LDC graduation to cost Bangladesh dearly

• Graduation from LDC status expected in 2024
• 8.9% additional tariff in preferential export markets
• Tariff hike to cost around $2 billion annually
• 70% exports go to preferential markets
• Clothing to face largest reduction in terms of value

Bangladesh is expected to face an average tariff hike of close to nine percent in its preferential export markets after graduating from the status of least developed countries, or LDCs, according to a latest report by the World Trade Organisation (WTO).

“LDC graduation will have the greatest impact on the exports of Bangladesh, which is estimated to see its exports decline by 14 percent,” said the report released on Friday.

The WTO, in association with the Enhanced Integrated Framework (EIF), published the report titled “Trade Impacts of LDC Graduation,” at the requests of LDCs, who think it will help them better understand the trade-related implications of graduating from LDC status.

Though the report looks at how graduation may affect the LDCs’ participation in world trade – including their access to export markets and implications for their WTO commitments – it was completed before the outbreak of the Covid-19 pandemic and the issuance of the WTO’s April trade forecast, which foresees a sharp downturn between 13 percent and 32 percent in 2020, because of Covid-19 pandemic disruptions.

Nevertheless, the global trade body said the study remains pertinent as it examines the trade impacts resulting from graduation, not the factors that could constrain prospects for graduation due to the pandemic.

There are currently 47 LDCs, of which 12 are at different stages of the graduation process. Of these LDCs, seven are WTO members: Angola, Bangladesh, Lao PDR, Myanmar, Nepal, Solomon Islands, and Vanuatu. Meanwhile, three are in the process of negotiating their WTO accession – Bhutan, Sao Tome and Principe, and Timor-Leste. The two other LDCs on the graduation path are Kiribati and Tuvalu.

The report said of all the graduating LDCs, Bangladesh will likely have the most challenges to confront after graduating. This is because it will lose LDC-specific duty-free market access and is overdependent on a single sector – garment exports.

The report said, assuming full preference utilisation, the graduating LDCs are expected to face a trade-weighted average tariff increase of 4.2 percent in the various preference-granting markets – the difference between the LDC duty rate and the next best alternative rate.

However, average tariff increases for Bangladesh and Nepal would be the highest at 8.9 percent and 8.1 percent respectively, while exports of Angola, Kiribati, Sao Tomé and Principe, and Timor-Leste are likely to see only marginal increases in tariff rates – below 0.5 percent.

The WTO’s tariff increase forecast is 2.2 percentage points higher than the estimate of 6.7 percent disclosed by Bangladesh’s two think-tanks – the Centre for Policy Dialogue and the Policy Research Institute of Bangladesh – last year.

According to the WTO report, tariff hikes would cost the 12 graduating LDCs an additional $2.9 billion of duties due to the loss of preferences. “Around three quarters (over $2 billion) of this cost increase would be shouldered by Bangladesh,” read the report.

The duty loss may be as enormous as 88 percent of the merchandise exports of graduating LDCs that go to markets with preference schemes for LDCs. For Bangladesh, it is 70 percent.

According to the WTO, exports of the 12 graduating LDCs amounted close to $112 billion in 2018 – representing nearly half of the total exports of the 47 LDCs.

Angola, Bangladesh and Myanmar are the three largest LDC exporters, representing 43 percent of LDC exports. The other nine graduating LDCs account for only four percent of LDC exports.

At the product level, clothing will face the largest reduction in value terms, mostly accounted for by Bangladesh, read the report.

In relative terms, the largest reduction in exports are expected for clothing (14.94%), textiles (7.11%), leather and footwear (11.93%), transport equipment (4.01%), fish and fish products (11.26%), sugars (29.87%), cereals (10.51%), dairy products (4.50%), and beverages and tobacco (4.81%).

The process of graduation may take longer than six years, in order to account for specific development concerns or to address requests by governments for longer transition periods. Bangladesh is expected to graduate from the LDC list in 2024.

The following are options that could be explored by the LDCs as they prepare to embrace graduation.

The European Union’s Everything But Arms (EBA) initiative has a built-in transition period that provides graduating LDCs with duty-free quota-free market access – a continuation of EBA benefits – for a period of three years after the graduation date.

This is flexibility that is welcomed by most graduating LDCs, and they have expressed interest in benefitting from similar provisions in other GSP schemes.

Graduating LDCs can actively engage with their preference-granting partners to try and secure an additional transition period to phase out LDC preferences in a gradual and extended manner.

For instance, Samoa obtained a three year transition period from China on its noni juice and other agro-processing products upon graduation in 2014.