A Free Trade Agreement [FTA] is the first tier of economic integration - a bilateral trading arrangement designed to enhance trade creation by eliminating tariff walls or redirecting trade from other countries to FTA countries, known as trade diversion. The agreement may work as a conduit for a country at the final stage of graduation from LDC to a developing country status. Bangladesh fulfils most graduation requirements. Once a country graduates, it loses many prerogatives designed for least-developed countries. Bangladesh will gradually lose most of its preferential trade facilities, including quota— and duty-free market access to most developed and developing countries. Bangladesh is on the way to having FTAs in many countries, such as Saudi Arabia, Thailand, Vietnam, Japan, and Malaysia, to retain these facilities. This is the appropriate time to float the initiative, exploring the potential advantage of the value chains based on the mutual benefits.

Bangladesh's trade with China is historically asymmetric, with a perennial trade deficit. The recent deficit is over USD 23 billion. The total trade has exceeded the USD 25 billion mark. Still, the trade is tilted to China’s exports of about USD 24 billion, with a paltry one billion dollar in exports from Bangladesh. The main export items to China are jute yarn, tanned equine and bovine hides, and processed hair. The principal export items of China are refined petroleum, light rubberised knitted fabric, and synthetic filament yarn woven fabric, constituting about 20% of the total import in value.  

During the last 27 years, Bangladesh's exports to China have increased at an annualised rate of 11.1%, from USD 55.3 million in 1995 to USD 952 million in 2022; the exports of China to Bangladesh have increased at an annualised rate of 14.8% from  USD 648M in 1995 to USD 26.8B in 2022. The trend in trade deficit has widened over the period; the export ratio of 40% is more than twice the 17% ratio of Bangladesh. Bangladesh bridges this gap through its trade surplus with the USA and the European Union. However, the lean flow of surplus from the USA and EU in global political instability could be a concern in Bangladesh unless trade is not formalised through the Chinese currency RMB.

Attaining the trade balance through export augmentation is crucial in bilateral trade, where exports from Bangladesh are essential. Thus, FTA could play a decisive role.  

Bangladesh and China signed a memorandum of understanding in October 2016.  Subsequently, two preliminary studies were conducted to assess the pros and cons of this bilateral trade agreement. Bangladesh’s study concentrated on the service sector, while China focused on the goods trade. However, the newspaper report did not provide any clear indication of the mutual benefits of FTA. The understanding is that Bangladesh will continue to receive benefits after graduation as Bangladesh anticipates that such benefits will be rushing from other countries. Prime Minister recently sought the GSP plus facility from Finland.

The utility of an FTA agreement is contingent on the country's perspective, where the deficit or surplus is in a narrow range. Bangladesh's trade balance with China (and India) and the FTA drive must be viewed cautiously. The perennial deficit underscores trade's static and stoic nature without percolation for both partners and provides a slim impetus for trade promotion.  Bangladesh is exempted from quotas or tariffs with China on 98% of products, indicating historically poor market penetration. Thus, an FTA with China may cause the country to lose revenues from import duties under the free list of commodities Bangladesh is supposed to offer.  

The FTA with China helped many countries augment export earnings from a different perspective. China has FTAs with several countries. Thus, exports from Mauritius to China increased by 15%, and exports from Cambodia to China rose by 30% after the signing of the FTAs. Given a competitive edge, Bangladesh could be in an enviable position in the export of jute and jute products, plastic products, and agricultural products such as agro-processing industries. Bangladesh may gain billions of dollars if Chinese investors are interested in investment proposals facilitating technology transfer and human capital development.

An FTA between complementary economies may benefit both partners. Countries at different stages of development find products and services with comparative advantage. Economists use comparative advantage to assess mutual benefits, so trade creation in those products could bring mutual benefit. Bangladesh enjoys a comparative advantage over China in a few products, such as footwear parts, non-knit women's shirts, other neat garments, knit women's shirts, fake hair, etc. A substantial market share may augment Bangladesh's export earnings.   

A careful look at China's commodity basket of exportable items to Bangladesh tells a harrowing story. The list includes dairy products, eggs, beverages, vegetables, plaiting materials, and ceramic products—an indication that Bangladesh could not catch up with China’s fast-eroding competitive edge and increase its export of labour-intensive products. However, opportunities are never lost; Vietnam, Thailand, and India grab the competitive edge--- a win-win status of bilateral trade. The key to seizing this opportunity is enhancing the ease of doing business index. Nevertheless, the abysmal growth trend of export earnings with tariff opportunities for over 98% manifests lower competitiveness and higher business costs for Bangladesh.   
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The writer is a Professor, Department of Economics, American
International University - Bangladesh