of Bangladeshi products.

Second, according to data of Bangladesh Ministry of Commerce, in the fiscal year 2022-23, Bangladesh exported goods to China worth US$ 677 million and imported goods worth US$22.90 billion, making China the largest trading partner of Bangladesh. In this context, FTA with China would be a real game changer if Bangladesh could tap into the Chinese market. If Bangladesh can explore even 1% potential of the Chinese market, then the exports of the country to China will total US$25 billion.

Third, against the backdrop of the rise of protectionism in some parts of the word and the trade war between the United States and China, this FTA between Bangladesh and China might provide a pro-trade signal to the rest of the world and for the necessity of rules-based order in trade. In addition, if materialized, Bangladesh-China FTA is expected to mark a significant milestone in Bangladesh-China economic relations.

Fourth, as of September 30, 2023, Chinese Foreign Direct Investment (FDI) stock in Bangladesh amounted to US $1.26 billion. Currently, China is the second largest source of foreign direct investment (FDI) for Bangladesh (The Daily Star, March 29, 2024). Within this investment, 57.60% (US $723.08 million) is allocated to the power sector, followed by textile and apparel (20.97%), construction (4.63%), trading (3.58%), leather and leather products (1.05%), chemical and pharmaceuticals (0.08%), and other sectors accounting for 11.39%. It is expected that FTA with China would increase the volume of Chinese investments in Bangladesh.

Fifth, FTA usually means further economic development for the participants. In this context, greater economic openness might bring economic benefits for both Bangladesh and China.

Finally, Dani Rodrik, a Professor of International Political Economy at John F. Kennedy School of Government, Harvard University writes that ‘The economists must have been aware that trade agreements, like free trade itself, create winners and losers (2018, p.74). According to the feasibility study, Bangladesh may lose nearly Tk 15,000 crore per year in revenues from import duties if a proposed free trade agreement (FTA) is signed with China.

In this context, a proper negotiation with China with regard to FTA needs to be ensured. There must be safeguards for Bangladesh economy while entering free trade arrangements with China. Growth of domestic industry and growing manufacturing sectors need to be protected. Bangladesh also needs to invest on creating a pool of experts on free trade and investment, economic diplomacy etc. This piece argues that there is no alternative but to have a sound knowledge-base on economic diplomacy of Bangladesh.

– Dr. Md. Shariful Islam is an adjunct Research Fellow of the KRF Center for Bangladesh and Global Affairs (CBGA) and an Associate Professor in International Relations at the University of Rajshahi, Bangladesh.

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