Academic journal article The Lahore Journal of Economics

Was the SAFTA (Phase II) Revision Successful? A Case Study of Bangladesh's RMG Exports to India

Academic journal article The Lahore Journal of Economics

Was the SAFTA (Phase II) Revision Successful? A Case Study of Bangladesh's RMG Exports to India

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

As low-technology manufactures, textiles and garments (T&G) occupy a pivotal place in the export portfolio of the larger economies within the South Asian Association for Regional Cooperation (SAARC), including Bangladesh, India, Pakistan and Sri Lanka (Table 1). Of these, Bangladesh has experienced phenomenal export growth in the readymade garments (RMG) sector, becoming the world's second-largest exporter of clothing after China. This particular segment has become the backbone of the economy, with the clothing sector accounting for 78 percent of total exports in 2014 compared to a negligible 0.001 percent in 1976. Today, despite the fact that Bangladesh is categorized as a least developed country (LDC), its RMG sector is seen as a promising success story. The sector employs approximately 4 million people, of which 85 percent are women.

Bangladesh was not traditionally an exporter of textiles and garments (T&G): till the 1970s, its exports were dominated by jute and jute products. However, it was a beneficiary of the Multi-Fiber Agreement, which controlled clothing quotas and supported underdeveloped countries by giving them favorable market access. Thus, in the 1980s, investors took advantage of the export quotas, making T&G a strategic sector of Bangladesh's economy. The phasing out of the quota system in 2005, however, gave rise to skepticism about the competitiveness of Bangladesh's RMGs and its prospects of continued success (Joarder, Hossain & Hakim, 2010).

Interestingly, Bangladesh survived the phasing-out period and remains internationally competitive to date (ibid). One of the reasons for this is that the country has preferential market access to its major export destinations, which are now sources of enhanced revenue. It enjoys preferential treatment under the Everything But Arms (EBA) initiative in the European Union (EU) and respective Generalized System of Preference (GSP) schemes in countries including Canada, Japan and the US (Rahman, 2014).

In 2011, under the South Asian Free Trade Agreement (SAFTA) Revision Phase II,1 India allowed similar special concessions to the LDCs in the region. The Phase II revision aimed mainly at reducing the sensitive list2 maintained by SAFTA signatories by 20 percent. India granted the highest concessions by reducing its sensitive list by 95 percent for the LDCs in the region. This entailed liberalizing its tariff lines from 480 items to 25 items, inter alia, and providing duty-free-quota-free access (DFQF) to 46 tariff lines pertaining to RMGs of which it had been cautious (Table A1 in the Appendix). For the nonleast developing countries (NLDCs) in the region, which included Pakistan and Sri Lanka, the sensitive list was reduced from 868 items to 614 items.

This DFQF access to the Indian market was seen as a window of opportunity for Bangladesh's RMG exports to penetrate the largest market in the region. Unfortunately, this failed to materialize. The aims of this study are to analyze pre- and post-revision trends in India's RMG imports from Bangladesh for the periods 2010-12 (before revision) and 2013-15 (after revision), and to investigate the underlying factors hindering the growth of these imports. Accordingly, we focus on the following questions:

* If both India and Bangladesh export the same products in the RMG sector, which country enjoys a higher comparative advantage in production?

* Is there any trade complementarity between Bangladesh and India, i.e., does the former export RMGs while the latter imports RMGs?

To address these questions, we calculate the revealed comparative advantage (RCA) for both countries' RMG exports, using data at the HC 4-digit level for the period 2010-14. We also construct a trade complementarity index (TCI) using data at HC 6-digit level for the same years. The study reveals that Bangladesh enjoys a higher RCA in all major product lines and thus has a higher comparative advantage than India in RMG production. …

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