Bangladesh on brink of major economic change

Bangladesh is entering a critical phase in its economic trajectory, but its trade policy framework remains inadequately prepared for the transition, according to a new policy study.

The paper, “Strengthening Trade Competitiveness: Bangladesh’s Strategy for Effective FTAs and EPAs”, authored by Selim Raihan of Dhaka University and Executive Director of the South Asian Network on Economic Modeling, assesses the country’s readiness for post-Least Developed Country (LDC) status using the Global Trade Analysis Project (GTAP) model. It simulates 10 trade scenarios to evaluate impacts on welfare, GDP, exports and industrial structure.

While Bangladesh’s graduation from LDC status in 2026 is a milestone, the study highlights significant risks. Preferential market access—particularly under the European Union’s Everything But Arms (EBA) scheme—is set to erode, further compounded by the India–EU free trade agreement, which could sharply reduce Bangladesh’s competitive margin.

Without new trade arrangements, Bangladeshi exports will face standard tariffs once EU and UK transition periods expire by 2029.

The model shows that in a “no-action” scenario, welfare would fall by 2.4 per cent of GDP, real GDP by 1.5 per cent, and exports by 8.7 per cent. The textiles and clothing sector would contract by nearly 8 per cent, described as a “cliff-edge” effect.

“Trade agreements can support growth, but domestic reforms are the primary driver of sustained and inclusive welfare gains,” the report notes.

The Economic Partnership Agreement (EPA) with Japan, signed in February, is identified as a key opportunity. It is projected to raise welfare by 0.7 per cent of GDP, increase GDP by 0.8 per cent, and boost exports by 3.0 per cent.

However, the agreement—covering more than 7,000 tariff lines along with services, investment and regulatory provisions—requires significant institutional upgrades. Improvements in customs systems, rules of origin compliance, and quality standards are essential to fully utilise the benefits.
“The Japan EPA is both an opportunity and a test,” the paper states.

Scenarios involving a China free trade agreement and accession to the Regional Comprehensive Economic Partnership (RCEP) deliver the largest export gains but raise concerns about structural imbalance.

Textiles and clothing output would rise by 10.99 per cent under a China FTA and 13.36 per cent under RCEP. However, light manufacturing could contract by around 9–10 per cent and heavy manufacturing by 8–10 per cent.

The report warns that such outcomes reflect “specialisation driven by comparative advantage, but in a potentially unbalanced way”, risking deeper dependence on garments while weakening industrial diversification.

An India FTA would increase exports by 5.7 per cent, but welfare gains remain modest at 0.2 per cent of GDP and GDP growth at 0.3 per cent. As India already offers near duty-free access to many Bangladeshi goods, additional benefits are limited, while import competition—particularly in light manufacturing—offsets gains.

The emerging trade framework with the United States is seen as potentially imbalanced. While offering selective tariff relief, it may require significant concessions, including zero-tariff access on US imports and regulatory alignment.

The study advises continued engagement with Washington but stresses the need for clearly defined national priorities.

A potential agreement with the Gulf Cooperation Council (GCC) yields modest gains, with welfare rising by 0.2 per cent and exports and imports by 1.7 per cent. Processed food emerges as a key growth sector.

The GCC market offers diversification potential, particularly in the expanding halal economy, but requires credible certification systems, reliable supply chains and compliance with international standards.

The report identifies major weaknesses in Bangladesh’s trade policy capacity. These include a shortage of skilled negotiators, fragmented institutional responsibilities, weak coordination, and limited private sector engagement.

Trade defence tools such as anti-dumping measures are underused, while the Bangladesh Trade and Tariff Commission lacks sufficient technical capacity. Awareness among firms remains low.

Fiscal risks are also highlighted. As tariffs are reduced under FTAs, reliance on import duties—currently a major source of government revenue—will create pressure, necessitating stronger domestic taxation, particularly a modernised VAT system.

To address these challenges, the paper proposes a four-pillar strategy. This includes prioritising trade partners, beginning with high-quality agreements such as Japan; establishing a dedicated FTA Negotiating Cell within the Ministry of Commerce; accelerating domestic reforms such as tariff simplification and customs modernisation; and strengthening trade diplomacy through active engagement in the WTO and with developing country coalitions.

The study underscores the need to “bridge the gap between access and ability”, noting that trade agreements alone cannot resolve structural weaknesses in productivity or competitiveness.
It recommends the development of a National FTA Roadmap with clear milestones and regular performance reviews.

“The effectiveness of Bangladesh’s FTA strategy will be judged not by the number of agreements signed,” the report concludes, “but by outcomes—whether exports diversify, firms become more competitive, and economic gains translate into better jobs and higher incomes.”