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Laws and Policies Affecting Trade Executive Summary Bangladesh has been pursuing policies and institutional reforms towards a free market economy in line with the prevailing world trend. The government has embarked upon an outward looking export-led industrialization strategy in early eighties and has been continuing the same to take advantage of liberalized world trade regime to achieve faster rate of growth of GDP and overall economic development. Bangladesh’s success in trade started since the liberalization and changes made in the 1990’s. The following formulations changed the trading environment immensely: • •

Tariff reform Elimination of QR

Export rate management

Regional cooperation

To provide continuity and stability, the government has formulated Five Year Export and Import Policies from 1997 and envisaged a private sector-led growth policy in the Export Development Strategy of the Fifth Five-Year Plan (FFYP 1997-2002). The main policies taken by government are: • •

Export policy Import policy

EPZ facilities

Foreign exchange policy

There are quite a few problems in the policies and infrastructure of the country. Some of the Issues are mentioned below: • •

Failure in the infrastructural sector like PDB causing high production cost Failure in loan retention in the SME sector

Too much importance to certain sectors

Existing rigidity in certain policies

Recommendations:  More liberated trade policy  Increased import of technological equipment for widespread expansion  Efficient raw material supply and distribution


 Introduction of Effective Risk Management techniques for Physical Inspection  Reduction in import control and gradual decrease in import tariff and not tariff barriers  Increase Enforcement Capacity

Introduction Economic theory suggests that the primary impact of trade liberalization will be on the overall level of trade, with a roughly parallel increase in exports and imports as a percentage of GDP. This is likely to require a modest depreciation of the real exchange rate in order to ensure that exports increase as much as imports, and leave the balance of trade unchanged. The export increase is likely to be concentrated in a relatively narrow range of products, products which use intensively the country's abundant factor of production (unskilled labor in the case of Bangladesh), while the import growth is expected to be much more diversified and more capital intensive. Some import-substituting industries are likely to find themselves squeezed, but others will respond to the competitive challenge by modernization. The net effect will be to increase the growth rate, through various channels, including concentration on industries in which the country has a comparative advantage, possibly increasing returns to scale in some of the export industries, the exposure of import-competing industries to competition from imports, improved technology when the price of imported capital goods declines and the country can afford to import more, and the chance to use imported intermediate goods when these are more suitable than domestic inputs. This is the basic idea to sustain the growth of a country like Bangladesh. Bangladesh launched a deep and wideranging trade reform strategy in the early 1990s. This included substantial reduction and rationalization of tariffs, removal of quantitative restrictions, move from multiple to a unified exchange rate system, convertible current account and an overall outward orientation of trade policy regime. Bangladesh always attaches great importance to trade and considers it as the engine of growth and economic development. In the earlier years of its independence, Bangladesh maintained a controlled trading regime. However, in order to keep consistency with the global system and to take benefit by integrating to the multi-lateral trading system (MTS), since mid-80s Bangladesh started to liberalize and deregulate its trade regime and adopted an export-led growth policy. As a result, the country’s trade integration, measured by the trade-GDP ratio, rose from 18% in 1990 to 43% in 2008. Anyone who has looked at Bangladesh's trade performance in the last few years has concluded that its trade liberalization since 1990 has been a textbook case of success. Exports have increased at double-digit rates, and imports have increased in parallel, leaving the trade balance largely unchanged in dollar terms. These exports have been heavily concentrated in the garment industry, which is an industry well-suited to Bangladesh's comparative advantage in view of its heavy use of abundant unskilled labor. GDP growth has accelerated. This expanded trade increased the contribution of international trade to total GDP and thus in growth of the economy, which has been growing at the rate of around 6% for last few years.Initial reforms and trade liberalization policies The beginnings of policy reform and liberalization can be traced to deregulation measures starting in 1976 under a new government, which increasingly distanced itself from the earlier socialist approach. However, initial reform efforts had neither a clear direction, nor a broad time frame for implementation. This phase of muddling through lasted for about a decade.


Four notable features of policy during this period of greater market orientation were: reduction of restrictions on investment; gathering momentum of denationalization of public sector enterprises; limited reduction of tariffs and NTBs; and incentive packages for the emerging ready-made garments sector. During the latter half of the 1980s, a more coherent picture of reforms began to emerge under structural adjustment policies (SAPs). In the area of tariff reforms, SAPs emphasized rationalization of the import regime, simplification and reduction of effective protection, elimination of negative and restricted lists of industrial imports, and facilitation of imports of raw materials and intermediate and capital goods, including the imports needed for direct and indirect exporters. However, political commitment to policy reforms remained problematic due to the Government’s continued preoccupation with the need to gain political legitimacy, which greatly restricted its ability to implement actions deemed unpopular. There were also genuine concerns over the policy prescriptions of the donors, particularly with regard to the design and implementation of the SAPs and their distributive implications. The policy reform process gained substantial momentum following the restoration of democracy in 1991. The main political parties embraced a liberal economic agenda, which augured well for genuine and sustained political commitment to reform and liberalization. Since then, wide-ranging reforms and liberalization measures have been initiated and implemented, which have virtually transformed the policy landscape. These measures include tariff reductions, the elimination of a large number of quantitative restrictions (QRs), a flexible exchange rate regime, and the provision of a range of fiscal and financial incentives for export promotion.

Tariff reform Throughout the 1990s, Bangladesh consistently reduced its import duties. The average weighted customs duty fell from 47 per cent in 1993 to less than 16 per cent in 2004 (Table 3). During the same period, the average weighted import customs duty fell from 23 per cent to 12 percent. The share of bound duties remained unchanged between 1997 and 2003, at 13.2 per cent, while the share of duty-free tariff lines increased nearly fourfold in a decade, from 4 per cent in 1992 to over15 per cent in 2002. The maximum import duty was reduced drastically from 350 per cent in 1992 to30 per cent in 2003. The 2004/05 budget provided a further reduction of the maximum tariff rate. The percentage of tariff lines with duties over 15 per cent fell from 80 per cent in 1992 to 42 per cent in2002

Table 1: Impact of tariff reforms on average customs duty rates Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

Unweighted avg (%)

Weighted avg (%)

47.4 36.0 25.9 22.3 21.5 20.7 20.3

23.6 24.1 20.8 17.0 18.0 16.0 14.1


1999-00 2000-01 2001-02 2002-03 2003-04

19.5 18.6 17.13 16.51 15.62

13.8 15.1 9.73 12.45 11.48

Source: Government of Bangladesh (2004a) One important aspect of the tariff structure in Bangladesh is related to the use of import taxes that have a protective impact (also known as para-tariffs) over and above the protection provided by customs duty (World Bank, 2004). These taxes include the infrastructure development surcharge, supplementary duties and regulatory duties. Although these taxes have been primarily imposed for generating additional revenues, in the absence of equivalent taxes on domestic production, they have provided extra protection to local industries. Similarly, while the value added tax is supposed to be trade-neutral, exemptions for specified domestic products have also resulted in it having some protective content. Some of these para-tariffs, such as the infrastructure development surcharge, are applied across-the-board to all or practically all imports, and can be considered as general or normally applied protective taxes that affect all or nearly all tariff lines. Others are selective protective taxes in that they are only applied to selected products (for example, the “supplementary” duties). The para-tariffs employed during the 1990s and early 2000s in Bangladesh are summarized in table 4. It appears that despite the lowering of customs duties, the presence of para-tariffs did not significantly lower the total protection rate. However, due to the application of a number of other charges, such as supplementary duties and Surcharges on imports, the average unweighted customs duty does not reflect the true extent of nominal protection. According to World Bank estimates, if these charges are taken into account, the average nominal protection rate stood at 27 per cent in 2002 (Ahmed and Sattar, 2004). This should be contrasted with the enterprise-level effective protection rate of 78 per cent for the same year, which points to the existence of tariff escalation. This observation is supported by Table 4, which shows the weighted average of custom duties on imports at different stages of production. Duties are higher on primary and intermediate goods than on final consumer goods, although, since 2001, weighted average duties on final consumer goods fell below those on intermediate goods. Thus, despite progress with tariff reforms, there is room for further liberalization.

Elimination of QRs There has been a substantial phasing out of quantitative restrictions, which took place in three stages since the early 1990s, to the extent that there may not be much room for their further removal. The first major slashing of QRs took place under the import policy order for 1991– 1993, which reduced the number of items on the import control list from 325 to 193. During the period 1993–1997, the number of restricted items was cut to between 111 and 120. The import policy order for 2003–2006 reduced the number further, to 63, of which only 23 are for trade reasons (Table 5). As a result, the share of total Harmonized System (HS) 4-digit tariff lines subject to QRs fell more than threefold, from over 6 per cent in 1993 to less than 2 per cent in 2003. Today, the remaining restrictions are in large part maintained on public interest grounds, such as health and environmental concerns and for cultural and religious


considerations. Although there is some room for further removal of controls, this will not be easy. A case in point is the current restriction on salt imports. Its removal can be argued on efficiency grounds, but needs to be weighed against the possible impact on the employment and livelihoods of nearly 40,000 raw salt producers.

Table 2: Progressive reductions of import restrictions IPO 1991- 93 IPO 1993-95 IPO 1995-97 IPO 1997-02 IPO 2003-06 Number of items in the control list 193 111 120 HS4- digit level Number of trade related items in the control list HS4- digit level

122

63

(5.1%) 79

(15.56%) 19

(9.0%) 27

(9.7%) 28

(9.8%) 24

(6.4%)

(1.5%)

(1.9%)

(2.2%)

(1.9%)

Source: World Bank (2004) Although a range of formalities still exists for customs clearance of controlled items, as well as permits and clearance for certain categories of imports, the situation is significantly better than it was in the early 1990s. For example, the requirement for export industries with a bonded warehouse facility to declare the country of origin of their imported raw materials has been discontinued, and the administrative complexities for obtaining prior approval from different ministries to establish industrial units have been significantly eased. An important institutional indication of progress in the elimination of import restrictions is the downsizing of the Office of the Chief Controller of Imports and Exports, regarded as an institutional symbol of import controls, as a result of the abolition of import licensing.

Exchange rate management There have been significant improvements in exchange rate management since the 1990s, with the introduction of a flexible exchange rate policy. The multiple exchange rate system gave way to a unified rate in 1992, to be followed up by making the taka convertible for the current account in 1994.Adjustments in the rate of exchange have been undertaken from time to time, taking into account the rates of inflation, movement of exchange rates and trade weights with partner countries. Finally, in May 2003 Bangladesh opted for an open market exchange rate policy by free float of the taka.

Export facilitation measures To support export expansion, a number of incentives have been in place, such as lower interest rates on bank loans, duty-free imports of machinery and intermediate inputs, cash incentives, duty drawback and certain tax exemptions. The ready-made garments sector, in particular, has derived substantial benefits from a range of facilitation measures, comprising three main elements: (i) back-to-back letters of credit, whereby ready-made garment exporters are allowed to import their required inputs on a deferred payment basis (ii) the ready-made garments exporters are allowed to import their required materials duty and tax free; and


(iii)

a mix of miscellaneous measures such as tax holidays, export credits and repatriation of profits by foreign investors.

Regional cooperation Regional trade agreements (RTAs) can offer an opportunity for trade liberalization, including tariff reductions among participant countries, which can go beyond multilateral commitments. Bangladesh is currently a member of two RTAs: the South Asia Free Trade Area and BIMSTEC, an economic cooperation arrangement between Bangladesh, India, Myanmar, Sri Lanka and Thailand. These agreements are due to become operational in 2006. To what extent they will open up trade among participating countries will depend upon the outcomes of ongoing negotiations, including the depth and breadth of tariff cuts, disciplines on NTBs, the scope of negative lists, rules of origin and contingency provisions.

Implications of the reforms and liberalization That policy reforms and trade liberalization policies pursued by Bangladesh have had manifold implications for its economy in general, and trade in particular, cannot be denied. However, the precise impact of these policies and actions is difficult to disentangle, as these are not the only factors that affect the economy. Whether a country is able to take full advantage of liberalization depends critically on its capacity to improve the supply of tradable and its flexibility in adjusting to changing price conditions. If its policies succeed in generating supply-side stimulus while enabling the economy to adjust to changing prices relatively quickly and smoothly, a positive impact on economic and human development might be expected. The impact of policy reforms and trade liberalization in Bangladesh appears to be mixed: an improved, but not strong enough growth performance; the expansion of trade, but without adequate diversification; a reduction of poverty, but an increase in inequality. Bangladesh emerged as an independent country in 1971. It entered into International Trade actively since 1972. In the early years of independence the gap between Import and Export was very wide. This gap started to decrease from 1980s when Bangladesh adopted liberal trade policy consistent with the emerging trend of the market economy. Extensive reform programs have been implemented in trade regimes during the last two decades. The prime objective of the trade policy of Bangladesh is to strengthen the economy. For achieving this objective, Bangladesh has adopted export-based development strategy. Trade and Commerce is one of the prime driving forces of socio-economic development. Since last two decades, export has been playing a very important role in the socio-economic development of Bangladesh. These days, export of Bangladesh has been developing and expanding fast, contributing in employment generation and reducing poverty significantly. For export promotion and development Bangladesh has been pursuing periodic Export Policy from 1980. In the first half of 80s it pursued one- year export policies and two-year policies in the last half of the same decade. Since then five- year export policies were formulated and implemented. After the expiry of the tenure of five-year policy government announced three–


year Export Policies. Ongoing Export Policy is for the period 2009-2012. These policies are consistent with the agreement under Uruguay Round Accord, WTO and the principles of market economy. (1) Exports Export of goods or services are provided to foreign consumers by domestic producers. Export of commercial quantities of goods normally requires involvement of the customs authorities in both the country of export and the country of import. The advent of small trades over the internet such as through Amazon and e-Bay has largely bypassed the involvement of Customs in many countries due to the low individual values of these trades. Nonetheless, these small exports are still subject to legal restrictions applied by the country of export.

Bangladesh Exports Bangladesh exports were worth 2065 Million USD in December of 2011. Bangladesh mainly exports readymade garments including knit wear and hosiery (75% of exports revenue). Others include: Shrimps, jute goods (including carpet), leather goods and tea. Bangladesh’s main export partners are United States (23% of total), Germany, United Kingdom, France, Japan and India.

Figure

1:

Monthly

exports

of

Bangladesh

Trend of export earnings

The exports of Bangladesh have been experiencing a steady rise since the late 80s of which apparels constitute approximately 75% of the total exports. Other items include frozen foods, jute & jute products, leather & leather products, handicrafts, vegetables, chemical products etc. Major export markets for Bangladeshi exporters are North America (33%) and EU (52%) while other regions constitute the rest. In Fiscal Year 2006-07, total exports earnings of Bangladesh exceeded US$ 12 billion. The trend of Bangladeshi exports from FY 1972-73 to 2009-10 is shown below:


Figure

2:

Trends

in

the

yearly

export

of

Bangladesh

Source: Export Control in Bangladesh

Export Basket & Market Share In the export basket of Bangladesh there are primary commodities and industrial goods. Frozen food, tea, agricultural product, raw jute, etc. are the primary product for export. On the other-hand, readymade garments (Oven garments and knitwear), leather, jute goods, fertilizer, and chemical products, footwear, ceramics product, engineering products, petroleum by-products and handicrafts are the major industrial export goods. The USA is the main destination of our export commodities which is 28.79% of the total exports. The second and third positions are held by Germany and UK which constitute 16.76% and 9.96% respectively. The principle items exported to these countries are readymade garments, frozen foods and home textiles. The product-wise export earnings from major exports and countrywise exports figures are shown below:

Table 3: Product and region wise exports of the year 2009–10 01. 02. 03. 04. 05. 06. 07.

Woven Garments Knitwear Frozen Food Jute Goods Leather Agro Products Engineering Products

37.11% 40.01% 2.73% 4.86% 1.40% 1.50% 1.92%


08. 09.

Footwear Other

1.26% 9.21%

01.

European Union (E-U)

52.3%

02.

American Region

33.3%

03.

Asian Region

8.8%

04.

Middle East Region

2.5%

05.

African Region

0.6%

06.

Oceania Region

0.3%

07.

East European Region

0.3%

08.

Other

1.8%

Source: Export Control in Bangladesh

Major Export items of Bangladesh The traditional export items of Bangladesh are: raw jute, jute manufactures (Hessian sacking, carpet backing, carpets), jute products, and tea, leather and leather products. Non-traditional export items are: garments, frozen shrimps, other fish products, newsprint, paper, naphtha, furnace oil, urea and ceramic products.

Export Rules, Regulation, and Controlling Authority In Bangladesh all trading activities are regulated by the Ministry of Commerce of the Government of Bangladesh under The Imports and Exports (Control), Act 1950. The Export Policy under the aforementioned Act is issued every three years by the Ministry of Commerce on behalf of the government. However, the Ministry can impose a ban or attach conditions, in the public interest, on an exportable at any time. Moreover, the Ministry of Commerce, through its office of the Chief Controller of Imports & Exports (CCI&E) is also responsible for issuance of Export Registration and/or Permits to the intending exporters. On the other hand, any tariff/tax related issues are determined by the National Board of Revenue (NBR),an entity under the Ministry of Finance. Bangladesh Customs a department of NBR is the enforcement agency of the Export Policy.

Export Prohibitions and Restrictions According to the current Export Policy, 2006-2009, the government has prohibited or imposed conditions on the exports of following products. (Please visit www.mincom.gov.bd for full text of the Export Policy and other information)


A. Prohibited Products • All petroleum and petroleum products except naphtha, furnace oil, lubricant oil and bitumen. • Jute and `Shan’ seeds • Wheat • Any kind of live animal, animal organs or hide/ skin of wild animals. • Fire arms, ammunition and related materials. • Radioactive materials. • Archeological Relics. • Human skeleton, blood plasma, or any product produced from human or human blood. • All types of pulses, except processed ones. • All shrimps except chilled, frozen and processed ones • Onion • Seawater shrimps of 71/90 count or smaller, except the species Harin/ harini and • Chaka • Cane, wood, wood logs/ thick pieces of wood (except handicrafts made from these materials). • All types of frogs (alive or dead) and frog legs. • Chemical products enlisted in the List 1 of the Chemical Weapons Convention. • Raw and wet blue Leather. B. Restricted Products • Urea Fertilizer: Upon permission from the Ministry of Industry, Urea fertilizer produced in all factories except Karnafully Fertilizer Company (KAFCO) can be exported. • Upon no objection from the Ministry of Information, entertainment programs, music, drama, films, documentary films etc. can be exported in the form of audio cassettes, video cassettes, CDs, DVDs etc.

Export Control Bangladesh follows a liberal trade policy in respect of Import and Export. There is a handsome incentive package for the exporters. But even export sector is not free from control and monitoring. The following measures have established necessary control over the export trade in Bangladesh: • Licensing the exporters. • Quality inspection of product. • Physical examination before shipment. • Security check by using scanning machine at ports • Constant Intelligence and monitoring by the concerned Government agencies • Observing ISPS code by port authority. • Application of penal provisions for violation of Rules and Regulations. • Installation of heavy-duty scanners in the ports. In a primary selection, the issues that we will be focusing on are the following:


1. According to sections 3.3 and 3.4, the following products are termed as highest priority sectors: • Light engineering products (including bicycles); • Footwear and leather products; • Pharmaceutical products; • Toiletries Products For such products, the project loans have a reduced interest rate and there are income tax exemptions. We feel that these particular sectors are developed enough to be charged with normal interest rate and income taxes. 2. According to sections 3.5 and 3.6, the following products are termed as special development sectors: • Frozen fish production and processing; • Fresh flower and foliage; • Ceramic products and melamine; • Electric and electronic products; • Plastic products; and • Furniture industries. These products are given possible financial benefits for utility services such as electricity, water and gas. It does not help the government to bear such huge costs of utility because clearly, they use a large amount of electricity and gas. 3. According to section 4.6.1., exporters will be exempted to a large level from paying fire and shipping insurance premiums. We feel that such privilege should not be given to exporters. 4. According to section 5.8.1, contract farming will be encouraged for production of exportable vegetables, poultry and other agricultural products. The policy should also include some monitoring strategies so that those lands are used for producing exportable items only. 5. Policies to encourage SMEs are included in section 4.15 of Bangladesh Export Policy. But the export policy should include export policies for SMEs so that they can export their products. In order to delve deeper into the issues, we are going to study various articles and other literature for description. The reform needed will be discussed with 5 industry experts. Their opinions will be used to derive how best to solve the issue Issue 1 The highest priority sectors contribute to the exports of Bangladesh as follows:

Table 4: Priority sectors Product

% Contribution in Exports

Light Engineering Products

2%


Leather and Footwear products

2-3%

Pharmaceutical products

1%

Toiletries products

1%

Mr. Nasim Manzur, a manager in Friends’ Apparel, has termed the growth in various priority sectors as commendable. He has called the global recession period to be an opportunity for Bangladesh. According to him, the sectors of light engineering, leather, pharmaceutical and toiletries products were in their childhood a few years ago. But these sectors have managed to fully grasp the opportunity obtained during the global financial crisis of 2007-2009. He says that these sectors have grown and matured and he is hopeful that these sectors can now survive on their own, without any government intervention in terms of interest rates and taxes. Issue 2 The Bangladesh Power Development Board (BPDB), which posted a loss of nearly $541 million in the fiscal year to June, 2011, lifted electricity tariffs in February by more than 11 percent for bulk users. BPDB suffered losses mainly through buying electricity at high prices from privately-owned power plants and selling it at lower price. (7) The government has continued raising the natural gas tariff for domestic users. Although Petro-Bangla currently does not incur loss in natural gas sales to domestic consumers, as it meets the local demand from domestic gas. But the domestic consumers pay much lesser than what the Petro-Bangla pays to international oil companies (IOCs) against gas purchase from them. Mr. Saiful Alam, an official of Petro-Bangla has admitted that the natural energy resources in Bangladesh are dwindling fast. In spite of increasing tariffs on a regular basis, the energy sectors seem to be incurring loss. It is a common knowledge that Bangladesh cannot produce the required amount of electricity. When asked about the government policy of subsidizing utilities to the special development sectors, he seemed a little skeptical. He agreed that these sectors need funding but he suggested that the funding be for some other purposes. In fact, he suggested that instead of incurring further losses through utility subsidy, the government can help the special development industries through capital investment and infrastructure development. Issue 3 The fire insurance tariffs are fixed by the insurance companies depending on the level of risk of location and activities of the particular building. Since the government exempts some of the insurance of exporters, export buildings with a high risk get more benefitted. The government has to pay more for the risky buildings. Although shipping insurance may not be covered by small-scale exporters, the large-scale exporters can easily afford the shipping premium. Hence, the export policy can be changed to relax shipping premiums for small exporters and stringent payment of shipping costs for large exporters.


Mr. Dewan Sohan, an employee at Bangladesh General Insurance Limited, said that the insurance business is already a risky business. Usually people who are more prone towards accidents make insurances. In other words, insurance clients are typically those who have a high risk. Being an employee of a public insurance company, Mr. Sohan claims that since the government provides insurance exemptions to exporters, many of them open offices in unsafe buildings and do not follow safety protocols in case of fire. Several exporters also get involved in ‘fishy’ shipping deals fearlessly because they know that if something goes wrong, the government is there to pay the premiums. In light of all these activities, Mr. Sohan said that providing insurance exemptions is a very thoughtful initiative on the part of the government but there should be some monitoring activities so that the exporters are careful in their business. Issue 4 Contract farming is a tripartite agreement-based process where banks will finance the exporters and the latter will provide agricultural products to the farmers. Typically, the farmer agrees to provide established quantities of a specific agricultural product, meeting the quality standards and delivery schedule set by the purchaser. In turn, the buyer commits to purchase the product, often at a pre-determined price. Although section 5.8.1 of Bangladesh Export Policy (2009-2012) says that contract farming will be encouraged for production of exportable vegetables. But Professor M. A. Sattar Mandal, Vice Chancellor Bangladesh Agricultural University says that a number of private sector companies have started contract farming with vegetables, poultry, milk and recently flowers. Contract farming facilitates integration of production and marketing of produce by numerous small holders. But small holders are not being monitored and therefore in many cases their potential contribution to the economy is being overlooked. Contract farming can also help frozen fish exporters earn billion dollars raising production and ensuring traceability in the farms. The government should provide raw materials such as fish fry, diesel as provided to agriculture sector at a subsidized rate under this program. The production in Bangladesh is only 250 kg per hectare while it could be raised to 500-600 kg per hectare through contract farming. Issue 5 In the past, the government introduced special schemes for small entrepreneurs. But their experience was not satisfactory, as borrowers did not bother much to repay the loans, as they thought that they had taken money from the government. Banks also did not make efforts to recover the loans as they could easily recoup the loans from the scheme, eventually compelling the government to cancel the scheme as many borrowers defaulted on the loans. The central bank is planning to introduce credit guarantee scheme so that banks do not have to worry about reaching the SMEs according to the Export Policy. According to their plan, the SME institution will run as a separate entity and will get premium to remain in the business. The central bank will provide the initial capital. Although the policy will be helpful to the Small and Medium Entrepreneurs, it however does not say much about easing export rules for. SME products carry almost 25% of Bangladesh’s total GDP. But if more and more SME products are exported, the contribution even with the same amount of production will increase.


Problems Some unscrupulous exporters take the opportunity of liberal trade policy of the Government. They are used to indulge in various corrupt practices like declaring more quantity than actually exported by means of fiddling of shipping documents. Another area of concern resulting in export fraud is the preferential trading arrangements where certain countries enjoy duty benefit subject to compliance of some conditionality related mostly to rules of origin. Other countries which are outside the purview of these preferential arrangements, that is, who fall in the Most Favored Nation (MFN) category, attempt to circumvent the system by means document forgery, falsification of shipment details etc. This leads to export of products of a particular country on papers which is actually produced elsewhere. These sort of malpractices might deprive the genuine exporters of the country belonging to the preferential trading bloc and put the importers of such products at a risk of penal actions from their authorities. Finally, weak infrastructure and limited capacity to enforce the IPR regulations and rules on standardization by the administrations of the developing countries like Bangladesh contribute substantially to protect its consumers from having sub-standard and/or counterfeit products. The authorities often lack adequate facilities to test the standards or originality of the products. Bangladesh is also facing some problems with exports from China. According to reports of law enforcement agencies goods exported from China to Bangladesh are detected as substandard, counterfeits and health hazardous in many cases. Milk powder for the babies is the most recent examples.

Proposal/Suggestion Followings are some recommendations on how we could overcome the hurdles faced by the developing countries in enforcing effective control over exports. • Maintain Profile of the Exporters • Systematic Certification process (Rules of origin, quality etc.) • Introduction of Effective Risk Management techniques for Physical Inspection • Effective use of Scanner • Increase Enforcement Capacity • Impart Training • Increase Cooperation among the Trading Countries through some Mutual Customs Cooperation • Penalize the Exporter for Breaching Rules and Regulation • Creation of International Consensus and Awareness to Ensure Quality in Export • Reduction in import control and gradual decrease in import tariff and not tariff barriers.

Facilities in EPZ An export processing zone (EPZ) is defined as a territorial or economic enclave in which goods may be imported and manufactured and reshipped with a reduction in duties / and/or minimal intervention by custom officials (World Bank 1999). EPZ Provides: • Promotion of foreign (FDI) & local investment • Diversification of export • Dev. OF backward & forward linkages


• • • •

Generation of employment Transfer of technology Up gradation of skill Development of management

Bangladesh has achieved phenomenal export success through the EPZs. In the total foreign exchange earnings of the country through exports, the share of EPZs increased from a microscopic low of 0.02% in 1983-84 to a spectacular high of 17.88% in 2004-05. The share of EPZs in the foreign exchange earnings through the exports of manufactured goods also shows the same trend over the corresponding period reflecting fast decline in the relative share of the DTA in both total exports and the exports of manufactured goods and the resulting foreign exchange earnings of the country. Annual trend rate of growth of export earnings of the EPZs has been more than six times higher than that of total national export earnings and more than four times higher than that of total national export earnings from manufactured goods. It means that export performance of the EPZs is much more impressive than that of the country as a whole. The enterprises of EPZs have exported goods worth of US$ 10,003.62 million up to June, 05 and it was US$ 4823.79 million till June 2001. During the last 4 years the export volume increases to about US$ 5179.83 million. This shows an increase of 107.38%. The export earnings from EPZs crosses billion dollar mark in the last four years. BEPZA represents average 18% of total national export during the last four years.

Table 5: EPZ’s contribution towards total national export Source: Export Diversification and Role of Export Processing Zones (EPZ) in Bangladesh Year 1994-1995 1995-1996 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

Total export of Total export of EPZs % of BEPZA’s Bangladesh (m US$) (m US$) contribution (m US$) 3473 228 6.56 3882 337 8.68 4418 463 10.48 5161 636 12.32 5313 712 13.40 5752 891 15.49 6467 1068 16.51 5986 1077 18.00 6548 1200 18.33 7603 1354 17.80 8654 1548 17.88

Imports Import is any good or service brought into one country from another country in a legitimate fashion, typically for use in trade. Import goods or services are provided to domestic consumers by foreign producers. An import in the receiving country is an export to the sending country. Imports, along with exports, form the basis of international trade. Import of goods, normally requires involvement of the Customs authorities in both the country of import and the country of export and are often subject to import quotas, tariffs and trade agreements. When the "imports" are the set of goods and services imported, "Imports" also means the economic value of all goods and services that are imported. The macroeconomic variable I usually stand for the value of these imports over a given period of time, usually one year.


Bangladesh Imports Bangladesh Imports were worth 3346 Million USD in January of 2012. Historically, from 1995 until 2012, Bangladesh Imports averaged 4989.3800 Million USD reaching an all time high of 20291.4000 Million USD in June of 2009 and a record low of 1424.2000 Million USD in August of 2009.

Figure 3: Bangladesh Imports by Month (million USD)

Commodities Imported The major import commodities of Bangladesh are: • Machinery and equipment • Chemicals • Iron and steel • Textiles • Foodstuffs • Petroleum products • Cement

Bangladesh Import Partners The following are Bangladesh’s import partners as of 2011: • China: 15.8% • India: 15.7% • Kuwait: 8.1% • Singapore: 7.6% • Japan: 4.4%

Overview of Trade Liberalization in Bangladesh Bangladesh pursued an import substituting industrialization strategy in the 1970s, the key objectives of which were to:


• • • • • •

Safeguard the country’s infant industries Reduce the balance of payment deficit Use the scarce foreign exchange efficiently Ward off international capital market and exchange rate shocks Lessen fiscal imbalance Achieve higher economic growth and self-sufficiency of the nation.

The basic policy tools used under this policy regime included high import tariffs, quantitative restrictions, foreign exchange rationing and overvalued exchange rate. However, in the face of failure of such inward looking strategies to deliver the desired outcomes along with rising internal and external imbalances, trade policy reforms were introduced in the early 1980s. Since then, trade liberalization has become the integral part of Bangladesh’s Trade Policy.

Evolution of Import Policies and Quantitative Restrictions Trade Policy during 1972-1980 consisted of significant import controls. The major administrative instruments employed to implement the import policy during this period were the foreign exchange allocation system and the Import policy orders (IPOs). Under the IPOs, it was specified whether items could be imported, prohibited or require special authorization. With the exception of a few cases, licenses were required for all other imports. The argument behind the import licensing system was that it would ensure the allocation of foreign exchange to priority areas and protect vulnerable local industries from import competition. However, the system was criticized for not being sufficiently flexible to ensure its smooth functioning under changing circumstances. Moreover, it was characterized by complexity, deficiency in administration, cumbersome foreign exchange budgeting procedures, poor interagency coordination, rigid allocation of licenses and time consuming procedures (Bhuyan and Rashid, 1993). During the 1980s, moderate import liberalization took place. In 1984, a significant change was made in the import policy regime with the abolishing of the import licensing-system, and imports were permitted against Letters of Credit (L/C). Since 1986, there were significant changes in the import procedures and IPOs with respect to their contents and structure. Whereas, prior to 1986, the IPOs contained a lengthy positive list of importable, in 1986 it was replaced by two lists, namely the Negative List for the banned items and the Restricted List for the items importable on the fulfillment of certain prescribed conditions. Import of any items outside the lists was allowed. These changes may be considered as significant moves towards import liberalization since no restrictions were imposed on the import of items that did not appear in the IPOs. With the aim to increase the elements of stability and certainty of trade policy, IPOs with relatively longer periods replaced the previous practice of framing annual import policies. Since 1990, the Negative and Restricted Lists of importable were consolidated into one list, namely the Consolidated List (Ahmed, 2001). The range of products subject to import ban or restriction has been curtailed substantially from as high as 752 in 1985-86 to only 63 in 2003-06. Import restrictions have been imposed on two grounds: either for trade related reasons (i.e. to protect domestic industries) or for non-trade reasons (eg. to protect environment, public health and safety and security). Therefore, only the trade related restrictions should be of interest to policy reforms and liberalization. Over the past two decades, the number of trade related banned items have declined from 275 to 5. In a similar fashion, other restricted and mixed (a combination of ban


and restriction) import categories fell quite rapidly. In 1987-88about 40% of all import lines at the HS-4 digit level was subject to trade-related quantitative restrictions (QRs), but these restrictions had drastically been reduced to less than 2 percent. The latest import policy, the Import Policy Order 2006-09, reiterates the governments’ commitment to continued liberalization of the of the import regime in Bangladesh. These commitments are manifested in the stated objectives which are to: • Make the Import Policy Order further liberalized to keep pace with the gradual development of globalization and free market economy under the WTO. • Provide facility for import of technology for the widespread expansion of modern technology • Provide facility for easy import for the export support industries for the purpose of placing export industries on a second base, and with this end in view, coordinate the import policy of the country with the industrial policy, export policy and other development programs. • Availability of industrial raw materials for increasing competition and efficiency by gradual removal of restrictions on import of finished goods • Ensure the supply of quality and hygienic goods and • Procure the import of goods on an emergency basis, in times of crisis, with the aim of ensuring the supply of basic staple goods while fulfilling the interests of the people of the country.

Reforms in the Tariff Structure From the late 1980s, the tariff regime has become increasingly liberalized. Between 1991-92 and 2004-05 the un-weighted average rate of tariff fell from 70% to 13.5%. much of this reduced protection was achieved through the reduction in the maximum rate. Bangladesh has no tariff quotas, seasonal tariffs and variable import levies (WTO, 2000). All these measures have greatly simplified the tariff regime and helped streamline customs administration procedures. A drastic reduction in un-weighted tariff rates during the 1990s also resulted in the fall in import-weighted tariff rates. One important aspect of the tariff structure in Bangladesh relates to the use of import taxes which have a protective impact (also known as para-tariffs) over and above the protection provided by customs duty (World Bank, 2004). These taxes include the infrastructure development surcharge (IDSC), supplementary duties (SD) and regulatory duties. Although these taxes have been primarily imposed for generating additional revenues, in the absence of equivalent taxes on domestic production, they have provided extra protection to local industries. Similarly, while the value added tax (VAT) is supposed to be trade neutral, exemptions for specified domestic products have also resulted in it having some protective content. Some of these para-tariffs, such as the IDSC, are applied across-the-board to all or practically all imports, and can be considered as general or normally applied protective tax which affect all or nearly all tariff lines. Others are selective protective taxes in that they are only applied to selected products, for example the ‘supplementary’ duties. Despite the lowering of custom duties, the presence of para-tariffs did not significantly lower the total protection rate.


3-year import-export policy approved The country’s new export-import policy for next three years (2009-2012) created room for conditional import of some new products, including eggs of hens, ducks and birds. WTO compliances came into consideration during the amendments. The new import policy added some new products, with some conditions, to the country’s import basket while the export policy also incorporated the nascent shipbuilding industry into the list of thrust sectors. Oceangoing ships and vessels’ export has been added as the seventh item to the existing sixitem list of thrust industries, which include agro-product and processing, light engineering, shoes and leather goods, pharmaceuticals, software and IT and home textiles. On the other hand, the import of some new items, which often came out to be essential commodities, has been relaxed through softening the conditions tying their import .In some cases, the import bar was completely withdrawn from some items on some conditions, while in other cases, some new conditions were imposed on the import of some other products. Under the new import policy, the import of maximum 3-year-old reconditioned cars has been allowed for taxicab services in compliance with the new national budget. Melamine-free certification has been made mandatory for the import of powdered milk and milk foods while import of tinned powdered milk allowed up to 2.5 kg. The import of eggs of hens, ducks and birds was allowed in the new import policy on some conditions while some conditions were imposed on the import of scrap vessels. The egg import has been permitted at a time when the country often faced artificial crisis of the essential food item, which is blamed on the domestic factory farmers. The import of capital machinery and raw materials without any L/C by RMG industries, import of reconditioned generator and generating sets on commercial basis, crude soybean and palm oil import by industries and import of telecommunications machinery for privatesector operators have been allowed in the new import policy. Some new sectors have been declared as special development sectors in the new export policy which include crust and finished leather, frozen foods, fish processing, handicrafts, electric and electronic goods, live-flowers, jute and jute-goods, hill tracts handloom, unfinished diamond and imitation jewelry, ceramic, melamine and plastic good.

Conclusion The picture often painted of Bangladesh’s trade policy is one of increasing openness to imports on the one hand, but with significant anti-export bias on the other. Associated advice to policy makers tends to be consistent in arguing for further significant reductions in the use of tariffs and associated supplementary duties on imports and a reduction in the implicit taxation of exportable (for which jute has often been used as an example).In reality however, trade policy has been actively used both in the promotion of the exports of locally produced value added products. In terms of exportable, the policy has been relatively consistent, although possibly susceptible to lobby pressures. On the import side, in light of the use of trade policy to alleviate potentially negative impacts on the security situation, interventions have been more ad hoc in nature.


In practice, both exportable and importable have therefore been subject to the use of instruments associated with trade promotion and trade restriction. In seeking to explain this pattern of use and to determine its appropriateness, it is necessary to consider the impact of trade policy along the value chain, rather than to focus just on the raw commodity (as tends to be the case when constructing indicators of protection and support). For example, the jute value chain is characterized by significant tariffs on jute and jute products, export restrictions on raw jute and cash incentives to the export of jute products. Similar strategies are used with respect to shrimp and vegetable trade (see for example Deb and Bairagi, 2009). Similarly, selective support to certain exportable also appears to have had positive effects in terms of improving producer incomes, in addition to their contribution to foreign exchange earnings. It might be argued that the trade policy, although far from liberal, has been used appropriately in minimizing the potentially negative effects of “competitive “imports undermining local production and related industry, while ensuring that availability has not been negatively affected. However, there is still concern that an over-emphasis on, and targeting of, some sectors has been to the detriment of other sectors. For example, Hossain and Saha (2010) argue that weaknesses in policy formulation includes an over emphasis on cereal food production which has negatively affected enterprises in the vegetable subsector. This could be particularly pertinent if the argument that factor-neutral technical change could run up against problems of domestic market absorption hold true. This could result in exports needing to be further developed to compensate for the possible slowing of domestic demand (Mandal 2010, pers. Comm.)In addition, the management of trade through government intervention, althoughnot necessarily negative in aggregate, has in practice caused difficulties for traders. In this respect, greater communication between private traders and government, and the cooperation of the latter in the articulation and implementation of trade policy could improve the impact of trade policy interventions. These contrasting points of view demonstrate the difficulty of using trade policy in pursuit of the objectives with regard to the agriculture sector’s contribution to often multiple and conflicting objectives. However, they do not, as is often argued, necessarily support a case for a more liberal, or uniform approach to trade policy

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Laws and Policies Affecting Trade_edited  

Laws and Policies Affecting Trade_edited  

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