Understanding the proposed Comprehensive Economic Partnership Agreement between Bangladesh and India – The Diplomat
Bangladesh and India have warm relations and cooperation in almost all fields. Throughout history, the two countries have also cultivated economic and commercial dependence. Currently, both countries are experiencing strong growth. To consolidate their growth and their interdependence, they are committed to signing a comprehensive economic partnership agreement, entitled Bangladesh-India Comprehensive Economic Partnership Agreement (CEPA).
Bangladeshi Prime Minister Sheikh Hasina is due to start a visit to India on September 5 and is likely to touch on CEPA during her trip. So what are the prospects and potential of CEPA?
Notably, the CEPA talks began informally in 2018, against the backdrop of increasing Chinese investment in Bangladesh. It has also received greater attention as existing regional free trade agreements, such as the South Asian Free Trade Area (SAFTA), have become dysfunctional. To date, the countries have conducted a joint study after to agree to the terms of reference.
The proposed CEPA between Bangladesh and India has three dimensions, namely trade in goods, trade in services and investment. The main objective of the proposed agreement is to reduce the huge trade gap between Bangladesh and India and open up new economic opportunities including connectivity, new markets, as well as cooperation and partnership. In addition, CEPA is expected to address issues and challenges of anti-dumping duties and rules of origin from the perspective of multimodal connectivity and deepening cooperation within the framework of sub-regional cooperation. It recognizes the significant benefits of bilateral economic and trade relations.
According to an official statement released by India’s Ministry of Commerce and Industry, CEPA will incorporate a variety of issues of mutual interest, including the development of railway infrastructure, port infrastructure, border hat (commercial posts), regional connectivity through multimodal transport, harmonization of standards and mutual recognition agreement. In addition, the agreement aims to intensify cooperation in new areas such as green technologies, renewable energies and IT and digital platforms. CEPA will also enhance the scope of investment as it includes new areas and modes of cooperation. This will give a significant boost to bilateral trade. Furthermore, the agreement focuses on four areas to enhance India-Bangladesh partnership including connectivity and maintaining an uninterrupted supply chain, joint production of defense equipment, exploration potential areas of investment and the joint manufacture of vaccines and other medicines.
Benefits of CEPA
CEPA could provide many future benefits. Firstly, against the backdrop of growing bilateral trade, the trade regime between the two countries, including imports, exports and related rules and regulations, will gain new momentum as the agreement has instruments to work jointly on trade, supply chains and production. If CEPA is operationalized, the bilateral trade potential could be $40 billion. After its withdrawal from the Regional Comprehensive Economic Partnership (RCEP), India is seeking to conclude several bilateral FTAs with neighboring countries.
Second, the agreement will boost the bilateral and sub-regional connectivity that Bangladesh has championed in its policy initiatives. CEPA will produce a connectivity cluster that will shape future trade across the Asian Highway Network routes (AH-1 and 2); the Bangladesh, Bhutan, India, Nepal Initiative; the Bangladesh-China-India-Myanmar Economic Corridor; and BIMSTEC – the Bay of Bengal Initiative for Multisectoral Technical and Economic Cooperation.
CEPA will also connect India and Bangladesh at Petrapole-Benapole, Phulbari-Banglabandha and Dawki-Tamabil points, and create a new rail link between Akhaura (Bangladesh) and Agartala (India), among others. The agreement will facilitate cross-border movement of personal, passenger and freight vehicles when fully implemented. This will be more noticeable in the border areas of Bangladesh where the price of goods could fall by more than 4.5%. More trade and transit will inspire new economic activity that will increase incomes and reduce costs for businesses and consumers.
The growing connectivity will have spillover effects on other connectivity projects in the region. For example, the BIMSTEC Conclave of Ports agreement linking the Thai port of Ranong with the ports of Chennai, Vishakhapatnam and Kolkata, a BIMSTEC coastal shipping agreement and a BIMSTEC free trade agreement will bring more than 2 billion people – 22 percent of the world’s population – together in a single economic region.
Third, the agreement will create a new place for cooperation and partnership and open up opportunities for the establishment of joint production centers and uninterrupted supply chains, which will create new markets for the two countries. Bangladesh has already set up three special economic zones for Indian investors and Indian companies are investing in various sectors including telecommunications, pharmaceuticals, consumer goods and automotive manufacturing in Bangladesh.
Fourth, as Bangladesh prepares for its dual transition (middle-income country graduation and LDC graduation), the agreement will be important in harnessing potential opportunities by addressing related concerns and leveraging initiatives. And fifth, CEPA will generate revenue for Bangladesh and India as connectivity and trade along territorial and maritime borders increases.
And then ?
To reap the benefits of any Economic Partnership Agreement, infrastructural conditions are crucial as they deliver results. Both countries should adopt calculated and accommodating positions to agree on the necessary conditions. Informal trade between the two countries should be reduced in the interest of formalizing economic relations. To increase trade, tariff and non-tariff barriers and rules of origin must be removed. Dumping and anti-dumping disputes, the lack of customs formalization, the tedious approach to loading and unloading in no man’s land must be resolved.
Existing legal obstacles can also cause problems. In accordance with World Trade Organization (WTO) regulations, all tariffs and undue restrictions must be eliminated, covering at least 90% of trade in goods with partner countries, and services must cover virtually all sectors (under Article XXIV of GATT 1994 and Article V of GATS) to enter into an FTA. Therefore, it could have an impact on Bangladesh import duties. Reciprocity must be maintained when entering into the agreement.
To fully exploit the benefits of an FTA, a country must have a diversified export basket to balance trade volumes. Notably, garments constitute more than 80% of Bangladesh’s total exports and are mainly exported to developed countries. There is very little demand for these Bangladeshi garments in Indian markets. Therefore, export product diversification is a prerequisite for the success of the proposed CEPA.
CEPA has the potential to be a game-changer given the economic and geographic potential of both countries. From trade and connectivity to infrastructure and socio-economic development, the agreement can foster a deep sense of cooperation and partnership. However, the challenges must be met. Both countries must carry out a cost-benefit analysis to achieve the desired result. Constructive steps must be taken towards triangulating the connectivity of trade, transport and investment in order to develop production networks and establish upstream and downstream value chains that serve the interests of trade and commerce – both bilaterally and beyond. In sum, a time-bound roadmap is needed to take advantage of the emerging window of opportunity.